<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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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, 53234-3924
MILWAUKEE, WISCONSIN (Zip Code)
(Address of principal executive offices)
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
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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. [ ]
As of March 1, 1999, 1,966,284 shares of Common Stock were outstanding, and
the aggregate market value of the shares of Common Stock (based upon the $8.00
last sale price on March 24, 1999 in the Nasdaq Stock Market) held by
non-affiliates (excludes a total of 986,448 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 $7,838,688.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K INTO WHICH PORTIONS OF
DOCUMENT DOCUMENT ARE INCORPORATED
Annual Report to Shareholders for
year ended December 31, 1998 Parts I and II
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Proxy Statement for Annual Meeting of
Shareholders on April 20, 1999 Part III
<PAGE> 3
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 page 14 of
the Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1998 ("1998 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 inches 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 directly through 14
district sales offices and by a network of approximately 65 distributors. Sales
offices are located in Milwaukee, Wisconsin; Hot Springs Village, Arkansas;
Novi, Michigan; Cleveland, Ohio; Dallas and Longview, Texas; Laguna Hills,
California; Lynnwood and Point Roberts, Washington; Atlanta, Georgia; Kansas
City, Missouri; St. George, Utah; Doylestown, Pennsylvania; and Piqua, Ohio. The
Company's international sales are generated directly by employees located in
Milwaukee, Wisconsin; Ajax, Ontario, Canada; Bedford and Leeds, England; Paris,
France; Hernani, Spain; Hattersheim-Eddersheim and Cologne, Germany; Montirone,
Italy; Taren Point, Australia; Belgaum and Bangalore, India; Taejon City, South
Korea; Sao Paulo, Brazil; and Pachuca, 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
two joint
<PAGE> 4
venture companies 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, and Towler
Automation Pvt. Ltd. whose name was changed in 1998 from Oilgear Harman Pvt.
Ltd., which designs and manufactures a wide array of process automation systems
for global distribution. In 1998, the Company obtained a 58% ownership interest
in a joint venture company in Taiwan, Oilgear Towler Taiwan Co. Ltd., which
distributes and services Oilgear products to customers in the Taiwanese market.
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
currently 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, 1998
was approximately $22,214,000, a decrease of approximately $1,800,000 from the
backlog of orders as of December 31, 1997, which was approximately $24,019,000.
The Company expects that substantially all such orders will be filled in 1999.
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, Wisconsin and Leeds, England plants,
who spend a substantial amount of their time on research and development. During
1998, the Company expended $2,500,000, and during 1997 and 1996, $2,543,000 and
$2,315,000, respectively, on the research and development activities of its
engineering staff. The emphasis of the Company's 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
<PAGE> 5
of the environment, has not had any material effect on the capital
expenditures, earnings and competitive position of the Company. The Company does
not currently anticipate that compliance with such provisions will have any
material effect on its capital expenditures, earnings and competitive position
in the future.
Employees
At December 31, 1998, the Company had 1,094 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 page 14 of the 1998 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.
A 132,000 square foot manufacturing facility owned by the Company and
subject to a mortgage, is located in Fremont, Nebraska. The facility has steel
and brick walls and a concrete floor. To manage the increased demand for the
Company's new products, the Company expanded its Fremont, Nebraska facility in
1997 by 33,000 square feet. This expansion was financed through an industrial
revenue bond issue. See Note 5 of "Notes to Consolidated Financial Statements"
on page 15 of the 1998 Annual Report.
Oilgear owns a manufacturing plant in Longview, Texas, constructed of
concrete block and steel, which contains approximately 44,000 square feet.
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. It 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 GmbH subsidiary owns an approximately 25,000 square
foot concrete block and steel manufacturing facility in Hattersheim-Eddersheim,
Germany, subject to a mortgage.
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The Oilgear Towler Polyhydron Pvt. Ltd. joint venture owns two
prefabricated concrete buildings in Belgaum, India, an office building
consisting of 6,500 square feet and a manufacturing plan consisting of 11,000
square feet.
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.
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 14 - 15 of the 1998 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.
The U.S. Environmental Protection Agency ("EPA") has identified the Company
as a potentially responsible party ("PRP") for response costs incurred under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"
or "Superfund"), pertaining to the Osage Metals site in Kansas City, Kansas.
Oilgear was identified based upon a shipment made by it of 660 pounds of waste
capacitors in 1985 (the "Shipment").
The Shipment was originally sent to a facility owned by PCB Treatment, Inc.
in Kansas City. PCB Treatment is also a Superfund site in Kansas City, Kansas
and Missouri. By letter dated September 16, 1997, the EPA identified the Company
as a PRP for costs incurred under CERCLA at the PCB Treatment site as well. Over
1,500 parties were identified as PRPs at the PCB Treatment site. (The Osage
Metal site and the PCB Treatment site are referred to collectively as the
"Sites.")
A de micromis settlement was offered to parties who contributed only a very
small amount of waste to the Sites. In order to qualify, a company must have
been responsible for not more than 2,000 pounds of material. Since the Company
was identified as a generator of 660 pounds, it qualified for the de micromis
settlement and paid $4,640 in settlement of the claim in 1998.
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 1998.
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.
<TABLE>
<CAPTION>
OFFICES AND POSITIONS PRESENT OFFICE
NAME AGE HELD WITH REGISTRANT HELD SINCE
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<S> <C> <C> <C>
David A. Zuege 57 President and Chief Executive 1996(1)
Officer; Director; Member of
Executive Committee
Gerhard W. Bahner 60 Vice President - Engineering; 1991(2)
Director
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Thomas J. Price 55 Vice President - Finance and 1994(3)
Corporate Secretary
Hubert Bursch 59 Vice President - European 1994(4)
Operations; Director
Dale C. Boyke 48 Vice President - Marketing & 1997(5)
Sales; Director
Robert D. Drake 44 Vice President - Asian/Latin 1997(6)
American Operations
</TABLE>
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(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. He
has been a member of the Board of Directors since 1997.
(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. Mr. Boyke has been a member of the Board of
Directors since 1998.
(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 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 India, Spain and Italy,
<PAGE> 8
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.
- - Financial and information system problems resulting with the advent of the
twenty-first century and affecting the Company, its suppliers or its
customers.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on The Nasdaq Stock Market National
Market under the symbol OLGR. The number of record holders of the Company's
common stock is 546.
Incorporated by reference to "Quarterly Financial Information" and "Equity"
on page 7 of the 1998 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to "5 Year Summary" on page 9 of the 1998 Annual
Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference to "Management's Discussion" on pages 6 through 9
of the 1998 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Incorporated by reference to "Market Risk Management" on Page 8 of the 1998
Annual Report.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary financial information required by
this item are set forth on pages 10 through 20 and under the heading "Quarterly
Financial Information (Unaudited)" on page 7, respectively, of the 1998 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 26, 1999, for its Annual Meeting of
Shareholders on April 20, 1999 ("1999 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 9 and page
13, respectively, of the 1999 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 1999 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.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the last quarter of 1998.
<PAGE> 10
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 LLP dated March 3, 1999, appearing on
pages 10 through 20 of the 1998 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
1998 Annual Report.
ADDITIONAL FINANCIAL DATA
Independent Auditors' Report
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.
INDEPENDENT AUDITORS' REPORT
Shareholders and the Board of Directors
The Oilgear Company:
Under date of March 3, 1999, we reported on the consolidated balance sheets of
The Oilgear Company and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations and shareholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998, which are incorporated by reference in the
Company's annual report on Form 10-K for the year ended December 31, 1998. 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 LLP
KPMG LLP
Milwaukee, Wisconsin
March 3, 1999
<PAGE> 11
THE OILGEAR COMPANY AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
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BALANCE AT CHARGED TO
BEGINNING COSTS AND OTHER AMOUNTS WRITTEN OFF, BALANCE AT
OF YEAR EXPENSES ADJUSTMENTS(1) NET OF RECOVERIES END OF YEAR
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowances for losses from
obsolescence which are deducted on
the balance sheet from inventories
Year ended
December 31, 1998 $2,495,904 534,220 42,195 (69,291) 3,003,028
---------------------------------------------------------------------------------
Year ended
December 31, 1997 $2,599,771 251,835 (78,013) (277,689) 2,495,904
---------------------------------------------------------------------------------
Year ended
December 31, 1996 $3,166,114 20,895 42,002 (629,240) 2,599,771
---------------------------------------------------------------------------------
Allowances for losses in collection
which are deducted on the balance
sheet from trade accounts receivable
Year ended
December 31, 1998 $ 211,372 146,733 3,756 (16,496) 345,365
---------------------------------------------------------------------------------
Year ended
December 31, 1997 $ 218,154 163,178 (8,399) (161,561) 211,372
---------------------------------------------------------------------------------
Year ended
December 31, 1996 $ 313,885 183,831 (98) (279,464) 218,154
---------------------------------------------------------------------------------
</TABLE>
(1) Includes adjustments due to foreign currency translation.
