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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, 2002
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)
WISCONSIN 39-0514580
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2300 SOUTH 51ST STREET, POST OFFICE BOX 343924, 53234-3924
MILWAUKEE, WISCONSIN (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (414) 327-1700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE (TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of the Common Stock held by non-affiliates as
of June 28, 2002 (the last business day of the registrant's second fiscal
quarter) was $5,782,022.
As of March 25, 2003, 1,955,398 shares of Common Stock were outstanding,
and the aggregate market value of the shares of Common Stock (based upon the
$2.14 last sale price on March 26, 2003 in the Nasdaq Small Cap Stock Market)
held by non-affiliates (excludes a total of 1,052,896 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 $1,931,354.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on May 13, 2003 are incorporated by reference into Part
III of this Form 10-K
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 value engineered fluid power components and
electronic controls for a broad range of industrial machinery and industrial
processes. Oilgear was incorporated under the laws of Wisconsin in 1921. For
additional information describing the business of the Company, see "Note
2-Business Description and Operations" in the Notes to Consolidated Financial
Statements and in Item 8 of this report.
PRINCIPAL PRODUCTS, MARKETS AND METHODS OF DISTRIBUTION
The Company's products primarily involve the flow, pressure, and 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 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 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. Our principal products
include piston pumps, motors, valves, controls, manifolds, electronics and
components, reservoirs, skids, and meters. They are used in disparate industries
including primary metals, machine tool, automobile, petroleum, aerospace, civil,
construction equipment, chemical, plastic, glass, lumber, rubber and food. 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. The Company supports responsive, high quality aftermarket sales and
flexible rebuilding services which include exchange, factory rebuild and field
repair service, along with customer training.
DOMESTIC SEGMENT
The Company's products are sold in the United States and Canada by sales
engineers and by a network of approximately 60 distributors. Sales engineers are
located in Milwaukee, Wisconsin; Hot Springs Village, Arkansas; Novi, Michigan;
Cleveland and Piqua, Ohio; Dallas, Texas; Atlanta, Georgia; Fairfax, Virginia;
Melbourne, Florida and Ajax, Ontario, Canada.
EUROPEAN SEGMENT
The Company's products are sold in Europe directly through 5 wholly owned
subsidiaries and by a network of approximately 15 distributors. Sales offices
are located in Leeds, England; Paris, France; Hernani, Spain; Hattersheim,
Germany; and Montirone, Italy.
INTERNATIONAL SEGMENT
The Company conducts business outside of the United Sates, Canada and Europe by
direct export sales and through subsidiary operations providing sales,
engineering, manufacturing and field services to customers worldwide. The
Company's 100% owned subsidiaries are located in Taren Point- Australia, Taejon
City- Korea, Nagoya-Japan, Pachuca-Mexico, and Campinas-Brasil. The Company
also has a 51% owned joint venture, Oilgear Towler Polyhydron Pvt. Ltd, located
in Belgaum City-India, OSL Offshore Machinery and Deck Systems located in
Milwaukee, WI, USA, and a 58% owned joint venture operation located in
Taipei-Taiwan, with both companies serving customers with hydraulic products. In
the year 2002, the Company acquired 100% ownership of Towler Enterprise
Solutions Pvt. Ltd located in Bangalore-India by purchasing the minority
interests. This company offers a wide variety of system automation and software
products with references worldwide. In addition to the above, the company sells
its products through distribution in selected countries.
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 have 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, 2002 was
approximately $29,562,000, a increase of approximately $9,117,000 from the
backlog of orders as of December 31, 2001, which was approximately $20,445,000.
Except for a large contract to engineer, build and start-up a custom engineered
hydraulic power unit with electronic controls, approximately $11,000,000 in
anticipated revenue, used to power and control a forty thousand ton open die
forging press in central France, the Company expects that substantially all
other orders in the backlog will be filled in 2003. A large percentage of the
forging press contract will be completed in 2003 and 2004. 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
its engineering staff at its Milwaukee, Wisconsin and Leeds, England plants, who
spend a substantial amount of their time on research and development. Due to
cost cutting programs, the Company decreased its research and development
expenditure during 2002 to approximately $1,600,000 from $2,100,000 in 2001 and
2000. The Company's product development efforts continue to be focused in 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, 2002, the Company had approximately 790 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 is the United States, Canada and certain exports
serviced directly by the Domestic factories. European is Europe and
International is Asia, Latin America, Australia and Africa.
SEGMENT SALES
For further information about the Company's sales by segment, see "Note
2-Business Description and Operations" in the Notes to Consolidated Financial
Statements in Item 8 of this report.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Company's revenues by geographic area are described in "Note 2 - Business
Description and Operations" in the Notes to Consolidated Financial Statements in
Item 8 of this 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. In 2002, the Company closed its manufacturing plant
in Longview, Texas, constructed of concrete block and steel, which has
approximately 44,000 square feet and is currently for sale. The Company leases a
132,000 square foot manufacturing facility located in Fremont, Nebraska. For
additional information regarding the lease of the Fremont, NE facility, see
"Note 5 - Long Term Debt" in the Notes to Consolidated Financial Statements in
Item 8 of this report.
EUROPEAN
The Company's Oilgear GmbH subsidiary owns a three level concrete block and
steel building with approximately 18,500 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 52,000 square feet on six acres of land in Leeds, England, and an
additional prefabricated facility being used for document storage.
The Company's Oilgear Towler S.A. 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. subsidiary owns a 12,500 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. subsidiary owns a 15,700 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 joint venture. The Company's Oilgear Towler
Polyhydron Pvt. Ltd joint venture owns two plants; Plant number 1 is a masonry
three story building with approximately 6,000 square feet on approximately
13,000 square feet of land and Plant number 2 is a one story masonry building
with approximately 16,000 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 the assets of the Company. For further
information about the Company's assets, see "Note 4-Short-Term Borrowings" and
"Note 5-Long-term Debt" in the Notes To Consolidated Financial Statements in
Item 8 of this 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 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, offices and positions held, and periods of service in their
present offices, of all executive officers of the Registrant are listed below.
Except in the case of mid-term vacancies, officers are elected for one-year
terms at the Board of Directors meeting following the annual meeting of
shareholders each year.
OFFICES AND POSITIONS PRESENT OFFICE
NAME AGE HELD WITH REGISTRANT HELD SINCE
---- --- -------------------- ----------
David A. Zuege 61 President and Chief Executive Officer; 1996(1)
Director; Member of Executive Committee
Thomas J. Price 59 Vice President - Chief Financial Officer 2000(2)
and Secretary
Hubert Bursch 63 Vice President - European Operations; 1994(3)
Director
Dale C. Boyke 52 Vice President - Marketing & Sales; 1997(4)
Director
Robert D. Drake 48 Vice President - International 2000(5)
Operations; Director
(1) Mr. Zuege has been a member of the Board of Directors since 1982.
(2) Mr. Price served as Vice President - Finance and Corporate Secretary from
1995 to 1999.
(3) Mr. Bursch has been a member of the Board of Directors since 1997.
(4) Mr. Boyke has been a member of the Board of Directors since 1998.
(5) Mr. Drake served as Director of International Sales from 1988 to 1996 and
Vice President Asia/Latin American Operations from 1997 to 1999.
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 Small Cap Market under
the symbol OLGR. As of March 27, 2003, the number of record holders of the
Company's common stock was 463.
For additional information regarding the Company's common stock and dividend
payments, see "Discussion of Financial Position" and "Quarterly Financial
Information (Unaudited)" in Item 7 of this report.
In 2002, 2001 and 2000, the Company sold an aggregate of 11,000, 5,100 and
7,000, respectively, of 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 officers and
other key employees in exempt offerings pursuant to Section 4(2) of the
Securities Act of 1933, as amended. The purchase price paid for each Share was
$7.92, $9.75 and $8.19 for years 2002, 2001 and 2000, respectively, which was
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.
5 YEAR SUMMARY
OPERATIONS 2002 2001 2000 1999 1998
- ---------- ---- ---- ---- ---- ----
Net sales $ 75,300,000 82,619,000 92,318,000 90,709,000 96,455,000
Net earnings (loss) (5,479,000) (1,704,000) 774,000 1,328,000 575,000
Basic earnings (loss) per share (2.81) (0.88) 0.39 0.67 0.30
Diluted earnings (loss) per share (2.81) (0.88) 0.39 0.67 0.29
Dividends per share -- 0.14 0.28 0.28 0.28
CAPITALIZATION
- --------------
Interest bearing debt $23,195,000 24,694,000 23,331,000 20,719,000 26,700,000
Shareholders' equity 3,859,000 17,581,000 31,387,000 33,078,000 32,847,000
Total assets 67,027,000 71,932,000 84,832,000 81,365,000 90,583,000
Book value per share 1.97 9.05 15.88 16.62 16.74
December 31st stock price* 3.01 8.50 9.69 6.88 11.00
*The last sale price for the year in the Nasdaq Stock Market or the Nasdaq Small
Cap Market, as applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Discussion of Results of Operations
Shipments, Orders & Backlog 2002 2001 2000
- --------------------------- ---- ---- ----
Net orders $84,417,000 81,877,000 94,661,000
Percentage increase (decrease) 3.1% (13.5%) 8.4%
Net sales (shipments) 75,300,000 82,619,000 92,318,000
Percentage increase (decrease) (8.9%) (10.5%) 1.8%
Backlog at December 31 29,562,000 20,445,000 21,187,000
Percentage increase (decrease) 44.6% (3.5%) 12.4%
A large contract, approximately $11,000,000 in anticipated revenue, for a custom
engineered hydraulic power unit with electronic controls used to power and
control a forty thousand ton open die forging press being installed in central
France was the primary cause for net orders to increase by 3.1% in 2002 compared
to 2001. Without this contract net orders would have decreased by 10.3% in 2002.
We will use the percentage-of-completion method of accounting for this order.
All of the net sales from this contract should be recognized in 2003 and 2004.
The continued low level of customer spending for capital goods in 2002 in the
Domestic and International geographic segments was the primary cause for an
approximately 43% decrease in net sales from engineered construction contracts.
This low level of spending caused the Domestic and the International segment's
2002 net sales to decrease approximately 15.8% and 11.3%, respectively, from
2001. The weaker dollar against the British Pound Sterling and the Euro helped
the European segment's 2002 net sales to increase by approximately 8.3% from
2001.
