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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 000-00822
THE OILGEAR COMPANY
(Exact name of registrant as specified in its charter)
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WISCONSIN 39-0514580
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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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
------- -------
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, 2000, 1,990,783 shares of Common Stock were outstanding, and
the aggregate market value of the shares of Common Stock (based upon the $7.375
last sale price on March 22, 2000 in the Nasdaq Stock Market) held by
non-affiliates (excludes a total of 1,052,075 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 $6,922,971.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT PART OF FORM 10-K INTO WHICH PORTIONS OF
DOCUMENT ARE INCORPORATED
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Annual Report to Shareholders for year ended December 31, 1999 Parts I and II
Proxy Statement for Annual Meeting of Shareholders on April 18, 2000 Part III
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PART I
ITEM 1. BUSINESS.
The primary business of The Oilgear Company ("Oilgear" or the "Registrant";
together with its subsidiaries, the "Company") and its subsidiaries is the
manufacture and distribution of systems and value engineered components for a
broad range of industrial machinery and industrial processes. Oilgear was
incorporated under the laws of Wisconsin in 1921. A business description is also
provided in Note 2 of "Notes to Consolidated Financial Statements" on page 14 of
the Registrant's Annual Report to Shareholders for the fiscal year ended
December 31, 1999 ("1999 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.
Domestic Segment
The Company's products are sold in the United States and Canada directly through
15 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 and Piqua, Ohio; Dallas and Longview, Texas;
Laguna Hills, California; Lynnwood and Point Roberts, Washington; Atlanta,
Georgia; Kansas City, Missouri; St. George, Utah; Doylestown, Pennsylvania; and
Ajax, Ontario, Canada.
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European Segment
The Company's products are sold in Europe directly through 6 wholly owned
subsidiaries and by a network of approximately 15 distributors. Sales offices
are located in Bedford and Leeds, England; Paris, France; Hernani, Spain;
Hattersheim, Germany; and Montirone, Italy.
International Segment
The Company's products are sold outside the United States, Canada and Europe
directly through 7 district sales offices and by a network of approximately 8
distributors. Sales offices are located in Taren Point, Australia; Belgaum and
Bangalore, India; Taejon City, South Korea; Sao Paulo, Brazil; and Pachuca,
Mexico. An Oilgear licensee, Oilgear Japan, is responsible for sales of all
equipment sold in Japan. The Company owns 51% of a two joint 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 invested in a 58% ownership of 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 presently engaged
in the industry, most of which are of greater overall size and resources than
the Company. The principal methods of competition include price, product
performance, product availability, service, and warranty.
Customers
No material part of the Company's business is dependent upon a single customer
or a very few customers.
Backlog
The Company's backlog of orders believed to be firm as of December 31, 1999 was
approximately $18,844,000, a decrease of approximately $3,370,000 from the
backlog of orders as of December 31, 1998, which was approximately $22,214,000.
The Company expects that substantially all such orders will be filled in 2000.
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
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their time on research and development. During 1999, the Company expended
approximately $2,100,000, and during 1998 and 1997, approximately $2,000,000 and
$2,100,000, respectively, on the research and development activities of its
engineering staff. The emphasis of the Company product development efforts
continues to be the expansion of its line of axial piston pumps and the
customizing of products to suit specific customer applications.
Environmental Matters
To date, compliance with federal, state and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment, has not had any
material effect on the capital expenditures, earnings and competitive position
of the Company. The Company does not presently anticipate that compliance with
such provisions will have any material effect on its capital expenditures,
earnings and competitive position in the future.
Employees
At December 31, 1999, the Company had approximately 1,000 employees.
Seasonal Aspects of Business
The Company's business is not seasonal to any significant extent.
Industry Segments and Principal Products
The individual subsidiaries of the Company operate predominantly 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.
The Company manages its operations in three reportable segments based upon
geographic area. Domestic includes the United States and Canada. European
includes Europe and International includes Asia, Latin America, Australia and
most of Africa.
Segment Sales
Incorporated by reference to Note 2 of "Notes To Consolidated Financial
Statements" on page 14 of the 1999 Annual Report.
ITEM 2. PROPERTIES.
Domestic
Oilgear owns a one-story general office and factory building located on 20 acres
of land at 2300 South 51st Street in Milwaukee, Wisconsin. This building is
constructed of concrete, steel and brick and contains approximately 276,000
square feet of floor space.
Oilgear owns a manufacturing plant in Longview, Texas, constructed of concrete
block and steel, which contains approximately 44,000 square feet.
The Company owns a 132,000 square foot manufacturing facility located in
Fremont, Nebraska. 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 1999 Annual Report.
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European
The Company's Oilgear GmbH subsidiary owns a three level concrete block and
steel building with approximately 16,000 square feet in Hattersheim, Germany.
This office and shop facility is constructed on two acres of land and is
subject to a mortgage.
The Company's Oilgear Towler Ltd. subsidiary owns a one-story manufacturing
plant and two office buildings constructed of concrete, steel and brick totaling
approximately 49,000 square feet on six acres of land in Leeds, England, and an
additional prefabricated facility being used by the electrical engineering
department.
The Company's Oilgear Towler Ltd. subsidiary also owns an approximately 8,000
square foot building on approximately one-half acre of land used for customer
service and sales 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 25,000 square feet on approximately one acre of land in Hernani,
Spain.
The Company's Oilgear Towler S.A. French subsidiary owns, subject to a mortgage,
a 7,000 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 9,000 square foot
two-story prefabricated concrete building on approximately one acre of land in
Montirone, Italy. The facility is used to repair and assemble customer
equipment, as well as house sales and service functions.
International
The Company leases facilities in all locations except for the Company's Oilgear
Towler Polyhydron Pvt. Ltd. The Company's Oilgear Towler Polyhydron Pvt. Ltd
Indian joint venture owns two plants. Plant number 1 is a masonary three story
building with approximately 6,000 square feet on approximately 13,000 square
feet of land. Plant number 2 is a one story masonary building with approximately
11,000 square feet on approximately 258,000 square feet of land.
Properties in all segments 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 page 15 of the 1999 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.
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 1999.
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,
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officers are elected for one-year terms at the Board of Directors meeting
following the annual meeting of shareholders each year.
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OFFICES AND POSITIONS PRESENT OFFICE
NAME AGE HELD WITH REGISTRANT HELD SINCE
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David A. Zuege 58 President and Chief Executive Officer; 1996(1)
Director; Member of Executive Committee
Gerhard W. Bahner 61 Vice President - Engineering; Director 1991(2)
Thomas J. Price 56 Vice President - Finance and Corporate 1994(3)
Secretary
Hubert Bursch 60 Vice President - European Operations; Director 1994(4)
Dale C. Boyke 49 Vice President - Marketing & Sales; Director 1997(5)
Robert D. Drake 45 Vice President - Asian/Latin American 1997(6)
Operations
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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.
(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:
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- 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 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 fair market value of the Company's common stock
or other factors that would negatively impact the funding of the
employee benefit plans.
- 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. As of March 30, 2000, the number of record holders of the
Company's common stock was 516.
Incorporated by reference to "Quarterly Financial Information" and "Discussion
of Cash Flows" on pages 7 and 8, respectively, of the 1999 Annual Report.
On February 28, 1999, the Company sold an aggregate of 12,500 unregistered
shares of its common stock ("Shares") pursuant to the Company's Key Employee
Stock Purchase Plan, as amended and restated September 6, 1990 (the "Plan").
The Shares were sold to two officers and six other key employees in an exempt
offering pursuant to Section 4(2) of the Securities Act of 1933, as amended.
The purchase price paid for each Share was $11.00, the market bid price on the
date of purchase. In payment, thereof, each purchaser delivered two promissory
notes to the Company bearing annual interest at a rate of 5%. One of the notes,
for one-half of the aggregate purchase price, is payable in three equal annual
installments due on the 2nd, 3rd and 4th February 28th after the date of
purchase. The other note, for the other half of the aggregate purchase price
will be forgiven if none of the Shares has been resold and the purchaser is
still in the employ of the Company on the due dates, which are the 4th, 5th and
6th February 28th after the date of purchase.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated by reference to "5 Year Summary" on page 9 of the 1999 Annual
Report.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated by reference to "Management's Discussion" on pages 6 through 9 of
the 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Incorporated by reference to "Market Risk Management" on Page 8 of the 1999
Annual Report.
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 1999 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 30, 2000, for its Annual Meeting of
Shareholders on April 18, 2000 ("2000 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 10 and page
14, respectively, of the 2000 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 2000 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.
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3. Exhibits. See Exhibit Index included as the 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 1999.
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 1, 2000, appearing on
pages 10 through 20 of the 1999 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
1999 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.