<PAGE> 12
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 30, 1999
-----------------------------------
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 David A. Zuege and Thomas J. Price, 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
- -----------------------------
David A. Zuege, President
and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Thomas J. Price
- ----------------------------- --------------------------
Thomas J. Price, Vice President -Finance and Roger G. DeLong, Director
Corporate Secretary (Principal Financial Officer
and Principal Accounting Officer)
/s/ Dale C. Boyke
- ----------------------------- --------------------------
Dale C. Boyke, Director Thomas L. Misiak, Director
/s/ Gerhard W. Bahner /s/ Frank L. Schmit
- ----------------------------- --------------------------
Gerhard W. Bahner, Director Frank L. Schmit, Director
/s/ Hubert Bursch /s/ Michael C. Sipek
- ----------------------------- --------------------------
Hubert Bursch, Director Michael C. Sipek, Director
- --------------
* Each of these signatures is affixed as of March 30, 1999.
<PAGE> 13
THE OILGEAR COMPANY
(THE "REGISTRANT")
(COMMISSION FILE NO. 0-822)
* * * * *
EXHIBIT INDEX
1998 ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO: HEREWITH
<C> <S> <C> <C>
3.1 Restated Articles of Incorporation Exhibit 3.1 to Registrant's
of The Oilgear Company (as adopted 10-K for year ended
March 18, 1969) December 31, 1994 ("1994
10-K")
3.2 Bylaws of The Oilgear Company (as Exhibit 3.2 to Registrant's
amended and restated by the Board of 10-K for year ended December 31,
Directors, effective January 1, 1992, 1991 ("1991 10-K")
to reflect the revised Wisconsin
Business Corporation Law)
*4
4.1 Loan Agreement between The Oilgear Exhibit 4.2 to Registrant's
Company and M&I Marshall & Ilsley 10-Q for the quarterly
Bank dated as of September 28, 1990, period ended June 30, 1996
as amended and restated as of June
17, 1996
(a) Amendment No. 1 to Loan Agreement dated Exhibit 4.1(a) to
October 11, 1996 Registrant's 10-K for year
ended December 31, 1997
("1997 10-K")
(b) Amendment No. 2 to Loan Agreement dated Exhibit 4.1(b) to 1997 10-K
January 23, 1997
(c) Amendment No. 3 to Loan Agreement dated Exhibit 4.1(c) to 1997 10-K
July 21, 1997
(d) Amendment No. 4 to Loan Agreement dated Exhibit 4.1(d)to 1997 10-K
October 7, 1997
(e) Amendment No. 5 to Loan Agreement dated Exhibit 4 to the Registrant's
April 28, 1998 10-Q for the quarterly period
ended June 30, 1998
(f) Amendment No. 6 to Loan Agreement dated X
October 15, 1998
</TABLE>
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* 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.
<PAGE> 14
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO: HEREWITH
<S> <C> <C> <C>
**10.1 The Oilgear Company Key Employee Stock Exhibit 10.5(a) to
Purchase Plan, as amended and Registrant's 10-K for year
restated September 6, 1990 ended December 31, 1990
("1990 10-K")
**10.2(a) The Oilgear Company Retirement Benefits Exhibit 10.6 to 1990 10-K
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 10-K for year
adopted on December 13, 1995 ended December 31, 1995
("1995 10-K")
**10.3(a) Oilgear Profit Sharing Program for Exhibit 10.4(b) to
Corporate Officers and Executives, as Registrant's 10-K for year
amended effective January 1, 1993 ended December 31, 1992
(b) Oilgear Variable Compensation Program Exhibit 10.4(b) to 1994
10-K
**10.4(a) Form of Deferred Compensation Agreement Exhibit 10.9 to Registrant's
with certain directors (December 8, 10-K for year ended
1971) December 31, 1980
(b) The Oilgear Company Deferred Directors' Exhibit 10.9(b) to
Fee Plan, as amended and restated December Registrant's 10-K for year
14, 1983 ended December 31, 1983
(c) Amendment to The Oilgear Company Exhibit 10.5(c) to 1995 10-K
Deferred Directors' Fee Plan adopted on
December 11, 1991
**10.5 The Oilgear Company 1992 Stock Option Plan Exhibit A to Registrant's 1993
Annual Meeting Proxy Statement
dated March 26, 1993
**10.6(a) The Oilgear Company Directors' Stock Plan Exhibit 10.7 to Registrant's
10-K for year ended December 31,
1993
(b) The Oilgear Company Amended and Restated Exhibit 10.7(b) to 1994 10-K
Directors' Stock Plan
**10.7 Consulting and Deferred Compensation Exhibit 10.8 to 1995 10-K
Agreement between Otto F. Klieve and
The Oilgear Company, dated as of
January 1, 1996
10.8 Agreements executed by The Oilgear
Company in connection with an industrial
revenue bond issue by County of Dodge,
Nebraska:
</TABLE>
- ---------
** Management contracts and executive compensation plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.
<PAGE> 15
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO: HEREWITH
<C> <S> <C> <C>
(a) Lease Agreement between County of Exhibit 10.9(a) to
Dodge, Nebraska, as Lessor, and The 1997 10-K
Oilgear Company, as Lessee, dated as of
October 1, 1997
(b) Building Improvement Lease from The Exhibit 10.9(b) to
Oilgear Company, as Lessor, to County 1997 10-K
of Dodge, Nebraska, as Lessee, dated
as of October 1, 1997
(c) Bond Guaranty Agreement by The Oilgear Exhibit 10.9(c) to
Company to Norwest Bank Wisconsin, 1997 10-K
National Association, as Trustee and
Paying Agent, dated as of October 1, 1997
(d) Credit Agreement by and between The Exhibit 10.9(d) to
Oilgear Company and M&I Marshall & 1997 10-K
Ilsley Bank, dated as of October 1,
1997
(e) Tax Regulatory Agreement among Norwest Exhibit 10.9(e) to
Bank Wisconsin, National Association, 1997 10-K
as Trustee, County of Dodge, Nebraska, as
Issuer, and The Oilgear Company, as
Borrower, dated as of October 1, 1997
13 Portions of The Oilgear Company 1998 X
Annual Report incorporated by reference in
this Form 10-K (pages 6 through 20
thereof)
21 Subsidiaries of The Oilgear Company X
23 Consent of KPMG LLP X
24 Power of Attorney Signatures
Page in
this
Report
27 Financial Data Schedule for the year X
ended December 31, 1998
</TABLE>
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO: HEREWITH
<S> <C> <C> <C>
99 Financial Statements and Exhibits To be
furnished in lieu of Form 11-K Annual filed by
Report for 1998 with respect to The Amend-
Oilgear Salaried Savings Plus Plan ment
(including related consent of KPMG LLP)
</TABLE>
<PAGE> 1
EXHIBIT 4.1 (f)
AMENDMENT NO. 6 TO LOAN AGREEMENT
This is Amendment No. 6 to an Amended and Restated Loan Agreement dated
as of June 17, 1996, subsequently amended (the "Loan Agreement"), between The
Oilgear Company ("Company") and M&I Marshall & Ilsley Bank ("M&I").
In consideration of the mutual covenants, conditions and agreements
set forth herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby expressly acknowledged, it is hereby agreed
that:
ARTICLE I - DEFINITIONS
When used herein, the following terms shall have the meanings
specified:
1. Amendment. "Amendment shall mean this Amendment No. 6 to Loan
Agreement.
2. Loan Agreement. "Loan Agreement" shall mean the Loan Agreement
between M&I and the Company, dated as of September 28, 1990, as
Amended and Restated on June 17, 1996, and subsequently amended,
together with the Exhibits attached thereto.
3. Other Terms. The other capitalized terms used in this Amendment shall
have the definitions specified in the Loan Agreement.
ARTICLE II - AMENDMENTS
The Loan Agreement is deemed amended as of the date hereof as follows:
4. Article I - Definitions. "Business Note." The definition of
"Business Note" is hereby added to the Loan Agreement as follows:
Business Note. "Business Note" shall mean the promissory note dated
October 15, 1998, in the amount of $6,000,000.00 from the Company to
M&I, together with all extensions, renewals, amendments, modifications
and refinancing thereof.
5. Section 2.1 - Revolving Credit Loans. Section 2.1 (a) of the Loan
Agreement is hereby amended in its entirety to read as follows:
2.1 Revolving Credit Loans. (a) From time to time prior to the
Commitment Termination Date and subject to the terms and conditions
set forth in the Loan Agreement, M&I agrees to make Revolving Credit
Loans to the Company. The aggregate amount of Revolving Credit Loans
outstanding at any one time shall never exceed the Commitment. All
Revolving Credit Loans shall be evidenced by a Revolving Credit Note
and/or Business
<PAGE> 2
Note, the Company being obligated to pay the amount of Revolving Credit
Loans actually made, together with interest on the amount which
remains outstanding from time to time. The Company may borrow, repay
and reborrow under this Section subject to the terms and conditions of
this Loan Agreement. The Revolving Credit Note shall mature on the
Commitment Termination Date and the Business Note shall mature on April
30, 2001.
6. Section 2.10 - (d). Section 2.10(d) is hereby added to the Loan
Agreement.
;(d) the prepayment indemnification amount is paid in accordance with
the Business Note and Term Note.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to M&I that:
7. Loan Agreement. All of the representations and warranties made by the
Company in the Loan Agreement are true and correct on the date of this
Amendment. No Default or Event of Default under the Loan Agreement
has occurred and is continuing as of the date of this Amendment.
8. Authorization; Enforceability. The making, execution and delivery of
this Amendment and the Term Note, and performance of and compliance
with the terms of the Loan Agreement as amended, have been duly
authorized by all necessary corporate action by the Company. This
Amendment and the Business Note are valid and binding obligations of
the Company, enforceable against the Company in accordance with their
terms.