A 13.5% decrease in net orders in 2001 led to a 10.5% decrease in net sales,
$82.6 million of net sales in 2001 when compared to the $92.3 million of net
sales in 2000. The Company uses the percentage-of-completion method of
accounting to recognize net sales from its engineered construction contracts. A
large order of this type, approximately $3,500,000, was recognized in December
2000; most of the revenue for this order was recognized in 2001, causing net
sales from engineered construction contracts using the percentage-of-completion
method of accounting to increase by 11.3% in 2001 when compared to 2000. Net
sales of product for which the Company does not use the percentage-of-completion
method of accounting decreased by 16.3% in 2001 from 2000. The soft demand in
the world economy for fluid power products in 2001 had a negative effect on the
performance of all three of the Company's geographic segments. The Domestic,
European and International segments net sales decreased by 10.3%, 10.4% and
11.5%, respectively in 2001. The strong dollar also accounted for some of the
decrease in the European and International segments. The percent change in the
average of the foreign currency exchange rates used to convert the results of
the European and International segments to US dollars was approximately negative
7% and negative 4%, respectively.
GROSS PROFIT 2002 2001 2000
- ------------ ---- ---- ----
Gross profit $ 14,389,000 18,860,000 23,743,000
Gross profit margin 19.1% 22.8% 25.7%
Percentage increase (decrease) (16.2%) (11.3%)
The large decrease in net sales previously discussed, together with relatively
high aggregate sales of products with lower profit
margins, were the primary reasons for the decrease in gross profit margin to
19.1% in 2002 from 22.8% in 2001. To offset the decrease in net sales, the
Company reduced its labor force by approximately 11% in total, including an
approximately 15% decrease in the Domestic segment, reduced pay to salaried
workers, kept overtime pay to a minimum, plant shutdowns, outsourced items made
in our factories to lower cost vendors, installed lean manufacturing techniques
in our factories, negotiated a more favorable three year union contract, and in
late 2002, closed our factory in Longview, Texas. These cost decreases were
partially offset by cost increases in healthcare benefits, insurance, energy,
pension benefits and unfavorable utilization variances created by the lower
utilization of our production facilities.
Gross profit margin decreased to 22.8% in 2001 compared to 25.7% in 2000. Gross
profit margin was down in 2001 primarily for five reasons. First, the strong US
dollar increased pricing pressure due to stronger competition from foreign
producers when selling products made in the United States to foreign markets.
Second, the recession in the fluid power industry increased competitive
pressures because firms competed for a smaller amount of potential orders.
Third, we added costs related to the learning curve on new products and
applications for those products. Fourth, the approximate $647,000 of special
costs in 2001 decreased the margin by approximately .8%. Fifth, lower
utilization of production facilities created inefficiencies and unfavorable
utilization variances.
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2002 2001 2000
- ----------------------- ---- ---- ----
Research and development $1,600,000 2,100,000 2,100,000
Special costs 467,000 326,000 --
Selling, general and administrative less
research and development 16,411,000 16,368,000 18,965,000
Percentage increase (decrease) 0.3% (13.7%) 5.8%
Percent of net sales 21.8% 19.8% 20.5%
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, less research and development and
special costs, increased by 0.3% in 2002 compared to 2001. The programs to
decrease expenses included downsizing the labor force, reducing pay to salaried
workers, keeping overtime pay to a minimum, and decreasing employee benefits.
These cost decreases were partially offset by cost increases in healthcare
benefits, insurance, and pension benefits. Translating stronger foreign
currencies into US Dollars, the Euro (up 17.8%), the British Pound Sterling (up
10.6%) and the average of all the other foreign currencies in our International
Segment (up slightly) increased operating expenses when compared to 2001 and
also offset the decreases made to operating expenses in 2002.
Selling, general and administrative expenses, less research and development
decreased by 13.7% in 2001 compared to 2000. During 2001 we aggressively reduced
expenses including reducing our workforce by approximately 15% through a
combination of early retirements and layoffs. We also reduced the hours and
salaries for the remaining employees.
Included in selling, general and administrative expenses are startup expenses
and net losses of approximately $800,000 for 2002 and approximately $500,000 for
2001 from OSL Offshore Machinery and Deck Systems (OSL). OSL is a company we
invested in during 2001 to expand our oil and gas industry presence. On December
31, 2002 we acquired the remaining interest in this company after absorbing 50%
of the net loss generated by OSL in 2002. Accordingly, we have consolidated
OSL's financials into The Oilgear Company's financial statements from the date
we gained majority ownership.
The Company's research and development expense decreased to $1,600,000 in 2002
compared to $2,100,000 in each of 2001 and 2000. Cost cutting programs in 2002
were the primary reason for the
change. The Company continues its commitment to the design and manufacture of
new and more efficient hydraulic products to gain new customers and to new
applications for the Company's products.
INTEREST EXPENSE decreased by approximately $411,000 in 2002, primarily due to
the decrease in interest rates. An increase in interest expense by approximately
$86,000 in 2001 was the result of an increase in interest bearing debt,
partially offset by lower rates.
INCOME TAX effective rates were 4.9%, 20.0% and 32.0% in 2002, 2001 and 2000,
respectively. Changes in the valuation allowance was the principal reason for
the fluctuation in effective tax rates. Also see note 8 to the Consolidated
Financial Statements for additional reconciliation of the rates.
THE NET LOSS OF $5,479,000 for 2002 was the result of decreased net sales, a
higher proportion of products with lower profit margins, special costs of
approximately $839,000, increased health care costs, increased pension costs,
increased insurance costs, $800,000 of losses and startup charges for OSL, and
increased competitive pressure due to a decrease in global capital expenditures.
THE NET LOSS OF $1,704,000 for 2001 was the result of lower margins caused by
the global weak demand for fluid power products, approximately $973,000
(pre-tax) of special charges and approximately $500,000 (pre-tax) of startup
charges for OSL to increase sales in the oil and gas industry.
OUTLOOK
Entering 2003, the fourth quarter total of net orders was the lowest quarter of
net orders since the third quarter of 1994 and the lowest level of backlog since
1996, excluding the order for the $11,000,000 forging machine contract in
France. However, in the first two months of 2003 we have seen an improvement.
Net orders increased by approximately 9.5% compared to the first two months of
2002 and we are encouraged that the net orders in all three geographic segments
have increased in the same two-month period. It is also encouraging that our
quoting activity has increased in the past few months and our list of completed
proposals for engineered construction contracts has increased as evidenced by
increased communication between our engineers and our customers' engineers.
However, with all of the uncertainties in the world today, we can't determine at
this time whether a recovery has begun, but we hope that we have seen the worst
of the current manufacturing recession. A weaker US dollar has continued into
the first two months of 2003 which should have a positive effect on net sales
and gross margins in the European and International segments. We have achieved
substantial savings from cost cutting programs we have initiated during the past
three years, (i.e. reducing employment, cutting salaries, reducing benefits and
hours, closing facilities in Longview, TX, Novi, MI and Bedford, England, and
lower cost outsourcing). However, increasing costs for healthcare, pension,
insurance, energy and consulting fees will offset a material part of the
savings. As part of our cost reduction and efficiency improvement efforts, we
are evaluating downsizing our facility in Leeds, England and moving these
operations to a smaller, more efficient facility. We have received a letter of
intent to acquire our existing facility for 4,050,000 British Pound Sterling.
The offer is contingent upon receiving government authorization to convert the
property to residential use and upon our ability to find a suitable site to
relocate. It is unlikely that this transaction could be consummated before 2004.
The property is on our books at zero value so the transaction may provide a
significant capital gain. The large increase in backlog resulting from the
$11,000,000 forging machine contract in France and continued pressure to reduce
costs should improve the Company's operating income. However, to bring the
Company back to profitability in 2003 we need net orders to increase. If there
is increased world demand for capital equipment projects that require fluid
power technology, then the Company is ready to supply a superior level of
technology required to meet those demands.
INFLATION AND CHANGING PRICES
Oilgear uses the LIFO method of accounting for 58% of its inventories and has
reserves for obsolete and slow moving inventory. Approximately 91% of the total
assets of the Company reside in the United States and Western Europe. These
assets are in operation and have been maintained in good condition through the
years. Management believes that inflation has not significantly distorted the
net earnings (loss) reported by the Company. However, because of inflation and
the extent to which these assets have been depreciated, management believes that
the book value of the Company, stated in historical dollars at $1.97 per share,
significantly understates the current or replacement value of the Company's
assets.
QUARTERLY FINANCIAL INFORMATION
(UNAUDITED)
2002 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
Net sales $ 20,596,000 18,738,000 18,091,000 17,875,000
Net earnings (loss) 24,000 (1,186,000) (1,279,000) (3,038,000)
Basic earnings (loss) per share of common
stock 0.01 (0.61) (0.66) (1.55)
Diluted earnings (loss) per share of common
stock 0.01 (0.61) (0.66) (1.55)
Dividends per share of common stock -- -- -- --
Stock price low* 6.10 6.11 3.75 2.06
Stock price high* 9.00 7.50 6.15 3.85
2001 FIRST SECOND THIRD FOURTH
- ---- ----- ------ ----- ------
Net sales $ 21,541,000 21,709,000 20,188,000 19,181,000
Net earnings (loss) 187,000 141,000 (1,834,000) (198,000)
Basic earnings (loss) per share of common stock 0.10 0.07 (0.94) (0.10)
Diluted earnings (loss) per share of common stock 0.10 0.07 (0.94) (0.10)
Dividends per share of common stock 0.07 0.07 -- --
Stock price low* 7.50 5.87 7.00 6.10
Stock price high* 10.50 9.02 9.20 8.61
*High and low sales prices in the Nasdaq Stock Market or the Nasdaq Small Cap
Stock Market, as applicable.
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 presentation provides
information intended to assist in assessing factors such as the Company's
liquidity and financial resources.
WORKING CAPITAL 2002 2001
- --------------- ---- ----
Current assets $ 44,117,000 48,095,000
Current liabilities 17,428,000 21,170,000
Working capital 26,689,000 26,925,000
Current ratio 2.53 2.27
Working capital decreased slightly in 2002. Current assets decreased by
approximately $3,978,000 and current liabilities decreased by approximately
$3,742,00 in 2002 causing the current ratio to increase to 2.53 at December 31,
2002 from 2.27 at December 31, 2001. The decrease in the dollar level of
business in 2002 was the primary reason for the decrease in current assets. The
changes in current assets in 2002 came from the decrease in trade receivables
($2,054,000), inventory ($2,354,000), other
current assets ($262,000) and cash and cash equivalents ($871,000). These
decreases were partially offset by an increase in costs and estimated earnings
in excess of billings on uncompleted contracts ($1,418,000) and prepaid expenses
($145,000).
