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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 South 51st Street, Post Office Box 343924, Milwaukee, Wisconsin 53234-3924
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 327-1700
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report.)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES | | NO |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding March 31, 2003
- ----------------------------- --------------------------
Common Stock, $1.00 Par Value 1,955,398
PAGE 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, 2003 December 31, 2002
-------------- -----------------
Current assets:
Cash and cash equivalents $ 4,067,873 4,126,006
Trade accounts receivable, less allowance for doubtful
receivables of $259,000 in 2003 and 2002 14,382,452 14,948,015
Costs and estimated earnings in excess of billings on uncompleted contracts 2,560,659 1,963,655
Inventories 20,904,472 21,555,858
Prepaid expenses 1,168,483 670,132
Other current assets 863,251 853,532
------------ ------------
Total current assets 43,947,190 44,117,198
------------ ------------
Property, plant and equipment, at cost
Land 1,029,249 1,001,932
Buildings 11,928,064 11,770,132
Machinery and equipment 49,143,405 50,403,018
Drawings, patterns and patents 5,626,613 5,505,539
------------ ------------
67,727,331 68,680,621
Less accumulated depreciation and amortization 46,999,466 47,532,145
------------ ------------
Net property, plant and equipment 20,727,865 21,148,476
Other assets 1,849,221 1,760,858
------------ ------------
$ 66,524,276 67,026,532
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 446,817 454,091
Current installments of long-term debt 1,536,381 1,754,576
Accounts payable 6,364,737 5,909,813
Billings in excess of costs and estimated earnings on uncompleted contracts 530,170 282,052
Customer deposits 906,231 2,564,181
Accrued compensation and employee benefits 2,783,607 2,557,508
Other accrued expenses and income taxes 4,090,270 3,906,164
------------ ------------
Total current liabilities 16,658,213 17,428,385
------------ ------------
Long-term debt, less current installments 21,892,279 20,985,913
Unfunded employee retirement plan costs 13,712,111 13,767,971
Unfunded post-retirement health care costs 9,040,000 9,100,000
Other noncurrent liabilities 1,060,037 1,026,699
------------ ------------
Total liabilities 62,362,640 62,308,968
------------ ------------
Minority interest in consolidated subsidiaries 873,708 858,192
Shareholders' equity:
Common stock, par value $1 per share, authorized 4,000,000 shares;
issued 1,990,783 shares 1,990,783 1,990,783
Capital in excess of par value 9,497,906 9,497,906
Retained earnings 15,535,991 16,505,044
------------ ------------
27,024,680 27,993,733
Deduct:
Treasury stock, 35,385 shares (305,192) (305,192)
Notes receivable from employees for purchase of Company
common stock (137,303) (161,055)
Accumulated other comprehensive income:
Foreign currency translation adjustment (2,094,018) (2,412,015)
Minimum pension liablility adjustment (21,200,239) (21,256,099)
------------ ------------
(23,294,257) (23,668,114)
------------ ------------
Total shareholders' equity 3,287,928 3,859,372
------------ ------------
$ 66,524,276 67,026,532
------------ ------------
See accompanying notes to consolidated financial statements
PAGE 3
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR QUARTER ENDED
MARCH 31,
2003 2002
------------ ------------
Net sales $ 20,213,673 20,596,222
Special costs 78,190 --
Cost of sales 15,911,197 15,595,554
------------ ------------
Gross profit 4,224,286 5,000,668
Special costs 158,492 --
Selling, general and administrative expenses 4,738,605 4,596,839
------------ ------------
Operating income (loss) (672,811) 403,829
Interest expense 327,994 285,315
Other non-operating income, net 168,628 4,507
------------ ------------
Earnings (loss) before income taxes and minority interest (832,177) 123,021
Income tax expense 121,360 46,475
------------ ------------
Minority interest in net earnings 15,516 52,190
------------ ------------
Net earnings (loss) $ (969,053) 24,356
============ ============
Basic weighted-average outstanding shares 1,955,398 1,942,978
============ ============
Diluted weighted-average outstanding shares 1,955,398 1,945,524
============ ============
Basic earnings (loss) per share of common stock $ (0.50) 0.01
============ ============
Diluted earnings (loss) per share of common stock $ (0.50) 0.01
============ ============
Dividends per share of common stock $ -- --
============ ============
See accompanying notes to consolidated financial statements.