9. Absence of Conflicting Obligations. The making, execution and
delivery of this Amendment, and performance and compliance with the
terms of the Loan Agreement as amended, do not violate any presently
existing provision of law or the Articles of Incorporation or Bylaws
of the Company or any agreement to which the Company is a party or by
which it is bound.
ARTICLE IV - MISCELLANEOUS
10. Continuance of Loan Agreement, the Notes and the Security Agreement.
Except as specifically amended by this Amendment, the Loan Agreement,
the Notes and the Security Agreement shall remain in full force and
effect.
11. Survival. All agreements, representations and warranties made in this
Amendment or in any documents delivered pursuant to this Amendment
shall survive the execution of this Amendment and the delivery of any
such document.
12. Governing Law. This Amendment and the other documents issued pursuant
to this Amendment shall be governed by, and construed and interpreted
in accordance with, the
<PAGE> 3
laws of the State of Wisconsin applicable to contracts made and wholly
performed within such state.
13. Counterparts; Headings. This Amendment may be executed in several
counterparts, each of which shall be deemed an original, but such
counterparts shall together constitute but one and the same
agreement. Article and Section headings in the Amendment are
inserted for convenience of reference only and shall not constitute a
part hereof.
14. Severability. Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions of this Amendment of
affecting the validity or enforceability of such provision in any
other jurisdiction.
In witness whereof, the parties hereto have executed this Amendment No.
6 to Loan Agreement as of this 15th day of October, 1998.
M&I Marshall Ilsley Bank (SEAL) The Oilgear Company (SEAL)
By: /s/ Kathleen T. Coleman By: /s/ T.J. Price
------------------------ -----------------------------
Title: Vice President Title: V.P.-Finance & Corp. Sec.
--------------------
By: /s/ Mark Hogan
------------------------
Title: SVP
--------------------
<PAGE> 1
EXHIBIT 13
(1998 10-K)
MANAGEMENT'S DISCUSSION
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
<TABLE>
<CAPTION>
SHIPMENTS,
ORDERS & BACKLOG 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net orders $94,650,000 96,966,000 85,677,000
Percentage increase
(decrease) (2.4%) 13.2% (3.9%)
Net sales (shipments) $96,455,000 $90,904,000 89,621,000
Percentage increase 6.1% 1.4% 9.1%
Backlog at December 31 $22,214,000 $24,019,000 17,957,000
Percentage increase
(decrease) (7.5%) 33.8% (18.0%)
</TABLE>
United States:
The demand in the domestic economy for fluid power products started to
weaken in the second quarter and fell significantly during the fourth quarter of
1998 causing our domestic order level for 1998 to decrease from the levels they
were at in 1997. The total value of domestic engineered hydraulic and electrical
systems orders increased by double digits in 1998 but this increase was offset
by decreased orders for components and after-sale products. Soft markets in Asia
and South America combined with a strengthening U.S. dollar compared to local
currencies in those countries caused export orders to decrease by approximately
13% in 1998 from their levels in 1997. There is a continued demand for the
Company's products outside the United States but the expensive U.S. dollar and
the on going economic crisis in Asia and South America make management cautious
going into 1999.
The domestic net sales increase of approximately 8% and the export net
sales decrease of approximately 15% resulted in an increase of approximately 2%
in total U. S. net sales for 1998 when compared to 1997. This increase taken
together with the decrease in orders caused domestic backlog to decrease by
approximately 8%.
FOREIGN:
Orders entered at our foreign subsidiaries decreased by 5%. Orders entered
at our European companies were stable but orders entered at our Asian and South
American companies decreased.
Foreign net sales increased by approximately 12%. The backlog of orders at
our foreign companies increased slightly at December 31, 1998 when compared to
1997.
<TABLE>
<CAPTION>
OPERATING EXPENSES 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development $ 2,500,000 2,543,000 2,315,000
Percentage increase (decrease) (1.7%) 9.8% 8.8%
Selling, general and
administrative less
research and
development $19,413,000 20,474,000 20,040,000
Percentage increase
(decrease) (5.2%) 2.2% (1.3%)
</TABLE>
The Company's research and development expense remained at the same level
it was in 1997. The Company continues its commitment to its customer demands for
new and more efficient hydraulic products. This commitment produced new
customers and new applications for the Company's products. Two new sizes of our
popular PVV pumps, a 250CC and a 200CC version, have recently been released
which will strengthen our position in a significant market.
Operating expenses less research and development decreased in 1998 through
continued emphasis on cost reductions. At the end of 1998, the Company
restructured its U. S. operations which should further reduce operating expenses
in 1999.
<TABLE>
<CAPTION>
PROFIT, INCOME & EARNINGS 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Gross profit $24,820,000 27,777,000 27,560,000
Percentage increase
(decrease) (10.6%) 0.8% 11.2%
Gross profit margin 25.7% 30.6% 30.8%
Operating income $ 2,908,000 4,760,000 5,205,000
Percentage increase
(decrease) (38.9%) (8.5%) 16.1%
Net earnings $ 575,000 2,677,000 2,518,000
Percentage increase (decrease) (78.5%) 6.3% 14.9%
</TABLE>
The Company's profits and earnings were negatively affected by several
factors. Some major factors were the initial start-up costs for new products and
higher production costs (including hiring, training and overtime costs) at our
piston pump plant in Fremont, Nebraska. The soft market in the fourth quarter of
1998 in the U. S. fluid power industry and the costs to restructure the U. S.
operations in the fourth quarter of 1998 also contributed to lower profits and
earnings.
Note 7 to the consolidated financial statements summarize the non-operating
income and expense.
1997 COMPARED TO 1996
UNITED STATES:
The domestic order level was strong in 1997, with most of the increase
coming from component orders. The total value of domestic orders for the
Company's new PVG pump and for engineered hydraulic and electrical systems
increased by double digits. The Company's new foreign subsidiaries have received
some orders that in prior years were entered directly as domestic export orders.
This contributed to the decrease in domestic export orders and the increase in
inter-company transfers between geographic areas. The strong U.S. dollar against
most other currencies during 1997 also contributed to the decrease in domestic
export orders by making the Company's products more expensive to foreign
customers.
The significant increase in orders puts an extreme amount of demand on the
Company's domestic manufacturing facilities, especially at the Fremont, NE
plant. This demand caused lead-times to increase which in turn caused
manufacturing expenses for overtime, hiring, training, and subcontracting to
increase. The Fremont, NE plant completed its new addition in the fourth quarter
and the Company has added equipment and hired people. Domestic net sales
increased by 2% and domestic orders increased by double digits causing domestic
backlog to increase significantly.
FOREIGN:
Orders entered at our foreign subsidiaries increased by double digits. The
strengthening of the U.S. dollar against the Company's foreign subsidiaries'
local currencies except for the British pound caused the increase of the net
total value of foreign orders to be approximately 5% lower when local currencies
were converted to U.S. dollars. A plan to increase the foreign after-market and
component orders was successful in increasing the total value of these orders.
The Company's Spanish subsidiary had a significant increase in orders and was a
major contributor to the overall foreign order increase. The Company's new joint
ventures and subsidiaries also made a positive contribution to the total foreign
orders.
Foreign net sales increased by approximately 8% in local currencies or 1%
when translated into U.S. dollars. Because orders were higher than shipments,
foreign backlog also increased.
The Company's continued increase in expenses for research and development
demonstrates commitment to its customer demands for new and more efficient
hydraulic products. This commitment produced new customers and new applications
for the Company's products.
The conversion difference from foreign currencies translated to U.S.
dollars offset a small increase in consolidated operating expenses less research
and development.
<PAGE> 2
Expenses incurred to solve the capacity constraints in our domestic
factories and orders for products with lower gross profit margins caused gross
profit and operating income to decrease. Net earnings increased because the
effective income tax rate decreased to 17.8% in 1997 from 29% in 1996(see note 8
to the consolidated financial statements).
FORWARD LOOKING COMMENTS AND MATTERS THAT MAY AFFECT FUTURE OPERATIONS
On the negative side the Company is going into 1999 with a decreased
backlog of orders and a soft U.S. fluid power market. However, on the positive
side the Company's cost cutting programs and restructuring have resulted in a
more efficient and productive Company that is well positioned in the world to
compete with its highly dependable products, engineering and customer service at
improved levels of profitability. The strong U.S. dollar in 1998 has continued
into the first two months of 1999. At this time, the Company has been able to
overcome this currency exchange factor. Domestic orders for the beginning of
1999 have continued to be soft. European orders for the beginning of 1999 are
stable. Foreign orders other than Europe have increased in the first two months
of 1999. If there is increased demand in the world for capital equipment
projects that require fluid power technology, then the Company is ready to
supply the engineering, hydraulic and electrical products and customer service
required in meeting those demands.
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 forty 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 $16.74 per share, significantly understates the current or replacement value
of the Company's assets.