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INDEPENDENT AUDITORS' REPORT
Shareholders and the Board of Directors
The Oilgear Company:
Under date of March 1, 2000, we reported on the consolidated balance sheets of
The Oilgear Company and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which are incorporated by reference in the
Company's annual report on Form 10-K for the year ended December 31, 1999. 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 1, 2000
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THE OILGEAR COMPANY AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1999, 1998 and 1997
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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
---------- ---------- ------------ -------------------- ------------
Allowances for losses from obsolescence
which are deducted on the balance
sheet from inventories
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Year ended
December 31, 1999 $3,003,028 82,921 (133,884) (338,296) 2,613,769
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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
---------- ---------- ---------- ---------- ---------
Allowances for losses in collection
which are deducted on the balance
sheet from trade accounts receivable
Year ended
December 31, 1999 $ 345,363 7,094 (18,533) (65,726) 268,198
----------- ---------- ---------- ---------- ---------
Year ended
December 31, 1998 $ 211,372 146,733 3,754 (16,496) 345,363
---------- ---------- ---------- ---------- ---------
Year ended
December 31, 1997 $ 218,154 163,178 (8,399) (161,561) 211,372
---------- ---------- ---------- ---------- ---------
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(1) Includes adjustments due to foreign currency translation.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE OILGEAR COMPANY
(Registrant)
By /s/ Thomas J. Price March 30, 2000
--------------------------------------
Thomas J. Price, Vice President-
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
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David A. Zuege, President
and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ Thomas J. Price
- ------------------------------------------
Thomas J. Price, Vice President -Finance and
Corporate Secretary (Principal Financial Officer
and Principal Accounting Officer)
/s/ Dale C. Boyke
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Dale C. Boyke, Director
/s/ Thomas L. Misiak
- ------------------------------------------
Thomas L. Misiak, Director
/s/ Gerhard W. Bahner
- ------------------------------------------
Gerhard W. Bahner, Director
/s/ Hubert Bursch
- ------------------------------------------
Hubert Bursch, Director
- ------------------------------------------
Frank L. Schmit, Director
/s/ Michael H. Joyce
- ------------------------------------------
Michael H. Joyce, Director
/s/ Roger H. Schroeder
- ------------------------------------------
Roger H. Schroeder, Director
/s/ Michael C. Sipek
- ------------------------------------------
Michael C. Sipek, Director
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*Each of these signatures is affixed as of March 30, 2000.
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THE OILGEAR COMPANY
(THE "REGISTRANT")
(COMMISSION FILE NO. 000-00822)
* * * * *
EXHIBIT INDEX
1999 ANNUAL REPORT ON FORM 10-K
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EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO: HEREWITH
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3.1 Restated Articles of Incorporation of Exhibit 3.1 to Registrant's
The Oilgear Company (as adopted March 18, 10-K for year ended
1969) December 31, 1994 ("1994
10-K")
3.2 Bylaws of The Oilgear Company (as amended Exhibit 3.2 to Registrant's
and restated by the Board of Directors, 10-K for year ended
effective January 1, 1992, to reflect the December 31, 1991 ("1991
revised Wisconsin Business Corporation Law) 10-K")
*4
4.1 Loan Agreement between The Oilgear Company Exhibit 4.2 to Registrant's
and M&I Marshall & Ilsley Bank dated as of 10-Q for the quarterly
September 28, 1990, as amended and restated period ended June 30, 1996
as of June 17, 1996
(a) Amendment No. 1 to Loan Agreement dated Exhibit 4.1(a) to Registrant's
October 11, 1996 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 Exhibit 4.1(f) to Registrant's
October 15, 1998 10-K for year ended
December 31, 1998
(g) Amendment No. 7 to Loan Agreement dated X
June 4, 1999
</TABLE>
- ----------
* Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the
Registrant agrees to furnish to the Securities and Exchange Commission,
upon request, a copy of any unfiled instrument with respect to long-term
debt.
<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 restated Registrant's 10-K for year
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 Retirement Exhibit 10.3(b) to
Benefits Equalization Plan adopted on December Registrant's 10-K for year
13, 1995 ended December 31, 1995
("1995 10-K")
**10.3(a) Oilgear Profit Sharing Program for Corporate Exhibit 10.4(b) to
Officers and Executives, as amended effective Registrant's 10-K for year
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, 1971) 10-K for year ended
December 31, 1980
(b) The Oilgear Company Deferred Directors' Fee Exhibit 10.9(b) to
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 Exhibit A to Registrant's
Plan 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
Company in connection with an industrial
revenue bond issue by County of Dodge,
Nebraska:
(a) Lease Agreement between County of Dodge, Exhibit 10.9(a) to 1997 10-K
Nebraska, as Lessor, and The Oilgear Company,
as Lessee, dated as of October 1, 1997
(b) Building Improvement Lease from The Oilgear Exhibit 10.9(b) to 1997 10-K
Company, as Lessor, to County of Dodge,
Nebraska, as Lessee, dated as of October 1,
1997
</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
<S> <C> <C> <C>
(c) Bond Guaranty Agreement by The Oilgear Exhibit 10.9(c) to 1997 10-K
Company to Norwest Bank Wisconsin,
National Association, as Trustee and
Paying Agent, dated as of October 1, 1997
(d) Credit Agreement by and between The Oilgear Exhibit 10.9(d) to 1997 10-K
Company and M&I Marshall & Ilsley Bank,
dated as of October 1, 1997
(e) Tax Regulatory Agreement among Norwest Bank Exhibit 10.9(e) to 1997 10-K
Wisconsin, National Association, 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 1999 Annual X
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
27.1 Financial Data Schedule for the year ended X
December 31, 1999
27.2 Restated Financial Data Schedule for the year X
ended December 31, 1998
27.3 Restated Financial Data Schedule for the year X
ended December 31, 1997
99 Financial Statements and Exhibits furnished To be filed
in lieu of Form 11-K Annual Report for 1999 by Amendment
with respect to The Oilgear Salaried Savings
Plus Plan (including related consent of
KPMG LLP)
</TABLE>
<PAGE> 1
EXHIBIT NO. 4.1(g)
AMENDMENT NO. 7 TO LOAN AGREEMENT
This is Amendment No. 7 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. 7 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 Agreement 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. "Commitment Termination Date." The date
contained in line two of this Section of the Agreement is amended by
deleting "April 30, 2001" and inserting in its place "April 30,
2002".
5. Article I- Definitions. "Pound Sterling Commitment Termination Date."
The date contained in line two of this Section of the Agreement is
amended by deleting "April 30, 2001" and inserting in its place "April
30, 2002".
6. Article II - Section 2.1 Revolving Credit Loans. Subsection (c). This
Section of the Agreement is deleted and restated in its entirety as
follows:
(c) The unpaid principal of all Revolving Credit Loans shall bear
interest at LIBOR quoted for each Interest Periods plus 1.40% until
March 31, 2000 after which time the following interest rates shall
become applicable:
<PAGE> 2
Interest Rate shall be determined based on the Company's Funded Debt to
EBITDA Ratio as follows:
<TABLE>
<CAPTION>
Funded Debt/ Spread over
EBITDA LIBOR
- ------ -----
<S> <C>
less than or equal to 1.50:1.0 100 b.p.
less than or equal to 2.00:1.0 but greater than 1.5 to 1.0 125 b.p.
less than or equal to 2.50:1.0 but greater than 2.0 to 1.0 140 b.p.
less than or equal to 3.00:1.0 but greater than 2.5 to 1.0 165 b.p.
greater than 3.00:1.0 190 b.p.
</TABLE>
In the event that the Funded Debt to EBITDA Ratio of the Company at the end
of any fiscal quarter shall change so as to result in a different spread over
LIBOR, as defined in the Agreement, the new spread for purposes of determining
the applicable interest rate for any Revolving Credit Loan shall change
effective as of the first business day of the calendar month following M&I's
receipt of the Company's quarterly financial statements for the preceding fiscal
quarter showing a Funded Debt to EBITDA Ratio resulting in a change in the
spread. The applicable interest spread will be increased or decreased, as the
case may be, as demonstrated by such financial statements, effective as of such
first business day of the calendar month.
Funded Debt shall mean all liabilities or obligations of Company or any
Subsidiary, whether primary or secondary or absolute or contingent: (a) for
borrowed money or for the deferred purchase price of property or services
(excluding trade obligations incurred in the ordinary course of business, which
are not the result of any borrowing); (b) as lessee under any leases that have
been or should be capitalized according to GAAP; (c) evidenced by notes, bonds,
debentures or similar obligations; (d) under any guaranty or endorsement (other
than in connection with the deposit and collection of checks in the ordinary
course of business), and other contingent obligations to purchase, provide funds
for payment, supply funds to invest in any Person, or otherwise assure a
creditor against loss; or (e) secured by any liens on assets of Company or any
Subsidiary, whether or not the obligations secured have been assumed by Company
or any Subsidiary.
EBITDA shall mean, for the four most recently completed fiscal quarters,
net income for such period plus all amounts deducted in arriving at such net
income in respect of (i) all charges for depreciation of fixed assets, (ii)
charges for amortization of intangibles, (iii) all interest expense with respect
to all indebtedness, and (iv) all taxes imposed on or measured by income or
excess profits (whether deferred or paid).
ARTICLE III - REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to M&I that:
<PAGE> 3
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, the Revolving Credit Note and the Pound Sterling 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 the Revolving Credit Note and the Pound Sterling
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 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
<PAGE> 4
or unenforceability without invalidating the remaining provisions of this
Amendment or affecting the validity or enforceability of such provision in
any other jurisdiction.
In witness whereof, the parties hereto have executed this Amendment No. 7
to Loan Agreement as of this 4th day of June, 1999.