PAGE 4
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR QUARTER ENDED
MARCH 31,
2003 2002
----------- -----------
Cash flows from operating activities:
Net earnings (loss) $ (969,053) 24,356
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 796,033 958,297
Common and treasury stock issued in connection with
compensation element of sales to employees
and employee savings plan 8,126 10,443
Minority interest in consolidated subsidiaries 15,516 52,190
Change in assets and liabilities:
Trade accounts receivable 732,248 1,136,929
Inventories 696,494 117,622
Billings, costs and estimated earnings on uncompleted contracts (329,588) (2,594,462)
Prepaid expenses (489,326) (15,472)
Accounts payable 424,271 290,027
Customer deposits (1,710,518) 86,043
Accrued compensation 172,833 256,313
Other, net 25,278 968,046
----------- -----------
Net cash provided (used) by operating activities $ (627,686) 1,290,332
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (277,595) (332,201)
----------- -----------
Net cash used by investing activities $ (277,595) (332,201)
----------- -----------
Cash flows from financing activities:
Net repayments under line of credit agreements (10,314) (1,030,906)
Repayment of long-term debt (371,991) (380,172)
Proceeds from issuance of long-term debt 1,062,700 1,218,758
Payments received on notes receivable from employees 15,626 17,339
----------- -----------
Net cash provided (used) by financing activities $ 696,021 (174,981)
----------- -----------
Effect of exchange rate changes on cash and cash equivalents 151,126 (100,268)
----------- -----------
Net increase (decrease) in cash and cash equivalents (58,133) 682,882
Cash and cash equivalents:
At beginning of period 4,126,006 4,996,723
----------- -----------
At end of period 4,067,873 5,679,605
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 285,270 375,390
Income taxes 7,255 22,217
=========== ===========
THE OILGEAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
FOR QUARTER ENDED
MARCH 31,
2003 2002
--------- ---------
Net earnings (loss) $(969,053) 24,356
--------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment 317,997 (399,470)
Minimum pension liability adjustment 55,860 --
--------- ---------
Total comprehensive loss $(595,196) (375,114)
========= =========
See accompanying notes to consolidated financial statements.
PAGE 5
THE OILGEAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation
These unaudited interim financial statements reflect all adjustments which are,
in the opinion of management, necessary for a fair statement of the results for
the interim periods in accordance with accounting principles generally accepted
in the United States of America. All such adjustments are of a normal recurring
nature. Management assumes the reader will have access to the December 31, 2002
Annual Report on Form 10-K, a copy of which is available upon request. These
notes should be read in conjunction with the Consolidated Financial Statements
and the related notes in the 2002 Annual Report on Form 10-K.
Business Description and Operations
The Company manages its operations in three reportable segments based upon
geographic area. Domestic includes the United States and Canada, European
includes Europe and International includes Asia, Latin America, Australia and
most of Africa.
The individual subsidiaries of the Company operate predominantly in the fluid
power industry. The Company provides advanced technology in the design and
production of unique fluid power components. Products include piston pumps,
motors, valves, controls, manifolds, electrohydraulic components, cylinders,
reservoirs, skids and meters. Industries that use these products are primary
metals, machine tool, automobile, aerospace, petroleum, construction equipment,
chemical, plastic, glass, lumber, rubber and food. The products are sold as
individual components or integrated into high performance applications.
