<PAGE>
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
         ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                        COMMISSION FILE NUMBER 333-48299
                            ------------------------
 
                                   SAUER INC.
             (Exact name of registrant as specified in its charter)
 
                  DELAWARE                             36-3482074
      (State or other jurisdiction of               (I.R.S. Employer
       incorporation or organization)              Identification No.)
 
     2800 EAST 13TH STREET, AMES, IOWA                 50010-8600
  (Address of principal executive offices)             (Zip Code)
 
                                (515) 239-6000
             (Registrant's telephone number, including Area Code)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                     Common Stock, par value $.01 per share
                             (Title of each class)
 
                            New York Stock Exchange
                       Frankfurt (Germany) Stock Exchange
                  (Name of each exchange on which registered)
 
        Securities registered pursuant to section 12(g) of the Act: None
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ X ]
 
    The aggregate market value of the voting stock of the Registrant held by
nonaffiliates at March 12, 1999, was $84,319,102. As of March 12, 1999, there
were 27,397,050 shares of common stock, $0.01 par value, of the Registrant
outstanding.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
    Portions of the Proxy Statement for the annual meeting of stockholders to be
held April 22, 1999, are incorporated by reference into Part III.
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART I
 
ITEM 1.  BUSINESS.
 
    (A)  GENERAL DEVELOPMENT
 
    Sauer Inc. ("Sauer" or the "Company"), a U.S. Delaware corporation, and its
predecessor organizations have been active in the mobile hydraulics industry
since the 1960s. Sauer, established in 1987, is a global manufacturer of
components and integrated hydraulic systems that generate, transmit, and control
fluid power in off-highway mobile equipment. Principal products are hydrostatic
transmissions, gear pumps and motors, microprocessor controls, and
electrohydraulics. The Company sells its products to original equipment
manufacturers ("OEMs") who use Sauer products to provide the hydraulic power for
the propel, work, and control functions of their vehicles. The Company's
products are sold primarily to the construction, road building, agriculture,
turf care, and specialty vehicle markets. The Company conducts its business
globally under the Sauer-Sundstrand name.
 
    During 1998, the Company commenced construction of a new manufacturing plant
in Lawrence, Kansas, to produce medium power hydrostatic transmissions, which
plant was completed in early 1999. The Company will gradually phase in
production at this facility based on product demand.
 
    In 1998, Sauer moved its Minneapolis operations to a new leased facility
nearly doubling the available capacity. In addition, the Company continued to
develop and expand its Slovakian operations. Sauer also completed an expansion
of over 30,000 square feet to its Hydro-Gear, Inc. plant in Sullivan, Illinois,
which manufactures hydrostatic transmissions for the turf care market.
 
    On December 2, 1998, the Company entered into agreements to terminate its
Brazilian licensee and to purchase certain machinery, equipment, and inventory
from the former licensee. The Company established a Brazilian limited liability
company, Sauer-Sundstrand Ltda., to conduct the sale and distribution of
hydrostatic transmissions and gear pumps and motors to the South American
market.
 
    The Company completed an initial public offering of its Common Stock in May
1998, which resulted in net proceeds of approximately $48.1 million. The
proceeds were used to repay long-term indebtedness, to fund the purchase of the
Company's main manufacturing facility in Germany, and to fund other capital
expenditures.
 
    (B)  FINANCIAL INFORMATION ABOUT SEGMENTS
 
    Information about the Company's two reportable segments defined by
geographic region is set forth in Note 16 of the Notes to Consolidated Financial
Statements on pages 37 - 39 of this report, and is incorporated herein by
reference.
 
    (C)  DESCRIPTION OF BUSINESS
 
    Information regarding Sauer's principal products and the business in general
is presented below. Information regarding sales by the Company's product lines
is set forth in Note 16 of the Notes to Consolidated Financial Statements on
page 39, and is incorporated herein by reference. No individual customer, OEM or
other, accounted for 10% or more of the Company's overall net sales during 1998.
 
HYDROSTATIC TRANSMISSIONS
 
    Sauer designs, manufactures, and sells a range of closed-circuit axial
piston hydrostatic transmissions for both the propulsion and work functions of
off-highway mobile equipment in the United States, Europe, and East Asia. High
power (typically over 50 HP) and medium power (typically 25 to 50 HP)
applications for hydrostatic transmissions manufactured by the Company include
construction and agricultural mobile equipment. Light power (typically 15 to 25
HP) and bantam power (typically under 15 HP) applications for hydrostatic
transmissions manufactured by the Company include light agricultural and turf
care mobile equipment.
 