M&I Marshall & Ilsley Bank (SEAL) The Oilgear Company (SEAL)
By: Kathleen T. Coleman By: T. J. Price
------------------------------------ -----------------------------
Title: VP Title: V.P. - Finance & Corp. Sec.
------------------------------------ -----------------------------
By: [SIG]
-------------------------------------
Title: SVP
-------------------------------------
<PAGE> 1
EXHIBIT 13
(1999 10-K)
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
- -------------------------------------------------------------------------------
DISCUSSION OF RESULTS OF OPERATIONS
SHIPMENTS,
ORDERS & BACKLOG 1999 1998 1997
==============================================================================
Net orders $87,339,000 94,650,000 96,966,000
Percentage increase
(decrease) (7.7%) (2.4%) 13.2%
Net sales (shipments) $90,709,000 $96,455,000 90,904,000
Percentage increase
(decrease) (6.0%) 6.1% 1.4%
Backlog at December 31 $18,844,000 $22,214,000 24,019,000
Percentage increase
(decrease) (15.2%) (7.5%) 33.8%
NET SALES of $90.7 million for 1999 were 6.0% lower than the $96.5 million
for 1998. Most of the decrease came from the continued decline in demand for
fluid power products in the Domestic markets. Customer sales in the United
States, including exports, decreased by 10.2%. Orders improved in the United
States during the second half of 1999. We are cautiously optimistic for a slight
improvement in orders during 2000. Although the European economy for fluid power
products was soft, the European segment had an increase in net sales of 4.6% in
local currencies which translated into a 0.4% increase when the local currencies
were converted to US dollars. The strong US dollar and UK pound against the Euro
will make it more difficult to sell products manufactured in the United States
and the United Kingdom during 2000. Net sales from the International segment
increased 35.5%. Current increased order activity in the International segment
makes us optimistic that net sales from this segment will continue to grow in
2000. Despite the decrease in consolidated net sales, the Company believes it
didn't lose market share during 1999.
Net sales of $96.5 million for 1998 were 6.1% higher than the $90.9 million
for 1997. Increased demand for custom engineered hydraulic and electrohydraulic
systems used in forging and extrusion machines built in the United States was
the primary reason net sales in the Domestic segment increased by approximately
10.8%. The demand in the United States economy for fluid power products started
to weaken in the third quarter and fell significantly during the fourth quarter
causing the United States order level for 1998 to decrease from the levels they
were at in 1997. The 12.2% increase in European net sales is primarily the
result of increased orders at our Spanish subsidiary. Soft markets in Asia and
South America combined with a strengthening U.S. dollar compared to local
currencies in those countries caused International net sales to decrease by
approximately 31.4%.
PROFIT, INCOME & EARNINGS 1999 1998 1997
==============================================================================
Gross profit $25,188,000 25,821,000 28,397,000
Gross profit margin 27.8% 26.8% 31.2%
Percentage increase
(decrease) 3.7% (14.1%) 1.3%
GROSS PROFIT MARGIN was 27.8% in 1999 compared to 26.8% in 1998 and 31.2%
in 1997. The improvement in 1999 was primarily the result of an improved mix of
products in net sales with higher margins. The improvement was partially offset
by the under-absorption of fixed overhead costs due to lower volumes.
The gross profit margin declined in 1998 due to 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 and a higher mix
of products in net sales with lower margins.
SELLING, GENERAL AND 1999 1998 1997
ADMINISTRATIVE EXPENSES
=============================================================================
Research and
development $2,100,000 2,000,000 2,100,000
Percentage increase
(decrease) 5.0% (4.8%) 9.8%
Selling, general and
administrative less research
and development $19,781,000 20,914,000 21,537,000
Percentage increase
(decrease) (5.4%) (2.9%) (2.2%)
Percentage of net sales 21.8% 21.7% 23.7%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, less research and
development, decreased by 5.4% and 2.9% in 1999 and 1998, respectively. The
continued emphasis on cost reductions and the restructuring in the Domestic
operations at the end of 1998 accounted for most of the change.
The Company's research and development expense remained approximately at
the same level for 1999, 1998 and 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.
INTEREST EXPENSE decreased by 21.4% or approximately $461,000 in 1999 and
increased by 30.6% or approximately $504,000 in 1998. The primary reason was the
decrease in the average net borrowings during 1999 and increase in the average
~net borrowings during 1998.
OTHER NON-OPERATING INCOME decreased by approximately $281,000 in 1999 and
increased by approximately $278,000 in 1998 primarily from the swing in gains or
losses from foreign currency transactions. In 1999 there was a foreign currency
loss of approximately $222,000, in 1998 there was a foreign currency gain of
approximately $182,000 and in 1997 there was a foreign currency loss of
approximately $147,000.
INCOME TAXES decreased to an effective rate of 19.9% in 1999 compared to
52.8% in 1998 due to the current income tax benefit that was recognized from the
utilization of net operating loss carryforwards. In 1998, the effective rate
increased to 52.8% compared to 17.8% in 1997 due to net operating losses
generated in 1998 that did not result in a deferred tax benefit. See note 8 to
the Consolidated Financial Statements for a reconciliation of the effective
rates.
FORWARD LOOKING COMMENTS AND MATTERS THAT MAY AFFECT FUTURE OPERATIONS
The Company is going into 2000 with a decreased backlog of orders, but a
stronger U.S. fluid power market. The strong U.S. dollar in 1999 has continued
into the first two months of 2000. At this time, the Company has been able to
overcome this currency exchange factor. Domestic orders for the beginning of
2000 have increased over the same period in 1999. European orders for the
beginning of 2000 are stable. International orders other than Europe have
increased in the first two months of 2000. 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.
6 ANNUAL REPORT 1999
<PAGE> 2
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
- -------------------------------------------------------------------------------
INFLATION AND CHANGING PRICES
Oilgear uses the LIFO method of accounting for 69% 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 resides 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 $16.62 per share, significantly understates the current or replacement value
of the Company's assets.
DISCUSSION OF FINANCIAL POSITION
The Consolidated Balance Sheets present the Company's financial position at
year end compared with the previous year end. This financial statement provides
information to assist in assessing factors such as the Company's liquidity and
financial resources.
The effect of currency rate changes during 1999 caused a $1,446,000
decrease in shareholders' equity. These rate changes also caused significant
decreases in trade accounts receivable, inventories, and property, plant and
equipment, as well as significant decreases in accounts payable and the various
accrual accounts.
WORKING CAPITAL 1999 1998
==============================================================================
Current assets $49,361,000 54,288,000
Current liabilities 15,861,000 18,807,000
Working capital 33,500,000 35,481,000
Current ratio 3.1 2.9
The most significant decreases in current assets came primarily from a 18.9%
decrease in inventory ($5,428,000), a 53.3% decrease in costs and estimated
earnings in excess of billings on uncompleted contracts ($584,000) and a 52.6%
decrease in other current assets ($1,085,000). Management's focus on reducing
inventory levels to align with current customer demand resulted in the decline
in inventory. A non trade receivable collected in 1999 was the primary reason
for the decline in other current assets.
The decrease in current liabilities came primarily from a 20.1% decrease in
accounts payable ($1,566,000), a 76.4% decrease in customer deposits
($1,695,000) and a 20.1% decrease in other accrued expenses ($909,000). The
lower level of net sales was the primary reason for the decreases. These
decreases were partially offset by a 723.3% increase in billings in excess of
costs and estimated earnings on uncompleted contracts ($638,000) and a 27.0%
increase in accrued compensation and employee benefits ($555,000). The accrual
of variable compensation at the end of 1999 compared to none at the end of 1998
was the primary reason for the increase in accrued compensation and employee
benefits.
Working capital decreased primarily from the result of currency
translation, but the current ratio remained strong in 1999 increasing to 3.1
from 2.9 at the end of 1998.
NET PROPERTY, PLANT AND EQUIPMENT decreased by 9.8% ($2,895,000) primarily
because 1999 depreciation expense was higher than the new capital expenditures.
OTHER ASSETS decreased by 19.9% or $1,286,000. The use of restricted cash
from the Nebraska industrial revenue bonds to purchase machinery and equipment
at the Fremont, Nebraska plant was the primary reason other assets declined.
Intangible pension asset, prepaid pension cost, unfunded employee
retirement plan costs, unfunded post-retirement health care costs and minimum
pension liability adjustment are explained further in note 9 to the Consolidated
Financial Statements.
CAPITALIZATION 1999 1998
==============================================================================
Interest bearing debt $20,719,000 26,700,000
Shareholders' equity 33,078,000 32,847,000
Debt and equity (Capitalization) 53,797,000 59,547,000
Debt-to-Capitalization ratio 38.5% 44.8%
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1999 FIRST SECOND THIRD FOURTH
===================================================================================================
<S> <C> <C> <C> <C>
Net sales $23,210,000 22,357,000 22,294,000 22,848,000
Net earnings 482,000 341,000 301,000 204,000
Basic earnings per share of common stock 0.25 0.17 0.15 0.10
Diluted earnings per share of common stock 0.25 0.17 0.15 0.10
Dividends per share of common stock 0.07 0.07 0.07 0.07
Stock price low* 6.75 4.50 6.25 6.25
Stock price high* 12.88 9.63 9.50 8.69
1998 FIRST SECOND THIRD FOURTH
===================================================================================================
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
*High and low sales prices in the Nasdaq Stock Market..