DISCUSSION OF FINANCIAL POSITION
<TABLE>
<CAPTION>
CAPITALIZATION 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Interest bearing debt $26,700,000 26,358,000 18,451,000
Shareholders' equity 32,847,000 31,828,000 27,317,000
Debt and equity 59,547,000 58,186,000 45,768,000
Ratio 44.8% 45.3% 40.3%
</TABLE>
EQUITY
The increase in shareholders' equity in 1998 was primarily the result of
the sale of Company common stock in connection with employee ownership plans as
stated in the table below (see note 9 to the consolidated financial statements)
and foreign currency translation mostly due to the strengthening of European
local currencies against the U.S. dollar. In 1997, shareholders' equity
increased by net earnings, the sale of Company common stock in connection with
employee ownership plans and the equity adjustment for pension liability (see
note 9 to the consolidated financial statements). A strong U.S. dollar compared
to most of the local currencies of the Company's foreign subsidiaries caused an
approximately $1,400,000 decrease in shareholders' equity from foreign currency
translation to U. S. dollars in 1997. The dividend paid in each of the four
quarters of 1998 was $.07 per share and was $.067 per share in all four quarters
of 1997, after adjusting for the effect of a stock dividend in the form of a
three-for-two stock split declared by the Company on December 10, 1997.
The Company's common stock is traded over-the-counter in the Nasdaq Stock
Market, symbol OLGR. 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 note 9 to the consolidated financial statements.
The Company sold common stock and made contributions of common stock in
connection with employee benefit plans as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------
<C> <C> <C>
1998 35,435 $469,000
1997 53,814 $381,000
1996 105,906 $986,000
</TABLE>
INTEREST BEARING DEBT
In 1998, the Company amended its revolving loan agreement. The amended
agreement extended the bank commitment date through April 2001 and changed the
rate used to calculate the interest. The interest rate on the first $6,000,000
was fixed at 6.4% and the interest rate on the remaining $10,000,000 is at the
bank prime rate or LIBOR plus 1.4% (7% at December 31, 1998).
In January 1997, the Company amended its revolving loan agreement. This
amended agreement provides for borrowings up to $16,000,000 through April 2000
at an interest rate of LIBOR plus 1.4%. The amount outstanding at December 31,
1997 bore interest at 7.3%.
Under the revolving loan agreement, the Company is required to pay a
commitment fee of .375% per annum on unused loan amounts available which was
approximately $2,700,000 at both December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1998 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $21,971,000 25,079,000 25,920,000 23,485,000
Net earnings (loss) 402,000 685,000 169,000 (682,000)
Basic earnings (loss) per share of common stock 0.21 0.35 0.09 (0.35)
Diluted earnings (loss) per share of common stock 0.21 0.35 0.09 (0.35)
Dividends per share of common stock 0.07 0.07 0.07 0.07
Stock price low* 13.00 14.50 10.00 9.50
Stock price high* 17.75 19.50 15.94 14.00
<CAPTION>
1997 FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $20,309,000 22,686,000 21,644,000 26,265,000
Net earnings 476,000 627,000 686,000 888,000
Basic earnings per share of common stock 0.25 0.33 0.36 0.46
Diluted earnings per share of common stock 0.25 0.33 0.36 0.46
Dividends per share of common stock 0.067 0.067 0.067 0.067
Stock price low* 9.67 10.50 11.50 14.00
Stock price high* 12.00 12.50 14.00 18.00
</TABLE>
*High and low sales prices in the Nasdaq Stock Market.
<PAGE> 3
The Company entered into a capital lease agreement with the County of
Dodge, NE in 1997 to issue industrial revenue bonds in the amount of $4,000,000
(see note 5 to the consolidated financial statements). The proceeds from these
bonds are restricted to expenditures for the expansion of the Fremont, NE
manufacturing facility and related machine tools. The average effective interest
rate in 1998 and 1997 was 3.7% and 4.0%, respectively. The leases require annual
rental amortization payments of $400,000 plus interest through October 2007. The
industrial revenue bonds are collateralized by the property and equipment
purchased from the bond proceeds. Allowable equipment purchases and expenses
paid out of bond proceeds in 1998 and 1997 was approximately $1,617,000 and
$1,045,000, respectively. At December 31, 1998, unused proceeds and related
accumulated interest income from the industrial revenue bonds were approximately
$1,338,000. Such funds were restricted for capital expenditures at the Fremont,
NE manufacturing facility. The bond payments are guaranteed by a bank letter of
credit that has an annual cost of .75% on the outstanding principal balance of
the bonds.
In 1997 the Company increased domestic short-term borrowings by $4,000,000
in the form of bank revolving business notes. In 1998 the $4,000,000 of
short-term borrowings were converted with an additional $2,000,000 of new debt
to a $6,000,000 five year bank term loan agreement bearing interest at a fixed
rate of 6.6% with monthly payments of $100,000 plus interest. The balance at
December 31, 1998 was $5,300,000.
Approximately $700,000 under lines of credit was available to the Company's
foreign subsidiaries at December 31, 1998. There was approximately $144,000 and
$78,000 of borrowings against these lines at December 31, 1998 and 1997,
respectively.
<TABLE>
<CAPTION>
LIQUIDITY 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $ 4,059,000 3,011,000 2,368,000
Short-term borrowings 144,000 4,078,000 113,000
Working capital 35,846,000 27,425,000 28,633,000
Current ratio 2.9 2.2 2.8
Quick ratio 1.2 1.0 1.1
Cash provided by
operations $ 952,000 2,950,000 6,235,000
Cash used by investing
activities (1,664,000) (6,895,000) (4,973,000)
Cash provided (used) by
financing activities 1,663,000 4,892,000 (1,569,000)
</TABLE>
The current ratio and the quick ratio continued to remain strong in all
three years reported. Cash provided by operations was positive for 1998, 1997
and 1996 as presented in the above table. Net earnings and depreciation and
amortization were the primary reasons for the positive results in each year. A
large dollar value of shipments was shipped in December of 1997 causing trade
receivables to increase at year-end. Inventories increased by approximately
$3,500,000 at the end of 1998 due to a large components order that was shipped
in January 1999 and the increased backlog of European orders.
In 1997 investing activities included the expansion of the Company's
Fremont, NE facility. This addition was needed to manage the increased demand
for the Company's new products and to continue to deliver excellent customer
service. The acquisitions and upgrading of the Company's machine tools and
computer equipment occurred in all three years. The Company entered into
operating lease agreements during 1998 for approximately $2,200,000 of capital
equipment of which most were machinery and tools for the Fremont and Milwaukee
factories.
The Company's financial position at December 31, 1998 continues to be
strong and management believes the Company has adequate means for meeting its
future capital and operating needs.
MARKET RISK MANAGEMENT
The Company is exposed to market risk stemming from changes in foreign
exchange rates and interest rates. Changes in these factors could cause
fluctuations in earnings and cash flows. The Company has significant foreign
operations, for which the functional currencies are denominated primarily in the
Euro and British Pound Sterling. As the values of the currencies of the foreign
countries in which the Company has operations increase or decrease relative to
the U. S. dollar, the sales, expenses, profits, assets and liabilities of the
Company's foreign operations, as reported in the Company's consolidated
financial statements, increase or decrease, accordingly. The Company's debt
structure and interest rate risk are managed through the use of fixed and
floating rate debt. The Company's primary exposure is to United States interest
rates (see notes 4 and 5 to the consolidated financial statements). A 100 basis
point movement in interest rates on floating rate debt outstanding at December
31, 1998 would result in a change in earnings before income taxes of
approximately $125,000.
YEAR 2000 ISSUE
Some computer software and hardware identifies dates by year but omit which
century the year falls into. These products may be unable to distinguish between
dates in the year 2000 and dates in the year 1900. That inability (referred to
as the "Year 2000 Issue") , if not addressed, could cause computer applications
or equipment using computer software or embedded chip technology to fail or
provide incorrect information when using dates after December 31, 1999. The
Company has equipment that use computer chips to run software programs used in
many of its business application systems including order entry, engineering,
production control, manufacturing, purchasing, accounting and communications.
The Company also manufactures products that incorporate components purchased
from other manufacturers that contain computer chips.
STATE OF READINESS
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the Year 2000 and thereafter.
Information systems - The Company is inspecting its computer hardware for
the Year 2000 Issue and expects to finish upgrading or replacing any equipment
not Year 2000 compliant by June 1999. Since most of the Company's application
system software was written by programmers employed by the Company, that
software is being reviewed, updated and tested by our in-house programmers. This
project will be done by March 1999. Software purchased from outside vendors is
being upgraded or replaced where necessary.
Manufacturing and facilities - The Company has performed an initial review
and testing of its machine controls which did not reveal any problem with the
Year 2000 Issue. Machines that have electronic controls with embedded chip
technology are being verified with the machine manufacturers for Year 2000
Issues. Security systems and HVAC systems at Company facilities are being tested
for the Year 2000 Issue.
Communications - Telephone, fax, mailing equipment and e-mail systems are
being tested for the Year 2000 Issue and upgraded or replaced when not compliant
with the Year 2000 Issue. Most of these systems have been reviewed and now are
Year 2000 compliant.
Third party relationships - The Company has mailed letters to its
significant vendors and service providers and is communicating with strategic
customers to determine the extent to which interfaces with such entities are
vulnerable to Year 2000 Issues and whether the products and services purchased
from or by such entities are Year 2000 compliant. All of the vendors who replied
to the letter responded that they are addressing the Year 2000 Issue on a timely
basis. A follow-up letter was mailed to vendors who did not reply.
Costs incurred by the Company to date to address the Year 2000 Issue are
approximately $100,000. Future costs are estimated to be approximately $75,000.
These costs are expensed when incurred and are funded from operating cash flows.