Segment information is as follows:
FOR QUARTER ENDED
NET SALES TO UNAFFILIATED CUSTOMERS MARCH 31, 2003 March 31, 2002
-------------- --------------
Domestic $ 9,409,193 11,830,120
European 8,446,322 5,956,605
International 2,358,158 2,809,497
------------ ------------
Total $ 20,213,673 20,596,222
------------ ------------
INTERSEGMENT NET SALES
Domestic $ 2,105,102 1,398,443
European 290,290 108,426
OPERATING INCOME (LOSS)
Domestic $ (611,731) 443,910
European 288,692 163,043
International 189,869 334,736
Corporate expenses, including R&D (539,641) (537,860)
------------ ------------
Total $ (672,811) 403,829
------------ ------------
IDENTIFIABLE ASSETS (AT MARCH 31)
Domestic $ 33,156,800 39,830,024
European 24,812,635 23,563,232
International 6,656,886 5,932,295
Corporate 1,897,955 1,860,716
------------ ------------
Total $ 66,524,276 71,186,267
------------ ------------
PAGE 6
Inventories
Inventories at March 31, 2003 and December 31, 2002 consist of the following:
MARCH 31, 2003 December 31, 2002
-------------- -----------------
Raw materials $ 2,789,606 3,177,375
Work in process 15,626,376 16,003,824
Finished goods 3,887,490 3,880,659
------------ ------------
22,303,472 23,061,858
LIFO reserve (1,399,000) (1,506,000)
------------ ------------
Total $ 20,904,472 21,555,858
============ ============
Inventories stated on the last-in, first-out (LIFO) basis were valued at
$13,003,000 and $12,567,000 at March 31, 2003 and December 31, 2002,
respectively.
Earnings (loss) per share
The following table sets forth the computation of basic and diluted earnings
(loss) per common share:
FOR QUARTER ENDED
MARCH 31, 2003 March 31, 2002
-------------- --------------
Net income (loss) for basic and diluted earnings per share (969,053) 24,356
Weighted average common shares outstanding 1,955,398 1,942,978
Dilutive stock options -- 2,546
Diluted average common shares outstanding 1,955,398 1,945,524
Basic earnings (loss) per common share $ (0.50) 0.01
Diluted earnings (loss) per common share $ (0.50) 0.01
Options to purchase 98,738 shares of common stock with a weighted average
exercise price of $6.92 per share were outstanding at March 31, 2003. Options to
purchase 95,524 shares of common stock with a weighted average exercise price of
$9.48 per share were outstanding at March 31, 2002.
Options to purchase 75,238 and 45,299 shares of common stock were not included
in the computations of diluted earnings per share at March 31, 2003 and 2002,
respectively, because the options' exercise prices were greater than the average
market price of common stock during the three month periods then ended.
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:
MARCH 31, 2003 March 31, 2002
-------------- --------------
Net earnings (loss) reported $(969,053) 24,356
Pro forma net earnings (loss) $(975,683) 15,000
Pro forma basic net earnings (loss) per share $(0.50) 0.01
Pro forma diluted net earnings (loss) per share $(0.50) 0.01
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: March 31, 2003 - expected volatility of
32% and expected dividend yield of 0%; and March 31, 2002 - expected volatility
of 23% and expected dividend yield of 0%. 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.
Other
During the fourth quarter 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, MI facility; (iv) a write-off of non-strategic assets;
and (v) 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 assets write-offs.
EMPLOYEE
TERMINATION
BENEFITS OTHER COSTS TOTAL
----------- ----------- ---------
Expenses 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
Cash expenditures (100,000) (105,000) (205,000)
--------- --------- ---------
Balance March 31, 2002 ** $ -- 50,000 50,000
========= ========= =========
** Paid during the third quarter of 2002
During the fourth quarter of 2002 the Company recorded special charges related
to:
(i) a downsizing of the corporate staff, (ii) the closing of the Longview, TX
facility and (iii) a write-off of non-strategic assets. The amount recorded
includes $298,000 of employee termination benefits for 28 notified employees,
$85,000 for moving expenses and $456,000 of assets write-offs.
During the first quarter of 2003 the Company continued its restructuring started
in 2001 and recorded additional special charges related to:
(i) a downsizing of the corporate staff, and (ii) additional costs to move
inventory and equipment formerly in our Longview facility to Milwaukee, WI. The
amount recorded includes $176,000 of employee termination benefits for 10
notified employees, and $61,000 for moving expenses.
