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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended . . . . . . . . . DECEMBER 31, 1996 . . . . . . . . .
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from . . . . . . to . . . . . . . . . . . . . . . .
Commission file number . . . . . . . . . . 0-822 . . . . . . . . . . . . . . .
THE OILGEAR COMPANY
. . . . . . . . . . . . . . . . . . .
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0514580
. . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 SOUTH 51ST STREET, POST OFFICE BOX 343924,
MILWAUKEE, WISCONSIN 53234-3924
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (414) 327-1700
. . . . . . . . . .
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 PAR VALUE
. . . . . . . . . . . . . . . . . . . . .
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
. . . . . . . . . . . . . . . . . . .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 3, 1997, 1,256,190 shares of Common Stock were
outstanding, and the aggregate market value of the shares of Common Stock
(based upon the $17.00 last sale price on March 12, 1997 in the Nasdaq Stock
Market) held by non-affiliates (excludes a total of 699,164 shares reported as
beneficially owned by directors and officers or held by Company plans--does not
constitute an admission as to affiliate status) was approximately $9,469,442.
DOCUMENTS INCORPORATED BY REFE
PART OF FORM 10-K
INTO WHICH PORTIONS OF DOCUMENT
DOCUMENT ARE INCORPORATED
Annual Report to Shareholders for
year ended December 31, 1996 Parts I and II
Proxy Statement for Annual Meeting
of Shareholders on April 15, 1997 Part III
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PART I
ITEM 1. BUSINESS.
The primary business of The Oilgear Company ("Oilgear" or the
"Registrant"; together with its subsidiaries, the "Company") and its
subsidiaries is the manufacture and distribution of systems and value
engineered components for a broad range of industrial machinery and industrial
processes. Oilgear was incorporated under the laws of Wisconsin in 1921. A
business description is also provided in Note 2 of "Notes to Consolidated
Financial Statements" on pages 15-16 of the Registrant's Annual Report to
Shareholders for the fiscal year ended December 31, 1996 ("1996 Annual Report")
and is hereby incorporated by reference.
Principal Products, Markets and Methods of Distribution
The Company's products primarily involve the flow, pressure, condition,
control and measurement of liquids, which the Company refers to as Fluid Power.
The Company provides advanced technology in the design and production of Fluid
Power components, systems and electronic controls. Its product line includes
hydraulic pumps, high pressure intensifier pumps, valves, controls, cylinders,
motors, and fluid meters. The Company manufactures both radial and axial piston
type hydraulic pumps in sizes delivering from approximately 4 gallons per
minute to approximately 230 gallons per minute at pressures ranging up to
15,000 pounds per square inch. The intensifier pumps are reciprocating pumps
operating at pressures up to 120,000 pounds per square inch. The valves
manufactured are pressure control, directional control, servo valves and
prefill valves for pressures up to 15,000 pounds per square inch. The Company's
pumps and valves are controlled through the actions of manual, hydraulic,
pneumatic, electric, and electrohydraulic controls or control systems. The
cylinders manufactured are heavy duty special purpose cylinders operating at up
to 3,500 pounds per square inch. The Company's bent axis and axial piston
motors are produced in sizes ranging from .85 cubic inch per revolution to 44
cubic inch per revolution.
The Company offers an engineering and manufacturing team capable of
providing advanced technology in the design and production of unique fluid
power components, systems and electronic controls. The Company's global
involvement focuses its expertise on markets in which customers demand top
quality, prompt delivery, high performance and responsive aftermarket support.
Its piston pumps, motors, valves, controls, manifolds, electronic systems and
components, cylinders, reservoirs, skids, meters and other products are
utilized in many industries such as the primary metals, machine tool,
automobile, petroleum, construction equipment, chemical, plastic, glass,
lumber, rubber and food industries. The Company strives to serve those markets
requiring high technology and expertise where reliability, top performance and
longer service life are needed. The products are sold as individual components
or integrated into high performance systems. A portion of the Company's
business comes from responsive, high quality aftermarket sales and flexible
rebuilding services which include exchange, factory rebuild and field repair
service, along with customer education.
The Company's products are sold in the United States and Canada directly
through 13 district sales offices and by a network of approximately 65
distributors. Sales offices are located in Milwaukee, Wisconsin; Novi,
Michigan; Cleveland, Ohio; Dallas and Longview, Texas; Laguna Hills,
California; Lynnwood, Washington; Atlanta, Georgia; Kansas City, Missouri; St.
George, Utah; Doylestown, Pennsylvania; Ajax, Ontario, Canada; and Piqua,
Ohio. The Company's international sales are generated directly by employees
located in Milwaukee, Wisconsin; Bedford and Leeds, England; Paris, France;
Hernani, Spain; Hattersheim-Eddersheim, Germany; Montirone, Italy; Taren Point,
Australia; Belgaum, India; Song Nam City, South Korea; and Mexico City,
Mexico; and by a worldwide network of approximately 20 distributors. An Oilgear
licensee, Oilgear Japan, is responsible for sales of all equipment sold in
Japan. The Company owns 51% of a joint venture company in India, Oilgear
Towler Polyhydron Pvt. Ltd., which distributes products manufactured in the
United States, as well as repairs and manufactures designated Oilgear products
for the Indian market. In 1997, the Company established
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another joint venture company in India, Harman Oilgear Pvt. Ltd., which will
design and manufacture a wide array of process automation systems for global
distribution.
Competition
The Company is a supplier of components for the capital goods industry.
Vigorous competition exists in this industry. The Company's products compete
worldwide against the products of a number of domestic and foreign firms
presently engaged in the industry, most of which are of greater overall size
and resources than the Company. The principal methods of competition include
price, product performance, product availability, service, and warranty.
Customers
No material part of the Company's business is dependent upon a single
customer or a very few customers.
Backlog
The Company's backlog of orders believed to be firm as of December 31,
1996 was approximately $17,950,000, a decrease of approximately $3,950,000 from
the backlog of orders as of December 31, 1995, which was approximately
$21,900,000. The Company expects that substantially all such orders will be
filled in 1997. The Company's backlog is significant to its operations but is
not seasonal in any significant respect. Backlog is generally dependent upon
economic cycles affecting capital spending in the industries which utilize the
Company's products.
Raw Materials
During the year, iron and steel castings, bearings, steel and other raw
materials were generally available from a number of sources, and the Company is
generally not dependent on any one supplier.
Patents, Licenses, Franchises
The Company has a number of United States and foreign patents. It does not
consider its business to be materially dependent upon any patent, patent
application or patent license agreement.
Research and Development
The Company's research and development activities are conducted by members
of the engineering staff at its Milwaukee and Leeds, England plants, who spend
a substantial amount of their time on research and development. During 1996,
the Company expended $2,315,000, and during 1995 and 1994, $2,127,000 and
$1,752,000, respectively, on the research and development activities of its
engineering staff. The emphasis of the Company product development efforts
continues to be the expansion of its line of axial piston pumps and the
customizing of products to suit specific customer applications.
Environmental Matters
To date, compliance with federal, state and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment, has
not had any material effect on the capital expenditures, earnings and
competitive position of the Company. The Company does not presently anticipate
that compliance with such provisions will have any material effect on its
capital expenditures, earnings and competitive position in the future.
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Employees
At December 31, 1996, the Company had 997 employees.
Seasonal Aspects of Business
The Company's business is not seasonal to any significant extent.
Industry Segments and Principal Products
The Company is engaged in one industry, the manufacture and distribution
of fluid power systems and components for industrial machinery and industrial
processes. The Company also provides repair parts and service for most of the
products it manufactures. See "Principal Products, Markets and Methods of
Distribution" above.
Foreign and Domestic Operations and Export Sales
Incorporated by reference to Note 2 of "Notes To Consolidated Financial
Statements" on pages 15-16 of the 1996 Annual Report.
ITEM 2. PROPERTIES.
Oilgear owns a one-story general office and factory building located on 20
acres of land at 2300 South 51st Street in Milwaukee, Wisconsin. This building
is constructed of concrete, steel and brick and contains approximately 276,000
square feet of floor space.
Oilgear owns a manufacturing plant in Longview, Texas, constructed of
concrete block and steel, which contains approximately 44,000 square feet.
A 99,000 square foot manufacturing facility is located in Fremont,
Nebraska. To manage the increased demand for the Company's new products, the
Company expanded its Fremont, Nebraska facility in 1995, which facility is
subject to a mortgage.
The Company's Oilgear GmbH subsidiary owns an approximately 25,000 square
foot concrete block and steel manufacturing facility in Hattersheim-Eddersheim,
Germany, subject to a mortgage.
The Company's Oilgear Towler Ltd. subsidiary owns a one-story
manufacturing plant and two office buildings constructed of concrete, steel and
brick totaling approximately 62,000 square feet on six acres of land in Leeds,
England, and an additional prefabricated facility being used by the electrical
engineering department.
The Company's Oilgear Towler Ltd. subsidiary also owns a small service and
sales facility in Bedford, England.
The Company's Oilgear Towler S.A. Spanish subsidiary owns a two-story
manufacturing plant and office constructed of concrete and brick totaling
approximately 35,000 square feet on approximately one acre of land in Hernani,
Spain.
The Company's Oilgear Towler S.A. French subsidiary owns, subject to a
mortgage, a 9,000 square foot office building constructed of prefabricated
steel materials located on approximately one-half acre of land in Paris,
France.
The Company's Oilgear Towler S.r.l. Italian subsidiary owns a two-story
prefabricated concrete building on .6 acre of land in Montirone, Italy. The
facility is used to repair and assemble customer equipment, as well as house
sales and service functions.
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These properties are maintained in good condition and are adequate for
present operations.
Borrowings under the Company's domestic and foreign loan agreements are
collateralized by substantially all domestic property, plant and equipment and
by substantially all assets of the applicable foreign subsidiaries,
respectively. See Notes 4 and 5 of "Notes To Consolidated Financial
Statements" on pages 16-17 of the 1996 Annual Report.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in several product liability actions which it
believes are adequately covered by insurance, and certain other litigation
incidental to its business.
