Back to GetFilings.com

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, 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)

(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]

As of June 30, 2003, the aggregate market value of the shares of Common Stock (based upon the $2.25 last sale price on June 30, 2003 in the Nasdaq Small Cap Stock Market) held by non-affiliates was approximately $1,960,459.  Shares of Common Stock held by each executive officer and director of the Company have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 25, 2004, 1,957,898 shares of Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on May 11, 2004 are incorporated by reference into Part III of this Form 10-K.

1

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 included 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 60,000 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 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; Trenton, South Carolina; Mead, Washington; 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.

2

INTERNATIONAL SEGMENT

The Company conducts business outside of the United States, 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, and a 58% owned joint venture operation located in Taipei, Taiwan, with both companies serving customers with hydraulic products. In 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, 2003 was approximately $28,912,000, a decrease of approximately $650,000 from the backlog of orders as of December 31, 2002, which was approximately $29,562,000. 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 total 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 2004. Approximately 47% of the revenue under the above large contract was recognized in 2003 and is not included in backlog as of December 31, 2003. The Company anticipates that approximately 30% of the contract revenue will be recognized in 2004 and that the contract will be completed in 2005. 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. The research and development expenditure for 2003 was $1,700,000. Due to cost cutting programs, the Company decreased its research and development expenditures during 2002 to approximately $1,600,000 from $2,100,000 in 2001. 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.

3

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, 2003, the Company had approximately 760 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 included 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 included 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 of floor space and is currently leased to a third-party who has an obligation to purchase the property by 2008. The Company leases a 141,000 square foot manufacturing facility on 14 acres of land located in Fremont, Nebraska. For additional information regarding the lease of the Fremont, Nebraska facility, see Note 5, “Long Term Debt” in the Notes to Consolidated Financial Statements included in Item 8 of this report.

EUROPEAN

The Company’s Oilgear GmbH subsidiary owns a three level concrete block and steel building with approximately 19,900 square feet in Hattersheim, Germany. This office and shop facility is constructed on two acres of land and is subject to a mortgage.

4

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 20,000 square feet on approximately one acre of land in Hernani, Spain.

The Company’s Oilgear Towler S.A. subsidiary owns a 9,500 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 16,790 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 to house sales and service functions.

INTERNATIONAL

The Company leases facilities in all international 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 outstanding debt, see Note 4, “Short-term Borrowings” and Note 5, “Long-term Debt” in the Notes To Consolidated Financial Statements included 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, none of which is expected to materially impact the Company’s operations or financial results.

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 2003.

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.

5

(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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Company’s common stock is traded on The Nasdaq Stock Small Cap Market under the symbol OLGR. As of March 23, 2004, 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 “Financial Condition and Liquidity” and “Quarterly Financial Information (Unaudited)” in Item 7 of this report.

In 2002 and 2001, the Company sold an aggregate of 11,000 and 5,100, respectively, of 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 and $9.75 for years 2002 and 2001, 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 4^th 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.

6

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the Company’s equity compensation plans as of December 31, 2003:

ITEM 6. SELECTED FINANCIAL DATA.

5 YEAR SUMMARY

*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

2003 was a challenging year for the Company as the fluid power industry lagged the recovery in the overall domestic economy for most of the year. This improved, however, with the anticipated rebound in sales in the fourth quarter. The net loss for 2003 included approximately $1.8 million of expenses and charges related to a production problem at one of our plants that has since been corrected, charges related to inventory, receivables and fixed assets in our International segment, and charges related to the downsizing of our labor force. We believe our continued investment in new products and product enhancements and our ongoing emphasis on reducing operating costs position the Company for improvement during a sustained recovery in our industry.

Discussion of Results of Operations

7

Although the domestic economy started to recover in 2003, the fluid power industry is lagging in that recovery. Our net orders in 2003 decreased by 4.8% when compared to 2002. In 2002 our European segment received a large order for approximately $11,000,000 to supply equipment on a new forging press being installed in central France. This single order distorts the comparisons of orders between the periods being reported. Excluding this individual order from the 2002 total, net orders for 2003 would have increased by 9.4% when compared to 2002. Approximately 33% of the 2003 net orders were sold by our European segment and therefore were subject to translation from Euros and British pounds which further distorts the year to year comparison as the Euro and British pound average exchange rate increased from their 2002 average by approximately 20% and 9%, respectively.