The changes in current liabilities in 2002 came from a decrease in short-term
borrowings ($5,177,000) resulting from the negotiation of a new bank agreement
with an April 30, 2004 expiration date, a decrease in billing in excess of costs
and estimated earnings on uncompleted contracts ($1,563,000) and a decrease in
current installments of long-term debt ($178,000). These decreases were
partially offset by increases in customer deposits ($1,186,000) from cash
received as a down payment on the large forging press contract, other accrued
expenses ($782,000), accounts payable ($532,000) and accrued compensation and
employee benefits ($675,000).
CAPITALIZATION 2002 2001
- -------------- ---- ----
Interest bearing debt $23,195,000 24,694,000
Shareholders' equity 3,859,000 17,581,000
Debt and equity 27,054,000 42,275,000
Ratio 85.7% 58.4%
The increase in the minimum pension liability adjustment decreased shareholders'
equity by $10,200,000 in 2002. The defined benefit pension plans in the United
States contributed $7,200,000 to the increase in the minimum pension liability.
The continued weakness in the financial equity markets in 2002 resulted in a net
investment loss of approximately $2,900,000 on pension plan assets. The
actuarial assumption was to earn approximately $1,800,000. Additionally, on
pension plan assets the further reduction in long-term interest rates in 2002
from the rates in 2001 resulted in a reduction in the discount rate, which was
the primary reason for the increase in pension benefit obligations by
approximately $2,500,000. The remaining $3,000,000 of the $10,200,000 pension
liability adjustment to shareholders' equity relates to our European operations.
It resulted from the same reasons the US pension plans minimum liabilities
increased: investment losses and reductions in long-term interest rates.
The Company's Milwaukee union defined benefit plan pension benefits were frozen
on December 31, 1998 and the non-union defined benefit plan pension benefits in
the United States were frozen at December 31, 2002. The defined benefit plan
pension service in the United Kingdom was frozen December 31, 2002. Also see
note 9 to the Consolidated Financial Statements.
Other reasons for the change in shareholders' equity were the consolidated net
loss in 2002 of approximately $5,479,000 partially offset by the effect of
foreign currency rate changes during 2002 causing a $1,890,000 increase in
shareholders' equity.
In the fourth quarter of 2002 the Company switched from the Nasdaq National
Market to the Nasdaq Small Cap Stock Market because of the decrease in the
valuation of its stock. The Company's common stock is traded under the 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.
In December 2000 the Company announced a stock buy back program for a total of
100,000 shares of common stock during the next three years. The Company bought
660, 44,507 and 22,982 shares in 2002, 2001 and 2000, respectively.
FINANCIAL CONDITION AND LIQUIDITY
The Company did not comply with all of its bank covenants at September 30, 2002.
We negotiated a new agreement in February 2003 and amended and restated it in
March 2003. The amended bank agreement extended the revolving loan termination
date to April 30, 2004. It has two term loans and a revolving line of credit
facility. The first is a term loan with a $500,000 balance as of December 31,
2002 and an annual interest rate of 6.33% with $100,000 monthly payments with
the final payment due in April of 2003. The second term loan is a new
$10,000,000 loan with an annual interest rate equal to the greater of 5.0% or
LIBOR plus 125 to 400 basis points with equal monthly payments totaling $500,000
in 2003 and equal monthly payments in 2004 totaling $1,500,000. The basis points
added to LIBOR is determined by the ratio of funded debt to EBITDA, as defined.
The revolving line of credit has a bank commitment of $12,000,000 at an annual
interest rate equal to the greater of 5.0% or LIBOR plus 125 to 400 basis
points. The amount available under the $12,000,000 bank commitment is limited by
a formula which is calculated on a weekly basis. The formula includes only
Domestic segment assets. These assets include 80% of qualifying trade
receivables and 50% of inventory, including inventory subject to percentage of
completion contracts, (limited to $7,250,000). The variable interest rate at
December 31, 2002 was 5.4%. These loans are secured by substantially all of the
Company's domestic assets. The loan agreement contains various covenants that
adjust over the term of the agreement. The new bank loan agreement's covenants
include the following: the covenant for capital expenditures limits them to not
greater than $750,000 for 2003; the covenant for EBITDA, as defined, sets a
minimum amount of EBITDA for each quarter in 2003; and the covenant for
consolidated net income or loss sets monthly minimums for 2003. The Company is
in compliance with all such covenants.
At December 31, 2002, the Company had approximately $3,637,000 of unused
borrowings availability under short-term and long-term credit facilities.
Interest bearing debt decreased by 6.0% ($1,499,000) at December 31, 2002
compared with year end 2001. Total debt increased by approximately $1,363,000 in
2001. The cash was used to fund the operating activities and additions to
property, plant and equipment.
Net cash provided by operating activities was $2,104,000 in 2002 and $1,179,000
in 2001. Despite a net loss of $5,479,000 and a $2,865,000 use of cash in the
change from contracts using percentage-of-completion, net cash was provided by
operating activities in 2002. The net change from contracts using
percentage-of-completion at December 31, 2002 compared to December 31, 2001 was
the result of the total decrease of the dollar amount of contracts where
billings are greater than costs and profits at December 31, 2002 and the total
increase of the dollar amount of contracts where costs and profits are greater
than billings at December 31, 2002. The primary reasons for the cash provided in
2002 were depreciation and amortizations of $3,559,000, the decreases in
inventory by $3,335,000 and trade accounts receivable by $3,088,000 and the
increase in customer deposits by $970,000.
The primary reason for the cash provided by operating activities in 2001 came
from the decrease in the amount of contracts on the percentage-of-completion
method of accounting and the increase in the billings under those contracts
compared to the end of 2000. The aggregate change resulting from these contracts
provided $3,442,000 of cash flow in 2001 compared to using $2,381,000 of cash in
2000.
Net property, plant and equipment was $21,148,000 at December 31, 2002 compared
to $22,701,000 at December 31, 2001. Capital expenditures in 2002 were
$1,368,000 compared to depreciation and amortization of $3,559,000. Capital
expenditures in 2001 were $1,771,000 compared to depreciation and amortization
of $3,701,000. The Company entered into operating lease agreements for
approximately $623,000 and $1,800,000 in 2002 and 2001, respectively, primarily
for capital equipment
most of which were machines and tools for the Fremont and Milwaukee
manufacturing facilities.
The Company did not declare or pay a dividend in 2002 or in the third or fourth
quarters of 2001. The Company paid dividends of $.07 per share in the first and
second quarters of 2001.
The Company believes its cash on hand, cash flows from operations and available
borrowings under short-term and long-term bank credit facilities will continue
to be sufficient to meet its operating needs.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions for
the reporting period and as of the financial statement date. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities and the reported amounts of revenues and
expenses. Actual results could differ from those amounts. A more complete
description of our accounting policies is presented in note 1 to the
Consolidated Financial Statements.
Critical accounting policies are those that are important to the portrayal of
the Company's financial condition and results, and which require management to
make difficult, subjective and/or complex judgments. Critical accounting
policies cover accounting matters that are inherently uncertain because the
future resolution of such matters is unknown. The Company believes that critical
accounting policies include accounting for percentage-of-completion contracts,
accounting for allowances for doubtful accounts receivable, accounting for
pensions and accounting for inventory obsolescence.
Accounting for contracts using percentage-of-completion requires estimates of
costs to complete each contract. Revenue earned is recorded based on accumulated
incurred costs to total estimated costs to perform each contract. Management
reviews these estimated costs on a monthly basis and revises costs and income
recognized when changes in estimates occur. To the extent the estimate of costs
to complete varies, so does the timing of recording profits or losses on
contracts.
Management is required to make judgments, based on historical experience and
future expectations, as to the collectibility of accounts receivable. The
allowance for doubtful accounts represent allowances for customer trade accounts
receivable that are estimated to be partially or entirely uncollectible. These
allowances are used to reduce gross trade receivables to their net realizable
value. The Company records these allowances based on estimates related to the
following factors: i) customer specific allowances: ii) amounts based upon an
aging schedule and iii) an estimated amount, based on the Company's historical
experience, for issues not yet identified.
Our accounting for pension benefits is primarily affected by our assumptions
about the discount rate, expected and actual return on plan assets and other
assumptions made by management, and is impacted by outside factors such as
equity and fixed income market performance. Pension liability is principally the
estimated present value of future benefits, net of plan assets. Pension expense
is principally the sum of interest and service cost of the plan, less the
expected return on plan assets and the amortization of the difference between
our assumptions and actual experience. The expected return on plan assets is
calculated by applying an assumed rate of return to the fair value of plan
assets. If plan assets decline due to poor performance by the equity markets
and/or long-term interest rates decline, as was experienced in 2002 and 2001,
our pension liability increases, ultimately increasing future pension expense.
See note 9 to the Consolidated Financial Statements for a more complete
discussion of our employee benefit plans.
Inventories are stated at the lower of cost or market value and are categorized
as raw materials, work-in-progress or finished goods. Inventory reserves are
recorded for damaged, obsolete, excess and slow-moving inventory. Management
uses estimates to record these reserves. Slow-moving inventory is reviewed by
category and may be partially or fully reserved for depending on the type of
product and the length of time the product has been included in inventory.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the Company to record the fair value of an
asset retirement obligation as a liability in the period in which it incurs a
legal obligation associated with the retirement of tangible long-lived assets
that result from the acquisition, construction, development, and/or normal use
of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS No.
143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a
material effect on the Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the rescission of Statement No. 4 are applied in fiscal
years beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected
to have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's financial statements. The
disclosure requirements are effective for financial statements of interim or
annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
the Consolidated Financial Statements included herein.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The application of this Interpretation is not
expected to have a material effect on the Company's financial statements.
CAUTIONARY FACTORS
The discussions in this section and elsewhere contain various forward-looking
statements concerning the Company's prospects that are based on the current
expectations and beliefs of management. Forward-looking statements may also be
made by the Company from time to time in other reports and documents as well as
oral presentations. When used in written documents or oral statements, the words
"anticipate", "believe", "estimate", "expect", "objective", and similar
expressions are intended to identify forward-looking statements. The statements
contained herein and such future statements involve or may involve certain
assumptions, risks and uncertainties, many of which are beyond the Company's
control, that could cause the Company's actual results and performance to differ
materially from what is expected. In addition to the assumptions and other
factors referenced specifically in connection with such statements, the
following factors could impact the business and financial prospects of the
Company:
- Factors affecting the Company's international operations, including
relevant foreign currency exchange rates, which can affect the cost
to produce the Company's products or the ability to sell the
Company's products in foreign markets, and the value in United
States dollars of sales made and costs incurred 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 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, the demand for
customers' products and services that utilize the Company products,
national and international events such as those of September 11,
2001, the current hostilities in the Middle East, and other threats
or acts of terrorism.