In October 1992, the United States Environmental Protection Agency ("EPA")
contacted the Company for information regarding the possible disposal of waste
at the Muskego Sanitary Landfill in Muskego, Wisconsin. The EPA made its
request pursuant to the provisions of the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and the Resource Conservation and
Recovery Act. The Company duly responded, noting that "ordinary trash" may have
been hauled to the Muskego site. In November 1992, the EPA notified the Company
that it had been identified as a responsible party for purposes of remedial
action at the Muskego Sanitary Landfill. On December 9, 1992, the EPA issued a
unilateral administrative order under CERCLA directing 46 respondents to
perform remedial action at the Muskego site and to reimburse the EPA for
oversight costs. The Company was not named in the order. In a subsequent
unilateral administrative order dated June 6, 1995 (the "1995 Order"), the EPA
directed the Company and 55 other respondents to design and implement remedial
measures for the second operable unit (groundwater remediation) at the Muskego
site. The Company is participating in a buyout settlement for the second
operable unit and has tendered payment of $17,113. The Company expects the
settlement to be finalized in 1997. It is not certain what further action
involving the Company, if any, may be brought regarding this matter, nor is it
possible at this time to predict the ultimate outcome of any litigation or
negotiation that might involve the Company.
Oilgear is a member of a De Minimis Group of small volume waste
contributors to the Conservation Chemical Company of Illinois, Inc. facility
located in Gary, Indiana (the "CCCI Site"). The CCCI Site is the subject of a
clean-up effort commenced by the EPA under CERCLA in 1985. The amount of waste
contributed by Oilgear to the CCCI Site was identified by the EPA as .0046% of
the total contributed by the more than 200 waste generators identified by the
EPA. In 1996, the Company finalized a de minimis settlement with the EPA
concerning the CCCI Site, pursuant to which the Company paid $1,388.25.
In August 1995, the EPA contacted the Company for information regarding
the possible disposal of waste by the Company at the former PCB Treatment, Inc.
facilities in Kansas City, Missouri and Kansas, respectively. The EPA made its
request pursuant to the provisions of CERCLA. The Company duly responded. A
steering committee has been formed to coordinate investigation of the sites on
behalf of the potentially responsible parties and its investigation is
currently underway. It is not certain what further involvement the Company may
have in this matter, if any, and, accordingly, it is not possible at this time
to predict the exposure, if any, to the Company as a result of this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, offices and positions held, and periods of service in
their present offices, of all executive officers of the Registrant are listed
below. Except in the case of mid-term vacancies, officers are elected for
one-year terms at the Board of Directors meeting following the annual meeting
of shareholders each year.
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<TABLE>
<CAPTION>
OFFICES AND POSITIONS PRESENT OFFICE
NAME AGE HELD WITH REGISTRANT HELD SINCE
<S> <C> <C> <C>
David A. Zuege 55 President and Chief Executive 1996(1)
Officer; Director; Member of
Executive Committee
Gerhard W. Bahner 58 Vice President - Engineering; 1991(2)
Director
Doward L. Runyan 65 Vice President - Manufacturing 1987
Thomas J. Price 53 Vice President - Finance and 1994(3)
Corporate Secretary
Hubert Bursch 57 Vice President - European 1994(4)
Operations
Dale C. Boyke 46 Vice President - Marketing & Sales 1997(5)
Robert D. Drake 42 Vice President - Asian/Latin 1997(6)
American Operations
</TABLE>
__________________
(1) Mr. Zuege was Secretary - Treasurer from 1972 to 1978, Vice President -
Finance and Secretary from 1979 to 1993, Senior Vice President and
Secretary for a portion of 1993, and Executive Vice President and Chief
Operating Officer during the remainder of 1993 through 1995. He has been
a member of the Board of Directors since 1982.
(2) Mr. Bahner has been employed with the Company in the engineering
department since 1973. He has served as Director of Engineering from 1987
to 1991 and Managing Director of Oilgear's subsidiary, Oilgear Towler
Ltd., from 1989 to 1991. He has been a member of the Board of Directors
since 1992.
(3) Mr. Price has been employed in various positions with the Company since
1966. He served as Controller of the Company from 1977 to 1986, as
Treasurer/Controller from 1987 to 1993, and as Treasurer/Controller and
Secretary from 1993 to 1994.
(4) Mr. Bursch has been employed in various positions with the Company's
European operations since 1966. He served as Geschaftsfuhrer of Oilgear
GmbH (now Oilgear Towler GmbH) before his appointment as Chairman of the
Board of Management - Europe in 1991, which office he held until January
1, 1994.
(5) Mr. Boyke has been employed in various positions with the Company since
1973. He served as General Sales Manager for the United States and
Canadian region from 1989 to 1996.
(6) Mr. Drake has been employed in various positions with the Company since
1982. He served as Director of International Sales from 1988 to 1996.
CAUTIONARY FACTORS
This report contains various forward-looking statements concerning the
Company's prospects that are based on the current expectations and beliefs of
management. Forward-looking statements may also
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be made by the Company from time to time in other reports and documents as well
as oral presentations. When used in written documents or oral statements, the
words "anticipate", "believe", "estimate", "expect", "objective", and similar
expressions are intended to identify forward-looking statements. The
statements contained herein and such future statements involve or may involve
certain assumptions, risks and uncertainties, many of which are beyond the
Company's control, that could cause the Company's actual results and
performance to differ materially from what is expected. In addition to the
assumptions and other factors referenced specifically in connection with such
statements, the following factors could impact the business and financial
prospects of the Company:
o Factors affecting the Company's international operations, including
relevant foreign currency exchange rates, which can affect the cost to
produce the Company's products or the ability to sell the Company's
products in foreign markets, and the value in United States dollars of
sales made in foreign currencies. Other factors include foreign trade,
monetary and fiscal policies; laws, regulations and other activities of
foreign governments, agencies and similar organizations; and risks
associated with having major facilities located in countries, such as
Mexico, Spain and Italy, which have historically been less stable than the
United States in several respects, including fiscal and political
stability.
o Factors affecting the Company's ability to hire and retain competent
employees, including unionization of the Company's non-union employees and
changes in relationships with the Company's unionized employees.
o The risk of strikes or other labor disputes at those locations which are
unionized which could affect the Company's operations.
o Factors affecting the economy generally, including the financial and
business conditions of the Company's customers and the demand for
customers' products and services that utilize Company products.
o Factors affecting the Company's financial performance or condition,
including tax legislation, unanticipated restrictions on the Company's
ability to transfer funds from its subsidiaries and changes in applicable
accounting principles or environmental laws and regulations.
o The cost and other effects of claims involving the Company's products and
other legal and administrative proceedings, including the expense of
investigating, litigating and settling any claims.
o Factors affecting the Company's ability to produce products on a
competitive basis, including the availability of raw materials at
reasonable prices.
o Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Incorporated by reference to "Quarterly Financial Information" and
"Equity" on pages 9 and 10, respectively, of the 1996 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to "5 Year Summary" on page 11 of the 1996
Annual Report.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference to "Management's Discussion" on pages 8 through
11 of the 1996 Annual Report. The second, third and fourth paragraphs under
"Legal Proceedings" in Item 3 hereof are also incorporated herein in response
to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information required
by this item are set forth on pages 12 through 19 and under the heading
"Quarterly Financial Information" on page 9, respectively, of the
1996 Annual Report and are incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated by reference to "Election of Directors" on pages 2 and 3 of
the Registrant's Proxy Statement, dated March 25, 1997, for its Annual Meeting
of Shareholders on April 15, 1997 ("1997 Annual Meeting Proxy Statement"), and
"Executive Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated by reference to "Executive Compensation" and "Compensation
Committee Interlocks and Insider Participation" on pages 6 through 11 and page
14, respectively, of the 1997 Annual Meeting Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to "Security Ownership of Certain Beneficial
Owners and Management" on pages 4 and 5 of the 1997 Annual Meeting Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
1. and 2. Financial Statements and Financial Statement Schedules.
See following "Index to Consolidated Financial Statements
and Schedule," which is incorporated herein by reference.
3. Exhibits. See Exhibit Index included as last part of
this report, which index is incorporated herein by
reference. Each management contract or compensatory plan
or arrangement required to be filed as an exhibit to this
report is identified in the Exhibit Index by two
asterisks preceding its exhibit number.
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(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of 1996.
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THE OILGEAR COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
________________________________________________________________________________
The consolidated financial statements of The Oilgear Company and subsidiaries
together with the report thereon of KPMG Peat Marwick LLP dated March 4, 1997,
appearing on pages 12 through 20 of the 1996 Annual Report, are incorporated by
reference into this Annual Report on Form 10-K. The following additional
financial data should be read in conjunction with the consolidated financial
statements in the 1996 Annual Report.
ADDITIONAL FINANCIAL DATA
Independent Auditors' Report on Financial Statement Schedule
Submitted:
II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or because the
required information is given in the consolidated financial statements and the
notes thereto.
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INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors
The Oilgear Company:
Under date of March 4, 1997, we reported on the consolidated balance sheets of
The Oilgear Company and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations and shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, which are incorporated by reference in the Company's annual report on
Form 10-K for the year ended December 31, 1996. In connection with our audits
of the aforementioned consolidated financial statements, we also audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement
schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
March 4, 1997
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THE OILGEAR COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Additions Deductions
------------------------------------- -------------------
Balance at Charged to
beginning costs and Other Amounts written off, Balance at
of year expenses Adjustments(1) net of recoveries end of year
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<S> <C> <C> <C> <C> <C>
Allowances for losses from
obsolescence which is deducted
on the balance sheet from
inventories
Year ended
December 31, 1996 $3,166,114 20,895 42,002 (629,240) 2,599,771
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1995 $3,026,743 517,109 26,940 (404,678) 3,166,114
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1994 $2,759,435 147,549 133,329 (13,570) 3,026,743
- -----------------------------------------------------------------------------------------------------------------------------------
Allowances for losses in
collection which is deducted
on the balance sheet from
trade accounts receivable
Year ended
December 31, 1996 $313,885 183,831 (98) (279,464) 218,154
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1995 $275,893 16,201 9,756 12,035 313,885
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended
December 31, 1994 $401,000 378,257 9,298 (512,662) 275,893
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes adjustments due to foreign currency translation.