                                       1
<PAGE>
ELECTROHYDRAULICS
 
    Sauer designs and manufactures electrohydraulic valves and electronic
controls, including microprocessor-based controls and electronic sensors through
its electrohydraulics operations in the United States and also designs
electrohydraulic products in Germany. Electrohydraulic controls and sensors
integrate hydraulics, hydrostatic transmissions, and mechanical components with
electronic controls and are used by OEMs of off-highway mobile equipment to
control both the Company's hydraulic systems, as well as the hydraulic systems
of other manufacturers. The electrohydraulic products bring together the
propulsion function and the work function by providing standard or custom
designed controls.
 
GEAR PUMPS AND MOTORS
 
    The Company designs, manufactures, and sells custom designed gear pumps, as
well as a broad range of high performance standard gear pumps and motors. Gear
pumps and motors are the most widely used type of mobile hydraulic pump and
motor in the industry. The Company manufactures customized gear pumps at its
Swindon, England facility and standard gear pumps and motors at its facilities
in Bologna, Italy and West Branch, Iowa.
 
OPEN CIRCUIT PISTON PUMPS
 
    Open circuit piston pumps are used to transform mechanical power from the
engine to hydraulic power for the work function of the vehicle. The advantages
of open circuit piston pumps compared to other types of pumps, such as vane or
gear pumps, are the high degree of control within the work function hydraulic
system and the more efficient use of engine power. Sauer designs and
manufactures open circuit piston pumps in the United States and Europe.
 
                         MAJOR MARKETS AND APPLICATIONS
 
<TABLE>
<CAPTION>
     CONSTRUCTION AND
       ROAD BUILDING           AGRICULTURE                  TURF CARE                    SPECIALTY VEHICLES
---------------------------  ----------------  ------------------------------------  ---------------------------
<S>                          <C>               <C>                                   <C>
Chip spreaders               Combines          Commercial-wide area, walk behind     Fruit pickers
Concrete pumps               Cotton pickers      mowers                              Industrial lift trucks
Concrete saws                Detasselers       Commercial zero-turn mowers           Logging equipment
Crawler dozers               Seeders           General turf maintenance              Marine equipment
Crawler loaders              Sprayers          Lawn and garden tractors              Mining equipment
Ditchers/trenchers           Tractors                                                Oil field equipment
Excavators                   Windrowers                                              Railway maintenance
Grinders                                                                             Rough terrain fork lifts
Landfill compactors                                                                  Self-propelled boom aerial
Oil distributors                                                                       lifts
Pavers                                                                               Self-propelled scissor
Planers                                                                                aerial lifts
Rollers                                                                              Snow groomers
Skid steer loaders                                                                   Sweepers
Transit mixers                                                                       Tree shakers
Utility tractors                                                                     Truck and bus fan drives
Wheel loaders
</TABLE>
 
                                       2
<PAGE>
GENERAL CHARACTERISTICS
 
    The Company sells both standard and customized products, with most products
being built to order. With respect to some of the most technologically demanding
vehicles, such as those used in construction and road building, Sauer's
engineers work closely with customers from design through manufacture of the
final product, a cycle that can take as long as six years for a major new
machine.
 
    Sauer operates 14 manufacturing facilities in the United States, Europe, and
China. The Company's decentralized manufacturing capabilities allow it to adapt
its products to local market needs and to provide flexibility to meet customer
delivery requirements. In North America, the Company sells and distributes its
products directly to large OEMs and through independent distributors to smaller
OEMs. In Europe, the Company sells and distributes its products either directly
or through sales subsidiaries located in Belgium, France, Holland, Italy,
Slovakia, Spain, Sweden, and the United Kingdom. In addition, Sauer licenses its
hydrostatic transmission technology to manufacturers that operate in India and
Japan.
 
    In accordance with standard industry practice for mobile hydraulics, the
Company warrants its products to be free from defects in material and
workmanship. The warranty period varies from one to three years from the date of
first use or date of manufacture, depending on the type of product or, in some
cases, the application. The Company's warranty expense has been less than 1.5%
of net sales in each of the past three years.
 
    Because many of its products are designed and developed in conjunction with
its customers' design teams to fit their specific needs and to minimize
inventory levels, the Company primarily manufactures products to order in both
the United States and Europe. The Company typically machines components with
long lead times according to a sales forecast and machines certain unique
components for specific customers according to firm orders. Inventories consist
primarily of raw materials and machined iron housings and components. Only small
amounts of assembled finished units are maintained in inventory.
 
    The Company does not normally accept orders subject to late delivery
penalties. On occasion, the Company sells its products to government agencies,
including those used for military applications, but does not design its products
specifically according to government standards and usually only enters into
contracts for the supply of commercial products. There are no government
contracts of material value to the Company.
 