RISKS AND CONTINGENCY PLANS
Although the Company believes its efforts will adequately
<PAGE> 4
MANAGEMENT'S DISCUSSION
address the Year 2000 Issue internally, it is possible that the Company will be
adversely affected by problems encountered by its vendors or suppliers. Despite
any vendor's or supplier's certification regarding Year 2000 compliance there
can be no assurance that the vendor's or supplier's ability to provide goods and
services will not be adversely affected by the Year 2000 Issue. The most likely
worst case scenario would be that a failure by the Company or one or more of its
vendors or suppliers to adequately and timely address the Year 2000 Issue,
interrupts manufacturing of the Company's products for an undeterminable period
of time. The Company has identified and will continue to identify alternative
vendors should a vendor's ability to meet the Company's raw material and supply
requirements be impacted by the Year 2000 Issue. While the Company believes it
can minimize the impact of such non-compliance through the use of these
alternative vendors, a disruption in production could have a material adverse
impact on the Company. The Company does not currently expect to develop a formal
contingency plan.
GENERAL
The costs of the Company's efforts to address the Year 2000 Issue and the
dates on which the Company believes it will complete such efforts are based upon
management's best estimates, which were derived using numerous assumptions
regarding future events. There can be no assurance that these estimates will
prove to be accurate and actual results could differ materially from those
currently anticipated. Specific factors that could cause such material
differences include, but are not limited to, the Company's ability to identify,
assess, remediate and test relevant computer codes and embedded technology, the
Company's reliance on third-party assurances and the variability of definitions
of "Year 2000 compliance" which may be used by such third parties, and similar
uncertainties.
EURO CONVERSION
The Company has assessed the impact the Euro conversion will have on its
operations with regard to competition, currency risk, contracts, taxation and
information technology. The software needed to properly process transactions in
Euros has been upgraded. The Company believes the conversion to the Euro which
began in January 1999 should not have a material adverse effect upon its
business or its financial condition. However, there can be no assurance that
unforeseen difficulties and costs may not arise.
BUISNESS DESCRIPTION
A business description is provided in note 2 to the consolidated financial
statements.
CAUTIONARY FACTORS
The discussions in this section and elsewhere contain 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 India, 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 that 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.
- Financial and information system problems resulting with the advent of
the twenty-first century and affecting the Company, its suppliers or its
customers.
<TABLE>
<CAPTION>
5 YEAR SUMMARY
OPERATIONS 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $96,455,000 90,904,000 89,621,000 82,157,000 69,840,000
Net earnings 575,000 2,677,000 2,518,000 2,192,000 1,765,000
Basic earnings per share 0.30 1.41 1.39 1.26 1.07
Diluted earnings per share 0.29 1.40 1.38 1.24 1.06
Dividends per share 0.28 0.27 0.27 0.27 0.17
<CAPTION>
Capitalization
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest bearing debt $26,700,000 26,358,000 18,451,000 19,899,000 18,403,000
Shareholders' equity 32,847,000 31,828,000 27,317,000 22,772,000 20,542,000
Total assets 90,859,000 89,197,000 77,839,000 77,902,000 69,879,000
Book value per share 16.74 16.52 14.58 12.89 12.03
December 31st stock price* 11.00 15.67 10.00 11.33 9.50
</TABLE>
*The last sale price for the year in the Nasdaq Stock Market.
<PAGE> 5
CONSOLIDATED STATEMENT OF OPERATION AND SHAREHOLDERS' EQUITY
'98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, YEARS ENDED DECEMBER 31, 1998, 1997 AND
1996
<TABLE>
<CAPTION>
OPERATIONS 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales (note 2) $96,454,980 90,903,847 89,620,862
Cost of sales (note 3) 71,634,619 63,127,168 62,060,844
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 24,820,361 27,776,679 27,560,018
Selling, general and administrative expenses 21,912,625 23,016,986 22,355,130
- -----------------------------------------------------------------------------------------------------------------------
Operating income 2,907,736 4,759,693 5,204,888
Interest expense 2,154,162 1,649,826 1,728,059
Other non-operating income, net (note 7) 530,858 252,857 143,593
- -----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and minority interest 1,284,432 3,362,724 3,620,422
Income tax expense (note 8) 677,000 600,000 1,050,000
Minority interest 32,670 85,242 52,298
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 574,762 2,677,482 2,518,124
======================================================================================= ========== ==========
Basic weighted average outstanding shares 1,946,805 1,896,248 1,806,663
- -----------------------------------------------------------------------------------------------------------------------
Diluted weighted average outstanding shares 1,955,803 1,913,948 1,820,795
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share of common stock $ 0.30 1.41 1.39
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share of common stock $ 0.29 1.40 1.38
- -----------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
Common stock (note 9):
Balance at beginning of year $ 1,927,103 1,248,859 1,178,255
Sales to employee and director benefit plans
(35,435, 35,876 and 46,032 shares in
1998, 1997 and 1996, respectively) 35,435 35,876 46,032
Contributions to employee benefit plans
(24,572 shares in 1996) -- -- 24,572
Three-for-two stock split -- 642,368 --
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,962,538 1,927,103 1,248,859
- -----------------------------------------------------------------------------------------------------------------------
Capital in excess of par value (note 9):
Balance at beginning of year 8,793,822 9,090,628 8,174,934
Sales to employee and director benefit plans 433,191 345,562 581,973
Contributions to employee benefit plans -- -- 333,721
Three-for-two stock split -- (642,368) --
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 9,227,013 8,793,822 9,090,628
- -----------------------------------------------------------------------------------------------------------------------
Retained earnings (note 9):
Balance at beginning of year 22,999,174 20,828,365 18,796,941
Net earnings 574,762 2,677,482 2,518,124
Cash dividends declared ($.28, $.27 and $.27
per share in 1998, 1997 and 1996, respectively) (546,453) (507,607) (486,700)
Treasury stock disposals over cost, net -- 934 --
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year 23,027,483 22,999,174 20,828,365
- -----------------------------------------------------------------------------------------------------------------------
Treasury stock (note 8):
Balance at beginning of year -- -- --
Purchases -- 3,046 shares in 1997 -- 47,975 --
Sales to employee benefit plans -- 3,046 shares in 1997 -- (47,975) --
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Notes receivable from employees (note 9):
Balance at beginning of year (182,221) (220,781) (147,410)
Sales under employee stock purchase plan (99,756) (64,525) (169,275)
Payments received/forgiven on notes 88,639 103,085 95,904
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (193,338) (182,221) (220,781)
- -----------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income:
- -----------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment:
Balance at beginning of year (990,315) 450,067 248,907
Translation adjustment 533,923 (1,440,382) 201,160
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (456,392) (990,315) 450,067
- -----------------------------------------------------------------------------------------------------------------------
Pension liability adjustment:
Balance at beginning of year (720,000) (4,080,000) (5,480,000)
Pension liability adjustment -- 3,360,000 1,400,000
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year (720,000) (720,000) (4,080,000)
- -----------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $32,847,304 31,827,563 27,317,138
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, DECEMBER 31, 1998, 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,058,530 3,010,929
Trade accounts receivable, less allowance for doubtful
receivables of $345,365 and $211,372 in 1998 and 1997, respectively 17,639,231 18,677,849
Inventories (note 3) 30,084,072 26,396,825
Prepaid expenses 356,897 444,099
Other current assets 2,425,476 1,106,497
- --------------------------------------------------------------------------------------------------------------------
Total current assets 54,564,206 49,636,199
- --------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, at cost (note 5):
Land 1,124,031 1,072,366
Buildings 11,551,569 11,231,982
Machinery and equipment 47,846,176 46,628,669
Drawings, patterns and patents 3,773,156 3,280,865
- --------------------------------------------------------------------------------------------------------------------
64,294,932 62,213,882
Less accumulated depreciation and amortization 34,814,532 30,834,701
- --------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 29,480,400 31,379,181
Pension intangible (note 9) 350,000 500,000
Other assets (notes 9) 6,464,320 7,681,978
- --------------------------------------------------------------------------------------------------------------------
$90,858,926 89,197,358
====================================================================================================================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current liabilities:
Short-term borrowings (note 4) $ 144,178 4,078,147
Current installments of long-term debt (note 5) 1,998,180 1,488,301
Accounts payable 7,784,829 8,166,590
Customer deposits 2,218,400 2,396,477
Accrued compensation 2,058,169 2,546,207
Other accrued expenses and income taxes (note 8) 4,514,690 3,535,224
- --------------------------------------------------------------------------------------------------------------------
Total current liabilities 18,718,446 22,210,946
- --------------------------------------------------------------------------------------------------------------------
Long-term debt, less current installments (note 5) 24,557,893 20,791,956
Unfunded employee retirement plan costs (note 9) 1,550,000 1,700,000
Unfunded post-retirement health care costs (note 9) 10,905,000 10,970,000
Other noncurrent liabilities 1,648,355 1,194,928
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 57,379,694 56,867,830
- --------------------------------------------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 631,928 501,965
- --------------------------------------------------------------------------------------------------------------------
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 1,962,538 and 1,927,103 shares in 1998 and 1997, respectively 1,962,538 1,927,103
Capital in excess of par value 9,227,013 8,793,822
Retained earnings 23,027,483 22,999,174
- --------------------------------------------------------------------------------------------------------------------
34,217,034 33,720,099
Deduct:
Notes receivable from employees for purchase of
common stock of the Company (193,338) (182,221)
- --------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income:
Foreign currency translation adjustment (456,392) (990,315)
Pension liability adjustment (note 9) (720,000) (720,000)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 32,847,304 31,827,563
- --------------------------------------------------------------------------------------------------------------------
$90,858,926 89,197,358
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, YEARS ENDED DECEMBER 31, 1998,
1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 574,762 2,677,482 2,518,124
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,704,166 3,631,740 3,405,180
Common and treasury stock issued in connection with:
Funding of expense for employee retirement plans -- -- 304,500
Compensation element of sales to employees
and employee savings plan 143,102 184,332 189,400
Deferred income taxes 371,000 (28,000) (13,000)
Minority interest in consolidated subsidiaries 32,670 85,242 52,298
Change in assets and liabilities:
Trade accounts receivable 1,368,450 (4,489,581) 1,589,878
Inventories (3,461,247) (745,435) 746,867
Prepaid expenses 100,268 43,906 (54,426)
Accounts payable (506,401) 2,698,845 (2,156,055)
Customer deposits (220,489) 477,916 (686,109)
Accrued compensation (557,824) (38,993) 196,533
Other, net (596,602) (1,547,538) 141,808
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 951,855 2,949,916 6,234,998
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,553,704) (6,824,333) (4,826,302)
Investment in subsidiaries (110,000) (71,000) (146,466)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (1,663,704) (6,895,333) (4,972,768)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit agreements (3,915,474) 3,972,556 (500,000)
Repayment of long-term debt (1,879,996) (1,836,110) (2,300,887)
Proceeds from issuance of long-term debt 6,073,074 5,981,028 1,300,000
Cash used or (restricted) for capital expenditures 1,617,265 (2,954,789) --
Dividends paid (546,453) (507,607) (486,700)
Purchase of treasury stock -- (47,975) --
Proceeds from sale of treasury stock -- 48,909 --
Proceeds from sale of common stock 265,198 189,631 373,335
Payments received on notes receivable from employees 49,209 46,035 45,692
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 1,662,823 4,891,678 (1,568,560)
- ---------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 96,627 (303,016) (105,172)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,047,601 643,245 (411,502)
Cash and cash equivalents:
At beginning of year 3,010,929 2,367,684 2,779,186
- ---------------------------------------------------------------------------------------------------------------------------------
At end of year $4,058,530 3,010,929 2,367,684
=================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $2,052,287 1,646,662 1,685,916
Income taxes $ 235,149 543,231 571,414
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------------------------------------------------------------------------
Net earnings $ 574,762 2,677,482 2,518,124
Other comprehensive income (loss):
Foreign currency translation adjustment 533,923 (1,440,382) 201,160
Pension liability adjustment -- 3,360,000 1,400,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income $1,108,685 4,597,100 4,119,284
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
(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 in consolidation.