</TABLE>
Growth Through Technology OILGEAR 7
<PAGE> 3
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
- -------------------------------------------------------------------------------
INTEREST BEARING DEBT decreased by 22.4% ($5,981,000) with cash provided by
operating activities. See Consolidated Statements of Cash Flows.
DISCUSSION OF CASH FLOWS
THE CONSOLIDATED STATEMENTS OF CASH FLOWS reflect cash inflows and
outflows from the Company's operating, investing and financing activities.
CASH FLOWS 1999 1998 1997
==============================================================================
Provided by operating
activities $10,113,000 952,000 2,950,000
Used by investing
activities (1,761,000) (1,664,000) (6,895,000)
Provided (used) by
financing activities (5,402,000) 1,663,000 4,891,000
Effect of exchange on
cash and cash
equivalents (330,000) 97,000 (303,000)
Net increase in cash
and cash equivalents $ 2,640,000 1,048,000 643,000
In 1999, net cash provided by operating activities increased by $9,181,000.
The increase was primarily the result of an increase in net earnings to
$1,328,000 in 1999 from $575,000 in 1998, a decrease in inventories of
$4,784,000 compared to an increase of $2,038,000 in 1998 and the net change in
other, net (net other assets and liabilities) which provided cash of $2,373,000
in 1999 compared to using cash of $1,604,000 in 1998.
In 1998 net cash provided by operating activities decreased by $1,998,000.
The decrease was primarily the result of the decrease in net earnings to
$575,000 in 1998 from $2,677,000 in 1997, a decrease in trade accounts
receivable of $953,000 compared to an increase of $4,490,000 in 1997, an
increase in inventories of $2,038,000 compared to an increase of $745,000 in
1997 and a decrease in accounts payable of $506,000 compared to an increase of
$2,699,000 in 1997.
Capital expenditures increased $207,000 in 1999 and decreased by $5,271,000
in 1998. In 1997 investing activities included the expansion of the Company's
Fremont, Nebraska 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 doesn't
anticipate a building expansion in 2000.
The Company entered into operating lease agreements for capital equipment
with a fair market value of approximately $3,700,000 and $3,600,000 in 1999 and
1998, respectively, for use in the Fremont and Milwaukee manufacturing
facilities.
In 1999, the net cash used by financing activities was $5,402,000 compared
to net cash provided by financing activities in 1998 and 1997 of $1,663,000 and
$4,891,000, respectively. The primary reason for the change was the net of debt
and restricted cash which decreased by $5,016,000 in 1999, but increased by
$1,895,000 and $5,163,000 in 1998 and 1997, respectively.
Cash dividends paid in each quarter of 1999 and 1998 were $.07 per share
and $.067 per share in 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. Several programs that are described in
note 9 to the Consolidated Financial Statements support this concept. The
Company sold common stock as follows:
COMMON STOCK SHARES VALUE
1999 28,245 $299,000
1998 35,435 $469,000
1997 35,876 $381,000
The Company's financial position at December 31, 1999 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, 1999 would result in a change in earnings before income taxes of
approximately $80,000.
YEAR 2000 ISSUE
As of January 1, 2000, the Company has addressed both the internal and key
supplier Year 2000 issues and to date no major Year 2000 issues have been
discovered. The total cost of the Year 2000 project was not material to the
operations of the Company and was funded through operating cash flows. However,
there can be no assurance that Year 2000 issues will not be encountered in the
future or that the costs of any such Year 2000 issues will not have a materially
adverse impact on the Company's business, operations or financial condition in
future periods.
8 ANNUAL REPORT 1999
<PAGE> 4
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION
- -------------------------------------------------------------------------------
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
the Euro has been upgraded. The Company believes the conversion to the Euro
which began in January 1999 will 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.
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 fair market value of the Company's common stock or
other factors that would negatively impact the funding of the employee
benefit plans.
- 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 1999 1998 1997 1996 1995
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net sales $90,709,000 96,455,000 90,904,000 89,621,000 82,157,000
Net earnings 1,328,000 575,000 2,677,000 2,518,000 2,192,000
Basic earnings per share of common stock 0.67 0.30 1.41 1.39 1.26
Diluted earnings per share of common stock 0.67 0.29 1.40 1.38 1.24
Dividends per share 0.28 0.28 0.27 0.27 0.27
CAPITALIZATION
========================================================================================================================
Interest bearing debt $20,719,000 26,700,000 26,358,000 18,451,000 19,899,000
Shareholders' equity 33,078,000 32,847,000 31,828,000 27,317,000 22,772,000
Total assets 81,365,000 90,583,000 89,197,000 77,839,000 77,902,000
Book value per share 16.62 16.74 16.52 14.58 12.89
December 31st stock price* 6.88 11.00 15.67 10.00 11.33
*The last sale price for the year in the Nasdaq Stock Market.
</TABLE>
Growth Through Technology OILGEAR 9
<PAGE> 5
- -------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
OPERATIONS 1999 1998 1997
==============================================================================
Net sales (note 2) $90,709,332 96,454,980 90,903,847
Cost of sales (note 3) 65,520,933 70,633,595 62,507,029
- ------------------------------------------------------------------------------
Gross profit 25,188,399 25,821,385 28,396,818
Selling, general and administrative
expenses 21,881,227 22,913,649 23,637,125
- ------------------------------------------------------------------------------
Operating income 3,307,172 2,907,736 4,759,693
Interest expense 1,693,455 2,154,162 1,649,826
Other non-operating income,
net (note 7) 249,895 530,858 252,857
- ------------------------------------------------------------------------------
Earnings before income taxes and
minority interest 1,863,612 1,284,432 3,362,724
Income tax expense (note 8) 370,000 677,000 600,000
Minority interest 165,544 32,670 85,242
- ------------------------------------------------------------------------------
Net earnings $ 1,328,068 574,762 2,677,482
- -------------------------------------------===================================
Basic weighted-average outstanding shares 1,983,456 1,946,805 1,896,248
- ------------------------------------------------------------------------------
Diluted weighted-average outstanding shares 1,983,736 1,955,803 1,913,948
- ------------------------------------------------------------------------------
Basic earnings per share of common stock $ 0.67 0.30 1.41
- -------------------------------------------===================================
Diluted earnings per share of common stock $ 0.67 0.29 1.40
==============================================================================
SHAREHOLDERS' EQUITY
==============================================================================
Common stock:
Balance at beginning of year $ 1,962,538 1,927,103 1,248,859
Sales to employee and director benefit
plans (28,245, 35,435 and
35,876 shares in 1999, 1998 and
1997, respectively) 28,245 35,435 35,876
Three-for-two stock split -- -- 642,368
- ------------------------------------------------------------------------------
Balance at end of year 1,990,783 1,962,538 1,927,103
- ------------------------------------------------------------------------------
Capital in excess of par value:
Balance at beginning of year 9,227,013 8,793,822 9,090,628
Sales to employee and director
benefit plans 270,893 433,191 345,562
Three-for-two stock split -- -- (642,368)
- ------------------------------------------------------------------------------
Balance at end of year 9,497,906 9,227,013 8,793,822
- ------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 23,027,483 22,999,174 20,828,365
Net earnings 1,328,068 574,762 2,677,482
Cash dividends declared ($.28, $.28
and $.27 per share in 1999, 1998
and 1997, respectively) (557,042) (546,453) (507,607)
Gain (loss) on sale of treasury stock (4,194) -- 934
- ------------------------------------------------------------------------------
Balance at end of year 23,794,315 23,027,483 22,999,174
- ------------------------------------------------------------------------------
Treasury stock:
Balance at beginning of year -- -- --
Purchases of 2,775 and 3,046 shares
in 1999 and 1997, respectively (29,253) -- (47,975)
Sales to employee benefit plans of
1,975 and 3,046 shares in 1999
and 1997, respectively 20,453 -- 47,975
- ------------------------------------------------------------------------------
Balance at end of year (8,800) -- --
- ------------------------------------------------------------------------------
Notes receivable from employees:
Balance at beginning of year (193,338) (182,221) (220,781)
Sales under employee stock
purchase plan (137,500) (99,756) (64,525)
Payments received/forgiven on notes 107,019 88,639 103,085
- ------------------------------------------------------------------------------
Balance at end of year (223,819) (193,338) (182,221)
- ------------------------------------------------------------------------------
Accumulated other comprehensive income:
Foreign currency translation adjustment:
Balance at beginning of year (456,392) (990,315) 450,067
Translation adjustment (1,445,982) 533,923 (1,440,382)
- ------------------------------------------------------------------------------
Balance at end of year (1,902,374) (456,392) (990,315)
- ------------------------------------------------------------------------------
Minimum pension liability adjustment:
Balance at beginning of year (720,000) (720,000) (4,080,000)
Minimum pension liability adjustment 650,000 -- 3,360,000
- ------------------------------------------------------------------------------
Balance at end of year (70,000) (720,000) (720,000)
- ------------------------------------------------------------------------------
Total shareholders' equity $33,078,011 32,847,304 31,827,563
- -------------------------------------------===================================
See accompanying notes to consolidated financial statements.