- Factors affecting the fair market value of the Company's common
stock or other factors that would negatively impact the funding of
or the value of securities held by the employee benefit plans.
- Factors affecting the Company's financial performance or condition,
including, restrictions or conditions imposed by its lenders, 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
disadvantage and create the potential for impairment of existing
assets.
The company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 US
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. If foreign exchange rates would
have been collectively 10% weaker against the US Dollar in 2002, the net loss
would have increased by approximately $120,000.
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, 2002 would result in a change in earnings (loss)
before income taxes of approximately $215,000.
The Company occasionally uses forward contracts to reduce fluctuations in
foreign currency cash flows related to third party material purchases,
intercompany product shipments and intercompany loans. At December 31, 2002, the
Company had no open forward exchange contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED STATEMENTS OF OPERATIONS AND SHAREHOLDERS' EQUITY
The Oilgear Company and Subsidiaries, Years ended December 31, 2002, 2001 and
2000
OPERATIONS 2002 2001 2000
- ---------- ------------ ----------- ----------
Net sales (note 2) $ 75,300,172 82,619,055 92,318,330
Cost of sales (note 3) 60,539,354 63,111,377 68,575,411
Special costs (note 12) 371,709 647,463 --
------------ ----------- ----------
Gross profit 14,389,109 18,860,215 23,742,919
Selling, general and administrative expenses 18,011,389 18,468,135 21,065,209
Special costs (note 12) 467,065 325,955 --
------------ ----------- ----------
Operating income (loss) (4,089,345) 66,125 2,677,710
Interest expense 1,254,504 1,665,798 1,580,043
Other non-operating income, net (note 7) 179,147 214,698 198,716
------------ ----------- ----------
Earnings (loss) before income taxes and minority interest (5,164,702) (1,384,975) 1,296,383
Income tax expense (note 8) 253,401 276,637 416,000
Minority interest 60,489 42,199 106,284
------------ ----------- ----------
Net earnings (loss) $ (5,478,592) (1,703,811) 774,099
============ =========== ==========
Basic weighted average outstanding shares 1,951,136 1,946,599 1,981,236
------------ ----------- ----------
Diluted weighted average outstanding shares 1,951,136 1,946,599 1,986,330
------------ ----------- ----------
Basic earnings (loss) per share of common stock $ (2.81) (0.88) 0.39
============ =========== ==========
Diluted earnings (loss) per share of common stock $ (2.81) (0.88) 0.39
============ =========== ==========
SHAREHOLDERS' EQUITY
Common stock (note 9): 1,990,783 1,990,783 1,990,783
Capital in excess of par value (note 9): $ 9,497,906 9,497,906 9,497,906
Retained earnings (note 9):
Balance at beginning of year 22,020,109 24,020,074 23,794,315
Net earnings (loss) (5,478,592) (1,703,811) 774,099
Cash dividends declared ($.14 per share in 2001 and $.28
per share in 2000) -- (271,921) (554,690)
Gain (loss) on sale of treasury stock (36,473) (24,233) 6,350
------------ ----------- ----------
Balance at end of year 16,505,044 22,020,109 24,020,074
------------ ----------- ----------
Treasury stock (note 9):
Balance at beginning of year (433,814) (128,207) (8,800)
Purchases of 660, 44,507 and 22,982 shares in 2002,
2001 and 2000, respectively (4,950) (396,315) (189,869)
Sales to employee benefit plans of 13,836, 10,728 and 9,000 shares in 2002,
2001 and 2000, respectively 133,572 90,708 70,462
------------ ----------- ----------
Balance at end of year (305,192) (433,814) (128,207)
------------ ----------- ----------
Notes receivable from employees (note 9):
Balance at beginning of year (144,956) (187,200) (223,819)
Sales under employee stock purchase plan (87,120) (49,725) (57,313)
Payments received/forgiven on notes 71,021 91,969 93,932
------------ ----------- ----------
Balance at end of year (161,055) (144,956) (187,200)
------------ ----------- ----------
Accumulated other comprehensive loss:
Foreign currency translation adjustment:
Balance at beginning of year (4,301,650) (3,326,735) (1,902,374)
Translation adjustment 1,889,635 (974,915) (1,424,361)
------------ ----------- ----------
Balance at end of year (2,412,015) (4,301,650) (3,326,735)
------------ ----------- ----------
Minimum pension liability adjustment:
Balance at beginning of year (11,047,000) (480,000) (70,000)
Minimum pension liability adjustment (10,209,099) (10,567,000) (410,000)
------------ ----------- ----------
Balance at end of year (21,256,099) (11,047,000) (480,000)
------------ ----------- ----------
Total shareholders' equity $ 3,859,372 17,581,378 31,386,621
============ =========== ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
The Oilgear Company and Subsidiaries, December 31, 2002 and 2001
ASSETS 2002 2001
- ------ ---- ----
Current assets:
Cash and cash equivalents $ 4,126,006 4,996,723
Trade accounts receivable, less allowance for doubtful
receivables of $259,000 and $212,000 in 2002 and 2001, respectively 14,948,015 17,002,306
Costs and estimated earnings in excess of billings on uncompleted contracts (note 3) 1,963,655 545,691
Inventories (note 3) 21,555,858 23,910,087
Prepaid expenses 670,132 525,056
Other current assets 853,532 1,115,213
----------- ----------
Total current assets 44,117,198 48,095,076
----------- ----------
Property, plant and equipment, at cost (notes 4 and 5)
Land 1,001,932 894,699
Buildings 11,770,132 11,273,523
Machinery and equipment 50,403,018 48,485,065
Drawings, patterns and patents 5,505,539 5,099,234
----------- ----------
68,680,621 65,752,521
Less accumulated depreciation and amortization 47,532,145 43,052,001
----------- ----------
Net property, plant and equipment 21,148,476 22,700,520
Other assets (note 9) 1,760,858 1,135,937
----------- ----------
$67,026,532 71,931,533
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
- ------------------------------------ ---- ----
Current liabilities:
Short-term borrowings (note 4) $ 454,091 5,631,036
Current installments of long-term debt (note 5) 1,754,576 1,932,328
Accounts payable 5,909,813 5,377,339
Billings in excess of costs and estimated earnings on uncompleted contracts (note 3) 282,052 1,845,038
Customer deposits 2,564,181 1,378,152
Accrued compensation and employee benefits 2,557,508 1,882,457
Other accrued expenses and income taxes (notes 8 and 12) 3,906,164 3,123,705
------------ -----------
Total current liabilities 17,428,385 21,170,055
------------ -----------
Long-term debt, less current installments (note 5) 20,985,913 17,130,335
Unfunded employee retirement plan costs (note 9) 13,767,971 4,095,945
Unfunded post-retirement health care and life insurance costs (note 9) 9,100,000 9,900,000
Other noncurrent liabilities 1,026,699 1,107,365
------------ -----------
Total liabilities 62,308,968 53,403,700
------------ -----------
Minority interest in consolidated subsidiaries 858,192 946,455
Commitments and contingencies (notes 9 and 11)
Shareholders' equity (notes 5 and 9):
Common stock, par value $1 per share, authorized 4,000,000 shares;
issued 1,990,783 shares in 2002 and 2001; outstanding 1,955,398 and 1,942,222
shares in 2002 and 2001, respectively 1,990,783 1,990,783
Capital in excess of par value 9,497,906 9,497,906
Retained earnings 16,505,044 22,020,109
------------ -----------
27,993,733 33,508,798
Deduct:
Treasury stock, 35,385 and 48,561 shares in 2002 and 2001, respectively (305,192) (433,814)
Notes receivable from employees for purchase of Company
common stock (161,055) (144,956)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (2,412,015) (4,301,650)
Minimum pension liability adjustment (note 9) (21,256,099) (11,047,000)
------------ -----------
(23,668,114) (15,348,650)
------------ -----------
Total shareholders' equity 3,859,372 17,581,378
------------ -----------
$ 67,026,532 71,931,533
============ ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Oilgear Company and Subsidiaries,
Years ended December 31, 2002,
2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net earnings (loss) $(5,478,592) (1,703,811) 774,099
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,559,347 3,701,070 3,909,180
Compensation element of sales of common stock and treasury
stock to employees and employee savings plan 52,830 58,899 63,026
Deferred income taxes (94,000) (20,000) (77,000)
Minority interest in net earnings of consolidated subsidiaries 60,489 42,199 106,284
Change in assets and liabilities:
Trade accounts receivable 3,088,423 1,220,640 (1,470,437)
Inventories 3,334,569 (394,920) (1,230,165)
Billings, costs and estimated earnings on uncompleted contracts (2,864,988) 3,441,730 (2,381,263)
Prepaid expenses (88,131) 12,211 (198,344)
Accounts payable 285,501 (2,258,424) 1,686,572
Customer deposits 969,595 (275,176) 1,157,954
Accrued compensation 445,035 (679,352) 93,224
Other, net (1,165,736) (1,965,676) (3,460,057)
----------- ---------- ----------
Net cash provided (used) by operating activities $ 2,104,342 1,179,390 (1,026,927)
----------- ---------- ----------
Cash flows used by investing activities:
Additions to property, plant and equipment (1,367,890) (1,770,954) (2,538,558)
----------- ---------- ----------
Net cash used by investing activities $(1,367,890) (1,770,954) (2,538,558)
----------- ---------- ----------
Cash flows provided (used) by financing activities:
Net borrowings (repayments) under line of credit agreements (5,193,835) 4,862,847 650,745
Borrowing (repayment) of long-term debt -- (3,915,025) (1,982,352)
Proceeds from issuance of long-term debt 3,610,128 473,413 3,935,317
Restricted cash used for capital expenditures -- -- 555,235
Dividends paid -- (271,921) (554,690)
Purchase of treasury stock (4,950) (396,315) (189,869)
Payments received on notes receivable from employees 28,167 49,818 50,406
----------- ---------- ----------
Net cash provided (used) by financing activities $(1,559,890) 802,817 2,464,792
----------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents $ (47,279) (316,472) (495,817)
----------- ---------- ----------
Net decrease in cash and cash equivalents (870,717) (105,219) (1,596,510)
----------- ---------- ----------
Cash and cash equivalents:
At beginning of year 4,996,723 5,101,942 6,698,452
----------- ---------- ----------
At end of year $ 4,126,006 4,996,723 5,101,942
=========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,279,499 1,704,170 1,460,629
Income taxes $ 121,826 390,036 482,501
----------- ---------- ----------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
The Oilgear Company and Subsidiaries,
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Net earnings (loss) $ (5,478,592) (1,703,811) 774,099
Other comprehensive income (loss):
Foreign currency translation adjustment 1,889,635 (974,915) (1,424,361)
Minimum pension liability adjustment (10,209,099) (10,567,000) (410,000)
------------ ------------- ----------
Total comprehensive loss $(13,798,056) (13,245,726) (1,060,262)
============ ============= ==========
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Oilgear Company and Subsidiaries, Years ended December 31, 2002, 2001 and
2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) CONSOLIDATION
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. They include the accounts of The Oilgear Company and its subsidiaries
(Company), including two joint ventures (one in India in which the Company has a
51% interest and one in Taiwan in which the Company has a 58% interest). During
2002, the Company acquired or obtained the remaining interest in the second
Indian joint venture that existed at December 31, 2001 and 2000 and two
subsidiaries, OSL Offshore Equipment and Deck Systems and Oilgear Towler Japan
Company. These transactions were immaterial to the Company's consolidated
financial statements. All significant intercompany balances and transactions
have been eliminated in consolidation.