RAW MATERIALS
 
    The Company purchases iron housings and components from various U.S. and
European foundries. The principal materials used by the Company are iron, steel,
brass, and aluminum. All materials used by the Company are generally available
from a number of domestic and foreign sources in sufficient quantities to meet
current requirements.
 
PATENTS, TRADEMARKS, AND LICENSES
 
    The Company owns or licenses rights to approximately 240 patents and
trademarks relating to its business. While the Company considers its patents and
trademarks important in the operation of its business and in protecting its
technology from being used by competitors, its business is not dependent on any
single patent or trademark or group of related patents or trademarks. The
Company licenses the use of the Sundstrand name from Sundstrand Corporation
under agreements that extend to March 31, 2004. The Company does not expect to
seek renewal of the license.
 
    To ensure worldwide availability of the Company's design of products, the
Company has licensed its technology to companies in certain countries. The
Company licenses all its open and closed circuit piston pumps and motor and
electrohydraulic valve technology to a subsidiary of Daikin Industries Ltd. in
Japan and licenses its original hydrostatic transmission technology to Larsen &
Toubro Ltd. in India. These licenses generally are exclusive licenses to
manufacture and sell hydrostatic transmissions using the
 
                                       3
<PAGE>
Company's technology in the territory covered by the license. In each license
agreement, the Company reserves the right to sell products based on the licensed
technology in the territory covered by the license, but primarily relies on the
licensee to supply the market needs in the territory. These licenses generally
provide for annual royalty payments based on the licensees' net sales. Royalty
income generated by these licenses during 1996, 1997, and 1998 was approximately
$1.2 million, $1.2 million, and $1.0 million, respectively.
 
    Sauer and its predecessors have had a long-standing working relationship
with the Company's principal licensee, Daikin. The Daikin license, first granted
by one of the Company's predecessors in 1967, has been renewed for successive
10-year periods and currently expires in 2008. All the Company's open and closed
circuit piston pump and motor and electrohydraulic valve technology is licensed
to Daikin under an agreement which allows the Company to benefit from any
improvements to the technology made by Daikin and vice versa. The Company and
Daikin jointly design and market products to meet worldwide needs and frequently
cooperate in the manufacture of components and complete products so as to
optimize the utilization of manufacturing capacity.
 
    Through these licensing arrangements, the Company is able to serve its North
American and European OEM customers as they expand their manufacturing
operations to other parts of the world. Management believes that the worldwide
availability of the Company's products and the local manufacturing capabilities
of its licensees play an important part in the decision of an OEM as to which
supplier to use.
 
BACKLOG
 
    The amount of the Company's backlog is significant because, among other
factors, customer orders typically involve long lead times and specific model
types. At December 31, 1998, the Company's backlog (consisting of accepted but
unfilled customer orders primarily scheduled for delivery during 1999) was
$261.7 million as compared with $277.5 million at December 31, 1997. However,
orders can be canceled or rescheduled by customers. Thus, the level of orders
currently in backlog could decline because of cancellation or rescheduling.
 
COMPETITION
 
    The mobile hydraulics industry is very competitive. Sauer competes based on
technological product innovation, quality, and customer service. The Company
believes that long-term successful suppliers to off-highway vehicle
manufacturers will be those companies that have the ability to capitalize on the
changing needs of the industry by providing technological innovation, shorter
product development times, and reduced manufacturing lead times.
 
    CLOSED CIRCUIT HYDROSTATIC TRANSMISSION MARKET
 
    The closed circuit hydrostatic transmission market is highly concentrated
and is intensely competitive. There is a small number of manufacturers of
hydrostatic transmissions with which the Company competes worldwide that are not
captive suppliers of OEMs. These include the Rexroth Hydromatic division of
Mannesmann AG, Eaton Corporation, Linde AG, and Aeroquip-Vickers. In addition,
the Company competes with alternative products, such as mechanical transmissions
of other manufacturers.
 
    The Company competes with a number of smaller companies that typically offer
a single, specialized product on a more limited geographic basis as a component
of a closed circuit hydrostatic transmission system.
 
    In terms of global supply of closed circuit hydrostatic transmissions, the
Company, together with its licensees, is the world leader in terms of product
range, market share, and geographic coverage. Only the Rexroth unit of
Mannesmann offers similar geographic coverage.
 