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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.
THE OILGEAR COMPANY
(Registrant)
By /s/ THOMAS J. PRICE March 31, 1997
----------------------------------
Thomas J. Price, Vice President of
Finance and Corporate Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl L. Gosewehr, Otto F. Klieve and David A.
Zuege, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
report, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their substitutes,
may lawfully do or cause to be done by virtue hereof.
______________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.*
/s/ DAVID A. ZUEGE /s/ ROGER G. DE LONG
- ------------------------------------------ -------------------------------
David A. Zuege, President Roger G. DeLong, Director
and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ THOMAS J. PRICE /s/ OTTO F. KLIEVE
- ------------------------------------------ -------------------------------
Thomas J. Price, Vice President of Otto F. Klieve, Director
Finance and Corporate Secretary
(Principal Financial Officer
and Principal Accounting Officer)
/s/ CARL L. GOSEWEHR
- ------------------------------------------ -------------------------------
Carl L. Gosewehr, Chairman of the Board Thomas L. Misiak, Director
/s/ GERHARD W. BAHNER /s/ EDWARD NEUWIRTH, JR.
- ------------------------------------------ -------------------------------
Gerhard W. Bahner, Director Edward Neuwirth, Jr., Director
/s/ FRANK L. SCHMIT
- ------------------------------------------ -------------------------------
Randolph W. Carson, Director Frank L. Schmit, Director
- ----------------
*Each of these signatures is affixed as of March 31, 1997.
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THE OILGEAR COMPANY
(THE "REGISTRANT")
(COMMISSION FILE NO. 0-822)
* * * * *
EXHIBIT INDEX
1996 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO: HEREWITH
- ------- ----------- ------------- --------
<S> <C> <C> <C>
3.1 Restated Articles of Incorporation of The Exhibit 3.1 to
Oilgear Company (as adopted March 18, Registrant's 10-K for
1969) year ended December 31,
1994 ("1994 10-K")
3.2 Bylaws of The Oilgear Company (as Exhibit 3.2 to
amended and restated by the Board of Registrant's 10-K
Directors, effective for year ended
January 1, 1992, to December 31, 1991 ("1991
reflect the revised Wisconsin Business 10-K")
Corporation Law)
*4
4.1 Loan Agreement between The Oilgear Exhibit 4.2 to
Company and M&I Marshall & Ilsley Registrant's 10-Q
Bank dated as of September 28, for the quarterly period ended
1990, as amended and restated as of June June 30, 1996
17, 1996
**10.1 Consulting and Deferred Compensation Exhibit 10.1 to 1991 10-K
Agreement between Carl L. Gosewehr
and The Oilgear Company, dated as of
January 1, 1992
**10.2 The Oilgear Company Key Employee Exhibit 10.5(a) to
Stock Purchase Plan, as amended and Registrant's 10-K for
restated September 6, 1990 year ended December
31, 1990 ("1990 10-K")
**10.3 (a) The Oilgear Company Retirement Exhibit 10.6 to 1990 10-K
Benefits Equalization Plan, effective
as of March 1, 1991
(b) Amendment to The Oilgear Company Exhibit 10.3(b) to
Retirement Benefits Equalization Plan Registrant's
adopted on December 13, 1995 10-K for year ended
December 31, 1995 ("1995
10-K")
</TABLE>
____________________
*Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant agrees to
furnish to the Securities and Exchange Commission, upon request, a copy of any
unfiled instrument with respect to long-term debt.
**Management contracts and executive compensation plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
EI-1
<PAGE> 15
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO: HEREWITH
- ------- ----------- ------------- --------
<S> <C> <C> <C>
**10.4 (a) Oilgear Profit Sharing Program for Exhibit 10.4(b) to
Corporate Officers and Certain Registrant's 10-K for
Executives, as amended effective year ended December 31,
January 1, 1993 1992
(b) Oilgear Variable Compensation Exhibit 10.4(b)
Program to 1994 10-K
**10.5 (a) Form of Deferred Compensation Exhibit 10.9 to
Agreement with certain directors Registrant's 10-K
(December 8, 1971) for year ended
December 31, 1980
(b) The Oilgear Company Deferred Directors' Exhibit 10.9(b) to
Fee Plan, as amended and restated Registrant's 10-K for
December 14, 1983 year ended December
31, 1983
(c) Amendment to The Oilgear Company Exhibit 10.5(c) to
Deferred Directors' Fee Plan 1995 10-K
adopted on December 11, 1991
**10.6 The Oilgear Company 1992 Stock Exhibit A to Registrant's
Option Plan 1993 Annual Meeting
Proxy Statement dated
March 26, 1993
**10.7 (a) The Oilgear Company Directors' Stock Exhibit 10.7 to Registrant's
Plan 10-K for year ended December 31,
1993
(b) The Oilgear Company Amended and Exhibit 10.7(b) to
Restated Directors' Stock Plan 1994 10-K
**10.8 Consulting and Deferred Compensation Exhibit 10.8 to
Agreement between Otto F. Klieve 1995 10-K
and The Oilgear Company, dated
as of January 1, 1996
13 Portions of The Oilgear Company 1996 X
Annual Report incorporated by
reference in this Form 10-K (pages 8
through 20 thereof)
21 Subsidiaries of The Oilgear Company X
</TABLE>
____________________
**Management contracts and executive compensation plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
EI-2
<PAGE> 16
<TABLE>
<CAPTION>
INCORPORATED
EXHIBIT HEREIN BY FILED
NUMBER DESCRIPTION REFERENCE TO: HEREWITH
- ------- ----------- ------------- --------
<S> <C> <C> <C>
23 Consent of KPMG Peat Marwick LLP X
24 Power of Attorney Signature
Page in
this
Report
27 Financial Data Schedule for the X
year ended December 31, 1996
99 Financial Statements and Exhibits To be
furnished in lieu of Form 11-K Annual filed by
Report for 1996 with respect to The Amend-
Oilgear Salaried Savings Plus Plan ment
(including related consent of KPMG
Peat Marwick LLP)
</TABLE>
EI-3
<PAGE> 1
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
SHIPMENTS, ORDERS & BACKLOG 1996 1995 1994
- -------------------------------------------------------------------------
Net sales (shipments) $89,621,000 82,157,000 69,840,000
Percentage increase 9.1% 17.6% 13.0%
Net orders $85,677,000 89,146,000 69,982,000
Percentage increase
(decrease) (3.9%) 27.4% 9.5%
Backlog at
December 31 $17,957,000 21,901,000 14,913,000
Percentage increase
(decrease) (18.0%) 46.9% 1.0%
The continued strong order level from the domestic and U.S. export
segments and a large beginning backlog produced an increase in consolidated
shipments of approximately 9%. Export shipments to the Asian markets were
strong, especially in Korea and China, resulting in total U.S. export shipments
increasing by 32%. European and domestic shipments increased by approximately
3% and 5%, respectively.
A weak fluid power market caused consolidated net orders to decrease by
approximately 4% in 1996. Despite the weak fluid power market, the domestic and
U.S. export orders combined were slightly higher in 1996 than in 1995.
Increased orders in the mobile and petroleum markets for pumps and engineered
systems were the reasons. After a significant increase in European orders in
1995 (61%), European orders decreased in 1996 by approximately 12%. A slowdown
in European capital expenditures and intensive price competition for
engineered systems in the European industrial market were the principal reasons
for the decline.
Some of the increased shipments came out of the backlog which decreased
by approximately $3,944,000 or 18%.
OPERATING EXPENSES 1996 1995 1994
- -------------------------------------------------------------------------
Research and development $ 2,315,000 2,127,000 1,752,000
Percentage increase 8.8% 21.4% 6.0%
Selling, general and
administrative less
research and development $21,917,000 19,690,000 18,719,000
Percentage increase 11.3% 5.2% 5.4%
The Company's commitment to its customer demands for new and more
efficient hydraulic products is demonstrated by increased expenses for research
and development. This commitment produced new customers and the use of our
products in new applications in 1996.
Growth is an objective of the Company. The sales and marketing effort
in 1996 achieved increased market share in the industrial, mobile and civil
markets. The cost of this effort and the addition of Oilgear Towler Polyhydron
Ltd. in 1996 increased operating expenses by 11.1%.
PROFIT, INCOME & EARNINGS 1996 1995 1994
- -------------------------------------------------------------------------
Gross profit $29,437,000 26,299,000 23,500,000
Percentage increase 11.9% 11.9% 18.7%
Gross margin 32.8% 32.0% 33.6%
Operating income $ 5,205,000 4,482,000 3,029,000
Percentage increase 16.1% 48.0% 712.1%
Net earnings $ 2,518,000 2,192,000 1,765,000
Percentage increase 14.9% 24.2% 404.3%
In 1996 the Company increased its ownership in Oilgear Towler
Polyhydron Ltd. to 51% and began consolidating it with the Company's financial
results. The effect was to increase net earnings by approximately $54,000.
Other than for this Indian joint venture, and except for slight deviations in
the mix of products shipped, the gross margin is consistent with prior years.
Gross profit, operating income and net earnings have increased as expected with
the increase in shipments.
Footnote 7 to the consolidated financial statements on page 17
summarizes the non-operating income and expense.
The Company's effective income tax rate was 29.0% in 1996 and 28.6% in
1995. See footnote 8 to the consolidated financial statements on page 17 for
an explanation of the effective income tax rate.
1995 COMPARED TO 1994
Domestic and U.S. export shipments combined for 1995 were approximately
15% higher than 1994. The increase was attributed to a strong United States
economy and a significant increase (approximately 32%) in export business.
European shipments for 1995 were approximately 61% higher than 1994.
The increase was attributed to the recovery of the European economy.