(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 income 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 a component of accumulated other
comprehensive income in 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
$2,312,000 and $3,283,000 at December 31, 1998 and 1997, respectively, and
consisted primarily of commercial paper and short-term U.S. government
securities. Approximately $1,338,000 of cash equivalents at December 31, 1998
are restricted for capital expenditures and are included in other assets in the
consolidated balance sheets (see note 5).
(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. 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.
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 the
percentage-of-completion method. 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 carry-forwards. 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 earnings 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 $2,500,000, $2,543,000 and $2,315,000 in
1998, 1997 and 1996, 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) EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net earnings
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Basic EPS does not consider common stock
equivalents. Diluted EPS reflects the dilution that would occur if convertible
debt securities and employee stock options were exercised or converted into
common shares or resulted in the issuance of common shares that then shared in
the net earnings of the entity. The computation of diluted EPS uses the "if
converted" and "treasury stock" methods to reflect dilution.
The number of weighted-average shares outstanding, used in calculating
basic EPS was 1,946,805 in 1998, 1,896,248 in 1997, and 1,806,663 in 1996. The
number of weighted-average shares outstanding, used in calculating diluted EPS
was 1,955,803 in 1998, 1,913,948 in 1997, and 1,820,795 in 1996. The difference
between the number of shares used in the two calculations is due to employee
stock options.
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
(l) COMMON STOCK SPLIT
On December 10, 1997, the Board of Directors declared a three-for-two stock
split on the Company's common stock. One additional share was issued for each
two shares of common stock held by shareholders of record on December 22, 1997.
The new shares were distributed on January 20, 1998. Par value per share
remained unchanged at $1.00.
(m) NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive
Income. SFAS 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income, foreign currency translation
adjustment and pension liability adjustment and is presented in the consolidated
statements of comprehensive income. The Statement requires only additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
In 1998, the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information, and SFAS 132, Employer's Disclosures about
Pensions and Other Post-retirement Benefits. SFAS 131 establishes standards for
reporting information about operating segments in annual financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 132
revises disclosures about pensions and other post-retirement benefit plans. All
prior year segment and benefit plan disclosures have been restated to conform
with the requirements of SFAS 131 and 132.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, which is effective
for periods beginning after December 15, 1999. SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The Company
plans to adopt SFAS 133 in the first quarter of fiscal year 2000. The Company is
currently evaluating the effect that SFAS 133 will have on its financial
position and results of operations.
(n) RECLASSIFICATIONS
Certain amounts as originally reported in 1997 and 1996 have been
reclassified to conform with the 1998 presentation.
(2) BUSINESS DESCRIPTION AND OPERATIONS
The Oilgear Company focuses on one segment, the fluid power industry. The
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:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales to unaffiliated
customers:
Within the United States $55,271,518 51,655,659 46,188,297
United States exports 8,919,971 10,475,381 14,957,673
- ----------------------------------------------------------------------
Total United States 64,191,489 62,131,040 61,145,970
Foreign 32,263,491 28,772,807 28,474,892
- ----------------------------------------------------------------------
$96,454,980 90,903,847 89,620,862
- ----------------------------------------------------------------------
</TABLE>
(3) INVENTORIES
Inventories at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------
<S> <C> <C>
Raw materials $ 2,601,718 1,740,946
Work in process 23,196,578 21,924,987
Finished goods 6,281,776 4,960,892
- -----------------------------------------------
32,080,072 28,626,825
LIFO reserve (1,996,000) (2,230,000)
- -----------------------------------------------
Total $30,084,072 26,396,825
</TABLE>
Inventories stated on the LIFO basis are valued at $19,404,000 and
$16,871,000 at December 31, 1998 and 1997, respectively.
During 1998, 1997 and 1996, 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 $740,000,
$750,000 and $1,350,000 below the amount that would have resulted from
liquidating inventory recorded at December 31, 1998, 1997 and 1996 prices,
respectively.
(4) SHORT-TERM BORROWINGS
In 1997, the Company increased domestic short-term borrowings in the form
of bank revolving business notes by $4,000,000. Interest paid on these notes was
calculated at LIBOR plus 1.4%. In 1998 these notes were converted to a five-year
term loan. There were no domestic short-term borrowings at December 31, 1998.
<PAGE> 10
Short-term borrowings under a $200,000 line of credit by one of the
Company's Indian joint ventures amounted to approximately $144,000 and $78,000
at December 31, 1998 and 1997, respectively. The Indian joint venture line of
credit bears interest at approximately 18.7% as of December 31, 1998. There were
no short-term borrowings outstanding on a $500,000 European line of credit at
December 31, 1998 and 1997. The European line of credit bears interest at the
bank's base rate plus 2% (8.2% as of December 31, 1998). These lines of credit
are collateralized by substantially all assets of the applicable Indian joint
venture and European subsidiaries.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Revolving loan agreement $13,265,208 13,327,247
Industrial Revenue Bonds, due in
annual installments of $400,000
through October 2007 3,600,000 4,000,000
Notes payable to banks 7,561,000 2,337,500
Note payable to a municipality, due
in monthly installments through
January 2006 at 4.2% per annum. 374,963 419,325
Mortgage notes of German subsidiary,
payable in Deutsche Marks and due
in annual installments through 2007 at
interest rates ranging from 4.8% to
7.6% per annum. 995,216 1,228,033
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. 159,925 186,538
Capital leases 452,332 573,092
Other 147,429 208,522
- -------------------------------------------------------------------------
26,556,073 22,280,257
Less current installments 1,998,180 1,488,301
- -------------------------------------------------------------------------
Long-term debt, less current
installments $24,557,893 20,791,956
=========================================================================
</TABLE>
In 1998, the Company amended its revolving loan agreement. The amended
agreement provides for borrowings up to $16,000,000 through April 2001. The
amended agreement fixed the interest rate on the first $6,000,000 at 6.4%. The
interest rate on the balance (approximately $7,265,000 at December 31, 1998)
will be calculated at the bank's prime rate or LIBOR plus 1.4% (7.0% at December
31, 1998). Under the agreement, the Company is required to pay a commitment fee
of .375 of 1% per annum on unused loan amounts available.
The industrial revenue bonds were issued in October 1997 under a capital
lease agreement between the County of Dodge, NE and the Company. It covers the
expansion of the Fremont, NE manufacturing facility and related machine tools.