                                       4
<PAGE>
    OPEN CIRCUIT WORK FUNCTION MARKET
 
    The open circuit work function market is fragmented with a large number of
suppliers of all types of products, including open circuit piston pumps, gear
pumps and motors, hydraulic and electrohydraulic valves, electronic sensors and
controls, and with intensive competition on pricing at the component level.
There are approximately ten major companies which compete on a global basis,
including the Rexroth unit of Mannesmann, Aeroquip-Vickers, Parker Hannifin
Corporation, Robert Bosch AG, and Eaton Corporation, and in Japan, Kayaba and
Kawasaki. The supply of standard gear pumps and motors and hydraulic valves is
particularly fragmented with more than 50 companies worldwide in each respective
area. Most of these competitors have a limited product range and operate in a
limited geographic market.
 
    ELECTROHYDRAULICS MARKET
 
    In the electrohydraulics market, which covers both propulsion and work
function systems, there are few suppliers of propulsion system controls and only
three are worldwide competitors. The main competition in this area comes from
major OEMs, who produce controls for their own use. In work function
electrohydraulic valves, electronic sensors and controls, there is a wide range
of niche suppliers in limited geographic markets. In recent years, larger
companies have increasingly acquired these niche or regional suppliers and
thereby have improved their ability to offer integrated systems. The Company
believes it is well positioned to establish itself as a technology leader in the
work function segment, as there is no clearly established technology in this
sector that is deemed to be an industry standard.
 
RESEARCH AND DEVELOPMENT
 
    The Company's research and development expenditures during 1996, 1997, and
1998 were approximately $20.5 million, $20.7 million, and $22.1 million,
respectively.
 
ENVIRONMENTAL MATTERS
 
    In all countries in which it operates, the Company is subject to
environmental laws and regulations concerning emissions to air, discharge to
waterways, and the generation, handling, storage, transportation, treatment, and
disposal of waste materials. These laws and regulations are constantly evolving,
and it is impossible to predict accurately the effect they will have on the
Company in the future. The regulations are subject to varying and conflicting
interpretations and implementation. In some cases, compliance can only be
achieved by additional capital expenditures. The Company cannot accurately
predict what capital expenditures, if any, may be required to comply with
applicable environmental laws and regulations in the future; however, the
Company does not currently estimate that any future capital expenditures for
environmental control facilities will be material. The Company is not currently
subject to any governmental remediation order, nor is the Company aware of any
environmental problems that would have a material adverse effect on the Company.
 
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
 
    Information regarding the Company's net sales and long-lived assets by
geographic area is set forth in Note 16 of the Notes to Consolidated Financial
Statements on page 39 of this report, and is incorporated herein by reference.
 
                                       5
<PAGE>
ITEM 2.  PROPERTIES.
 
    Sauer conducts its manufacturing operations at 14 locations, eight in the
United States, one in Germany, two in Slovakia, and one each in Italy, the
United Kingdom, and China. The following table sets forth certain information
relating to the Company's principal manufacturing facilities:
 
<TABLE>
<CAPTION>
                                                                                    APPROX.
                                                                                    AREA IN
                   LOCATION                            PRINCIPAL PRODUCTS           SQ. FT.   OWNED/LEASED
----------------------------------------------  ---------------------------------  ---------  -------------
<S>                                             <C>                                <C>        <C>
UNITED STATES
  Ames, Iowa..................................  Hydrostatic transmissions            330,000        Owned
  LaSalle, Illinois...........................  Hydrostatic transmissions            325,000        Owned
  Freeport, Illinois..........................  Hydrostatic transmissions            183,000        Owned
  Lawrence, Kansas............................  Hydrostatic transmissions            162,000        Owned
  Minneapolis, Minnesota......................  Electrohydraulics                     75,000       Leased
  West Branch, Iowa...........................  Gear pumps and motors                105,000        Owned
  Newtown, Pennsylvania.......................  Electrohydraulics                     96,000       Leased
  Sullivan, Illinois..........................  Hydrostatic transmissions            176,000        Owned
 
EUROPE
  Neumunster, Germany.........................  Hydrostatic transmissions and        463,000        Owned
                                                electrohydraulics
  Povazska-Bystrica, Slovakia.................  Hydrostatic transmissions and        351,500        Owned
                                                mechanical gear boxes
  Dubnica, Slovakia...........................  Hydrostatic transmissions            236,000       Leased
  Swindon, England............................  Gear pumps                           229,000       Leased
  Bologna, Italy..............................  Gear pumps and motors                246,000        Owned
 
ASIA
  Shanghai/Pudong, China......................  Hydrostatic transmissions            105,000       Leased
</TABLE>
 
ITEM 3.  LEGAL PROCEEDINGS.
 
    The Company is involved in certain legal proceedings in the ordinary course
of its business. Management believes that the outcome of such proceedings will
not have a material adverse effect upon the Company.
 