(B) FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated at
the exchange rate prevailing at the balance sheet date and 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
(loss), but are a component of accumulated other comprehensive loss in
shareholders' equity. Gains and losses resulting from foreign currency
transactions are included in net earnings (loss).
(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
$876,000 and $611,000 at December 31, 2002 and 2001, respectively, and consisted
primarily of money market funds, commercial paper and short-term U.S. Government
securities.
(D) INVENTORIES
Inventories are stated at the lower of cost or market. Cost has been
calculated on the last-in, first-out (LIFO) method for the majority of the
domestic inventories. For the balance of 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) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation on plant
and equipment is calculated on the straight-line method over the estimated
useful lives of the assets. 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.
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates recoverability of assets to be held and
used by comparing the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
(F) REVENUE RECOGNITION
The Company recognizes revenue on construction 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 sales of products other than percentage-of-completion contracts
upon shipment to the customer, which is when the risk of ownership passes.
(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) FOREIGN CURRENCY EXCHANGE CONTRACTS
The Company recognizes derivatives as either assets or liabilities in
the balance sheet and measures those instruments at fair value. Derivative
financial instruments are used by the Company principally in managing its
foreign currency exposure. The Company periodically enters into forward foreign
exchange contracts to hedge the risk from changes in fair value to unrecognized
firm purchase commitments. These firm commitments generally require the Company
to exchange U.S. dollars for foreign currencies. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company did not
have any forward foreign exchange contracts at December 31, 2002. At December
31, 2001, the outstanding forward contract value was 500,000 EURO ($445,750),
with a net effective position of 313,578 British Pounds Sterling ($456,569).
(I) 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 (loss) in the period that includes the enactment
date.
(J) 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 $1,600,000 in 2002 and $2,100,000 in 2001
and 2000.
(K) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities, 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.
(L) EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing net earnings
(loss) 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 common shares
that participated in the net earnings of the Company were issued upon the
exercise of dilutive employee stock options. The computation of diluted EPS uses
the "if converted" and "treasury stock" methods to reflect dilution.
The weighted-average number of shares outstanding used in calculating
basic EPS was 1,951,136 in 2002, 1,946,599 in 2001, and 1,981,236 in 2000. The
weighted-average number of shares outstanding used in calculating diluted EPS
was 1,951,136 in 2002, 1,946,599 in 2001, and 1,986,330 in 2000. The difference
between the number of shares used in the two calculations for 2000 is due to
assumed exercise of employee stock options where the exercise price is less than
the market price of the underlying stock. No impact is reflected in 2002 and
2001 because the exercise would be anti-dilutive.
(M) RECLASSIFICATIONS
Certain amounts as originally reported in 2001 and 2000 have been
reclassified to conform with the 2002 presentation.
(2) BUSINESS DESCRIPTION AND OPERATIONS
The Company manages its operations in three reportable segments based
upon geographic area. Domestic is the United States, Canada and certain exports
serviced directly by the domestic factories. European is Europe and
International is Asia, Latin America, Australia and most of Africa.
The individual subsidiaries of the Company operate predominantly in the
fluid power industry. The Company offers an engineering and manufacturing team
capable of providing advanced technology in the design and production of unique
fluid power components 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. Our products
include piston pumps, motors, valves, controls, manifolds, electronics and
components, cylinders, reservoirs, skids, and meters. Industries that use these
products include primary metals, machine tool, automobile, petroleum,
construction equipment, chemical, plastic, glass, lumber, rubber and food. 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
applications. The Company's supports a responsive, high quality aftermarket
sales and flexible rebuilding services which include exchange, factory rebuild
and field repair service, along with customer education.
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 2002 2001 2000
- --------------------------------------------------------------------------------
CUSTOMERS
Domestic $ 41,739,000 49,582,000 55,289,000
European 23,508,000 21,703,000 24,222,000
International 10,053,000 11,334,000 12,807,000
- --------------------------------------------------------------------------------
Total $ 75,300,000 82,619,000 92,318,000
INTERSEGMENT SALES
- --------------------------------------------------------------------------------
Domestic 6,278,000 6,828,000 7,282,000
European 411,000 1,053,000 1,561,000
- --------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
- --------------------------------------------------------------------------------
Domestic (2,076,000) 1,713,000 3,198,000
European 299,000 181,000 860,000
International (254,000) 648,000 1,234,000
Corporate expenses,
including R&D (2,058,000) (2,476,000) (2,614,000)
- --------------------------------------------------------------------------------
Total (4,089,000) 66,000 2,678,000
IDENTIFIABLE ASSETS
- --------------------------------------------------------------------------------
Domestic $ 32,780,000 40,886,000 51,103,000
European 26,037,000 22,719,000 25,627,000
International 6,308,000 6,481,000 6,323,000
Corporate 1,902,000 1,846,000 1,779,000
- --------------------------------------------------------------------------------
Total $ 67,027,000 71,932,000 84,832,000
DEPRECIATION AND AMORTIZATION
- --------------------------------------------------------------------------------
Domestic $ 2,546,000 2,753,000 2,888,000
European 629,000 559,000 653,000
International 89,000 119,000 126,000
Corporate 295,000 270,000 242,000
- --------------------------------------------------------------------------------
Total $ 3,559,000 3,701,000 3,909,000
CAPITAL EXPENDITURES
- --------------------------------------------------------------------------------
Domestic $ 518,000 454,000 1,231,000
European 204,000 848,000 516,000
International 295,000 132,000 379,000
Corporate 351,000 337,000 413,000
- --------------------------------------------------------------------------------
Total $1,368,000 1,771,000 2,539,000
NET SALES BY COUNTRY
- --------------------------------------------------------------------------------
United States $ 36,700,000 44,946,000 48,116,000
Other 38,600,000 37,673,000 44,202,000
- --------------------------------------------------------------------------------
Net sales $75,300,000 82,619,000 92,318,000
NET SALES BY ACCOUNTING
METHOD
- --------------------------------------------------------------------------------
Contracts using the $ 12,248,000 21,584,000 19,388,000
percentage-of-completion
Contracts using the 63,052,000 61,035,000 72,930,000
completed contracts method
Net sales $ 75,300,000 82,619,000 92,318,000
(3) INVENTORIES
Inventories at December 31, 2002 and 2001 consist of the following:
2002 2001
Raw materials $ 3,177,375 2,717,478
Work in process 16,003,824 18,631,086
Finished goods 3,880,659 4,179,523
- --------------------------------------------------------------------------------
23,061,858 25,528,087
LIFO reserve (1,506,000) (1,618,000)
- --------------------------------------------------------------------------------
Total $ 21,555,858 23,910,087
================================================================================
Inventories, stated on the LIFO basis, including amounts allocated to
uncompleted contracts, are valued at $12,567,000 and $17,637,000 at December 31,
2002 and 2001, respectively. The remaining inventory is stated on the FIFO or
average cost basis.
During 2002, 2001 and 2000, 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 $502,000,
$505,000 and $490,000 below the amount that would have resulted from replacing
the inventory at prices in effect at December 31, 2002, 2001 and 2000,
respectively.
A summary of costs and estimated earnings on uncompleted contracts at
December 31, 2002 and 2001 is as follows:
2002 2001
- --------------------------------------------------------------------------------
Costs incurred $ 2,783,784 5,246,088
Estimated earnings thereon 1,139,878 1,219,775
- --------------------------------------------------------------------------------
3,923,662 6,465,863
Less billings to date (2,242,059) (7,765,210)
- --------------------------------------------------------------------------------
1,681,603 (1,299,347)
- --------------------------------------------------------------------------------
Cost and estimated earnings in excess of
billings on uncompleted contracts 1,963,655 545,691
- --------------------------------------------------------------------------------
Billings in excess of costs and estimated
earnings on uncompleted contracts (282,052) (1,845,038)
- --------------------------------------------------------------------------------
1,681,603 (1,299,347)
- --------------------------------------------------------------------------------
(4) SHORT-TERM BORROWINGS
Both the Company's Indian joint venture and 100% owned Indian
subsidiary have $200,000 bank lines of credit. Short-term borrowings under these
lines of credit amounted to approximately $316,000 and $380,000 at December 31,
2002 and 2001, respectively. Current borrowings under these lines of credit bear
interest ranging from 16.0% to 18.0% as of December 31, 2002. The Indian joint
venture also had $48,000 of export receivables at December 31, 2001 that were
discounted with a bank and secured by current assets of the Indian joint
venture. The Company also has a $500,000 European line of credit that bears
interest at the bank's base rate plus 2% (6.0% as of December 31, 2002).
Short-term borrowings under this line of credit amounted to approximately
$138,000 and $203,000 at December 31, 2002 and 2001, respectively. These lines
of credit are collateralized by substantially all assets of the applicable
Indian joint venture, Indian subsidiary and European subsidiaries, respectively.
During 2002, the Company's previous $6,000,000 line of credit in the
United States, which was available through April 2002, was refinanced with a
$10,000,000 term loan from the same bank with a two-year maturity (see note 5).
Short-term borrowings under the previous line of credit were $5,000,000 at
December 31, 2001. This previous line of credit bore interest at 4.5% at
December 31, 2001, and was collateralized by substantially all domestic
property, plant, and equipment.