EMPLOYEE
TERMINATION
BENEFITS OTHER COSTS TOTAL
----------- ----------- ---------
Expenses accrued $ 298,000 541,000 839,000
Non-cash charges -- (456,000) (456,000)
Cash expenditures (87,000) (85,000) (172,000)
========= ========= ========
Balance December 31, 2002 211,000 -- 211,000
Expenses accrued 176,000 61,000 237,000
Cash expenditures (315,000) (61,000) (376,000)
--------- --------- --------
Balance March 31, 2003 $ 72,000 -- 72,000
========= ========= ========
PAGE 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The 4.4% decrease ($770,000) in total current liabilities along with a 0.4%
decrease ($170,000) in total current assets caused working capital to increase
by approximately $600,000 at March 31, 2003 compared to December 31, 2002. One
key reason for the decrease in current liabilities was the approximately
$1,658,000 decrease in customer deposits. A large customer deposit paid in the
fourth quarter of 2002 for the large forging machine order in France was used
to pay progress billings for work completed in the first quarter of 2003.
Short-term borrowings and current installments of long-term debt decreased in
the first quarter of 2003 by approximately $225,000. These decreases were more
than offset by increases in accounts payable ($455,000), billings in excess of
costs and estimated earnings on uncompleted contracts ($248,000), accrued
compensation and pension expense ($226,000), and other accrued expenses
($184,000).
Net cash used by operating activities was approximately $628,000 for the quarter
ended March 31, 2003, as compared to approximately $1,290,000 of cash provided
in the same quarter in 2002. The net loss of approximately $969,000 was the
principal reason why cash was used by operating activities in the first quarter
of 2003. Property, plant and equipment additions totaled approximately $278,000
in the first quarter of 2003, which is down slightly from approximately
$332,000 in the first quarter of 2002. Most of the cash used by the property,
plant and equipment additions and operating activities was funded by an
approximate $700,000 increase in bank borrowings.
The Company believes its cash on hand, anticipated 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 and the Company is
in compliance of all bank covenants pertaining to the bank credit agreement.
However, given the difficult economy and competitive environment in the
Company's markets and the manufacturing challenges associated with some of the
Company's products, management is not confident that the Company will be able
to continue to satisfy certain of these covenants.
RESULTS OF OPERATIONS
Orders increased by 14.0% in the first quarter of 2003 when compared to the same
period in 2002. Backlog of orders at March 31, 2003 has increased by 11.9% to
approximately $33,074,000 from approximately $29,562,000 at December 31, 2002.
All three segments experienced an increase in orders in the first quarter of
2003. The Domestic segment increased by 7.7%, the International segment
increased by 15.4%, and the European segment increased by 14.3%. However, the
increase in the European segment was the result of the currency exchange
difference from a weaker dollar against the Pound Sterling and Euro. If the
currency exchange impact is taken out, the European segment would have a
decrease in orders of approximately 6%. The result of the currency exchange
difference in the International segment affected the increase only slightly.
Except for the third quarter of 2002 when we entered one order for $11,000,000,
we received more orders in this quarter than in any other quarter in the last
twelve quarters.
The low amount of orders in the fourth quarter of 2002 and the low amount of
custom engineered construction contracts in backlog at January 1, 2003 compared
to January 1, 2002 in the Domestic and International segments were the primary
reasons for the decreases in first quarter 2003 net sales in both the Domestic
segment of 20.5% and the International segment of 16.1% compared to the first
quarter of 2002. The European segment net sales in the first quarter of 2003
increased by 41.8% when compared to the same period in 2002. After taking out
the effect of the currency exchange, the European segment increase in net sales
was approximately 21%. The primary reason for the increase in the European
segment was the approximately $11,000,000 contract received in the third quarter
of 2002 which we commenced and started to recognize percentage-of-completion
method revenue and profit during the first quarter of 2003. Consolidated net
sales decreased in the first quarter of 2003 by 1.9% when compared to the same
period in 2002.