                                       6
<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
    The Company did not submit any matter to a vote of security holders, through
a solicitation of proxies, or otherwise, during the fourth quarter of 1998.
 
                      EXECUTIVE OFFICERS OF THE REGISTRANT
 
    The following table sets forth certain information regarding the executive
officers of the Company:
 
<TABLE>
<CAPTION>
                                                                                                                 YEAR
NAME                                   AGE                               POSITION                            APPOINTED(1)
---------------------------------      ---      ----------------------------------------------------------  ---------------
<S>                                <C>          <C>                                                         <C>
Klaus H. Murmann (2).............          67   Chairman and Chief Executive Officer and Director                   1989
Tonio P. Barlage.................          47   President and Chief Operating Officer and Director                  1995
David L. Pfeifle.................          54   Executive Vice President and Director                               1994
David J. Anderson (3)............          51   Vice President, Sales and Marketing - United States                 1997
Thomas K. Kittel (4).............          50   Vice President, Operations - Germany and Slovakia                   1997
Wolfgang Weisser (4).............          55   Vice President, Sales and Marketing - Europe                        1997
James R. Wilcox (3)..............          53   Vice President and General Manager - Hydrostatics U.S.              1994
Kenneth D. McCuskey..............          44   Treasurer and Secretary                                             1989
</TABLE>
 
------------------------
 
(1) All of the executive officers listed above have served in various capacities
    with the Company or its subsidiaries for more than the past five years.
 
(2) Klaus Murmann is the father of Nicola Keim and Sven Murmann, who are
    directors of the Company.
 
(3) David J. Anderson and James R. Wilcox are Vice Presidents of
    Sauer-Sundstrand Company, the U.S. operating subsidiary of the Company.
 
(4) Thomas K. Kittel and Wolfgang Weisser are Vice Presidents of
    Sauer-Sundstrand GmbH & Co., the German operating partnership of the
    Company.
 
                                       7
<PAGE>
                                    PART II
 
ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
 
MARKET AND DIVIDEND INFORMATION
 
    The Company's Common Stock is traded on the New York Stock Exchange and the
Frankfurt (Germany) Stock Exchange. As of March 12, 1999, there were
approximately 113 stockholders of record. Although exact information is
unavailable, the Company also estimates that there are 3,000 additional
beneficial owners of the Company's Common Stock, based upon the 1999 proxy
solicitation.
 
    The Company is currently paying a quarterly dividend of $0.07 per share. The
payment of dividends is subject to restrictions as described in Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Liquidity and Capital Resources, on page 47 of this report.
 
    The following table sets forth the high and low prices on the New York Stock
Exchange for the Company's Common Stock since the commencement of trading on May
12, 1998, and the quarterly cash dividends paid in 1997 and 1998:
 
<TABLE>
<CAPTION>
                                                                                                        FULL
                                                             1ST        2ND        3RD        4TH       YEAR
                                                          ---------  ---------  ---------  ---------  ---------
<S>                                                       <C>        <C>        <C>        <C>        <C>
1997
  High..................................................        N/A        N/A        N/A        N/A        N/A
  Low...................................................        N/A        N/A        N/A        N/A        N/A
  Dividends.............................................  $    0.08  $    0.08  $    0.08  $    0.08  $    0.32
 
1998
  High..................................................        N/A  $   18.38  $   16.50  $   10.00  $   18.38
  Low...................................................        N/A      13.25       7.56       6.06       6.06
  Dividends.............................................  $    0.08  $    0.07  $    0.07  $    0.07  $    0.29
</TABLE>
 
USE OF PROCEEDS
 
    The Company's Registration Statement on Form S-1 under the Securities Act of
1933 was declared effective on May 11, 1998, and the Commission File No. is
333-48299. The offering commenced on May 12, 1998. The offering has terminated
with all registered securities being sold. The managing underwriters were Credit
Suisse First Boston Corporation, global lead manager, Smith Barney Inc., and
Deutsche Morgan Grenfell Inc.
 