When 2003 orders in each geographic segment are compared to 2002, the Domestic segment increased by approximately 4.7%, the European segment decreased by approximately 23.7% and the International segment increased by approximately 23.1%. The increase in the Domestic segment resulted from an increase in custom engineered orders for integrated hydraulic and electrical products used on extrusion presses and products used on the Atlas V rocket program in the aerospace industry. The large order discussed above was the primary reason for the decrease in European orders in 2003. If that order is taken out of the calculation, European segment orders increased by approximately 12.2% in 2003. Orders for integrated hydraulic and electrical products used in aluminum extrusion and forging applications were the reason for the 2003 increase in orders in the International segment.

Net sales increased by 7.6% when compared to 2002. When comparing 2003 net sales to 2002 by segment, the Domestic segment increased by 2.0%, the European segment increased by 20.8% and the International segment decreased by 0.4%. Excluding the effect of favorable foreign exchange rates on sales, net sales for 2003 increased by 0.8% over 2002. The economic condition in the fluid power industry was the primary reason net sales, measured in local currencies, remained relatively flat in 2003. Roughly 47% of the approximately $11,000,000 forging press order entered in 2002 was recognized through net sales in 2003. The year end backlog was affected by all of the above mentioned factors. It decreased by 2.2%, or $650,000, from the year end of 2002.

The large contract received in France was the primary reason for the 3.1% increase in net orders in 2002 compared to 2001. Without this contract net orders would have decreased by 10.3% in 2002.

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 International segments 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.

Gross profit increased by 20.9% in 2003 when compared to 2002. Gross profit margin also increased in 2003 (from 19.1% to 23.1%) despite the approximately $1,000,000 of added costs incurred from a manufacturing quality problem at our Fremont plant. By the end of 2003, that quality problem was substantially alleviated. The cost savings from closing plants, outsourcing to low cost vendors, a favorable union contract, the use of lean manufacturing techniques and a more favorable mix of products with higher profit margins have all helped to improve the gross profit margin.

The large decrease in net sales in 2002, 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

8

offset the decrease in net sales, the Company reduced its labor force by approximately 11% in total in 2002, including an approximately 15% decrease in the Domestic segment, reduced pay to salaried workers, kept overtime pay to a minimum, 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.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, less research and development, increased by 7.1% or $1,201,000 in 2003. When the local foreign currency expenses were converted to US dollars using the average 2003 exchange rate the expenses were approximately $1,200,000 higher than the expenses would have been if they were converted using the 2002 average exchange rate. This was the primary reason for the increase in 2003. Another factor that increased these expenses in 2003 was the approximately $400,000 increase in pension costs allocated to selling, general and administrative expenses. These increases were partially offset by an approximately $249,000 reduction in charges related to various headcount reductions and other exit costs recorded in 2003 and 2002.

Selling, general and administrative expenses increased by 1.1% in 2002 compared to 2001. The increase in expenses was caused primarily by cost increases in healthcare benefits, insurance and pension benefits. In addition, the Company incurred $159,000 more in charges related to various headcount reductions and other exit costs in 2002 than in 2001. These increases were offset by Company programs to decrease expenses, which included downsizing the labor force, reducing pay to salaried workers, keeping overtime pay to a minimum, and decreasing employee 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 2002 operating expenses when compared to 2001 and also offset the decreases made to operating expenses in 2002.

Included in selling, general and administrative expenses are startup expenses and net losses of approximately $800,000 for 2002 from OSL Offshore Machinery and Deck Systems (OSL). OSL is a company we started 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 financial statements into our financial statements from the date we obtained majority ownership.

The Company’s 2003 research and development expenses totaled $1,700,000 which was a $100,000 increase over 2002. These expenses were $1,600,000 in 2002 compared to $2,100,000 in 2001. Cost cutting programs in 2002 were the primary reason for the change in 2002. 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 increased by approximately $75,000 in 2003 as the result of increased interest rates compared to 2002 and decreased by $411,000 in 2002, primarily due to the decrease in interest rates, compared to 2001.