The bonds are remarketed weekly and bear interest at a market rate. The average
effective rate in 1998 and 1997 was 3.7% and 4.0%, respectively. The lease
requires annual rental amortization payments of $400,000 plus interest through
October 2007. The Company has the option to purchase the property during the
lease period and upon termination of the lease the Company will obtain title to
the property. The Industrial Revenue Bonds are collateralized by the property
and equipment purchased from the bond proceeds. Allowable equipment purchases
and expenses paid out of bond proceeds in 1998 and 1997 were approximately
$1,617,000 and $1,045,000, respectively. The unused proceeds and related
accumulated interest income from the industrial revenue bonds at December 31,
1998 and 1997 were approximately $1,338,000 and $2,955,000, respectively. These
amounts are included in other assets in the consolidated balance sheets. Such
funds are restricted for capital expenditures at the Fremont, NE manufacturing
facility. The bond payments are guaranteed by a bank letter of credit that has
an annual cost of .75% of the outstanding principal balance of the bonds.
In 1998, the Company converted its $4,000,000 short-term borrowings and
added an additional $2,000,000 to a new $6,000,000 five year note payable to
bank bearing interest at 6.6% with monthly payments of $100,000 plus interest.
The balance at December 31, 1998 was $5,300,000.
The Company has borrowings of 1,000,000 Pounds Sterling ($1,659,500 and
$1,651,000 at December 31, 1998 and 1997, respectively, included in notes
payable to banks) due April 2001. The interest rate on this loan floats on a
quarterly basis based on bank interest rates in the United Kingdom (8.5% at
December 31, 1998).
The Company also has notes payable to a bank and a municipality with
balances of approximately $601,500 and $375,000, respectively, at December 31,
1998. These notes bear interest at 8.5% and 4.2%, respectively. These notes are
payable in monthly installments through January 2006.
All borrowings under the amended revolving loan agreement and notes payable
to banks and municipality are collateralized by substantially all 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. The
Company was in compliance with all covenants at December 31, 1998.
Aggregate annual principal payments for long-term debt maturing during the
next five years, including capital leases, are: 1999 - $1,998,180; 2000 -
$1,950,368; 2001 - $17,337,516; 2002 - $1,900,031; and 2003 - $1,291,752.
(6) LEASES
The Company has non-cancelable operating leases, primarily for automobiles,
equipment, and sales facilities. Rent expense for operating leases during 1998,
1997 and 1996 was $1,425,000, $1,006,000 and $935,000, respectively.
Future minimum lease payments under non-cancelable operating leases for
each of the next five years are: 1999 - $1,918,000; 2000 - $1,579,000; 2001 -
$1,268,000; 2002 - $1,136,000; and 2003 - $1,109,000.
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
(7) NON-OPERATING INCOME, NET
Non-operating income consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Interest income $306,630 154,077 119,917
Foreign currency
exchange gain (loss) 181,648 (146,811) (195,036)
Miscellaneous, net 42,580 245,591 218,712
- -----------------------------------------------------------------
$530,858 252,857 143,593
</TABLE>
(8) INCOME TAXES
Income tax expense (benefit) attributable to earnings before income taxes and
minority interest consists of:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $(364,000) 237,000 772,000
State -- 50,000 50,000
Foreign 670,000 341,000 241,000
- -----------------------------------------------------------------
306,000 628,000 1,063,000
Deferred 371,000 (28,000) (13,000)
- -----------------------------------------------------------------
Total $ 677,000 600,000 1,050,000
- -----------------------------------------------------------------
</TABLE>
The rate of expected income tax expense differs from the effective income
tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" income tax rate 34.0% 34.0% 34.0%
State taxes (net of federal income
tax benefit) -- 1.0 0.9
Provision for prior years' estimated
income taxes -- 9.2 13.8
Benefit of carryforwards not
recognized 31.94 7.1 --
Change in balance of valuation
allowance allocated to
income tax expense (20.0) (34.2) (16.7)
Unremitted foreign earnings and
foreign tax rate differential 4.8 (3.9) (3.2)
Other items, net 2.1 4.6 0.2
- -------------------------------------------------------------------------
Effective income tax rate 52.8% 17.8% 29.0%
=========================================================================
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to earnings before income taxes and minority interest are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax expense (exclusive
of the effects of other
components listed below) $218,000 2,824,000 1,152,000
Effects of adjustments in
the beginning of year
valuation allowance 153,000 (2,852,000) (1,165,000)
- ------------------------------------------------------------------------------
$371,000 (28,000) (13,000)
==============================================================================
</TABLE>
During 1997, the Company allocated $1,520,000 of tax benefit to
shareholders' equity related to the change in unfunded employee retirement plan
costs. The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable $ 60,000 60,000
Compensation 725,000 653,000
Warranty reserve 68,000 130,000
Employee benefits accruals 3,253,000 3,400,000
Tax credit carryforwards 860,000 1,110,000
Net operating loss carryforwards 812,000 389,000
- -----------------------------------------------------------------
Total gross deferred tax assets 5,778,000 5,742,000
Less valuation allowance 722,000 569,000
- -----------------------------------------------------------------
Net deferred tax assets 5,056,000 5,173,000
- -----------------------------------------------------------------
Deferred tax liabilities:
Depreciation 4,927,000 4,999,000
Inventories 500,000 187,000
Other 45,000 32,000
- -----------------------------------------------------------------
Total gross deferred tax liabilities 5,472,000 5,218,000
- -----------------------------------------------------------------
Net deferred tax liability $ (416,000) (45,000)
=================================================================
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1997 was
$3,421,000. The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997 was an increase of $153,000 and a decrease of
$2,852,000, 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 asset 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.
At December 31,1998 the Company has a U.S. general business tax credit
carryforward of approximately $510,000 and an AMT tax credit carryforward of
approximately $350,000. The U.S. business tax credits begin expiring in 2001
through 2013 and the AMT tax credits have no expiration. The Company also has a
tax operating loss carryforward applicable to a foreign subsidiary of
approximately $400,000 which can be carried forward indefinitely and a U.S. tax
operating loss carryforward of approximately $2,000,000 which can be carried
forward for 20 years.
The unremitted earnings of the Company's foreign subsidiaries, on which
income taxes have not been provided, are considered permanently invested and
aggregated approximately $9,000,000 at December 31, 1998.
(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
to the Employee Retirement Income Security Act of 1974.
<PAGE> 12
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 accumulated other comprehensive income in shareholders' equity.
Plan assets are primarily invested in The Oilgear Company common stock (115,617
shares at both December 31, 1998 and 1997), money market, equity and long-term
bond mutual funds. Data relative to 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
FUNDED STATUS 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of vested
benefit obligation $(18,800,000) (17,600,000)
Nonvested benefit obligation (1,500,000) (1,100,000)
- ------------------------------------------------------------------------------
Accumulated benefit obligation
including vested benefits (20,300,000) (18,700,000)
Excess of projected benefit obligation
over accumulated benefit obligation (2,000,000) (800,000)
- ------------------------------------------------------------------------------
Projected benefit obligation (22,300,000) (19,500,000)
Plan assets at fair value 19,000,000 19,100,000
- ------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets (3,300,000) (400,000)
Unrecognized net transition liability 300,000 400,000
Unrecognized prior service cost (600,000) --
Unrecognized net loss from past
experience, experience different
from that assumed and effects
of changes in assumptions 7,650,000 3,700,000
- ------------------------------------------------------------------------------
Prepaid pension cost, included
in other assets 4,050,000 3,700,000
Adjustment for additional minimum
liability, reflected as unfunded
employee retirement plan costs (1,550,000) (1,700,000)
- ------------------------------------------------------------------------------
Total prepaid pension cost $ 2,500,000 2,000,000
==============================================================================
CHANGE IN PLAN ASSETS 1998 1997
- ------------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $ 19,100,000 15,400,000
Actual return on plan assets 1,100,000 4,000,000
Employer contributions 300,000 1,200,000
Benefits paid (1,500,000) (1,300,000)
Administrative expenses (100,000) (200,000)
Transfer from Retirement Stock Plan 100,000 --
- ------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 19,000,000 19,100,000
==============================================================================
CHANGE IN PROJECTED BENEFIT OBLIGATION 1998 1997
- ------------------------------------------------------------------------------
Projected benefit obligation at
beginning of year $(19,500,000) (18,400,000)
Service cost (300,000) (500,000)
Interest cost (1,300,000) (1,300,000)
Plan amendments 600,000 --
Benefits paid 1,500,000 1,300,000
Acturarial loss (3,200,000) (600,000)
Transfer from Stock Retirement Plan (100,000) --
- ------------------------------------------------------------------------------
Projected benefit obligation
at end of year $(22,300,000) (19,500,000)
==============================================================================
</TABLE>
Net pension expense under these plans for the year is comprised of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 300,000 500,000 400,000
Interest cost on projected
benefit obligation 1,300,000 1,300,000 1,300,000
Return on plan assets (1,800,000) (3,900,000) (2,200,000)
Net amortization and deferral
of net transition liability 200,000 2,700,000 1,300,000
- ----------------------------------------------------------------------------------
Net pension expense $ - 600,000 800,000
==================================================================================
</TABLE>
The actuarial present value of the projected benefit obligation was
determined using a weighted-average discount rate of 7.0% in 1998 and 1997 and
7.5% in 1996 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 1998, 1997 and 1996.
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:
<TABLE>
- ----------------------------------------------------------------------
<S> <C>
Actuarial present value of vested
accumulated plan benefits $7,000,000
======================================================================
Market value of net assets available for benefits $7,000,000
======================================================================
</TABLE>
Pension expense for the UK Plan was $162,000, $241,000 and $240,000 in
1998, 1997 and 1996, 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. No contributions were made
to the Stock Retirement Plan in 1998 and 1997. The amount charged to expense for
contributions made in 1996 was approximately $305,000. The Stock Retirement Plan
owned 437,233 and 437,248 shares of the Company's common stock as of December
31, 1998 and 1997, 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 minimum 2%
contribution and 25% of any additional contribution up to 3% above the minimum
contribution. Contributions are placed in trust for investment in defined funds,
including a stock fund for investment primarily in common stock of the Company.