    All securities registered were shares of the Company's Common Stock, par
value $.01 per share. The following information relates to securities sold by
the Company and the selling stockholders:
 
<TABLE>
<CAPTION>
                                                                                          AGGREGATE
                                                      AGGREGATE                            OFFERING
                                      AMOUNT           OFFERING                            PRICE OF
                                    REGISTERED          PRICE          AMOUNT SOLD       AMOUNT SOLD
                                ------------------  --------------  ------------------  --------------
<S>                             <C>                 <C>             <C>                 <C>
Company.......................    3,000,000 shares  $   54,000,000    3,000,000 shares  $   54,000,000
Selling Stockholders..........    6,000,000 shares  $  108,000,000    6,000,000 shares  $  108,000,000
</TABLE>
 
    From the May 11, 1998 effective date of the Registration Statement through
February 17, 1999, the following expenses have been incurred for the Company's
account in connection with the issuance and distribution of the common stock
registered:
 
<TABLE>
<CAPTION>
                                                                                               AMOUNT
                                                                                            ------------
<S>                                                                                         <C>
Underwriting Discounts and Commissions....................................................  $  2,700,000
Other Expenses (including accounting, legal, and printing)................................     3,200,000
                                                                                            ------------
        Total.............................................................................  $  5,900,000
                                                                                            ------------
                                                                                            ------------
</TABLE>
 
                                       8
<PAGE>
    None of the above expenses were paid directly or indirectly to directors or
officers of the Company, or to persons owning 10% or more of the Company's
Common Stock, or to affiliates of the Company.
 
    The net offering proceeds to the issuer after deducting the total expenses
described in the preceding paragraph were $48,100,000. From the May 11, 1998
effective date of the Registration Statement through February 17, 1999, the net
offering proceeds to the company have been used as follows:
 
<TABLE>
<CAPTION>
                                                                                              AMOUNT
                                                                                           -------------
<S>                                                                                        <C>
Repayment of long-term indebtedness......................................................  $  15,000,000
Purchase of real estate, plant, and building for the Company's main facility in
 Germany.................................................................................     15,680,000(1)
Other capital expenditures...............................................................     17,420,000
                                                                                           -------------
        Total............................................................................  $  48,100,000
                                                                                           -------------
                                                                                           -------------
</TABLE>
 
------------------------
 
(1) The real estate and improvements were purchased from, and the proceeds were
    paid to, Sauer Hydraulik, which is wholly-owned by Klaus Murmann and his
    family. Klaus Murmann is Chairman of the Board of Directors and Chief
    Executive Officer and a 10% stockholder of the Company. All payments other
    than the payment to Sauer Hydraulik were made to others.
 
                                       9
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
 
                            SELECTED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                                DOLLARS IN THOUSANDS EXCEPT SHARE, PER SHARE AND EMPLOYEE DATA
                                                 1994          1995          1996          1997          1998
                                             ------------  ------------  ------------  ------------  ------------
<S>                                          <C>           <C>           <C>           <C>           <C>
OPERATING DATA:
Net sales..................................  $    362,482  $    446,774  $    467,566  $    535,173  $    564,524
Gross profit...............................        86,517       110,074       113,532       131,108       136,213
Marketing..................................        21,615        23,577        23,523        23,256        24,942
R&D........................................        16,068        18,796        20,505        20,655        22,089
Administration.............................        20,560        24,551        28,333        29,319        29,571
Total operating expenses...................        58,243        65,275        69,912        73,230        76,602
EBIT.......................................        24,341        38,419        35,100        50,680        50,527
Total interest expense-net.................         5,686         6,657         5,959         7,607         8,814
Net Income.................................        11,374        26,580        18,898        27,129        26,334
PER SHARE DATA:
Income per common share, basic and
 diluted...................................  $       0.47  $       1.10  $       0.78  $       1.12  $       1.01
Cash dividends per share...................  $       0.08  $       0.32  $       0.32  $       0.32  $       0.29
Weighted average basic shares
 outstanding...............................    24,050,000    24,187,500    24,225,000    24,225,000    26,148,288
Weighted average diluted shares
 outstanding...............................    24,050,000    24,187,500    24,225,000    24,225,000    26,150,302
BALANCE SHEET DATA:
Inventories................................  $     64,131  $     85,098  $     78,273  $     89,031  $     89,195
Property, plant & equipment, net...........        89,620       117,827       152,321       191,690       262,527
Total assets...............................       235,146       304,237       337,527       388,735       459,771
Total debt.................................        68,766        92,169       108,632       136,428       151,027
Stockholder's equity.......................        37,962        59,491        70,874        85,301       148,904
Debt to debt-equity........................         56.7%         53.6%         53.1%         53.6%         45.0%
OTHER DATA:
Backlog (at year end)......................  $    187,400  $    235,600  $    227,000  $    277,500  $    261,700
Depreciation and amortization..............        18,204        19,898        24,830        25,835        30,635
Capital expenditures.......................        21,350        45,689        56,284        66,750        98,582
EBITDA*....................................        42,545        58,317        59,930        76,515        81,162
Number of employees (at year end)..........         2,628         2,899         3,055         3,751         3,710
Sales/total compensation expense...........         3.15x         3.37x         3.46x         3.66x         3.68x
</TABLE>
 
------------------------
 
*   EBITDA -- represents net income, plus provision for income taxes and net
    interest expense, plus depreciation and amortization
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
    This information is set forth on pages 42 - 49 of this report and is
incorporated herein by reference.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
    Certain market risks are discussed on pages 42 - 43 and page 47 - 48 of this
report, and the other disclosure requirements are either considered not
applicable or not material.
 