10 ANNUAL REPORT 1999
<PAGE> 6
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999 and 1998
ASSETS 1999 1998
==============================================================================
Current assets:
Cash and cash equivalents $ 6,698,452 4,058,530
Trade accounts receivable, less allowance
for doubtful receivables of
$268,000 and $345,000 in 1999
and 1998, respectively 17,563,376 18,054,508
Inventories (note 3) 23,232,920 28,661,018
Costs and estimated earnings in excess of
billings on uncompleted contracts (note 3) 511,564 1,096,042
Prepaid expenses 378,680 356,897
Other current assets 976,355 2,061,476
- ------------------------------------------------------------------------------
Total current assets 49,361,347 54,288,471
- ------------------------------------------------------------------------------
Property, plant and equipment, at cost:
Land 1,010,165 1,124,031
Buildings 11,196,541 11,551,569
Machinery and equipment 47,233,691 47,846,176
Drawings, patterns and patents 4,249,083 3,773,156
- ------------------------------------------------------------------------------
63,689,480 64,294,932
Less accumulated depreciation and amortization 37,103,920 34,814,532
- ------------------------------------------------------------------------------
Net property, plant and equipment 26,585,560 29,480,400
Intangible pension asset (note 9) 240,000 350,000
Other assets (notes 5 and 9) 5,178,340 6,464,320
- ------------------------------------------------------------------------------
$81,365,247 90,583,191
- -------------------------------------------------=============================
Liabilities and Shareholders' Equity 1999 1998
==============================================================================
Current liabilities:
Short-term borrowings (note 4) $ 158,244 144,178
Current installments of long-term debt (note 5) 2,014,355 1,998,180
Accounts payable 6,219,199 7,784,829
Billings in excess of costs and estimated
earnings on uncompleted contracts (note 3) 726,671 88,265
Customer deposits 523,717 2,218,400
Accrued compensation and employee benefits 2,612,856 2,058,169
Other accrued expenses and income
taxes (note 8) 3,605,491 4,514,690
- ------------------------------------------------------------------------------
Total current liabilities 15,860,533 18,806,711
- ------------------------------------------------------------------------------
Long-term debt, less current
installments (note 5) 18,546,233 24,557,893
Unfunded employee retirement plan
costs (note 9) 790,000 1,550,000
Unfunded post-retirement health care
costs (note 9) 10,809,000 10,905,000
Other noncurrent liabilities 1,483,998 1,284,355
- ------------------------------------------------------------------------------
Total liabilities 47,489,764 57,103,959
- ------------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 797,472 631,928
Commitments and contingencies (notes 6, 9 and 11)
Shareholders' equity:
Common stock, par value $1 per share,
authorized 4,000,000 shares; issued
1,990,783 and 1,962,538 shares in 1999
and 1998, respectively 1,990,783 1,962,538
Capital in excess of par value 9,497,906 9,227,013
Retained earnings 23,794,315 23,027,483
- ------------------------------------------------------------------------------
35,283,004 34,217,034
Deduct:
Treasury stock, 800 shares in 1999, at cost (8,800) -
Notes receivable from employees for
purchase of common stock (note 9) (223,819) (193,338)
Accumulated other comprehensive income:
Foreign currency translation adjustment (1,902,374) (456,392)
Minimum pension liability
adjustment (note 9) (70,000) (720,000)
- ------------------------------------------------------------------------------
Total accumulated other comprehensive income (1,972,374) (1,176,392)
- ------------------------------------------------------------------------------
Total shareholders' equity 33,078,011 32,847,304
- ------------------------------------------------------------------------------
$81,365,247 90,583,191
- -------------------------------------------------=============================
See accompanying notes to consolidated financial statements.
Growth Through Technology OILGEAR 11
<PAGE> 7
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
<TABLE>
<CAPTION>
Cash Flows 1999 1998 1997
===========================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,328,068 574,762 2,677,482
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 4,078,318 3,704,166 3,631,740
Common and treasury stock issued in connection with:
Compensation element of sales to employees
and employee savings plan 84,527 143,102 184,332
Deferred income taxes (225,000) 371,000 (28,000)
Minority interest in consolidated subsidiaries 165,544 32,670 85,242
Change in assets and liabilities:
Trade accounts receivable (221,113) 953,173 (4,489,581)
Inventories 4,783,505 (2,038,193) (745,435)
Prepaid expenses (57,962) 100,268 43,906
Accounts payable (1,290,258) (506,401) 2,698,845
Customer deposits (1,599,581) (220,489) 477,916
Accrued compensation 713,789 (557,824) (38,993)
Other, net 2,372,693 (1,604,379) (1,547,538)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 10,132,530 951,855 2,949,916
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (1,760,946) (1,553,704) (6,824,333)
Investment in subsidiaries -- (110,000) (71,000)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities $ (1,760,946) (1,663,704) (6,895,333)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line of
credit agreements 17,487 (3,915,474) 3,972,556
Repayment of long-term debt (5,836,257) (1,879,996) (1,836,110)
Proceeds from issuance of long-term debt -- 6,073,074 5,981,028
Cash used or (restricted) for capital expenditures 802,529 1,617,265 (2,954,789)
Dividends paid (557,042) (546,453) (507,607)
Purchase of treasury stock (29,253) -- (47,975)
Proceeds from sale of treasury stock 16,259 -- 48,909
Proceeds from sale of common stock 124,441 265,198 189,631
Payments received on notes receivable from employees 59,692 49,209 46,035
- -----------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities $(5,402,144) 1,662,823 4,891,678
- -----------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents $ (329,518) 96,627 (303,016)
- -----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,639,922 1,047,601 643,245
Cash and cash equivalents:
At beginning of year 4,058,530 3,010,929 2,367,684
- -----------------------------------------------------------------------------------------------------------
At end of year $ 6,698,452 4,058,530 3,010,929
- ------------------------------------------------------------===============================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,663,570 2,052,287 1,646,662
Income taxes $ 6,448 235,149 543,231
- ------------------------------------------------------------===============================================
COMPREHENSIVE INCOME
===========================================================================================================
Net earnings $ 1,328,068 574,762 2,677,482
Other comprehensive income (loss):
Foreign currency translation adjustment (1,445,982) 533,923 (1,440,382)
Minimum pension liability adjustment 650,000 -- 3,360,000
- -----------------------------------------------------------------------------------------------------------
Total comprehensive income $ 532,086 1,108,685 4,597,100
- ------------------------------------------------------------===============================================
See accompanying notes to consolidated financial statements.
</TABLE>
12 ANNUAL REPORT 1999
<PAGE> 8
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CONSOLIDATION
These consolidated financial statements include the accounts of The
Oilgear Company and its subsidiaries (Company). The Company is also involved in
three joint ventures (two in India in which the Company has a 51% interest and
one in Taiwan in which the Company has a 58% interest). 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
$1,922,000 and $2,312,000 at December 31, 1999 and 1998, respectively, and
consisted primarily of money market funds, commercial paper and short-term U.S.
government securities. Approximately $535,000 and $1,338,000 of cash equivalents
at December 31, 1999 and 1998, respectively 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 domestic
inventories. For the balance of 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. Revenue earned is recorded based on the
percentage of costs incurred to internal engineering estimates of total costs to
perform each contract. Contract costs include all direct material, labor, and
those indirect costs related to contract performance. Changes in performance,
conditions, and estimated profitability, including those arising from contract
penalty provisions and final contract settlements, may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined. Losses are recognized at the time a loss is projected. Revenue is
recognized on other sales of products upon shipment to the customer.
(G) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, as permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Under APB
Opinion No. 25, compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeds the exercise price of
the stock option.
(H) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in 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 $2,100,000, $2,000,000 and $2,100,000 in
1999, 1998 and 1997, 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 Company. 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 1,983,456 in 1999, 1,946,805 in 1998, and 1,896,248 in 1997. The number
of weighted-average shares outstanding used in calculating diluted EPS was
1,983,736 in 1999, 1,955,803 in 1998, and 1,913,948 in 1997. The difference
between the number of shares used in the two calculations is due to assumed
conversion of employee stock options where the exercise price is less than the
market price of the underlying stock.
GROWTH THROUGH TECHNOLOGY OILGEAR 13
<PAGE> 9
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
(L) COMMON STOCK SPLIT
On December 10, 1997, the Board of Directors declared a three-for-two stock
split of 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 PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and hedging
activities. This statement requires companies to record derivatives on the
balance sheet as assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives will be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company is required to adopt SFAS 133 in the first quarter of
fiscal year 2001. 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 1998 and 1997 have been
reclassified to conform with the 1999 presentation.
(2) BUSINESS DESCRIPTION AND OPERATIONS
The Company manages its operations in three reportable segments based upon
geographic area. Domestic includes the United States and Canada, European
includes Europe and International includes Asia, Latin America, Australia and
most of Africa.
The individual subsidiaries of the Company operate predominantly in 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,
electrohydraulic 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.
The accounting policies of the segments are the same as those of the
Company as described in note 1, except that segment financial information is
presented on a basis that is consistent with the manner in which the Company
disaggregates financial information for internal review and decision-making.