INCOME TAX effective rates were (26.3%), 4.9% and 20.0% in 2003, 2002 and 2001, respectively. In recent years, the Company has recorded income tax expense on losses before income taxes and minority interest due to significant losses in the Domestic segment that are not benefited for tax purposes, coupled with earnings and related income tax expense in the European and International segments. In 2003, the reserve for income tax exposure items was reduced by approximately $800,000 to an amount supported by the risk associated with the possible tax liability, which is the primary reason for the negative effective tax rate. Changes

9

in the valuation allowance were the principal reason for the fluctuation in effective tax rate in 2002. Also see note 8 to the Consolidated Financial Statements for additional reconciliation of the tax rates.

THE NET LOSS OF $1,793,000 for 2003 was primarily the result of approximately $1,000,000 of costs related to the quality problems in our Fremont Factory, approximately $500,000 of charges relating to inventory, receivables and fixed assets written off in our International segment and $296,000 of employee termination and other exit costs.

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, employee termination and other exit 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.

OUTLOOK

The fluid power industry data is starting to show signs of a recovery in the first two months of 2004. Our net orders in the first two months of 2004 increased by approximately 8.8% compared to the first two months of 2003, and our backlog at February 29, 2004 is at a near record level of approximately $34,068,000, an increase of $5,156,000, or 17.8% since December 31, 2003. A weaker US dollar has continued 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, Texas, Novi, Michigan and Bedford, England, and lower cost outsourcing). However, increasing costs for healthcare, pension, insurance, and legal, auditing and other Sarbanes-Oxley compliance costs will offset part of the savings. As part of our cost reduction and efficiency improvement efforts, we are in the process of downsizing our facility in Leeds, England and we expect to sign a lease to move these operations to a smaller, more efficient facility. The lease will require the lessor to construct a building per our specifications on an already approved site. The earliest we could move would be late in 2004. We have entered into a conditional contract with a developer to sell our existing facility for 4,050,000 British pound sterling. The contract is contingent upon receiving government authorization to convert the property to residential use and for us to relocate to our new site. We anticipate that the zoning will be changed at a meeting with the zoning commission in Leeds scheduled for April 2004. The property has a zero carrying value so the transaction may provide a significant capital gain.

INFLATION AND CHANGING PRICES

Oilgear uses the LIFO method of accounting for 60% of its inventories and has reserves for obsolete and slow moving inventory. Approximately 97% 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 affected the net earnings (loss) reported by the Company.

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

10

*High and low sales prices in the Nasdaq Stock Market or the Nasdaq Small Cap Stock Market, as applicable.

FINANCIAL CONDITION AND LIQUIDITY

We signed an amended credit agreement in March 2004 which extended our credit agreement to April 1, 2005 and set covenants for 2004 and the first quarter of 2005. The amended credit agreement includes a term loan and a revolving line of credit facility. The term loan balance at December 31, 2003 was $7,983,330 with an annual interest rate equal to the greater of 6.0% or LIBOR plus 125 to 400 basis points with payments equal to $125,000 per month. The basis points added to LIBOR are determined by the ratio of funded debt to EBITDA, as defined in the agreement. 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 eligible Domestic segment assets. These assets include 80% of qualifying trade receivables and 50% of inventory (limited to $7,250,000). The variable interest rate at December 31, 2003 was 5.2%. 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 covenants in the new credit agreement include the following:  we may not make capital expenditures of greater than $1,200,000 for 2004; we must maintain a minimum cumulative amount of EBITDA as defined in the agreement as of the end of each quarter in 2004; and we must also maintain cumulative monthly minimums of earnings and losses before income taxes and minority interest for 2004 and the first quarter of 2005. The covenants were set taking into account both the Company's expected levels of capital expenditures and earnings for 2004 and early 2005 and the bank's requirements for debt service, but there are risks and uncertainties that could result in a shortfall. If we do not meet the required minimums, the loans could be accelerated, and the Company might not have sufficient liquid resources to satisfy these obligations. The bank has waived all past covenant violations in connection with the extension of the credit facilities.

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 increased slightly in 2003, which was mostly due to the favorable affect from the conversion of foreign currencies. The current ratio decreased to 2.31 at December 31, 2003 from 2.53 at December 31, 2002. The increase in short term borrowings and an increase in accounts payable in the United States were the primary reasons for the decrease in this ratio. The Company’s working capital ratio is primarily driven by inventory values of $23,647,000 and $21,556,000 at December 31, 2003 and 2002, respectively, which is not an easily liquidated asset.