                                       10
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
    The Consolidated Financial Statements, Report of Management, Report of
Independent Public Accountants, and Management's Discussion and Analysis are
presented on pages 17 - 49 of this report.
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
    None.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
    Information regarding directors of the Company is set forth under "Election
of Directors" on pages 4 - 7 of the Company's Proxy Statement for the annual
meeting of stockholders to be held April 22, 1999, and is incorporated herein by
reference. Information regarding executive officers of the Company is set forth
in Part I of this report under the caption "Executive Officers of the
Registrant."
 
ITEM 11.  EXECUTIVE COMPENSATION
 
    Information as to executive compensation is set forth under "Executive
Compensation" on pages 8 - 12 of the Company's Proxy Statement for the annual
meeting of stockholders to be held April 22, 1999, and is incorporated herein by
reference.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
    Information regarding security ownership is set forth under "Security
Ownership of Certain Beneficial Owners and Management" on pages 2 - 4 of the
Company's Proxy Statement for the annual meeting of stockholders to be held
April 22, 1999, and is incorporated herein by reference.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
    Information as to certain relationships and related transactions is set
forth under "Certain Relationships and Related Transactions" on pages 13 - 14 of
the Company's Proxy Statement for the annual meeting of stockholders to be held
April 22, 1999, and is incorporated herein by reference.
 
                                       11
<PAGE>
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as a part of this report.
 
    (1) The following consolidated financial statements and related information,
       included in Item 8, are filed as a separate section of this report:
 
           Consolidated Statements of Income for the years ended December 31,
           1996, 1997, and 1998, on page 17.
 
           Consolidated Balance Sheets as of December 31, 1997, and 1998, on
           page 18.
 
           Consolidated Statements of Stockholders' Equity and Comprehensive
           Income for the years ended December 31, 1996, 1997, and 1998, on page
           19.
 
           Consolidated Statements of Cash Flows for the years ended December
           31, 1996, 1997, and 1998, on page 20.
 
           Notes to Consolidated Financial Statements, December 31, 1996, 1997,
           and 1998, on pages 21 - 39.
 
           Report of Management and Report of Arthur Andersen LLP as independent
           public accountants, on pages 40 - 41.
 
           Management's Discussion and Analysis of Financial Condition and
           Results of Operations, on pages 42 - 49.
 
    (2) The following financial statements and schedules:
 
           Schedule I
 
               Sauer Inc. (Parent Only) Condensed Balance Sheets as of December
               31, 1997 and 1998 on page 50.
 
               Sauer Inc. (Parent Only) Condensed Statements of Income for the
               Years Ended December 31, 1996, 1997 and 1998 on page 51.
 
               Sauer Inc. (Parent Only) Condensed Statements of Cash Flows for
               the Years Ended December 31, 1996, 1997 and 1998 on page 52.
 
           Schedule II, Valuation and Qualifying Accounts, on page 53.
 
           Report of Arthur Andersen LLP, independent public accountants, on
           Schedules I and II, on page 54.
 
           All other schedules for which provision is made in Regulation S-X of
           the Securities and Exchange Commission, are not required under the
           related instructions or are inapplicable and, therefore, have been
           omitted.
 