Segment net sales are attributed to the subsidiary from which the product is
sold. In computing operating income by segment, no allocations of corporate
expenses, research and development costs (R&D), interest expense, non-operating
income, income taxes or minority interest have been made. Identifiable assets of
the European and International segments are those assets related to the
operations of the applicable subsidiaries. Domestic assets consist of all other
operating assets of the Company except for corporate assets which are
principally assets used in the Company's research and development facilities.
Geographic segment information is as follows:
SALES TO UNAFFILIATED
CUSTOMERS 1999 1998 1997
==============================================================================
Domestic $51,726,519 60,252,462 54,359,813
European 28,752,054 28,649,718 25,528,353
International 10,230,759 7,552,800 11,015,681
- ------------------------------------------------------------------------------
Total $90,709,332 96,454,980 90,903,847
- -------------------------------------------===================================
INTERSEGMENT SALES
Domestic 7,514,872 7,747,143 9,787,175
European 1,213,378 2,322,182 1,418,284
- -------------------------------------------===================================
OPERATING INCOME
Domestic 3,089,204 2,802,070 4,547,897
European 1,890,538 2,157,173 1,282,225
International 987,040 498,493 1,611,136
Corporate expenses,
including R&D (2,659,610) (2,550,000) (2,681,565)
- ------------------------------------------------------------------------------
Total $ 3,307,172 2,907,736 4,759,693
- -------------------------------------------===================================
IDENTIFIABLE ASSETS
Domestic 49,406,985 58,355,279 61,024,659
European 24,570,824 26,151,752 23,636,435
International 5,778,819 4,688,108 3,368,357
Corporate 1,608,619 1,388,052 1,167,907
- ------------------------------------------------------------------------------
Total $81,365,247 90,583,191 89,197,358
- -------------------------------------------===================================
DEPRECIATION AND
AMORTIZATION
Domestic 2,938,872 2,657,895 2,688,691
European 827,836 798,362 709,728
International 77,083 70,000 60,000
Corporate 234,527 177,909 173,321
- ------------------------------------------------------------------------------
Total $ 4,078,318 3,704,166 3,631,740
- -------------------------------------------===================================
CAPITAL EXPENDITURES
Domestic 573,907 570,025 5,360,213
European 603,850 570,231 843,193
International 174,144 51,981 148,475
Corporate 409,045 361,467 472,452
- ------------------------------------------------------------------------------
Total $ 1,760,946 1,553,704 6,824,333
- -------------------------------------------===================================
(3) INVENTORIES AND UNCOMPLETED CONTRACTS
Inventories at December 31, 1999 and 1998 consist of the following:
1999 1998
==============================================================================
Raw materials $ 2,447,402 2,601,718
Work in process 17,634,558 21,773,524
Finished goods 4,777,960 6,281,776
- ------------------------------------------------------------------------------
24,859,920 30,657,018
LIFO reserve (1,627,000) (1,996,000)
- ------------------------------------------------------------------------------
Total $23,232,920 28,661,018
- ------------------------------------------------------========================
Inventories, stated on the LIFO basis, including amounts allocated to
uncompleted contracts, are valued at $15,642,000 and $19,404,000 at December 31,
1999 and 1998, respectively
During 1999, 1998 and 1997, 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 $850,000,
$740,000 and $750,000 below the amount that would have resulted from liquidating
inventory recorded at December 31, 1999, 1998 and 1997 prices, respectively.
14 ANNUAL REPORT 1999
<PAGE> 10
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
A summary of costs and estimated earnings on uncompleted contracts at
December 31, 1999 and 1998 is as follows:
1999 1998
==============================================================================
Cost incurred $ 3,871,802 1,909,272
Estimated earnings thereon 1,567,880 758,764
- ------------------------------------------------------------------------------
5,439,682 2,668,036
Less billings to date (5,654,789) (1,660,259)
- ------------------------------------------------------------------------------
$ (215,107) 1,007,777
- -------------------------------------------------------=======================
Cost and estimated earnings in
excess of billings on uncompleted
contracts $ 511,564 1,096,042
- ------------------------------------------------------------------------------
Billings in excess of costs and
estimated earnings on uncompleted contracts (726,671) (88,265)
- ------------------------------------------------------------------------------
$ (215,107) 1,007,777
- -------------------------------------------------------=======================
4) SHORT-TERM BORROWINGS
Each of the Company's two Indian joint ventures have a $200,000 line of
credit. Short-term borrowings under these lines of credit amounted to
approximately $158,000 and $144,000 at December 31, 1999 and 1998, respectively.
Current borrowings under these lines of credit bear interest at approximately
15.8% as of December 31, 1999. The Company also has a $500,000 European line of
credit that bears interest at the bank's base rate plus 2% (9.3% as of December
31, 1999). There were no borrowings outstanding against the European line of
credit at December 31, 1999 and 1998. These lines of credit are collateralized
by substantially all assets of the applicable Indian joint ventures and
European subsidiaries, respectively.
(5) LONG-TERM DEBT
Long-term debt consisted of the following:
1999 1998
==============================================================================
Revolving Loan Agreement $ 9,429,681 13,265,208
Industrial Revenue Bonds 3,200,000 3,600,000
Notes payable to banks 6,233,800 7,561,000
Note payable to a municipality, due
in monthly installments through
January 2006 at 4.2% per annum. 328,650 374,963
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. 768,109 995,216
Mortgage notes of French subsidiary,
payable in French Francs and due in
quarterly installments through 2002
at 9.2% and 9.8% per annum. 99,167 159,925
Capital leases 501,181 452,332
Other -- 147,429
- ------------------------------------------------------------------------------
20,560,588 26,556,073
Less current installments 2,014,355 1,998,180
- ------------------------------------------------------------------------------
Long-term debt, less current
installments $18,546,233 24,557,893
- -------------------------------------------------------=======================
The Revolving Loan Agreement provides for borrowings up to $16,000,000
through April 2002. The interest rate on the first $6,000,000 is fixed at 6.4%.
The interest rate on the balance (approximately $3,430,000 and $7,265,000 at
December 31, 1999 and 1998, respectively) is calculated at the bank's prime rate
or LIBOR plus 1.4% (7.9% at December 31, 1999). Under the Revolving Loan
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, Nebraska and the Company. It covers
the expansion of the Fremont manufacturing facility and related machine tools.
The bonds are remarketed weekly and bear interest at a market rate. The average
effective rate in 1999 was 3.6%. 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 1999 and 1998 were approximately $803,000 and $1,617,000, respectively. The
unused proceeds and related accumulated interest income from the Industrial
Revenue Bonds at December 31, 1999 and 1998 were approximately $535,000 and
$1,338,000, respectively. These amounts are included in other assets in the
consolidated balance sheets. Such funds are restricted for capital expenditures
at the Fremont 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
through May 2003. The balance at December 31, 1999 and 1998 was $4,100,000 and
$5,300,000, respectively.
The Company has borrowings of 1,000,000 Pounds Sterling ($1,617,500 and
$1,659,500 at December 31, 1999 and 1998, respectively, included in notes
payable to banks) due April 2002. The interest rate on this loan floats on a
quarterly basis based on bank interest rates in the United Kingdom ~(7.5% at
December 31, 1999).
The Company also has a note payable to a bank of approximately $516,300,
and $601,500 at December 31, 1999 and 1998, respectively. This note bears
interest at 7.5% and is payable in monthly installments of $7,100 plus interest
through January 2006.
All borrowings under the 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, 1999.
Aggregate annual principal payments for long-term debt maturing during the
next five years, including capital leases, are: 2000 - $2,014,355; 2001 -
$2,364,864; 2002 - $12,959,239; 2003- $1,287,210; and 2004 - $579,852.
(6) LEASES
The Company has non-cancelable operating leases, primarily for automobiles,
equipment, and sales facilities. Rent expense for operating leases during 1999,
1998 and 1997 was $2,047,000, $1,425,000 and $1,006,000, respectively.
Future minimum lease payments under non-cancelable operating leases for
each of the next five years and thereafter are: 2000 - $1,991,000; 2001 -
$1,650,000; 2002 - $1,482,000; 2003 - $1,379,000; 2004 - $1,277,000; and
thereafter - $1,612,000.