The first quarter of 2003 had a larger proportion of total net sales with
lower gross margins than the first quarter of 2002. Also, operating problems at
our Fremont, NE plant adversely affected pump deliveries and decreased gross
profit by as much as $500,000 in the first quarter of 2003. We are currently
evaluating and addressing the problem. Special costs and increased expenses
relating to retirement and health care benefits in the first quarter of 2003
also lowered gross profit. For the above reasons the gross margin percentage
decreased to 20.9% for the first quarter of 2003 from 23.7% for the first
quarter of 2002.
The effects of translating stronger foreign currencies into US dollars, together
with increased health care expenses, increased insurance expenses, increased
retirement benefit expenses and special expenses related to employee reductions
were the primary reasons for the 9.4% increase in operating expenses in the
first quarter of 2003 compared to the same quarter in 2002.
PAGE 8
Interest expense increased approximately $43,000 in the first quarter of 2003
compared to the same period of 2002 primarily from an increase in interest
rates.
The primary reasons for the decrease from diluted net earnings per share of $.01
in the first quarter of 2002 to a net loss per share of $.50 in the first
quarter of 2003 were the decrease in gross profit and the increase in operating
expenses described above.
Non-operating income consists of the following:
FOR QUARTER ENDED
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Interest income $ 10,349 6,306
Foreign currency exchange gain (loss) 46,009 (32,429)
Miscellaneous, net 112,270 30,630
-------- --------
Non-operating income $168,628 4,507
======== ========
The primary reason for the increase in miscellaneous income in the first quarter
of 2003 compared to the same quarter in 2002 was the gain on the sale of
machinery and equipment at our closed Longview, TX plant. The Longview land and
building are also for sale and listed with a real estate broker. We are also in
the process of selling our facility in Leeds, England. We have received a letter
of intent to acquire our Leeds facility for 4,050,000 Pounds Sterling and expect
to sign a contingent contract in May 2003. 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 which we could relocate. It is
unlikely that this transaction would be consummated before 2004. The property is
on our books at a zero value and, as a result, the transaction has the potential
to provide us with a significant capital gain.
PAGE 8
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("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 results 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 adopted SFAS No. 143 on January 1, 2003. The adoption of SFAS No.
143 did not 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 did not 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. The Company applied the provisions of
SFAS 146 in measuring and reporting the special charges recognized in the first
quarter of 2003.
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 have not
had a material effect on the Company's financial statements. The disclosure
requirements were effective for the Company year ended December 31, 2002, and
likewise did not have a significant impact on the Company's financial statements
in the first quarter of 2003.
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 were required for
fiscal years ending December 31, 2002 and the remaining components were
effective beginning May 1, 2003.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 (the
"Interpretation"). 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 did not have a material effect on the Company's financial
statements.
PAGE 9
CAUTIONARY FACTORS
The discussions in this section and elsewhere contain various forward-looking
statements concerning the Company's propects that are based on the current
expectations and beliefs of management. Forward-looking statements may also be
made by the Company from time to time in other reports and documents as well as
oral presentations. When used in written documents or oral statements, the words
"anticipate", "believe", "estimate", "expect", "objective", and similar
expressions are intended to identify forward-looking statements. The statements
contained herein and such future statements involve or may involve certain
assumptions, risks and uncertainties, many of which are beyond the Company's
control, that could cause the Company's actual results and performance to differ
materially from what is expected. In addition to the assumptions and other
factors referenced specifically in connection with such statements, the
following factors could impact the business and financial prospects of the
Company:
* Factors affecting the Company's international operations, including relevant
foreign currency exchange rates, which can affect the cost to produce the
Company's products or the ability to sell the Company's products in foreign
markets, and the value in United States dollars of sales made in foreign
currencies. Other factors include foreign trade, monetary and fiscal policies,
laws, regulations and other activities of foreign governments, agencies and
similar organizations; and risks associated with having major facilities located
in countries 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 the employee benefit plans;
* Factors affecting the Company's financial performance or condition, including
tax legislation, unanticipated restrictions on the Company's ability to transfer
funds from its subsidiaries and changes in applicable accounting principles or
environmental laws and regulations;
* The cost and other effects of claims involving the Company's products and
other legal and administrative proceedings, including the expense of
investigating, litigating and settling any claims;
* Factors affecting the Company's ability to produce products on a competitive
basis, including the availability of raw materials at reasonable prices and
financing with acceptable terms; and
* Unanticipated technological developments that result in competitive
disadvantages 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.