(5) LONG-TERM DEBT
LONG-TERM DEBT CONSISTED OF THE FOLLOWING: 2002 2001
Revolving Loan Agreement/Line of Credit $ 9,479,647 13,838,410
Notes payable to banks 10,500,000 2,045,900
Industrial Revenue Bonds 2,000,000 2,400,000
Note payable to a municipality, due in monthly installments
through January 2006 at 4.2% per annum 177,182 229,871
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 267,335 257,143
Mortgage notes of French subsidiary, payable in French Francs
and due in quarterly installments through 2002 at 9.2% and
9.8% per annum -- 17,044
Capital leases 164,806 274,295
Other 151,519 --
----------- -----------
22,740,489 19,062,663
Less current installments 1,754,576 1,932,328
----------- -----------
Long-term debt, less current installments $20,985,913 17,130,335
=========== ===========
The 2001 Revolving Loan Agreement for $15,500,000 was replaced with a
$12,000,000 revolving line of credit that was due on April 30, 2003. On March
31, 2003, the line of credit was extended to April 30, 2004. The borrowing base
for this new line of credit is limited to 80% of qualifying domestic trade
receivables, 50% of domestic inventory (limited to $7,250,000), and 50% of the
net assets from domestic contracts accounted for under the percentage of
completion method. The annual interest rate is calculated at LIBOR plus 4.0%
(5.4% at December 31, 2002). The premium above LIBOR (ranging between 1.0% and
4.0%) is determined by the ratio of funded debt to earnings before interest,
taxes, depreciation, and amortization. The Company is required to pay a
commitment fee of .375 of 1% per annum on the unused portion of the $12,000,000
commitment.
The $6,000,000 short-term borrowing (see note 4) and a portion of the
balance outstanding under the Revolving Loan Agreement at December 31, 2001 were
refinanced with a $10,000,000 term loan from the same bank with a two- year
maturity due in October 2004. Principal and interest payments are to be made
monthly, as well as a quarterly payment in the amount of fifty percent of the
quarterly excess cash flow with a balloon payment of approximately $8,400,000 at
October 31, 2004. Excess cash flow is defined as consolidated net income (loss)
plus accrued interest expense, depreciation, and amortization and less
unfinanced capital expenditures, principal payments on long-term debt, and
capital lease payments. The annual interest rate is calculated at LIBOR plus
4.0% (5.4% at December 31, 2002). The premium above LIBOR (ranging between 1.0%
and 4.0%) is determined by the ratio of funded debt to earnings before interest,
taxes, depreciation and amortization.
The Company has a note payable bearing interest at 6.3% which
requires monthly payments of $100,000 plus interest through May 2003. The
balance at December 31, 2002 and 2001 was $500,000 and $1,700,000, respectively.
The Industrial Revenue Bonds were issued in October 1997 under a
capital lease agreement between the County of Dodge, Nebraska and the Company to
cover the expansion of the Fremont manufacturing facility and acquisitions of
related machine tools. The bonds are remarketed weekly and bear interest at a
market rate. The average effective interest rate was 1.7% and 2.8% in 2002 and
2001, respectively. The lease of the Fremont facility 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. 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.
During 2002, the Company repaid its note payable that had a balance of
$345,900 at December 31, 2001. This note bore interest at 7.5% and was payable
in monthly installments of $7,100 plus interest through January 2006.
All borrowings under the revolving line of credit, term loan, and notes
payable to banks and municipality are collateralized by substantially all
domestic assets.
Financial 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 financial covenants at
December 31, 2002.
Aggregate annual principal payments for long-term debt maturing during
the next five years, including capital leases, are: 2003 - $1,754,576; 2004 -
$19,673,314; 2005 - $507,777; 2006- $404,822; and 2007 - $400,000.
(6) LEASES
The Company has non-cancelable operating leases, primarily for
automobiles, equipment, and sales facilities. Rent expense for operating leases
during 2002, 2001 and 2000 was $2,649,000, $2,476,000 and $2,389,000,
respectively.
Future minimum lease payments under non-cancelable operating leases for
each of the next five years are: 2003 - $2,484,000; 2004 - $2,203,000; 2005 -
$1,889,000; 2006 - $1,208,000; 2007-
$582,000 and thereafter- $301,000.
(7) OTHER NON-OPERATING INCOME, NET
Non-operating income consists of the following:
2002 2001 2000
Interest income $ 59,694 117,005 160,443
Foreign currency exchange gain (loss) 116,719 19,534 (26,807)
Miscellaneous, net 2,734 78,159 65,080
-------- ------- -------
$179,147 214,698 198,716
======== ======= =======
(8) INCOME TAXES
Income tax expense (benefit) attributable to earnings (loss) before income taxes
and minority interest consists of:
2002 2001 2000
Current:
Federal $ -- -- --
State 20,000 20,000 65,000
Foreign 327,401 276,637 428,000
- --------------------------------------------------------------------------------
347,401 296,637 493,000
Deferred) (94,000) (20,000) (77,000)
- --------------------------------------------------------------------------------
Total $ 253,401 276,637 416,000
- --------------------------------------------------------------------------------
The expected income tax rate based on the U.S. statutory rate of 34% differs
from the effective income tax rate as follows:
2002 2001 2000
- --------------------------------------------------------------------------------
Computed "expected" income tax rate (34.0%) (34.0%) 34.0%
State taxes (net of federal income
tax effect) (6.9) (4.6) 2.0
Change in balance of valuation
allowance allocated to
income tax expense 46.0 49.8 (18.4)
Unremitted foreign earnings and
foreign tax rate differential 1.8 7.1 12.2
Other items, net (2.0) 1.7 2.2
- --------------------------------------------------------------------------------
Effective income tax rate 4.9% 20.0% 32.0%
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2002 and
2001 are as follows:
2002 2001
Deferred tax assets:
Accounts receivable $ 91,000 60,000
Compensation 457,000 526,000
Warranty reserve 74,000 54,000
Employee benefits accruals 8,966,000 5,624,000
Tax credit carryforwards 1,829,000 1,812,000
Net operating loss carryforwards 4,752,000 2,714,000
- --------------------------------------------------------------------------------
Total gross deferred tax assets 16,169,000 10,790,000
Less valuation allowance 12,216,000 6,195,000
- --------------------------------------------------------------------------------
Net deferred tax assets 3,953,000 4,595,000
Deferred tax liabilities:
Depreciation 3,542,000 3,969,000
Inventories 391,000 680,000
Other 20,000 40,000
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,953,000 4,689,000
- --------------------------------------------------------------------------------
Net $ 0 (94,000)
================================================================================
The valuation allowance for deferred tax assets as of January 1, 2001
was $1,282,000. The net change in the total valuation allowance for the years
ended December 31, 2002 and 2001 was an increase of $6,021,000 and $4,913,000,
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.
A portion of the valuation allowance for the year ending December 31,
2002 relates to a deferred tax asset on the unfunded pension liability amount in
shareholders' equity. This amount totals $5,304,000 at December 31, 2002. The
change in valuation allowance during 2002 with no income statement impact due to
this issue is $3,666,000.
At December 31, 2002 the Company has a U.S. general business tax credit
carryforward of approximately $750,000, a Wisconsin tax credit carryforward of
approximately $600,000, a foreign tax credit carryforward of approximately
$12,000, and an AMT tax credit carryforward of approximately $500,000. The U.S.
business tax credits begin expiring in 2004 through 2017, of which $54,000 will
expire in 2004. The Wisconsin tax credits begin expiring in 2003 through 2017,
of which $17,000 will expire in 2003. The foreign tax credits begin expiring in
2003 through 2007, of which $3,000 will expire in 2003, and the AMT tax credits
may be carried forward indefinitely.
The Company also has a tax operating loss carryforward applicable to
two foreign subsidiaries of approximately $2,260,000 which can be carried
forward indefinitely and a U.S. regular tax operating loss carryforward of
approximately $10,000,000 which will begin to expire in 2018. The Company also
has an AMT tax operating loss carryforward of approximately $11,000,000.
The unremitted earnings of the Company's foreign subsidiaries, on which
income taxes have not been provided, are considered permanently invested and
aggregated approximately $10,800,000 at December 31, 2002.
(9) EMPLOYEE BENEFIT PLANS
(A) PENSION PLANS
The Company has non-contributory defined benefit retirement plans
covering substantially all domestic employees. The plan covering salaried and
management employees provides pension benefits that are based on years of
service and the employee's compensation during the last ten years prior to
retirement. This plan was frozen on December 31, 2002. Benefits payable under
this plan may be reduced by benefits payable under The Oilgear Stock Retirement
Plan (Stock Retirement Plan). The plan covering hourly employees and union
members generally provides benefits of stated amounts for each year of service.
The Company's policy is to fund pension costs to conform to the Employee
Retirement Income Security Act of 1974.
Unfunded employee retirement plan costs reflect the excess of the
unfunded accumulated benefit obligation over plan assets. This is
reflected as an adjustment to accumulated other comprehensive loss in
shareholders' equity. Plan assets are primarily invested in The Oilgear Company
common stock (135,858 and 115,617 shares at December 31, 2002 and 2001,
respectively), money market, equity and long-term bond mutual funds. Data
relative to 2002 and 2001 is as follows:
FUNDED STATUS 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation including vested benefits ($26,000,000) (22,700,000)
Excess of projected benefit obligation over accumulated benefit
obligation - (3,000,000)
- ----------------------------------------------------------------------------------------------------------------
Projected benefit obligation (26,000,000) (25,700,000)
Plan assets at fair value 15,300,000 18,600,000
- ----------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (10,700,000) (7,100,000)
Unrecognized prior service cost - (500,000)
Unrecognized net loss from past experience, experience different
from that assumed and effects of changes in assumptions 18,700,000 15,000,000
- ----------------------------------------------------------------------------------------------------------------
Prepaid pension costs, included in other assets - -
Adjustment for additional minimum liability, reflected as unfunded
employee retirement plan costs (accumulated benefit obligation
in excess of plan assets) (10,700,000) (4,100,000)
- ----------------------------------------------------------------------------------------------------------------
Total accrued pension cost $(10,700,000) (4,100,000)
================================================================================================================
CHANGE IN PLAN ASSETS 2002 2001
- -----------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 18,600,000 21,100,000
Actual return on plan assets (2,900,000) (2,500,000)
Employer contributions 1,500,000 1,800,000
Benefits paid (1,800,000) (1,600,000)
Administrative expenses (200,000) (200,000)
Transfer from Stock Retirement Plan 100,000 --
- -----------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 15,300,000 18,600,000
===================================================================================
CHANGE IN PROJECTED BENEFIT OBLIGATION 2002 2001
- ---------------------------------------------------------------------------------------
Projected benefit obligation at beginning of year ($25,700,000) (23,000,000)
Service cost (500,000) (400,000)
Interest cost (1,900,000) (1,800,000)
Benefits paid 1,800,000 1,600,000
Actuarial loss (2,600,000) (2,100,000)
Curtailments 2,800,000 --
Transfer from Stock Retirement Plan 100,000 --
- ---------------------------------------------------------------------------------------
Projected benefit obligation at end of year ($26,000,000) (25,700,000)
=======================================================================================
Net pension expense under these plans for the year is comprised of the
following:
2002 2001 2000
-----------------------------------------------
Service cost $ 500,000 400,000 400,000
Interest cost on projected benefit obligation 1,900,000 1,800,000 1,700,000
Expected return on plan assets (1,800,000) (2,000,000) (1,800,000)
Net amortization of actuarial losses 900,000 500,000 300,000
Adjustment for curtailment (500,000) -- --
- ----------------------------------------------------------------------------------------------------
Net pension expense $ 1,000,000 700,000 600,000
====================================================================================================
The actuarial present value of the projected benefit obligation was
determined using a weighted-average discount rate of 7.00%, 7.75%, and 8.25% in
2002, 2001 and 2000, respectively. There was no rate of increase in compensation
levels, but there are 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 8.9% in 2002 and 10.0% in 2001 and 2000, and the
expected rate of return on the assets in the Stock Retirement Plan was 7.0%,
2.6%, and 9.5% in 2002, 2001, and 2000, respectively.