The Savings Plan trustee may purchase for the stock fund 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.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
98 OILGEAR ANNUAL REPORT
THE OILGEAR COMPANY AND SUBSIDIARIES, YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
The amounts charged to expense under the Savings Plan, including the stock
discount, were $300,000, $314,000 and $306,000 in 1998, 1997 and 1996,
respectively. The Savings Plan owned 328,958 and 360,319 shares of the Company's
common stock as of December 31, 1998 and 1997, respectively.
The Company also has 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 Company was not required to pay
matching contributions in 1996. Beginning with payrolls paid after October 31,
1997 the Company started to contribute an additional 10% on the first 5% of
employee contributions. Contributions are placed in trust for investments in
defined funds. The amount charged to expense for 1998 and 1997 was approximately
$16,000 and $3,000, respectively.
(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 Company forgives the last portion of the note over a three-year period,
beginning 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 $51,000, $63,000 and $66,000 in 1998, 1997
and 1996, respectively.
(d) STOCK OPTION PLAN
The Oilgear Company 1992 Stock Option Plan (Option Plan) provides for the
issuance of both incentive stock options and nonqualified stock options to
purchase up to 150,000 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
five-year terms and vest incrementally, becoming fully exercisable after three
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.
A summary of stock option activity related to the Company's plan is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average Price
of Shares Per Share
- ----------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 90,692 $ 8.65
Granted 21,458 $ 9.78
Exercised (7,187) $ 7.33
Canceled and available for reissue (20,477) $ 7.33
- -----------------------------------------------------------------------------
Outstanding at December 31, 1996 84,486 $ 9.35
Granted 32,874 $13.08
Exercised (19,862) $ 8.54
Canceled and available for reissue (34,488) $ 8.54
- -----------------------------------------------------------------------------
Outstanding at December 31, 1997 63,010 $11.91
Granted 5,626 $14.08
Exercised (1,985) $11.84
Canceled and available for reissue (8,909) $11.84
- -----------------------------------------------------------------------------
Outstanding at December 31, 1998 57,742 $12.31
- -----------------------------------------------------------------------------
Range of exercise prices
at December 31, 1998 $8.83 - $16.00
- -----------------------------------------------------------------------------
Options available for grant at
December 31, 1998 49,666
- -----------------------------------------------------------------------------
</TABLE>
Other information regarding the Company's stock option plan is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Options exercisable at end of year 16,434 13,731 48,657
- -----------------------------------------------------------------------
Weighted-average exercise price of
exercisable options $ 11.00 11.09 8.54
- -----------------------------------------------------------------------
Weighted-average fair value of
options granted during year $ 0.83 1.82 1.05
- -----------------------------------------------------------------------
</TABLE>
At December 31, 1998, the weighted-average remaining contractual lives of
stock options outstanding is approximately 3.8 years.
Had compensation cost for the Company's stock options been recognized using
the fair value method, the Company's pro forma operating results would have been
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Net earnings $561,210 2,665,169 2,511,315
- ---------------------------------------------------------
Basic earnings per share .29 1.41 1.39
- ---------------------------------------------------------
Diluted earnings per share .29 1.39 1.38
- ---------------------------------------------------------
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option pricing model with an expected volatility of 24%, an expected dividend
rate of approximately 2%, a risk free rate equivalent to 4 year U.S. Treasury
securities and an expected life of 3.5 years. The pro forma operating results
reflect only options granted since 1995.
(e) DIRECTORS' STOCK PLAN
The Oilgear Company Directors' Stock Plan provides for directors of
Oilgear, eligible to receive directors' fees, to receive Oilgear common stock in
lieu of all or part of their directors' fees. There are 15,000 shares authorized
for issuance under the plan of which 2,000, 1,500 and 1,125 shares were issued
in 1998, 1997 and 1996, respectively. As of December 31, 1998, 8,125 shares
remain available for issuance.
<PAGE> 14
(f) POST-RETIREMENT HEALTHCARE AND LIFE INSURANCE BENEFITS
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired domestic employees. All
non-bargaining 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. Non-bargaining unit domestic employees hired subsequent to, or
ineligible at December 31, 1991, will receive no future retiree health care
benefits. As of February 22, 1996, active bargaining unit domestic employees are
provided retiree health care benefits up to the amount of credits each employee
accumulates during their employment with the Company. All bargaining unit
domestic retirees as of February 22, 1996 are provided retiree health care
benefits in accordance with the employment agreement at the time of their
retirement. Employees terminating their employment prior to normal retirement
age forfeit their rights, if any, to receive health care and life insurance
benefits.
The post-retirement healthcare and life insurance benefits are 100% funded
by the Company on a pay as you go basis. There are no assets in these plans.
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheets at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit
obligation: $ (8,504,000) (8,806,000)
Plan assets at fair value -- --
- --------------------------------------------------------------------------
Accumulated post-retirement benefit
obligation in excess of plan assets: (8,504,000) (8,806,000)
Unrecognized prior service cost (432,000) (467,000)
Unrecognized net gain (1,969,000) (1,697,000)
- --------------------------------------------------------------------------
Accrued post-retirement benefit costs,
reflected as unfunded post-retirement
health care costs $(10,905,000) (10,970,000)
===========================================================================
</TABLE>
The following table presents the plan's changes in accumulated post-retirement
benefit obligation
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------
<S> <C> <C>
Accumulated post-retirement benefit
obligation in excess of plan assets
at beginning of year $ (8,806,000) (8,029,000)
Service cost (87,000) (96,000)
Interest cost (594,000) (580,000)
Benefits paid 630,000 603,000
Actuarial gain/(loss) 353,000 (704,000)
- --------------------------------------------------------------------------
Accumulated post-retirement benefit
obligation in excess of plan assets
at end of year $ 8,504,000) (8,806,000)
==========================================================================
</TABLE>
Net periodic post-retirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 87,000 96,000 99,000
Interest cost 594,000 580,000 557,000
Net amortization and deferral (116,000) (212,000) (245,000)
- -------------------------------------------------------------------------
Net periodic post-retirement
benefit cost $ 565,000 464,000 411,000
=========================================================================
</TABLE>
For measurement purposes, the following health care cost assumptions were
made:
For all retiree and active groups, health care costs increase at a rate of
6.5% in year one, grading down to a rate of 4.5% in year six 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
post-retirement benefit obligation as of December 31, 1998 by $370,000 and the
aggregate of the service and interest cost components of net periodic
post-retirement cost for the year ended December 31, 1998 by $25,000. The
weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.0%, 7.0% and 7.5% at December 31, 1998,
1997 and 1996, 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, 1998:
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 agreements 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 that it
believes are adequately covered by insurance.
19
<PAGE> 15
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 controls
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 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.
David A. Zuege
David A. Zuege, President
and Chief Executive Officer
Thomas J. Price
Thomas J. Price,
Vice President - Finance
and Corporate Secretary
INDEPENDENT AUDITORS' REPORT
Shareholders and 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, 1998 and 1997, and the related
consolidated statements of operations and shareholders' equity, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
March 3, 1999
20
<PAGE> 1
EXHIBIT 21
(1998 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 do Grazil Hydraulica Ltda. Brazil
Oilgear Towler Korea Ltd. South Korea
Oilgear Canada Inc. Canada
Oilgear Towler Polyhydron Pvt. Ltd. India
(51% Joint Venture)
Towler Automation Pvt. Ltd. India
(51% Joint Venture)
Oilgear Towler Taiwan Co. Ltd. Taiwan
(58% Joint Venture)
<PAGE> 1
EXHIBIT 23
CONSENT OF KPMG LLP
Shareholders and 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 3, 1999, relating to the consolidated balance sheets of The Oilgear
Company and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations and shareholders' equity, comprehensive
income, and cash flows and the related financial statement schedule for each of
the years in the three-year period ended December 31, 1998, which reports appear
or are incorporated by reference in the December 31, 1998 annual report on Form
10-K of The Oilgear Company.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS OF THE OILGEAR COMPANY FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,058,530
<SECURITIES> 0
<RECEIVABLES> 17,639,231
<ALLOWANCES> 345,365
<INVENTORY> 30,084,072
<CURRENT-ASSETS> 54,564,206
<PP&E> 64,294,932
<DEPRECIATION> 34,814,532
<TOTAL-ASSETS> 90,858,926
<CURRENT-LIABILITIES> 18,718,446
<BONDS> 26,556,073
0
0
<COMMON> 11,189,551
<OTHER-SE> 21,657,753
<TOTAL-LIABILITY-AND-EQUITY> 90,858,926
<SALES> 96,454,980
<TOTAL-REVENUES> 96,454,980
<CGS> 71,634,619
<TOTAL-COSTS> 71,634,619
<OTHER-EXPENSES> 21,912,625
<LOSS-PROVISION> 146,733
<INTEREST-EXPENSE> 2,154,162
<INCOME-PRETAX> 1,284,432
<INCOME-TAX> 677,000
<INCOME-CONTINUING> 574,762
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574,762
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
</TABLE>