GROWTH THROUGH TECHNOLOGY OILGEAR 15
<PAGE> 11
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
(7) OTHER NON-OPERATING INCOME, NET
Non-operating income consists of the following:
1999 1998 1997
==============================================================================
Interest income $216,906 306,630 154,077
Foreign currency
exchange gain (loss (222,309) 181,648 (146,811)
Miscellaneous, net 255,298 42,580 245,591
- ------------------------------------------------------------------------------
$249,895 530,858 252,857
- -------------------------------------------===================================
(8) INCOME TAXES
Income tax expense (benefit) attributable to earnings before income taxes
and minority interest consists of:
1999 1998 1997
==============================================================================
Current:
Federal $ -- (364,000) 237,000
State 65,000 -- 50,000
Foreign 530,000 670,000 341,000
- ------------------------------------------------------------------------------
595,000 306,000 628,000
Deferred (225,000) 371,000 (28,000)
- ------------------------------------------------------------------------------
Total $370,000 677,000 600,000
- -------------------------------------------===================================
The rate of expected income tax expense differs from the effective income
tax rate as follows:
1999 1998 1997
==============================================================================
Computed "expected" income tax rate 34.0% 34.0% 34.0%
State taxes (net of federal income
tax benefit) 2.3 -- 1.0
Provision for prior years' estimated
income taxes -- -- 9.2
Benefit of carryforwards not
recognized 4.8 31.9 7.1
Change in balance of valuation
allowance allocated to
income tax expense (19.3) (20.0) (34.2)
Unremitted foreign earnings and
foreign tax rate differential (3.2) 4.8 (3.9)
Other items, net 1.3 2.1 4.6
- ------------------------------------------------------------------------------
Effective income tax rate 19.9% 52.8% 17.8%
- ----------------------------------------------================================
The significant components of deferred income tax expense (benefit)
attributable to earnings before income taxes and minority interest are as
follows:
1999 1998 1997
==============================================================================
Deferred tax expense (benefit)
exclusive of the effects of other
components listed below $ 46,000 (64,000) 2,824,000
Effects of adjustments in
the beginning of year
valuation allowance (271,000) 435,000 (2,852,000)
- ------------------------------------------------------------------------------
($225,000) 371,000 (28,000)
- -----------------------------------------=====================================
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, 1999 and 1998 are as follows:
1999 1998
==============================================================================
Deferred tax assets:
Accounts receivable $ 60,000 60,000
Compensation 720,000 725,000
Warranty reserve 100,000 68,000
Employee benefits accruals 3,447,000 3,253,000
Tax credit carryforwards 1,000,000 860,000
Net operating loss carryforwards 734,000 1,094,000
- ------------------------------------------------------------------------------
Total gross deferred tax assets 6,061,000 6,060,000
Less valuation allowance 733,000 1,004,000
- ------------------------------------------------------------------------------
Net deferred tax assets 5,328,000 5,056,000
- ------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 4,782,000 4,927,000
Inventories 694,000 500,000
Other 43,000 45,000
- ------------------------------------------------------------------------------
Total gross deferred tax liabilities 5,519,000 5,472,000
- ------------------------------------------------------------------------------
Net deferred tax liability $ (191,000) (416,000)
- -----------------------------------------------------=========================
The valuation allowance for deferred tax assets as of January 1, 1998 was
$569,000. The net change in the total valuation allowance for the years ended
December 31, 1999 and 1998 was a decrease of $271,000 and an increase of
$435,000, 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.
During 1999, 1998 and 1997, the Company utilized net operating loss
carryforwards to reduce current U.S. and foreign income tax expense by
approximately $360,000, $150,000 and $110,000, respectively.
At December 31,1999 the Company has a U.S. general business tax credit
carryforward of approximately $650,000 and an AMT tax credit carryforward of
approximately $350,000. The U.S. business tax credits begin expiring in 2001
through 2014, while the AMT tax credits have no expiration. The Company also has
a tax operating loss carry forward applicable to a foreign subsidiary of
approximately $425,000 which can be carried forward indefinitely and a U.S. tax
operating loss carry forward of approximately $1,500,000 which can be carried
forward for 19 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 $10,000,000 at December 31, 1999.
(9) EMPLOYEE BENEFIT PLANS
(A) PENSION PLANS
The Company has noncontributory 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
16 ANNUAL REPORT 1999
<PAGE> 12
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
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.
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 December 31, 1999 and 1998, respectively), money market, equity and
long-term bond mutual funds. Data relative to 1999 and 1998 is as follows:
FUNDED STATUS 1999 1998
==============================================================================
Accumulated benefit obligation
including vested benefits (19,300,000) (20,300,000)
Excess of projected benefit
obligation over accumulated
benefit obligation (1,700,000) (2,000,000)
- ------------------------------------------------------------------------------
Projected benefit obligation (21,000,000) (22,300,000)
Plan assets at fair value 18,500,000 19,000,000
- ------------------------------------------------------------------------------
Projected benefit obligation
in excess of plan assets (2,500,000) (3,300,000)
Unrecognized net transition liability
being recognized over 15 years 200,000 300,000
Unrecognized prior service cost (550,000) (600,000)
Unrecognized net loss from past
experience, experience different
from that assumed and effects
of changes in assumptions 6,300,000 7,650,000
- ------------------------------------------------------------------------------
Prepaid pension cost, included in other assets 3,450,000 4,050,000
Adjustment for additional minimum
liability, reflected as unfunded
employee retirement plan costs (790,000) (1,550,000)
- ------------------------------------------------------------------------------
Total prepaid pension cost $ 2,660,000 2,500,000
- -----------------------------------------------------=========================
CHANGE IN PLAN ASSETS 1999 1998
==============================================================================
Fair value of plan assets at
beginning of year $ 19,000,000 19,100,000
Actual return on plan assets 700,000 1,100,000
Employer contributions -- 300,000
Benefits paid (1,500,000) (1,500,000)
Administrative expenses -- (100,000)
Transfer from Stock Retirement Plan 300,000 100,000
- ------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 18,500,000 19,000,000
- -----------------------------------------------------=========================
CHANGE IN PROJECTED BENEFIT
OBLIGATION 1999 1998
==============================================================================
Benefit obligation at
beginning of year $(22,300,000) (19,500,000)
Service cost (500,000) (300,000)
Interest cost (1,500,000) (1,300,000)
Plan amendments -- 600,000
Benefits paid 1,500,000 1,500,000
Actuarial gain (loss) 2,100,000 (3,200,000)
Transfer from Stock Retirement Plan (300,000) (100,000)
- ------------------------------------------------------------------------------
Projected benefit obligation~at end of year $(21,000,000) (22,300,000)
- -----------------------------------------------------=========================
Net pension expense under these plans for the year is comprised of the
following:
1999 1998 1997
==============================================================================
Service cost $ 500,000 300,000 500,000
Interest cost on projected
benefit obligation 1,500,000 1,300,000 1,300,000
Return on plan assets (1,800,000) (1,800,000) (3,900,000)
Net amortization and deferral
of net transition liability 400,000 200,000 2,700,000
- ------------------------------------------------------------------------------
Net pension expense $ 600,000 - 600,000
- -------------------------------------------===================================
The actuarial present value of the projected benefit obligation was
determined using a weighted-average discount rate of 8.25% in 1999 and 7.0% in
1998 and 1997 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 1999, 1998 and 1997 and the expected rate of return on
the assets in the Stock Retirement Plan was 9.5% in 1999 and 9% in 1998 and
1997.
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 1998, the pension plan data
comprised the following:
- ------------------------------------------------------------------------------
Actuarial present value of vested
accumulated plan benefits $ 8,600,000
- -------------------------------------------------------------------===========
Plan assets at fair value $11,800,000
- -------------------------------------------------------------------===========
Pension expense for the UK Plan was $311,000, $268,000 and $241,000 in
1999, 1998 and 1997, respectively.
The Stock Retirement Plan is a defined contribution plan covering
substantially all domestic salaried employees. The Stock Retirement Plan is
noncontributory 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 1999, 1998 and 1997. The Stock Retirement Plan
owned 437,233 shares of the Company's common stock as of December 31, 1999 and
1998, respectively. Certain benefits payable under the Stock Retirement Plan
serve to reduce benefits payable under the noncontributory 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 an
additional Company contribution to the Savings Plan in the year of purchase.
GROWTH THROUGH TECHNOLOGY OILGEAR 17
<PAGE> 13
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
The amounts charged to expense under the Savings Plan, including the stock
discount, were $308,000, $300,000 and $314,000 in 1999, 1998 and 1997,
respectively. The Savings Plan owned 383,644 and 328,958 shares of the Company's
common stock as of December 31, 1999 and 1998, 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. 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 amounts charged to expense were approximately
$14,000, $16,000 and $3,000 in 1999, 1998 and 1997, 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 $53,000, $51,000 and $63,000 in 1999, 1998
and 1997, 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 Option Plan is as
follows:
Weighted
Number Average Price
of Shares Per Share
==============================================================================
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
Granted 31,000 $ 7.68
Exercised -- --
Canceled and available for reissue (1,112) $14.78
- ------------------------------------------------------------------------------
Outstanding at December 31, 1999 87,630 $10.76
- -------------------------------------------------------=======================
Range of exercise prices of options
outstanding at December 31, 1999 $7.19 - $18.00
- -------------------------------------------------------=======================
Options available for grant at
December 31, 1999 16,778
- -------------------------------------------------------=======================
Other information regarding the Option Plan is as follows:
1999 1998 1997
==============================================================================
Options exercisable at end of year 47,083 16,434 13,731
- ------------------------------------------------------------------------------
Weighted-average exercise price of
exercisable options $ 12.00 11.00 11.09
- ------------------------------------------------------------------------------
Weighted-average fair value of
options granted during year $ 1.39 3.03 1.82
- -----------------------------------------------------=========================
At December 31, 1999, the weighted-average remaining contractual lives of
stock options outstanding is approximately 2.5 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:
1999 1998 1997
==============================================================================
Net earnings reported $1,328,068 574,762 2,677,482
- ------------------------------------------------------------------------------
Pro forma net earnings $1,306,552 561,210 2,665,169
- ------------------------------------------------------------------------------
Pro forma basic net
earnings per share $ .66 .29 1.41
- ------------------------------------------------------------------------------
Pro forma diluted net
earnings per share $ .66 .29 1.39
- --------------------------------------------==================================
The fair value of the Company's stock options used to compute pro forma net
earnings and earnings per share disclosures is the estimated fair value at grant
date using the Black-Scholes option pricing model with a risk-free interest rate
equivalent to 3 year Treasury securities, and an expected life of 3.5 years. The
Black-Scholes option pricing model also used the following weighted-average
assumptions: 1999 - expected volatility of 24% and expected dividend yield of
4%; 1998 - expected volatility of 24% and expected dividend yield of 2%; and
1997 - expected volatility of 39% and expected dividend yield of 2%. Option
valuation models require the input of highly subjective assumptions, including
the expected stock price volatility. Because the Company's options have
characteristics significantly different from traded options, and because changes
in the subjective input can materially affect the fair value estimates, in the
opinion of management the existing models do not necessarily provide a reliable
single value of its options and may not be representative of the future effects
on reported net earnings or the future stock price
18 ANNUAL REPORT 1999
<PAGE> 14
- ------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
The Oilgear Company and Subsidiaries, Years ended December 31, 1999, 1998
and 1997
of the Company's common stock. For purposes of pro forma disclosure, the
estimated fair value of the options is amortized to expense over the option's
vesting period.