An increased beginning backlog of domestic orders and increased orders
from all business resulted in shipments for 1995 increasing by approximately
18% from 1994.
In 1995, due to increased demand from the Original Equipment
Manufacturing market segment for new products, the Company increased the level
of its development projects resulting in increased research and development
costs.
<PAGE> 2
The increased level of debt arising from the expansion of the business
and the addition to the building at the Fremont, Neb. plant caused interest
expense to increase in 1995.
The Company's effective income tax rate was 28.6% in 1995 and 10.5% in
1994. See footnote 8 to the consolidated financial statements on page 17 for an
explanation of the effective tax rate.
FORWARD LOOKING COMMENTS AND MATTERS
THAT MAY AFFECT FUTURE OPERATIONS
The Company is going into 1997 with a decreased backlog of orders and a
cautious outlook for a continued strong capital goods market. The strong rise in
the dollar which occurred at the end of 1996 has continued into the first few
months of 1997. At this time, the Company has been able to overcome this
currency exchange factor and export orders have not been significantly impacted,
however, this is a concern for 1997. Domestic orders for the beginning of 1997
have rebounded from the low level in the fourth quarter 1996. European orders
for the beginning of 1997 are improved over the last three quarters of 1996 and
are expected to stabilize for the remainder of 1997. If there is increased
demand in the world for capital equipment projects that require systems
technology, then the Company is ready to supply the engineering, hydraulic and
electrical products and customer service required to meet the demand. The
Company expects to continue to outperform its competitors and its industry in
1997.
INFLATION AND CHANGING PRICES
Oilgear uses the LIFO method of accounting for most of its inventories
and has reserves for obsolete and slow moving inventory. The majority of the
Company's assets were purchased over the last 40 years and reside in the United
States and Western Europe. These assets are in operation and have been
maintained through the years. Management believes that inflation has not
significantly distorted the net earnings reported for the Company. However,
because of inflation and the extent to which these assets have been depreciated,
management believes the book value of the Company, stated in historical dollars
at $21.87 per share, significantly understates the current or replacement value
of the Company's assets.
SUBSEQUENT EVENT
In February, 1997 the Company entered into a joint venture agreement
with Harman Engineers Private Ltd., a leading supplier of electronic control
systems for the Indian marketplace. Oilgear has a 51% interest in this joint
venture, which further establishes its presence as a leader in this emerging
market.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1996 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $21,523,314 23,576,057 22,160,979 22,360,512
Net earnings 494,226 672,721 641,553 709,624
Net earnings per share of common stock 0.42 0.56 0.53 0.58
Dividends per share of common stock 0.10 0.10 0.10 0.10
Stock price low* 14.50 14.75 13.75 14.25
Stock price high* 17 17.50 16.50 15.63
<CAPTION>
1995 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $17,760,031 19,274,473 21,499,167 23,623,699
Net earnings 351,888 567,423 617,957 654,466
Net earnings per share of common stock 0.31 0.49 0.53 0.56
Dividends per share of common stock 0.10 0.10 0.10 0.10
Stock price low* 12.50 13.50 17 15.25
Stock price high* 14.25 18.50 19.50 18.50
</TABLE>
*High and low sales prices in the Nasdaq Stock Market.
<PAGE> 3
DISCUSSION OF FINANCIAL POSITION
CAPITALIZATION 1996 1995 1994
- -------------------------------------------------------------------------------
Interest bearing debt $18,451,000 19,899,000 18,403,000
Shareholders' equity 27,317,000 22,772,000 20,542,000
Debt and equity 45,768,000 42,671,000 38,945,000
Ratio 40.3% 46.6% 47.3%
EQUITY
The increase in shareholders' equity in 1996 and 1995 was primarily the
result of net earnings and the sale of Company common stock to employee
ownership plans as stated in the next paragraph. The dividends paid in each of
the four quarters of 1996 and 1995 were $.10 per share.
The Company's common stock is traded over-the-counter in the Nasdaq
Stock Market, symbol OLGR. At December 31, 1996, there were approximately 586
shareholders of record. Oilgear believes it is desirable for its employees to
have an ownership interest in the Company. This concept is supported by several
programs that are described in footnote 9 to the consolidated financial
statements starting on page 18. The Company sold common stock and made
contributions of common stock to employee benefit plans as follows:
1996 shares value
- ----------------------------------
Common stock 70,604 $ 986,000
1995 shares value
- ----------------------------------
Common stock 40,317 $ 412,000
1994 shares value
- ----------------------------------
Common stock 94,780 $1,040,000
INTEREST BEARING DEBT
During 1996, the Company amended its revolving loan agreement. The
amended agreement provides for borrowings up to $16,000,000 through April 30,
1999, and replaced both the prior revolving loan agreement which provided for
borrowings up to $11,000,000 through June 1997 and the $2,000,000 line of
credit. At December 31, 1996, $11,500,000 was used on the revolving loan
agreement.
Interest bearing debt increased in 1995 from the financing of the
approximately 21,000 square foot addition to the plant in Fremont, Neb. This
addition was financed with a $850,000 ten year bank term loan with an interest
rate of 8.5% and a $500,000 ten year municipal term loan with an interest rate
of 4.25%. In addition, 1,000,000 Pounds Sterling in additional borrowings was
added to the revolving agreement in 1995. This amount was used to pay down the
European short-term borrowings.
Approximately $1,000,000 under lines of credit was available to the
Company's foreign subsidiaries at December 31, 1996. There were approximately
$113,000 of borrowings against these lines at that time.
WORKING CAPITAL
LIQUIDITY 1996 1995 1994
- -------------------------------------------------------------------------
Cash and cash equivalents $ 2,368,000 2,779,000 2,830,000
Short-term borrowings 113,000 500,000 2,172,000
Working capital 28,633,000 26,833,000 26,076,000
Current ratio 2.8 2.4 2.5
Quick ratio 1.1 1.0 1.0
Cash provided by operations $ 6,235,000 3,861,000 4,374,000
Cash used by investing
activities (4,973,000) (5,347,000) (3,049,000)
Cash provided (used) by
financing activities (1,569,000) 1,149,000 (391,000)
The current ratio and the quick ratio continued to remain strong in all
three years reported.
Cash provided by operations was positive for 1996, 1995 and 1994 as
presented in the above table. Net earnings and depreciation and amortization
were the primary reasons for the positive results in each year. However, 1996
was the first of the three years that inventories decreased, resulting in an
even greater increase in cash provided by operations. A large dollar value of
shipments was shipped in December of 1995 causing trade receivables to increase
at year end. The improvement in the domestic (including exports) and European
business created an increase in work in process inventories in 1995.
Cash used for investing activities in 1996 and 1994 was primarily for
machine tools. In 1995, investing activities included the expansion of the
Fremont, Neb. facility, the acquisition of multiple spindle machine tools and
upgrading of computer equipment. To manage the increased demand for the
Company's new products and continue to deliver excellent customer service, the
Company anticipates that capital expenditures will increase in 1997 which
includes a further expansion of the Fremont facility.
The Company's financial position at December 31, 1996, continues to be
strong and management believes the Company has adequate means for meeting its
future capital and operating needs.
BUSINESS DESCRIPTION
A business description is provided in footnote 2 on page 15.
<PAGE> 4
CAUTIONARY FACTORS
This report in this section and elsewhere contains various
forward-looking statements concerning the Company's prospects that are based on
the current expectations and beliefs of management. Forward-looking statements
may also be made by the Company from time to time in other reports and
documents as well as oral presentations. When used in written documents or oral
statements, the words "anticipate", "believe", "estimate", "expect",
"objective", and similar expressions are intended to identify forward-looking
statements. The statements contained herein and such future statements involve
or may involve certain assumptions, risks and uncertainties, many of which are
beyond the Company's control, that could cause the Company's actual results and
performance to differ materially from what is expected. In addition to the
assumptions and other factors referenced specifically in connection with such
statements, the following factors could impact the business and financial
prospects of the Company:
* Factors affecting the Company's international operations, including
relevant foreign currency exchange rates, which can affect the cost to
produce the Company's products or the ability to sell the Company's
products in foreign markets, and the value in United States dollars of
sales made in foreign currencies. Other factors include foreign trade,
monetary and fiscal policies; laws, regulations and other activities of
foreign governments, agencies and similar organizations; and risks
associated with having major facilities located in countries, such as
Mexico, Spain and Italy which have historically been less stable than the
United States in several respects, including fiscal and political
stability.
* Factors affecting the Company's ability to hire and retain competent
employees, including unionization of the Company's non-union employees and
changes in relationships with the Company's unionized employees.
* The risk of strikes or other labor disputes at those locations which are
unionized which could affect the Company's operations.
* Factors affecting the economy generally, including the financial and
business conditions of the Company's customers and the demand for
customers' products and services that utilize Company products.
* Factors affecting the Company's financial performance
or condition, including tax legislation, unanticipated restrictions on the
Company's ability to transfer funds from its subsidiaries and changes in
applicable accounting principles or environmental laws and regulations.
* The cost and other effects of claims involving the Company's products and
other legal and administrative proceedings, including the expense of
investigating, litigating and settling any claims.
* Factors affecting the Company's ability to produce products on a
competitive basis, including the availability of raw materials at
reasonable prices.
* Unanticipated technological developments that result in competitive
disadvantages and create the potential for impairment of existing assets.
<TABLE>
<CAPTION>
5 YEAR SUMMARY
OPERATIONS 1996 1995 1994 1993 1992**
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $89,620,862 82,157,370 69,839,643 61,779,060 68,265,617
Net earnings 2,518,124 2,191,734 1,765,161 349,532 1,078,417
Net earnings after accounting change -- -- -- -- (6,675,583)
Earnings per share 2.09 1.89 1.60 0.34 1.07
Earnings per share after accounting
change -- -- -- -- (6.67)
Dividends per share 0.40 0.40 0.25 0.35 0.60
<CAPTION>
CAPITALIZATION
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest bearing debt $18,451,213 19,899,255 18,403,414 18,499,778 19,637,606
Shareholders' equity 27,317,138 22,771,627 20,542,443 17,270,867 19,549,833
Total assets 77,838,827 77,902,162 69,879,022 63,704,350 65,470,908
Book value per share 21.87 19.33 18.05 16.56 19.34
December 31st stock price* 15.00 17.00 14.25 11.13 11.00
</TABLE>
*The last sale price for the year in the Nasdaq Stock Market.