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. This plan was frozen on December 31, 2002. Prior actuarial valuations of
the UK Plan's liability were less than the fair market value of the plan'
assets. Data relative to 2002 is as follows:
FUNDED STATUS 2002
- -----------------------------------------------------------------------------------------
Accumulated benefit obligation including vested benefits ($12,950,000)
Excess of projected benefit obligation over accumulated benefit
obligation (1,450,000)
- -----------------------------------------------------------------------------------------
Projected benefit obligation (14,400,000)
Plan assets at fair value 9,900,000
- -----------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets (4,500,000)
- -----------------------------------------------------------------------------------------
Prepaid pension costs, included in other assets -
Adjustment for additional minimum liability, reflected as unfunded
employee retirement plan costs (accumulated benefit obligation
in excess of plan assets) (3,050,000)
- -----------------------------------------------------------------------------------------
Total accrued pension cost $(3,050,000)
=========================================================================================
The actuarial present value of the projected benefit obligation was
determined using a weighted-average discount rate of 6.0% in 2002. The expected
long-term rate of return used to measure the plan assets was 7.5% in 2002.
Pension expense for the UK Plan was $254,000, $275,000 and $296,000 in 2002,
2001 and 2000, 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. A $100,000 contribution
was made to the Stock Retirement Plan in 2002. No contributions were made to the
Stock Retirement Plan in 2001 or 2000. The Stock Retirement Plan owned 393,831
and 419,538 shares of the Company's common stock as of December 31, 2002 and
2001, respectively. Certain benefits payable under the Stock Retirement Plan
serve to reduce benefits payable under the non-contributory defined benefit
retirement plan referred to above.
(B) EMPLOYEE SAVINGS PLANS
The Company has an employee savings plan (Savings Plan), under which
eligible domestic salaried employees may elect, through payroll deduction, to
defer from 1% to 15% of their base salary, subject to certain limitations, on a
pretax basis. The Company contributes 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 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.
The amounts charged to expense under the Savings Plan, including the
stock discount, were $245,000, $285,000 and $327,000 in 2002, 2001 and 2000,
respectively.
The Savings Plan owned 402,213 and 409,838 shares of the Company's common stock
as of December 31, 2002 and 2001, respectively.
The Company also has the Oilgear Milwaukee Shop Savings Plan, under
which eligible domestic collective bargaining unit employees may elect, through
payroll deductions, to defer from 1% to 15% of their earnings, subject to
certain limitations, on a pretax basis. The Company contributes 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 $15,000, $18,000 and $19,000 in 2002, 2001 and 2000, respectively.
The Company has a savings plan called the Group Personal Pension Plan
(the Plan) for eligible United Kingdom employees. The minimum contribution
requirement for employees joining the Plan is a gross contribution of 4% of base
salary. The maximum contribution is set by the Inland Revenue and depends on the
participant's age. The Company pays an amount equal to 4.0% of base salary on
March 6 of each year. The Company also pays the cost of the death benefit (two
and one half times a participant's base salary) provided under the plan. The
expense for this Plan was $22,000, $17,000 and $16,000 in 2002, 2001 and 2000,
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 a 5% promissory note over a three-year period.
The Company forgives the last remaining portion of the purchase price 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
purchase price is charged to operations on the straight-line basis over the life
of the related note. The amounts charged to operations were $38,000, $42,000 and
$44,000 in 2002, 2001 and 2000, 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 must be greater than or equal to the fair market value of the
Company's common stock when the option is granted. All stock options have
five-year terms and vest incrementally, becoming fully exercisable after three
years from the date of grant. The Committee establishes the period or periods of
time within which the option may be exercised within the parameters of the
Option Plan document.
A summary of stock option activity related to the Company's plan is as
follows:
Number of shares Weighted Average price
per share
Outstanding at December 31, 2000 103,429 $ 9.46
Granted 22,828 $ 9.03
Exercised (3,128) $ 7.32
Canceled and available for reissue (22,061) $ 9.17
Outstanding at December 31, 2001 101,068 $ 9.49
Granted 25,251 $ 3.11
Exercised (336) $ 7.13
Canceled and available for reissue (27,248) $ 12.91
Outstanding at December 31, 2002 98,735 $ 6.92
Range of exercise prices of options outstanding at December 31, 2002 -- $2.71 - $14.50
Options available for grant at December 31, 2002 2,209
Other information regarding the Company's stock option plan is as follows:
2002 2001 2000
- ----------------------------------------------------------------------------------------------
Options exercisable at end of year 54,710 55,819 56,378
Weighted-average exercise price of exercisable
options $ 8.22 10.57 11.12
Weighted-average fair value of options granted
during year $ 0.81 1.73 1.27
At December 31, 2002, the weighted-average remaining contractual lives
of stock options outstanding is approximately 3.1 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:
2002 2001 2000
- ------------------------------------------------------------------------------------------------
Net earnings (loss) reported $ (5,478,592) (1,703,811) 774,099
Pro forma net earnings (loss) $ (5,515,330) (1,739,826) 737,049
Pro forma basic net earnings (loss)
per share $ (2.83) (.89) .37
Pro forma diluted net earnings (loss)
per share $ (2.83) (.89) .37
The fair value of the Company's stock options used to compute pro forma net
earnings (loss) and earnings (loss) 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: 2002- expected volatility of 31% and
expected dividend yield of 0%; 2001- expected volatility of 23% and expected
dividend yield of 2%; 2000- expected volatility of 23% and expected dividend
yield of 3%. 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 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 2,500 shares were issued in 2002 and 2001
and 2,000 shares were issued in 2000. As of December 31, 2002, 1,625 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 who were 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. Beginning February 22, 1996, active bargaining
unit domestic employees are provided retiree health care benefits up to the
amount of credits each employee accumulates during his or her employment with
the Company. All bargaining unit domestic retirees after 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 sheets at December 31,
2002 and 2001:
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation ($7,450,000) (6,450,000)
Plan assets-fair value -- --
- ----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation in excess of plan assets (7,450,000) (6,450,000)
Unrecognized prior service cost (200,000) (250,000)
Unrecognized net gain (1,450,000) (3,200,000)
- ----------------------------------------------------------------------------------------------------------------
Net amount recognized (9,100,000) (9,900,000)
================================================================================================================
The following table presents the plan's changes in accumulated
post-retirement benefit obligation
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit in excess of plan assets at beginning of (6,450,000) (7,720,000)
year
Service cost (60,000) (61,000)
Interest cost (477,000) (456,000)
Benefits paid 580,000 485,000
Actuarial gain (loss) (1,469,000) 1,090,000
Curtailments and settlements 426,000 212,000
- ----------------------------------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation in excess of plan assets at
end of year (7,450,000) (6,450,000)
================================================================================================================
Net periodic post-retirement benefit cost includes the following components:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost $ 60,000 61,000 79,000
Interest cost 477,000 456,000 587,000
Net amortization and deferral (350,000) (442,000) (313,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $ 187,000 75,000 353,000
===================================================================================================================================
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 12.0% in 2003, grading down to a rate of 5.0% in the year 2010 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, 2002 by $154,000 and the
aggregate of the service and interest cost components of net periodic
post-retirement cost for the year ended December 31, 2002 by $10,000. 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, 2002 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,
2002 by $11,000. The weighted-average discount rate used in determining the
accumulated post-retirement benefit obligation was 7.00% at December 31, 2002,
and 8.0% at December 31, 2001 and 2000.
(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, 2002 and
2001: 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 analyses, 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) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in several product liability actions which
management believes are adequately covered by insurance.
The Company has approximately $7,900,000 in open bank guarantees, letters
of credit and insurance bonds covering our performance of contracts and down
payment guarantees to our customers in the European and International segments
at December 31, 2002.
(12) SPECIAL CHARGES
At the end of 2002, the Company recorded special charges related to:
(i) a downsizing of the corporate staff, (ii) a closing of the Longview, Texas
facility, (iii) a write-off of non-strategic assets. The amount recorded
includes $298,000 of employee termination benefits for 22 notified employees,
$85,000 for moving expenses and $456,000 of asset write-offs.
At the end of 2001, the Company recorded special charges related to:
(i) an early retirement program, (ii) a downsizing of the corporate staff, (iii)
a closing of the Novi, Michigan facility, (iv) the write-off of non-strategic
assets and downsizing at the Leeds, England facility. The amount recorded
includes $480,000 of employee early retirement and termination benefits for 28
notified employees, $120,000 for abandoned leased facility expenses and $374,000
of equipment, inventory and other asset write-offs.
Employee
Termination
Benefits Other Costs Total
Expense accrued $ 480,000 494,000 974,000
Non-cash charges -- (324,000) (324,000)
Cash expenditures (380,000) (15,000) (395,000)
- --------------------------------------------------------------------------
Balance December 31, 2001 $ 100,000 155,000 255,000
Expense accrued 298,000 541,000 839,000
Non-cash charges -- (456,000) (456,000)
Cash expenditures (187,000) (240,000) (427,000)
- --------------------------------------------------------------------------
Balance December 31, 2002 $ 211,000 -- 211,000
==========================================================================
ANNUAL REPORT 2002
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.
KMPG 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
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/ T.J. PRICE
- ---------------------------------
Vice President, Chief Financial
Officer and Secretary
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, 2002 and 2001, and the related
consolidated statements of operations and shareholders' equity, comprehensive
income (loss), and cash flows for each of the years in the three-year period
ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Milwaukee, Wisconsin
March 4, 2003, except for footnote 5, which is as of March 31, 2003.
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" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Registrant's Proxy
Statement for its Annual Meeting of Shareholders on May 13, 2003 ("2003 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" in the 2003 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" and "Executive Compensation" in the 2003 Annual Meeting Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
ITEM 14. CONTROLS AND PROCEDURES.