(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, 2,000 and 1,500 shares were issued
in 1999, 1998 and 1997, respectively. As of December 31, 1999, 6,125 shares
remain available for issuance.
(F) POST-RETIREMENT HEALTH CARE 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 health care 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 sheet at December 31,
1999 and 1998:
1999 1998
==============================================================================
Accumulated post-retirement benefit
obligation $ (7,621,000) (8,504,000)
Plan assets at fair value -- --
- ------------------------------------------------------------------------------
Accumulated post-retirement benefit
obligation in excess of plan assets (7,621,000) (8,504,000)
Unrecognized prior service cost (383,000) (432,000)
Unrecognized net gain (2,805,000) (1,969,000)
- ------------------------------------------------------------------------------
Net amount recognized $(10,809,000) (10,905,000)
- ----------------------------------------------------==========================
The following table presents the plan's changes in accumulated post-retirement
benefit obligation.
1999 1998
==============================================================================
Accumulated post-retirement benefit
obligation in excess of
plan assets at begining of year $ (8,504,000) (8,806,000)
Service cost (95,000) (87,000)
Interest cost (578,000) (594,000)
Benefits paid 540,000 630,000
Actuarial gain 1,033,000 353,000
Plan amendments (17,000) --
- ------------------------------------------------------------------------------
Accumulated post-retirement benefit
obligation in excess of plan assets
at end of year $ (7,621,000) (8,504,000)
- ----------------------------------------------------==========================
Net periodic post-retirement benefit cost includes the following components:
1999 1998 1997
==============================================================================
Service cost $ 95,000 87,000 96,000
Interest cost 578,000 594,000 580,000
Net amortization and deferral (230,000) (116,000) (212,000)
- ------------------------------------------------------------------------------
Net periodic post-retirement
benefit cost $ 443,000 565,000 464,000
- ------------------------------------------------==============================
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 2000, grading down to a rate of 4.5% in year 2004 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, 1999 by $146,000 and the
aggregate of the service and interest cost components of net periodic
post-retirement cost for the year ended December 31, 1999 by $27,000. Decreasing
the assumed health care cost trend rates by one percentage point in each year
would decrease the accumulated post-retirement benefit obligation as of December
31, 1999 by $164,000 and the aggregate of the service and interest cost
components of net periodic post-retirement cost for the year ended December 31,
1999 by $22,000. The weighted-average discount rate used in determining the
accumulated post-retirement benefit obligation was 8.0% at December 31, 1999 and
7.0%, at December 31, 1998 and 1997, 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, 1999 and
1998:
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.
OTHER FINANCIAL INSTRUMENTS:
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, trade accounts receivable, accounts payable and notes
receivable from employees 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.
GROWTH THROUGH TECHNOLOGY OILGEAR 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 Audit Committee of the Board of Directors meets with the independent
auditors and the Company's management to review the scope and findings of the
audit, review the Company's system of internal control, and review other
accounting and financial matters. The Company will continue to conduct its
business affairs in accordance with the highest ethical standards.
/s/ David A. Zuege
- ---------------------------
David A. Zuege, President
and Chief Executive Officer
/s/ Thomas J. Price
- ---------------------------
Thomas J. Price,
Vice President - Finance
and Corporate Secretary
- ------------------------------------------------------------------------------
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
March 1, 2000
20 ANNUAL REPORT 1999
<PAGE> 1
EXHIBIT 21
(1999 10-K)
SUBSIDIARIES OF THE OILGEAR COMPANY
<TABLE>
<CAPTION> JURISDICTION
IN WHICH
NAME OF SUBSIDIARY INCORPORATED
<S> <C>
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 Brazil Hydraulica Ltda. Brazil
Oilgear Towler Korea Ltd. South Korea
Oilgear Canada Inc. Canada
The Oilgear Japan Company Japan
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)
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF KPMG LLP
The Board of Directors
The Oilgear Company:
We consent to incorporation by reference in the registration statements (Nos.
33-67672 and 33-59033) on Form S-8 of The Oilgear Company of our reports dated
March 1, 2000, relating to the consolidated balance sheets of The Oilgear
Company and subsidiaries as of December 31, 1999 and 1998, 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, 1999, which reports are
incorporated by reference or appear in the December 31, 1999 annual report on
Form 10-K of The Oilgear Company.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS OF THE OILGEAR COMPANY FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,698,452
<SECURITIES> 0
<RECEIVABLES> 17,563,376
<ALLOWANCES> 268,198
<INVENTORY> 23,232,920
<CURRENT-ASSETS> 49,361,347
<PP&E> 63,689,480
<DEPRECIATION> 37,103,920
<TOTAL-ASSETS> 81,365,247
<CURRENT-LIABILITIES> 15,860,533
<BONDS> 20,560,588
0
0
<COMMON> 11,488,689
<OTHER-SE> 21,589,322
<TOTAL-LIABILITY-AND-EQUITY> 81,365,247
<SALES> 90,709,332
<TOTAL-REVENUES> 90,709,332
<CGS> 65,520,933
<TOTAL-COSTS> 65,520,933
<OTHER-EXPENSES> 21,881,227
<LOSS-PROVISION> 7,094
<INTEREST-EXPENSE> 1,693,455
<INCOME-PRETAX> 1,863,612
<INCOME-TAX> 370,000
<INCOME-CONTINUING> 1,328,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,328,068
<EPS-BASIC> 0.67
<EPS-DILUTED> 0.67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS OF THE OILGEAR COMPANY FOR THE YEAR ENDED DECEMBER
31, 1998, AS RECLASSIFIED TO CONFORM WITH THE 1999 PRESENTATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> $4,058,530
<SECURITIES> $0
<RECEIVABLES> $18,054,508
<ALLOWANCES> $345,363
<INVENTORY> $28,661,018
<CURRENT-ASSETS> $54,288,471
<PP&E> $64,294,932
<DEPRECIATION> $34,814,532
<TOTAL-ASSETS> $90,583,191
<CURRENT-LIABILITIES> $18,806,711
<BONDS> $26,556,073
$0
$0
<COMMON> $11,189,551
<OTHER-SE> $21,657,753
<TOTAL-LIABILITY-AND-EQUITY> $90,583,191
<SALES> $96,454,980
<TOTAL-REVENUES> $96,454,980
<CGS> $70,633,595
<TOTAL-COSTS> $70,633,595
<OTHER-EXPENSES> $22,913,649
<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-BASIC> $0.30
<EPS-DILUTED> $0.29
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS RESTATED SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED FINANCIAL STATEMENTS OF THE OILGEAR COMPANY FOR THE YEAR ENDED DECEMBER
31, 1997, AS RECLASSIFIED TO CONFORM WITH THE 1999 PRESENTATION AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,010,929
<SECURITIES> 0
<RECEIVABLES> 18,677,849
<ALLOWANCES> 211,372
<INVENTORY> 26,396,825
<CURRENT-ASSETS> 49,636,199
<PP&E> 62,213,882
<DEPRECIATION> 30,834,701
<TOTAL-ASSETS> 89,197,358
<CURRENT-LIABILITIES> 22,210,946
<BONDS> 22,280,257
0
0
<COMMON> 10,720,925
<OTHER-SE> 21,106,638
<TOTAL-LIABILITY-AND-EQUITY> 89,197,358
<SALES> 90,903,847
<TOTAL-REVENUES> 90,903,847
<CGS> 62,507,029
<TOTAL-COSTS> 62,507,029
<OTHER-EXPENSES> 23,637,125
<LOSS-PROVISION> 163,178
<INTEREST-EXPENSE> 1,649,826
<INCOME-PRETAX> 3,362,724
<INCOME-TAX> 600,000
<INCOME-CONTINUING> 2,677,482
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,677,482
<EPS-BASIC> 1.41
<EPS-DILUTED> 1.40
</TABLE>