**Reflects an accounting change to recognize postretirement employee
benefits on an accrual basis from a cash basis of accounting. The result of this
accounting change reduced 1992 net earnings by $7,754,000.
<PAGE> 5
CONSOLIDATED STATEMENTS OF OPERATIONS AND SHAREHOLDERS' EQUITY
The Oilgear Company and Subsidiaries Years
ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
OPERATIONS 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (note 2) $89,620,862 82,157,370 69,839,643
Cost of sales (note 3) 60,184,305 55,858,297 46,340,042
- --------------------------------------------------------------------------------
Gross profit 29,436,557 26,299,073 23,499,601
Selling, general and administrative
expenses 24,231,669 21,817,122 20,470,707
- --------------------------------------------------------------------------------
Operating income 5,204,888 4,481,951 3,028,894
Interest expense 1,728,059 1,690,107 1,407,648
Other non-operating income, net
(note 7) 143,593 277,890 349,915
- --------------------------------------------------------------------------------
Earnings before income taxes and
minority interest 3,620,422 3,069,734 1,971,161
Income tax expense (note 8) 1,050,000 878,000 206,000
Minority interest 52,298 - -
- --------------------------------------------------------------------------------
Net earnings $ 2,518,124 2,191,734 1,765,161
================================================================================
Weighted average outstanding shares 1,204,442 1,162,713 1,102,865
- --------------------------------------------------------------------------------
Earnings per share of common stock $ 2.09 1.89 1.60
================================================================================
SHAREHOLDERS' EQUITY:
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock (note 9):
Balance at beginning of year $ 1,178,255 1,137,938 1,043,158
Sales to employee and director
benefit plans (46,032, 40,317
and 36,940 shares in 1996,
1995 and 1994, respectively) 46,032 40,317 36,940
Contributions to employee
benefit plans (24,572 and
57,840 shares in 1996 and
1994, respectively) 24,572 - 57,840
- --------------------------------------------------------------------------------
Balance at end of year 1,248,859 1,178,255 1,137,938
- --------------------------------------------------------------------------------
Capital in excess of par value
(note 9):
Balance at beginning of year 8,174,934 7,803,727 6,858,845
Sales to employee and director
benefit plans 581,973 371,207 376,863
Contributions to employee
benefit plans 333,721 - 568,019
- --------------------------------------------------------------------------------
Balance at end of year 9,090,628 8,174,934 7,803,727
- --------------------------------------------------------------------------------
Retained earnings (note 9):
Balance at beginning of year 18,796,941 17,072,882 15,586,766
Net earnings 2,518,124 2,191,734 1,765,161
Cash dividends declared ($.40,
$.40 and $.25 per share in
1996, 1995 and 1994,
respectively) (486,700) (467,675) (279,045)
- --------------------------------------------------------------------------------
Balance at end of year 20,828,365 18,796,941 17,072,882
- --------------------------------------------------------------------------------
Notes receivable from employees
(note 9):
Balance at beginning of year (147,410) (168,044) (207,745)
Sales under employee stock
purchase plan (169,275) (66,250) (36,750)
Payments received/forgiven on
notes 95,904 86,884 76,451
- --------------------------------------------------------------------------------
Balance at end of year (220,781) (147,410) (168,044)
- --------------------------------------------------------------------------------
Equity adjustment for foreign
currency translation:
Balance at beginning of year 248,907 (124,060) (1,130,157)
Translation adjustment 201,160 372,967 1,006,097
- --------------------------------------------------------------------------------
Balance at end of year 450,067 248,907 (124,060)
- --------------------------------------------------------------------------------
Equity adjustment for pension
liability:
Balance at beginning of year (5,480,000) (5,180,000) (4,880,000)
Pension liability adjustment 1,400,000 (300,000) (300,000)
- --------------------------------------------------------------------------------
Balance at end of year (4,080,000) (5,480,000) (5,180,000)
- --------------------------------------------------------------------------------
Total shareholders' equity $27,317,138 22,771,627 20,542,443
================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
The Oilgear Company and Subsidiaries December 31, 1996 and 1995
ASSETS 1996 1995
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 2,367,684 2,779,186
Trade accounts receivable, less allowance for
doubtful receivables of $218,154 and $313,885
in 1996 and 1995, respectively 14,894,195 16,383,534
Inventories (note 3) 26,229,868 26,595,579
Prepaid expenses 528,854 414,029
Other current assets 537,795 409,726
- --------------------------------------------------------------------------------
Total current assets 44,558,396 46,582,054
- --------------------------------------------------------------------------------
Property, plant and equipment, at cost (note 5):
Land 1,283,679 1,281,471
Buildings 10,213,472 9,772,276
Machinery and equipment 42,512,215 37,965,751
Drawings, patterns and patents 2,585,379 2,302,638
- --------------------------------------------------------------------------------
56,594,745 51,322,136
Less accumulated depreciation and amortization 27,740,588 24,214,130
- --------------------------------------------------------------------------------
Net property, plant and equipment 28,854,157 27,108,006
Pension intangible (note 9) 600,000 700,000
Other assets (note 9) 3,826,274 3,512,102
- --------------------------------------------------------------------------------
$77,838,827 77,902,162
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- --------------------------------------------------------------------------------
Current liabilities:
Short-term borrowings (note 4) $ 113,414 500,000
Current installments of long-term debt (note 5) 2,182,838 3,324,359
Accounts payable 5,728,452 7,922,093
Customer deposits 1,992,367 2,704,924
Accrued compensation 2,724,274 2,555,159
Other accrued expenses and income taxes (note 8) 3,154,282 2,742,026
- --------------------------------------------------------------------------------
Total current liabilities 15,895,627 19,748,561
- --------------------------------------------------------------------------------
Long-term debt, less current installments (note 5) 16,154,961 16,074,896
Unfunded employee retirement plan costs (note 9) 5,600,000 7,100,000
Unfunded postretirement health care costs (note 9) 11,109,000 11,180,000
Other noncurrent liabilities 1,414,099 1,027,078
- --------------------------------------------------------------------------------
Total liabilities 50,173,687 55,130,535
- --------------------------------------------------------------------------------
Minority interest in consolidated subsidiary 348,002 -
- --------------------------------------------------------------------------------
Commitments and contingencies (notes 9 and 11)
Shareholders' equity (notes 5 and 9):
Common stock, par value $1 per share,
authorized 4,000,000 shares; issued
1,248,859 and 1,178,255 shares in
1996 and 1995, respectively 1,248,859 1,178,255
Capital in excess of par value 9,090,628 8,174,934
Retained earnings 20,828,365 18,796,941
- --------------------------------------------------------------------------------
31,167,852 28,150,130
Deduct:
Notes receivable from employees for purchase of
common stock of the Company (220,781) (147,410)
Equity adjustment for foreign currency translation 450,067 248,907
Equity adjustment for pension liability (note 9) (4,080,000) (5,480,000)
- --------------------------------------------------------------------------------
Total shareholders' equity 27,317,138 22,771,627
- --------------------------------------------------------------------------------
$77,838,827 77,902,162
================================================================================
See accompanying notes to consolidated financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Oilgear Company and Subsidiaries Years ended December 31, 1996,1995 and 1994
1996 1995 1994
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 2,518,124 2,191,734 1,765,161
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 3,405,180 3,061,675 2,787,251
Common and treasury stock issued in
connection with:
Funding of expense for employee
retirement plans 304,500 - 625,859
Compensation element of sales
to employees and employee
savings plan 189,400 115,632 123,871
Deferred income tax expense (benefit) (13,198) - 17,000
Minority interest 52,298 - -
Change in assets and liabilities:
Trade accounts receivable 1,589,878 (1,132,502) 271,779
Inventories 746,867 (4,158,041) (3,397,219)
Prepaid expenses (54,426) (93,225) 89,092
Accounts payable (2,156,055) 1,295,429 2,112,262
Customer deposits (686,109) 1,650,842 (1,067,995)
Accrued compensation 196,533 229,310 507,538
Other, net 142,006 700,571 539,126
- --------------------------------------------------------------------------------
Net cash provided by operating activities 6,234,998 3,861,425 4,373,725
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and
equipment (4,826,302) (5,241,948) (2,865,346)
Investment in affiliate (146,466) (105,543) (183,385)
- --------------------------------------------------------------------------------
Net cash used by investing activities (4,972,768) (5,347,491) (3,048,731)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line
of credit agreement (500,000) (1,778,345) 440,895
Repayment of long-term debt (2,300,887) (2,613,177) (1,850,820)
Proceeds from issuance of long-term
debt 1,300,000 5,691,806 967,950
Dividends paid (486,700) (467,675) (279,045)
Proceeds from sale of common stock 373,335 272,950 300,942
Payments received on notes receivable
from employees 45,692 43,576 28,691
- --------------------------------------------------------------------------------
Net cash provided (used) by financing
activities (1,568,560) 1,149,135 (391,387)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash (105,172) 285,643 150,194
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (411,502) (51,288) 1,083,801
Cash and cash equivalents:
At beginning of year 2,779,186 2,830,474 1,746,673
- --------------------------------------------------------------------------------
At end of year $ 2,367,684 2,779,186 2,830,474
================================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 1,685,916 1,582,959 1,515,300
Income taxes $ 571,414 522,723 320,507
================================================================================
See accompanying notes to consolidated financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Oilgear Company and Subsidiaries Years
ended December 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A)CONSOLIDATION
These consolidated financial statements include the accounts of The
Oilgear Company and its subsidiaries (Company). All significant intercompany
balances and transactions have been eliminated.