PAGE 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk stemming from changes in foreign exchange
rates and interest rates. Changes in these factors could cause fluctuations in
earnings and cash flows. The Company has significant foreign operations, for
which the functional currencies are denominated primarily in the Euro and
British Pound Sterling. As the values of the currencies of the foreign countries
in which the Company has operations increase or decrease relative to the U.S.
dollar, the sales, expenses, profits, assets and liabilities of the Company's
foreign operations, as reported in the Company's Consolidated Financial
Statements, decrease or increase accordingly.
INTEREST RATE RISK
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 U.S.
interest rates on the approximately $23,000,000 of floating rate debt
outstanding at March 31, 2003. A 100 basis point movement in interest rates on
floating rate debt outstanding at March 31, 2003 would result in a change in
earnings or loss before income taxes of approximately $230,000 per year.
FOREIGN EXCHANGE RATE RISK
If foreign exchange rates would have been collectively 10% weaker against the
U.S. dollar in the first quarter of 2003, the net loss would have increased by
approximately $140,000.
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 March 31, 2003, the
Company had one exchange contract for 600,000 Euros against Pounds Sterling at
a rate of 1.5951 for delivery between May 16, 2003 and June 13, 2003.
PAGE 11
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in Rules
13d-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) designed to
provide reasonable assurance that material information about the Company is made
known to the officers certifying this report, and accordingly is reflected in
our SEC reports, including this report. Based on their evaluation, as of a date
within 90 days of the filing date of this Form 10-Q, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls and
procedures are effective.
Change in Internal Controls
There have been no significant changes in our internal controls (that are
designed to provide reasonable assurance as to the reliability of our published
financial statements) or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PAGE 12
Part II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
See Exhibit Index following the last page of this Form 10-Q which Exhibit
Index is incorporated herein by reference.
(b) Reports on Form 8-K:
On March 28, 2003, The Oilgear Company filed a report on Form 8-K dated
March 21, 2003 to furnish as an exhibit the press release reporting its
annual earnings.
PAGE 13
SIGNATURES
Pursuant to the requirements 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.
May 15, 2003
THE OILGEAR COMPANY
Registrant
/S/ DAVID A. ZUEGE
--------------------------------------------------
David A. Zuege
President and CEO
(Principal Executive Officer)
/S/ THOMAS J. PRICE
--------------------------------------------------
Thomas J. Price
VP-CFO and Secretary
(Principal Financial and Chief Accounting Officer)
CERTIFICATIONS
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, David A. Zuege, certify that:
1 I have reviewed this quarterly report on Form 10-Q of The Oilgear
Company;
2 Based on my knowledge, this quarterly 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 quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly 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 registrant's board of directors (or
persons performing the equivalent function):
(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; and
6 The registrant's other certifying officer and I have indicated in
this quarterly report whether or not 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: May 15, 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 quarterly report on Form 10-Q of The Oilgear
Company;
2 Based on my knowledge, this quarterly 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 quarterly report;
3 Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
(c) Presented in this quarterly 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 registrants's 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; and
6 The registrant's other certifying officer and I have indicated in
this quarterly report whether or not 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: May 15, 2003
/s/ Thomas J. Price
----------------------------------------
Thomas J. Price
Vice President - Chief Financial Officer
and Secretary
THE OILGEAR COMPANY
COMMISSION FILE NUMBER 000-00822
EXHIBIT INDEX
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2003
Exhibit
Number Exhibit Description Filed Herewith
- ------- ------------------- --------------
99.1 Chief Executive Officer's Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 X
99.2 Chief Financial Officer's Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 X