Long-term debt repayments have decreased interest bearing debt by $1,400,000 in 2003 but the increases in short term debt and current installments on long-term debt increased interest bearing debt by $2,041,000.

Shareholders’ equity was negatively impacted during 2003 by (i) the consolidated net loss in 2003 of approximately $1,793,000, and (ii) the fact that lower discount rates increased the equity adjustment for minimum pension liability by $773,000. These negative items were more than offset by the effect of foreign currency rate changes during 2003 brought on by a weaker US dollar which caused a $2,658,000 increase in total 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.

11

In December 2000 the Company announced a stock buy back program for a total of 100,000 shares of common stock during the following three years. The Company bought 660 and 44,507 shares in 2002 and 2001, respectively. No shares were repurchased in 2003.

The Company is currently negotiating the terms of new financing to replace its existing credit agreement. The March 2004 amendment to the credit agreement requires a $100,000 fee if the Company has not received a firm commitment for the new financing by April 30, 2004. We expect to obtain a firm commitment on or before that date, but this cannot yet be assured.

During 2003, the Company’s Leeds, England subsidiary negotiated a loan agreement with a local British bank with an availability of 1,500,000 British pounds (approximately $2,675,000) to be drawn down in two 750,000 pound tranches. The first tranche was taken in May 2003. The second tranche will be available when the Leeds planning commission changes the zoning of the Leeds property to residential. The loan is secured by the existing land and building in Leeds, England and is to be repaid when the sale of the Leeds property is closed. The interest rate applicable to this loan is LIBOR plus 2.25%, which was 6% at December 31, 2003. For more information about our efforts to sell the Leeds property, see “Outlook” above in this Section 7.

At December 31, 2003, the Company had approximately $2,675,000 of unused borrowings available under its short-term and long-term credit facilities. Interest bearing debt increased by 2.8% ($641,000) at December 31, 2003 compared with year end 2002. The cash was used to fund the working capital needs and additions to property, plant and equipment.

Net cash provided by operating activities was $2,062,000 in 2003 compared to $2,104,000 provided in 2002 and $1,179,000 provided in 2001. Depreciation and amortization have decreased by $491,000 and $142,000 in 2003 and 2002, respectively, because additions to plant and equipment are decreasing. Approximately $850,000 of cash was provided from trade accounts receivable in 2003 compared to $3,088,000 in 2002. The increase in work-in-process inventory resulting from an increase in net sales caused total inventories to increase and use $865,000 cash in 2003. The decrease in net sales in 2002 compared to 2001 was the primary reason cash was provided in 2002 and the decrease in customer deposits offset accounts receivable and was the primary reason cash was provided in 2003. The decrease in work-in-process inventory resulted from lower net sales and caused total inventories to decrease and provided $3,335,000 of cash in 2002. Increased shipments in the fourth quarter of 2003 and slower payment of accounts payable were the primary reasons for the $1,851,000 and $286,000, respectively, of cash provided in 2003 and 2002. In 2003, the contracts using percentage-of-completion had more billings and payments than accumulated costs and provided $1,333,000 of cash. Contracts using percentage-of-completion had more accumulated costs than billings in 2002 causing billings, costs and estimated earnings on uncompleted contracts to use $2,864,988 of cash.

Net property, plant and equipment was $19,895,000 at December 31, 2003 compared to $21,148,000 at December 31, 2002. Capital expenditures in 2003 were $1,046,000 compared to depreciation and amortization of $3,068,000.

12

Capital expenditures in 2002 were $1,368,000 compared to depreciation and amortization of $3,559,000. The Company entered into operating lease agreements for approximately $623,000 in 2002, primarily for capital equipment (mostly machines and tools for the Fremont and Milwaukee manufacturing facilities). In 2003, the Company did not enter into any operating leases. On September 26, 2003 the Company entered into a “Net” lease agreement with a company in Longview, Texas for the lease of its Longview facility. The lease ends September 30, 2008, and the lessee is obligated to purchase the property on that date or an earlier date specified by the lessee.

The Company did not declare or pay any dividends in 2003 or 2002.

The following table provides information as of December 31, 2003, with respect to the Company’s known contractual obligations.