(B)FOREIGN CURRENCY TRANSLATION
Substantially all assets and liabilities of foreign subsidiaries are
translated at the exchange rate prevailing at the balance sheet date and
substantially all revenue and expense accounts are translated at the weighted
average exchange rate during the year. Translation adjustments are not included
in determining net earnings, but are accumulated as a component of
shareholders' equity. Gains and losses resulting from foreign currency
transactions are included in net earnings.
(C)CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents. Cash equivalents totaled approximately
$351,000 and $444,000 at December 31, 1996 and 1995, respectively, and
consisted primarily of commercial paper.
(D)INVENTORIES
Inventories are stated at the lower of cost or market. Cost has been
calculated on the last-in, first-out (LIFO) method for the majority of the
domestic inventories. As discussed in note 3, effective January 1, 1994, the
Company changed its method of accounting for LIFO inventories from the dollar
value approach to the specific goods approach. For the balance of the
inventories, cost has been calculated under the first-in, first-out (FIFO) or
average actual cost methods. Market means current replacement cost not to
exceed net realizable value. Products returned from customers are inspected to
verify that the product is in "as new" condition. Products verified to be in
"as new" condition, are added to inventory. Reserves for obsolete and slow
moving inventory are charged to cost of sales.
(E)DEPRECIATION AND AMORTIZATION
Depreciation and amortization of plant and equipment are provided over
the estimated useful lives of the respective assets under the straight-line
method. Estimated useful lives range from 20 to 40 years for buildings, 5 to 15
years for machinery and equipment and 5 to 17 years for drawings, patterns and
patents.
(F)REVENUE RECOGNITION
The Company recognizes revenue on systems contracts on a
percentage-of-completion basis, measured by an estimate of the revenue
generated by each component of the system upon its completion. Losses are
recognized at the time a loss is projected. Revenue is recognized on other
sales of products generally upon shipment to the customer.
(G)STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, as permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB
Opinion No. 25, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise price of
the stock option.
(H)INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(I)RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to selling, general and
administrative expenses in the year they are incurred. Total research and
development expense was approximately $2,315,000, $2,127,000 and $1,752,000 in
1996, 1995 and 1994, respectively.
(J)USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(K)RECLASSIFICATIONS
Certain amounts as originally reported in 1994 and 1995 have been
reclassified to conform with the 1996 presentation.
(2) BUSINESS DESCRIPTION AND OPERATIONS
The Oilgear Company provides advanced technology in the design and
production of unique fluid power components, systems and electronic controls.
Products include piston pumps, motors, valves, controls, manifolds, electronic
systems and components, cylinders, reservoirs, skids and meters. Industries
that use these products are primary metals, machine tool, automobile,
petroleum, construction equipment, chemical, plastic, glass, lumber, rubber and
food. The products are sold as individual components or integrated into high
performance systems.
Geographic area information is as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Net sales to unaffiliated
customers:
Within the United States $46,188,297 44,118,481 39,452,849
United States exports 14,957,673 11,319,811 8,587,932
- --------------------------------------------------------------------------------
Total United States 61,145,970 55,438,292 48,040,781
Foreign 28,474,892 26,719,078 21,798,862
- --------------------------------------------------------------------------------
$89,620,862 82,157,370 69,839,643
================================================================================
Transfers between
geographic areas:
United States exports $ 3,774,661 3,909,946 3,426,753
================================================================================
United States imports $ 1,491,747 989,147 986,425
================================================================================
Earnings (loss) before income
taxes and minority interest:
United States $ 2,473,797 1,953,373 2,311,246
Foreign 1,146,625 1,116,361 (340,085)
- --------------------------------------------------------------------------------
$ 3,620,422 3,069,734 1,971,161
================================================================================
Identifiable assets:
United States $53,148,843 52,345,054 48,000,022
Foreign 24,689,984 25,557,108 21,879,000
- --------------------------------------------------------------------------------
$77,838,827 77,902,162 69,879,022
================================================================================
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Oilgear Company and Subsidiaries Years ended December 31, 1996, 1995 and
1994
Foreign operations consist predominately of subsidiaries in Europe.
Transfers and sales between geographic areas are accounted for at cost plus a
reasonable profit.
(3) INVENTORIES
Inventories at December 31, 1996 and 1995 consist of the following:
1996 1995
- ---------------------------------------------------
Raw materials $ 1,497,513 1,440,263
Work in process 23,212,707 24,921,466
Finished goods 4,431,648 3,381,850
- ---------------------------------------------------
29,141,868 29,743,579
LIFO reserve (2,912,000) (3,148,000)
- ---------------------------------------------------
Total $26,229,868 26,595,579
===================================================
Inventories stated on the LIFO basis are valued at $17,275,000 and
$14,820,000 at December 31, 1996 and 1995, respectively.
During 1996 and 1995, LIFO inventory layers were reduced. These
reductions resulted in charging lower inventory costs prevailing in previous
years to cost of sales, thus reducing cost of sales by approximately $1,350,000
and $800,000 below the amount that would have resulted from liquidating
inventory recorded at December 31, 1996 and 1995 prices, respectively.
Effective January 1, 1994, the Company changed its method of accounting
for inventories valued under the LIFO method from the dollar value approach to
the specific goods approach. The Company believes the specific goods approach
will provide a more accurate presentation of inventories and result in better
matching of revenues with related costs. The cumulative effect of this
accounting change and the pro forma effect on prior years' earnings were not
determinable.
During 1994, LIFO inventory layers were reduced. This reduction
resulted in charging lower inventory costs prevailing in previous years to cost
of sales in 1994, thus reducing cost of sales by approximately $1,300,000 below
the amount that would have resulted from liquidating inventory recorded at
December 31, 1994 prices. The effect was partially offset by higher cost of
sales of $1,000,000 than would have occurred under the dollar value approach
for certain inventory items. The net result was that 1994 operating income was
approximately $300,000 higher due to the change in accounting method discussed
above.
(4) SHORT-TERM BORROWINGS
In June 1996 short-term borrowings under the domestic line of credit
were combined with the revolving loan agreement. See note 5. Short-term
borrowings amounted to $500,000 at December 31, 1995.
Short-term borrowings under the $500,000 line of credit of the
Company's Indian joint venture amounted to approximately $113,000 at December
31, 1996 and bears interest at 21%. There were no short-term borrowings
outstanding on the $500,000 European line of credit at December 31, 1996.
Compensating balances are not required. These lines of credit are
collateralized by substantially all assets of the applicable European
subsidiaries and Indian joint venture.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
1996 1995
- ------------------------------------------------------------------------------
Revolving loan agreement $11,500,000 10,200,000
Notes payable to bank 3,806,000 5,609,000
Note payable to municipality, due in
monthly installments through January
2006 at 4.25% per annum. 462,000 500,000
Mortgage notes of German subsidiary,
payable in Deutsche Marks and due in
annual installments through 2003
(interest rates range from 5.2% to 7.6%
as of December 31, 1996). 1,370,388 1,575,711
European Steel and Coal Community
note of UK subsidiary, payable
in Pounds Sterling in annual
installments through 1998 at
10% interest per annum. 241,704 335,366
Mortgage notes of French subsidiary,
payable in French Francs and due in
quarterly installments through 2002 at
9.2% and 9.8% interest per annum. 252,988 308,086
Capital leases 652,061 871,092
Other 52,658 -
- ------------------------------------------------------------------------------
18,337,799 19,399,255
Less current installments 2,182,838 3,324,359
- ------------------------------------------------------------------------------
Long-term debt, less current installments $16,154,961 16,074,896
==============================================================================
In June 1996, the Company amended its revolving loan agreement. The
amended agreement provides for borrowings up to $16,000,000 through April 1999
and replaced both the prior revolving loan agreement which provided for
borrowings up to $11,000,000 through June 1997 and the $2,000,000 domestic line
of credit. Interest on borrowings under the agreement is at varying rates
based, at the Company's option, on LIBOR plus 2% or the bank's prime rate.
Under the agreement, the Company is required to pay a commitment fee of .375 of
1% per annum on unused loan amounts available. Amounts outstanding at December
31, 1996 bear interest at 7.56%.
In November 1995, the Company amended their revolving loan agreement.
The amended agreement provided for additional borrowings of 1,000,000 Pounds
Sterling ($1,674,000 at December 31, 1996 included in notes payable to banks)
through April 1998. The proceeds were used to decrease short-term borrowings in
the United Kingdom. The interest rate on this loan floats on a quarterly basis
based on bank interest rates in the United Kingdom (8.45% at December 31,
1996).
In connection with the revolving loan agreement, the Company also has
two term loans with remaining balances of $630,000 and $730,000 payable in
monthly installments through September 1997 and bearing interest at 7.1% and
the bank's prime rate plus .25% (8.5% as of December 31, 1996), respectively.
The Company also has notes payable to a bank and a municipality with
balances of $772,000 and $462,000, respectively, at December 31, 1996. These
notes bear interest at 8.5% and 4.25%, respectively. These notes are payable in
monthly installments through January 2006.
All borrowings under the amended revolving loan agreement and notes
payable are collateralized by domestic property, plant and equipment.
Covenants in connection with long-term debt provide for, among other
things, a specified minimum level of consolidated net worth and working capital
and limitations on additional long-term debt and capital expenditures.
<PAGE> 10
Aggregate annual principal payments for long-term debt maturing during
the next five years, including capital leases, are: 1997 - $2,182,838; 1998 -
$2,858,711; 1999 - $11,789,299 2000 - $299,449 and 2001 - $276,768.
(6) LEASES
The Company has noncancelable operating leases, primarily for
automobiles, equipment, and sales facilities. Rent expense for operating leases
during 1996, 1995 and 1994 was $935,000, $863,000 and $646,000, respectively.
Future minimum lease payments under noncancelable operating leases for
each of the next five years are: 1997 - $921,000; 1998 - $587,000; 1999 -
$304,000; 2000 - $49,000; 2001 - $12,000.