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of our
disclosure controls and procedures within 90 days before the filing date of this
annual report. Based on the evaluation, management, including the CEO and CFO,
concluded that our disclosure controls and procedures are adequate and
effective. There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation, including any corrective actions with regard to significant
deficiencies or material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed:
1. Financial Statements and Report of Independent Auditors Included in
Part II of this Report.
Consolidated Statements of Operations and Shareholders' Equity
for each of the three years ended December 31, 2002.
Consolidated Balance Sheets as of December 31, 2002 and 2001.
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2002.
Consolidated Statements of Comprehensive Income (Loss).
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
2. Financial Statement Schedules Included in Part IV of this Report.
Schedule II - Valuation and Qualifying Accounts for each of the
years ended December 31, 2002, 2001 and 2000.
Independent Auditors' Report.
3/27/2003 THE OILGEAR COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2002, 2001 and 2000
Amounts
Balance at Charged to written off Balance
beginning costs and Other Net of at end
of year expenses Adjustments (1) Recoveries of year
------- -------- --------------- ---------- -------
Allowances for losses from
obsolescence which are
deducted on the balance
sheet from inventories
Year ended
December 31, 2002 $ 2,599,671 605,872 178,120 (180,173) 3,203,490
----------- ------- ------- -------- ---------
Year ended
December 31, 2001 $ 2,561,548 493,759 (49,537) (406,099) 2,599,671
----------- ------- ------- -------- ---------
Year ended
December 31, 2000 $2,613,769 92,897 (106,166) (38,952) 2,561,548
----------- ------- ------- -------- ---------
(1) INCLUDES ADJUSTMENTS DUE TO FOREIGN CURRENCY TRANSLATION.
3/27/2003 THE OILGEAR COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 2002, 2001 and 2000
ADDITIONS DEDUCTIONS
---------------------------- -------------------------------
AMOUNTS
BALANCE AT CHARGED TO WRITTEN OFF, BALANCE
BEGINNING COSTS AND OTHER NET OF AT
OF YEAR EXPENSES JUSTMENTS(1) RECOVERIES END OF YEAR
------- -------- ------------ ---------- -----------
Allowances for losses in
collection which is
deducted on the balance
sheet from accounts
receivable
Year ended
December 31, 2002 $211,995 601,820 10,226 (564,934) 259,107
Year ended
December 31, 2001 $931,560 (35,392) (19,019) (665,154) 211,995
Year ended
December 31, 2000 $268,198 477,746 (8,583) 194,199 931,560
(1) INCLUDES ADJUSTMENTS DUE TO FOREIGN CURRENCY TRANSLATION.
INDEPENDENT AUDITORS' REPORT
Shareholders and the Board of Directors
The Oilgear Company:
Under date of March 4, 2003, we reported on the consolidated balance sheets of
The Oilgear Company and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations and shareholders' equity,
comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2002, which are included herein. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related financial statement Schedule II:
Valuation and Qualifying Accounts, included in Part IV of this report. 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 4, 2003
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.
On October 4, 2002, The Oilgear Company filed a report on Form 8-K
dated September 24, 2002 to report receipt of a 90-day notice from The
Nasdaq Stock Market that the Company has not maintained a minimum
market value of publicly held shares of $5,000,000 as required for
continued listing on the National Market.
On March 28, 2003, The Oilgear Company filed a report on Form 8-K dated
March 21, 2003 to report the release of its annual earnings.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE OILGEAR COMPANY (Registrant)
By /s/ Thomas J. Price March 31, 2003
-----------------------------------------
Thomas J. Price, Vice President-
Chief Financial Officer and
Corporate Secretary
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints David A. Zuege and Thomas J. Price, and each of them,
his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.*
/s/ DAVID A. ZUEGE
- --------------------------------------------
David A. Zuege, President
and Chief Executive Officer
(Principal Executive Officer) and Director
/s/ THOMAS J. PRICE
- --------------------------------------------
Thomas J. Price, Vice President - Chief
Financial Officer and Secretary
(Principal Financial Officer
and Principal Accounting Officer)
/s/ DALE C. BOYKE
- --------------------------------------------
Dale C. Boyke, Director
/s/ THOMAS L. MISIAK
- --------------------------------------------
Thomas L. Misiak, Director
/s/ ROBERT D. DRAKE
- --------------------------------------------
Robert D. Drake, Director
/s/ HUBERT BURSCH
- --------------------------------------------
Hubert Bursch, Director
/s/ FRANK L. SCHMIT
- --------------------------------------------
Frank L. Schmit, Director
/s/ MICHAEL H. JOYCE
- --------------------------------------------
Michael H. Joyce, Director
11
/s/ ROGER H. SCHROEDER
- --------------------------------------------
Roger H. Schroeder, Director
/s/ MICHAEL C. SIPEK
- --------------------------------------------
Michael C. Sipek, Director
* Each of these signatures is affixed as of March 31, 2003.
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, David A. Zuege, certify that:
1. I have reviewed this annual report on Form 10-K of The Oilgear Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of its board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ David A. Zuege
------------------
David A Zuege
President and Chief Executive Officer - Principal
Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Thomas J Price, certify that:
1. I have reviewed this annual report on Form 10-K of The Oilgear Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of its board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ Thomas J. Price
-------------------
Thomas J Price
Vice President - Chief Financial Officer and Secretary
THE OILGEAR COMPANY
(THE "REGISTRANT")
(COMMISSION FILE NO. 000-00822)
* * * * *
EXHIBIT INDEX
2002 ANNUAL REPORT ON FORM 10-K
EXHIBIT
FILED INCORPORATED HEREIN
NUMBER FILED WITH
HEREWITH DESCRIPTION BY REFERENCE TO: FILES REPORT
- ------ ----------- ---------------- ------------
3.1 Restated Articles of Exhibit 3.1 to Registrant's
Incorporation of The 10-K for year ended December
Oilgear Company (as 31, 1994 ("1994 10-K")
adopted March 18, 1969)
3.2 Bylaws of The Oilgear Exhibit 3.2 to
Company (as amended and Registrant's 10-K for
restated by the Board of year ended December 31,
Directors, effective 1991 ("1991 10-K")
January 1, 1992, to
reflect the revised
Wisconsin Business
Corporation Law)
*4
4.1 Fifth Amended and Restated X
Credit Agreement between The
Oilgear Company and M&I Marshall
& Ilsley Bank dated as of
March 31, 2003,
**10.1 The Oilgear Company Key Exhibit 10.5(a) to
Employee Stock Purchase Registrant's 10-K for year
Plan, as amended and ended December 31, 1990
restated September 6, 1990 ("1990 10-K")
**10.2(a) The Oilgear Company Exhibit 10.6 to 1990 10-K
Retirement Benefits
Equalization Plan,
effective as of March 1,
1991
(b) Amendment to The Oilgear Exhibit 10.3(b) to
Company Retirement Registrant's 10-K for
Benefits Equalization Plan year ended December 31,
adopted on December 13, 1995 ("1995 10-K")
(c) Amendment to The Oilgear Exhibit 10.4(c) to
Company Retirement Registrant's 10-K for
Benefits Equalization Plan year ended December 31, 2001
adopted on December 13,
2001
**10.3(a) Oilgear Profit Sharing Exhibit 10.4(b) to
Program for Corporate Registrant's 10-K for
Officers and Executives, year ended December 31,
as amended effective 1992
January 1, 1993
(b) Oilgear Variable Exhibit 10.4(b) to 1994
Compensation Program 10-K
**10.4(a) Form of Deferred Exhibit 10.9 to
Compensation Agreement Registrant's 10-K for
with certain directors year ended December 31,
(December 8, 1971) 1980
(b) The Oilgear Company Exhibit 10.9(b) to
Deferred Directors' Fee Registrant's 10-K for
Plan, as amended and year ended December 31,
restated December 14, 1983 1983
(c) Amendment to The Oilgear Exhibit 10.5(c) to 1995
Company Deferred 10-K
Directors' Fee Plan
adopted on December 11,
1991
(d) Amendment to The Oilgear Exhibit 10.9(d) to
Company Deferred 10-K Registrant's 10-K for
Directors' Fee Plan year ended December 31, 2001
adopted on December 13,
2001
**10.5 The Oilgear Company 1992 Exhibit A to Registrant's
Stock Option Plan 1993 Annual Meeting Proxy
Statement dated March 26,
1993
**10.6(a) The Oilgear Company Exhibit 10.7 to
Directors' Stock Plan Registrant's 10-K for
year ended December 31,
1993
(b) The Oilgear Company Exhibit 10.7(b) to 1994
Amended and Restated 10-K
Directors' Stock Plan
**10.7 Consulting and Deferred Exhibit 10.8 to 1995 10-K
Compensation Agreement
between Otto F. Klieve and
The Oilgear Company, dated
as of January 1, 1996
10.8 Agreements executed by The
Oilgear Company in
connection with an
industrial revenue bond
issue by County of Dodge,
Nebraska:
(a) Lease Agreement between Exhibit 10.9(a) to 1997
County of Dodge, Nebraska, 10-K
as Lessor, and The Oilgear
Company, as Lessee, dated
as of October 1, 1997
(b) Building Improvement Lease Exhibit 10.9(b) to 1997 10-K
from The Oilgear Company,
as Lessor, to County of
Dodge, Nebraska, as
Lessee, dated as of
October 1, 1997
(c) Bond Guaranty Agreement by Exhibit 10.9(c) to 1997 10-K
The Oilgear Company to
Norwest Bank Wisconsin,
National Association, as
Trustee and Paying Agent,
dated as of October 1,
1997
(d) Credit Agreement by and Exhibit 10.9(d) to 1997 10-K
between The Oilgear
Company and M&I Marshall &
Ilsley Bank, dated as of
October 1, 1997
(e) Tax Regulatory Agreement Exhibit 10.9(e) to 1997 10-K
among Norwest Bank
Wisconsin, National
Association, as Trustee,
County of Dodge, Nebraska,
as Issuer, and The Oilgear
Company, as Borrower,
dated as of October 1,
1997
21 Subsidiaries of The X
Oilgear Company
23 Consent of KPMG LLP X
24 Power of Attorney Signatures Page in this Report
99.1 Certification Pursuant to 18 U.S.C. Section 1350 X
99.2 Certification Pursuant to 18 U.S.C. Section 1350 X
* Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant
agrees to furnish to the Securities and Exchange Commission, upon
request, a copy of any unfiled instrument with respect to long-term
debt.
** Management contracts and executive compensation plans or arrangements
required to be filed as exhibits pursuant to Item 14(c) of Form 10-K.