(7) NON-OPERATING INCOME, NET
Non-operating income (expense) consists of the following:
1996 1995 1994
- -----------------------------------------------------------
Interest income $ 119,917 158,316 130,502
Foreign currency
exchange gain (loss) (195,036) 149,159 67,640
Miscellaneous, net 218,712 (29,585) 151,773
- -----------------------------------------------------------
$ 143,593 277,890 349,915
===========================================================
(8) INCOME TAXES
Income tax expense (benefit) attributable to income from continuing
operations consists of:
1996 1995 1994
- ---------------------------------------------------
Current:
Federal $ 772,000 520,000 59,000
State 50,000 50,000 40,000
Foreign 241,000 308,000 90,000
- ---------------------------------------------------
1,063,000 878,000 189,000
Deferred (13,000) - 17,000
- ---------------------------------------------------
Total $1,050,000 878,000 206,000
===================================================
The rate of expected income tax expense differs from the effective income
tax rate as follows:
1996 1995 1994
- -------------------------------------------------------------
Computed "expected" income tax rate 34.0% 34.0% 34.0%
State taxes (net of federal income
tax benefit) 0.9 1.1 1.2
Provision for prior years' estimated
income taxes 13.8 - -
Change in balance of valuation
allowance allocated to
income tax expense (16.7) (5.8) (27.5)
Unremitted foreign earnings and
foreign tax rate differential (3.2) 0.9 3.0
Exempt foreign sales
corporation income (1.6) (1.5) (1.2)
Other 1.8 0.1 1.0
- -------------------------------------------------------------
Effective income tax rate 29.0% 28.6% 10.5%
=============================================================
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations
are as follows:
1996 1995 1994
- -----------------------------------------------------------------------------
Deferred tax expense (exclusive of
the effects of other components
listed below) $1,152,000 469,000 385,000
Effects of adjustments in the beginning
of year valuation allowance (1,165,000) (469,000) (368,000)
- -----------------------------------------------------------------------------
$ (13,000) - 17,000
=============================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
1996 1995
- ----------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable $ 60,000 60,000
Inventories - 335,000
Compensation 741,000 544,000
Warranty reserve 206,000 60,000
Employee benefits accruals 5,206,000 6,019,000
Tax credit carryforwards 1,330,000 1,019,000
Net operating loss carryforwards 405,000 779,000
- ----------------------------------------------------------------------------
Total gross deferred tax assets 7,948,000 8,816,000
Less valuation allowance 3,421,000 4,586,000
- ----------------------------------------------------------------------------
Net deferred tax assets 4,527,000 4,230,000
- ----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 4,437,000 4,138,000
Inventories 28,000 -
Other 135,000 178,000
- ----------------------------------------------------------------------------
Total gross deferred tax liabilities 4,600,000 4,316,000
- ----------------------------------------------------------------------------
Net deferred tax liability $ (73,000) (86,000)
============================================================================
The valuation allowance for deferred tax assets as of January 1, 1995
was $5,055,000. The net change in the total valuation allowance for the years
ended December 31, 1996 and 1995 was a decrease of $1,165,000 and $469,000,
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Subsequently recognized tax benefits relating to the valuation
allowance for deferred tax assets as of December 31, 1996 will be allocated as
follows:
- -----------------------------------------------------------------
Income tax benefit reported in the
consolidated statement of operations $2,341,000
Shareholders' equity 1,080,000
- -----------------------------------------------------------------
$3,421,000
=================================================================
The valuation allowance allocated to shareholders' equity relates to
the portion of the equity adjustment for pension liability under Statement of
Financial Accounting Standards No. 87 for which no tax benefit has been
recognized.
At December 31, 1996 the Company has a U.S. foreign tax credit
carryforward of approximately $120,000, a general business tax credit
carryforward of approximately $450,000 and an AMT tax credit carryforward of
approximately $760,000. The U.S. foreign tax credits begin expiring in 1997
through 2001, the business tax credits begin expiring in 2001 through 2011 and
the AMT tax credits have no expiration. The Company also has a tax operating
loss carryforward applicable to a foreign subsidiary of approximately
$1,200,000 which can be carried forward indefinitely.
The unremitted earnings of the Company's foreign subsidiaries, on which
income taxes have not been provided, are considered permanently invested and
aggregated approximately $6,700,000 at December 31, 1996.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Oilgear Company and Subsidiaries Years
ended December 31, 1996, 1995 and 1994
(9) EMPLOYEE BENEFIT PLANS
(A)PENSION PLANS
The Company has non-contributory defined benefit retirement plans
covering substantially all domestic employees. The plan covering salaried and
management employees provides pension benefits that are based on years of
service and the employee's compensation during the last ten years prior to
retirement. Benefits payable under this plan may be reduced by benefits payable
under The Oilgear Stock Retirement Plan (Stock Retirement Plan). The plan
covering hourly employees and union members generally provides benefits of
stated amounts for each year of service. The Company's policy is to fund
pension costs to conform with the Employee Retirement Income Security Act of
1974.
Unfunded employee retirement plan costs reflect the excess of the
unfunded accumulated benefit obligation over accrued pension cost. This excess
has been partially offset by an intangible asset with the remainder reflected
as an adjustment to shareholders' equity. Plan assets are primarily invested in
The Oilgear Company common stock (88,840 shares at December 31, 1996 and 1995),
money market, equity and long-term bond mutual funds. Data relative to 1996 and
1995 is as follows:
1996 1995
- -------------------------------------------------------------------------------
Actuarial present value of vested
benefit obligation $ 16,600,000 16,500,000
- -------------------------------------------------------------------------------
Accumulated benefit obligation
including vested benefits $ 17,800,000 17,600,000
- -------------------------------------------------------------------------------
Projected benefit obligation $ 18,400,000 17,900,000
Plan assets at fair value (15,400,000) (13,100,000)
- -------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets 3,000,000 4,800,000
Unrecognized net transition liability
being recognized over 15 years (500,000) (600,000)
Unrecognized net loss from past
experience, experience different
from that assumed and effects
of changes in assumptions (5,600,000) (6,800,000)
- -------------------------------------------------------------------------------
Prepaid pension cost, included
in other assets (3,100,000) (2,600,000)
Adjustment for additional minimum
liability, reflected as unfunded
employee retirement plan costs 5,600,000 7,100,000
- -------------------------------------------------------------------------------
Total pension liability $ 2,500,000 4,500,000
===============================================================================
Net pension expense under these plans for the year is comprised of the
following:
1996 1995 1994
- -----------------------------------------------------------------------------
Service cost $ 400,000 300,000 300,000
Interest cost on projected
benefit obligation 1,300,000 1,200,000 1,100,000
Return on plan assets (2,200,000) (2,800,000) 500,000
Net amortization and deferral
of net transition liability 1,300,000 2,200,000 (1,200,000)
- -----------------------------------------------------------------------------
Net pension expense $ 800,000 900,000 700,000
=============================================================================
The actuarial present value of the projected benefit obligation was
determined using a weighted average discount rate of 7.5% in 1996, 7.4% in 1995
and 8.5% in 1994 and a rate of increase in compensation levels (as applicable)
of 3% offset by projected payments from the Stock Retirement Plan as outlined
in the plan's provisions. The expected long-term rate of return used to measure
plan assets was 10% in 1996, 1995 and 1994.
The Company has a pension plan (UK Plan) for substantially all United
Kingdom employees that provides defined benefits based upon years of service
and salary. The provisions of the UK Plan provide for vesting after six months
of continuous employment and employee contributions equal to 6% of salary. At
the most recent actuarial determination date, April 1995, the pension plan data
comprised the following:
- ----------------------------------------------------------------------------
Actuarial present value of vested accumulated plan benefits $7,000,000
- ----------------------------------------------------------------------------
Market value of net assets available for benefits $7,000,000
============================================================================
Pension expense for the UK Plan was $240,000, $199,000 and $205,000 in
1996, 1995 and 1994, respectively.
The Stock Retirement Plan is a defined contribution plan covering
substantially all domestic salaried employees. The Stock Retirement Plan is
non-contributory and provides for discretionary Company contributions based on
a percentage of defined earnings of eligible employees. The Stock Retirement
Plan owned 296,703 and 272,131 shares of the Company's common stock as of
December 31, 1996 and 1995, respectively. Certain benefits payable under the
Stock Retirement Plan serve to reduce benefits payable under the
non-contributory defined benefit retirement plan referred to above.
(B)EMPLOYEE SAVINGS PLANS
The Company has an employee savings plan (Savings Plan), under which
eligible domestic salaried employees may elect, through payroll deduction, to
defer from 1% to 15% of their base salary, subject to certain limitations, on a
pretax basis. The Company will contribute an additional 50% of the first 2%
contribution and 25% of any additional contribution up to 3% of additional
contribution. Contributions are placed in trust for investment in defined
funds, including a stock plan for investment primarily in common stock of the
Company. The Savings Plan trustee may purchase for the stock plan the Company's
common stock, subject to certain limitations, at a price equal to 80% of the
previous month's average low bid price. This discount is considered as an
additional contribution to the Savings Plan in the year of purchase. The
amounts charged to expense under the Savings Plan, including the stock
discount, were $306,000, $216,000 and $208,000 in 1996, 1995 and 1994,
respectively. The Savings Plan owned 255,672 and 226,281 shares of the
Company's common stock as of December 31, 1996 and 1995, respectively.
During 1994, the Company adopted the Oilgear Milwaukee Shop Savings
Plan, under which eligible domestic collective bargaining unit employees may
elect, through payroll deductions, to defer from 1% to 15% of their earnings,
subject to certain limitations, on a pretax basis. The plan does not require
Company matching contributions. Employee contributions are placed in trust for
investments in defined funds.
(C)EMPLOYEE STOCK PURCHASE PLAN
The Company has a key employee stock purchase plan under which shares
of common stock may be sold to key employees under restricted sales agreements.
The shares are sold at the market price at the time of the sale. One-half of
the purchase price is payable under 5% promissory notes over a three-year
period. The last portion of the note is forgiven by the Company over a
three-year period, beginning in the year in which the first half is repaid, if
employment has continued. The anticipated compensation element of the shares
sold, represented by the potential forgiveness of the last one-half of the
principal due, is charged to operations on the straight-line basis over the
life of the note. The amounts charged to operations were $66,000, $54,000 and
$58,000 in 1996, 1995 and 1994, respectively.
<PAGE> 12
(D) STOCK OPTION PLAN
In 1992, the Company adopted The Oilgear Company 1992 Stock Option Plan
(Option Plan). The Option Plan provides for the issuance of both incentive
stock options and nonqualified stock options to purchase up to 100,000 shares
of common stock. Eligibility for participation in the Option Plan is determined
by the Compensation Committee of the Board of Directors (Committee). The
exercise price of the options is determined by the Committee, but shall be
greater than or equal to the fair market value of the Company's common stock
when the option is granted. All stock options have 5 year terms and become
fully exercisable after 3 years from the date of grant. The Committee
establishes the period or periods of time within which the option may be
exercised within the parameters of the Option Plan document. The pro forma
effect on net income for 1996 and 1995 using the fair value based method of
accounting for employer stock options under SFAS No. 123 is not considered
significant to these consolidated financial statements. Changes in stock
options outstanding are as follows:
Number Price
of Shares Per Share
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1994 71,500 $11.00
Granted 19,161 $15.50 - $18.00
Exercised (11,039) $11.00
Canceled and available for reissue (19,161) $11.00
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1995 60,461 $11.00 - $18.00
Granted 14,305 $14.25 - $15.75
Exercised (4,791) $11.00
Canceled and available for reissue (13,651) $11.00
- -------------------------------------------------------------------------------
Options outstanding at December 31, 1996 56,324 $11.00 - $18.00
- -------------------------------------------------------------------------------
Options exercisable at December 31, 1996 32,438 $11.00 - $18.00
- -------------------------------------------------------------------------------
Options available for grant at
December 31, 1996 27,846
- -------------------------------------------------------------------------------
(E)DIRECTORS' STOCK PLAN
The Oilgear Company Directors' Stock Plan (Plan) provides for any
director of Oilgear, eligible to receive directors' fees, to receive Oilgear
common stock in lieu of all or part of their directors fees. There are 10,000
shares authorized for issuance under the Plan of which 750, 500 and 1,000
shares were issued in 1996, 1995 and 1994, respectively. As of December 31,
1996, 7,750 shares remain available for issuance.
(F)POSTRETIREMENT HEALTH AND LIFE CARE BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired domestic employees. All
nonbargaining unit domestic employees eligible to receive retiree health care
benefits as of December 31, 1991 are eligible to receive a health care credit
based upon a defined formula or a percentage multiplied by the Medicare
eligible premium. Nonbargaining unit domestic employees hired subsequent to, or
ineligible at December 31, 1991, will receive no future retiree health care
benefits. Bargaining unit domestic employees are provided retiree health care
benefits in accordance with the employment agreement. Employees terminating
their employment prior to normal retirement age forfeit their rights, if any,
to receive health care and life insurance benefits.
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet at December 31,
1996 and 1995:
1996 1995
- -------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ 5,258,000 4,980,000
Fully eligible active plan participants 791,000 692,000
Other active plan participants 1,980,000 2,626,000
- -------------------------------------------------------------------------------
8,029,000 8,298,000
- -------------------------------------------------------------------------------
Plan assets at fair value - -
- -------------------------------------------------------------------------------
Accumulated postretirement benefit
in excess of plan assets 8,029,000 8,298,000
Unrecognized prior service cost
being recognized over 16 years 500,000 -
Unrecognized net gain 2,580,000 2,882,000
- -------------------------------------------------------------------------------
Accrued postretirement benefit cost,
reflected as unfunded postretirement
health care cost $11,109,000 11,180,000
===============================================================================
Net periodic postretirement benefit cost includes the following components:
1996 1995 1994
- -------------------------------------------------------------------------------
Service cost $ 99,000 117,000 110,000
Interest cost 557,000 633,000 704,000
Net amortization and deferral (245,000) (273,000) (16,000)
- -------------------------------------------------------------------------------
Net periodic postretirement
benefit cost $ 411,000 477,000 798,000
===============================================================================
For measurement purposes, the following health care cost assumptions were made:
FOR THE CURRENT RETIREE GROUP AND CURRENT ACTIVE BARGAINING GROUP:
* Health care costs increase at a rate of 8.5% in years one and two,
grading down to a rate of 4.5% in year 12 and thereafter.
FOR THE CURRENT NONBARGAINING ACTIVE GROUP:
* Health care costs increase at a rate of 13.5% in year one, grading down
to a rate of 4.5% in year 12 and thereafter.
FOR ALL PARTICIPANTS:
* Medicare costs increase at a rate of 5.5% in year one to three, grading
down to a rate of 4.5% in year seven and thereafter.
The health care cost trend rate assumption has a significant effect on
the amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $402,000 and the
aggregate of the service and interest cost components of net periodic
postretirement cost for the year ended December 31, 1996 by $2,000. The
weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5%, 7.4% and 8.5% at December 31, 1996,
1995 and 1994, respectively.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating the fair value of financial instruments as of December 31, 1996:
CASH AND CASH EQUIVALENTS:
The carrying amount reported in the consolidated balance sheet for cash and
cash equivalents approximates their fair value.
SHORT-TERM BORROWINGS AND LONG-TERM DEBT:
The carrying amounts of the Company's short-term borrowings, its revolving
loan agreement and variable rate long-term debt instruments as reported in
notes 4 and 5 approximate their fair value. The fair value of the Company's
other long-term debt is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. The carrying amounts of other long-term
debt as reported in note 5 approximate their fair value.
(11) LEGAL CONTINGENCIES
The Company is a defendant in several product liability actions which
it believes are adequately covered by insurance.
<PAGE> 13
MANAGEMENT'S REPORT
The management of The Oilgear Company is responsible for the integrity
and objectivity of the financial information presented in this annual report.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, applying best estimates and
judgements as required.
The Oilgear Company maintains a system of internal accounting control
designed to provide reasonable assurance for the safeguarding of the Company's
assets and the reliability of financial records. Essential elements of this
system are the selection of qualified personnel, appropriate division of
responsibilities, communication of policies and procedures, and appropriate
follow-up by management. Management believes that this system provides
reasonable assurance that transactions are executed in accordance with
management's authority and that they are properly recorded.
KPMG Peat Marwick LLP is the firm of independent auditors retained to
express their opinion as to whether the consolidated financial statements
present fairly, in all material respects, the financial position, results of
operations and cash flows of The Oilgear Company. Their audit procedures
include an evaluation and review of the Company's system of internal control to
establish the audit scope, tests of selected transactions, and other audit
procedures.
The entire Board of Directors functions as an audit committee and meets
with the independent auditors and the Company's management to review the scope
and findings of the audit, review the Company's system of internal control, and
review other accounting and financial matters. The Company will continue to
conduct its business affairs in accordance with the highest ethical standards.
/s/ David A. Zuege
David A. Zuege, President
and Chief Executive Officer
/s/ Thomas J. Price
Thomas J. Price,
Vice President - Finance
and Corporate Secretary
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Oilgear Company:
We have audited the accompanying consolidated balance sheets of The
Oilgear Company and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations and shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Oilgear
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for LIFO inventories in 1994.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
March 4, 1997
<PAGE> 1
EXHIBIT 21
(1996 10-K)
SUBSIDIARIES OF THE OILGEAR COMPANY
JURISDICTION
IN WHICH
NAME OF SUBSIDIARY INCORPORATED
------------------ ------------
Oilgear Towler GmbH Republic of Germany
Oilgear F.S.C., Inc. Virgin Islands
Oilgear Ltd. England
Oilgear Towler Ltd. England
Oilgear Towler S.A. France
Oilgear Towler S.A. Spain
Oilgear Towler S.r.l. Italy
Oilgear Towler Australia Pty. Ltd. Australia
Oilgear Mexicana S.A. de C.V. Mexico
Oilgear Asia PTE Ltd. Singapore
Oilgear Canada Inc. Canada
Oilgear Towler Polyhydron Pvt. Ltd. India
(51% Joint Venture)
Harman Oilgear Pvt. Ltd. India
(51% Joint Venture)
-1-
<PAGE> 1
EXHIBIT 23
(1996 10-K)
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
The Oilgear Company:
We consent to incorporation by reference in the registration statements (Nos.
33-67672 and 33-59033) on Form S-8 of The Oilgear Company of our reports dated
March 4, 1997, relating to the consolidated balance sheets of The Oilgear
Company and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations and shareholders' equity, and cash flows
and the related financial statement schedule for each of the years in the
three-year period ended December 31, 1996, which reports appear or are
incorporated by reference in the December 31, 1996 annual report on Form 10-K
of The Oilgear Company.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Milwaukee, Wisconsin
March 28, 1997
-1-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS OF THE OILGEAR COMPANY FOR THE YEAR ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,367,684
<SECURITIES> 0
<RECEIVABLES> 15,112,349
<ALLOWANCES> 218,154
<INVENTORY> 26,229,868
<CURRENT-ASSETS> 44,558,396
<PP&E> 56,594,745
<DEPRECIATION> 27,740,588
<TOTAL-ASSETS> 77,838,827
<CURRENT-LIABILITIES> 15,895,627
<BONDS> 18,337,799
0
0
<COMMON> 10,339,487
<OTHER-SE> 16,977,652
<TOTAL-LIABILITY-AND-EQUITY> 77,838,827
<SALES> 89,620,862
<TOTAL-REVENUES> 89,620,862
<CGS> 60,184,305
<TOTAL-COSTS> 60,184,305
<OTHER-EXPENSES> 24,231,669
<LOSS-PROVISION> 183,831
<INTEREST-EXPENSE> 1,728,059
<INCOME-PRETAX> 3,620,422
<INCOME-TAX> 1,050,000
<INCOME-CONTINUING> 2,518,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,518,124
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
</TABLE>