                                       12
<PAGE>
    (3) Exhibits
 
<TABLE>
<CAPTION>
   EXHIBIT
     NO.                                               DESCRIPTION OF DOCUMENT
-------------  -------------------------------------------------------------------------------------------------------
<S>            <C>
        3.1    The Restated Certificate of Incorporation of the Company dated April 23, 1998, is attached as Exhibit
                3.1(c) to the Company's Form S-1 Registration Statement filed on March 20, 1998, and is incorporated
                herein by reference.
        3.2    The Restated Bylaws of the Company dated March 13, 1998, are attached as Exhibit 3.2 to the Company's
                Form S-1 Registration Statement filed on March 20, 1998, and is incorporated herein by reference.
        4.1    The form of Certificate of the Company's Common Stock, $.01 Par Value, is attached as Exhibit 4.1 to
                Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is
                incorporated herein by reference.
       10.1(a) The Amended and Restated Agreement Regarding the Establishment of a Silent Partnership Agreement is
                attached as Exhibit 10.1(a) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed
                on April 23, 1998, and is incorporated herein by reference.
       10.1(b) The Registration Rights Agreement is attached as Exhibit 10.1(b) to Amendment No. 1 to the Company's
                Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
       10.1(c) The form of Indemnification Agreement entered into between the Company and each of its directors and
                certain officers is attached as Exhibit 10.1(c) to Amendment No. 1 to the Company's Form S-1
                Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
       10.1(d) The Lease Agreement for the Company's Dubnica, Slovakia facility is attached as Exhibit 10.1(f) to
                Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is
                incorporated herein by reference.
       10.1(e) The Lease Agreement for the Company's Swindon, England facility is attached as Exhibit 10.1(g) to
                Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is
                incorporated herein by reference.
       10.1(f) The Lease Agreement for the Company's Minneapolis, Minnesota facility is attached as Exhibit 10.1(h) to
                Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is
                incorporated herein by reference.
       10.1(g) The Lease Agreement for the Company's Newtown, Pennsylvania facility is attached as Exhibit 10.1(i) to
                Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is
                incorporated herein by reference.
       10.1(h) The Lease Agreement for the Company's Shanghai/Pudong, China facility is attached as Exhibit 10.1(j) to
                Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is
                incorporated herein by reference.
       10.1(i) The Employment Contract with Klaus Murmann is attached as Exhibit 10.1(k) to Amendment No. 1 to the
                Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
       10.1(j) The Employment Contract with Tonio Barlage is attached as Exhibit 10.1(l) to Amendment No. 1 to the
                Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
       10.1(k) The Employment Contract with Thomas Kittel is attached as Exhibit 10.1(m) to Amendment No. 1 to the
                Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
</TABLE>
 
                                       13
<PAGE>
<TABLE>
<S>            <C>
       10.1(l) The Sauer Inc. Phantom Share Plan is attached as Exhibit 10.1(n) to Amendment No. 1 to the Company's
                Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
       10.1(m) The Sauer Inc. Bonus Plan is attached as Exhibit 10.1(o) to Amendment No. 1 to the Company's Form S-1
                Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
       10.1(n) The Sauer Inc. Management Incentive Plan is attached as Exhibit 10.1(r) to Amendment No. 1 to the
                Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
       10.1(o) The Sauer-Sundstrand Employees' Retirement Plan is attached as Exhibit 10.1(s) to Amendment No. 1 to
                the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
       10.1(p) The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for Certain Key Executives is
                attached as Exhibit 10.1(t) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed
                on April 23, 1998, and is incorporated herein by reference.
       10.1(q) The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for Certain Key Executives Previously
                Employed by the Sundstrand Corporation is attached as Exhibit 10.1(u) to Amendment No. 1 to the
                Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
       10.1(r) The Sauer-Sundstrand Employees' Savings & Retirement Plan is attached as Exhibit 10.1(v) to Amendment
                No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated
                herein by reference.
       10.1(s) The Retirement Benefits Agreement for Klaus Murmann is attached as Exhibit 10.1(w) to Amendment No. 1
                to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
                by reference.
       10.1(t) The Retirement Benefits Agreement for Tonio Barlage is attached as Exhibit 10.1(x) to Amendment No. 1
                to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein
                by reference.
       10.1(u) The European Employees' Pension Plan is attached as Exhibit 10.1(y) to Amendment No. 1 to the Company's
                Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by reference.
       10.1(v) The Sauer Inc. 1998 Long-Term Incentive Plan is attached as Exhibit 10.1(p) to Amendment No. 1 to the
                Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated herein by
                reference.
       10.1(w) The Sauer Inc. Non-employee Director Stock Option and Restricted Stock Plan is attached as Exhibit
                10.1(q) to Amendment No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998,
                and is incorporated herein by reference.
       10.1(x) The Purchase Agreement for the Neumunster, Germany facility is attached as Exhibit 10.1(d) to Amendment
                No. 1 to the Company's Form S-1 Registration Statement filed on April 23, 1998, and is incorporated
                herein by reference.
         21    Subsidiaries of the Registrant, on page 55.
         23    Consent of Independent Public Accountants, on page 56.
         27    Financial data schedule.
</TABLE>
 
(b) REPORTS ON FORM 8-K. There were no reports on Form 8-K filed for the quarter
    ended December 31, 1998.
 
(c) The exhibits which are listed under Item 14(a)(3) are filed or incorporated
    by reference hereunder.
 
                                       14
<PAGE>
                                   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.
 
    Each person signing below also hereby appoints Tonio P. Barlage and Kenneth
D. McCuskey, and each of them singly, his or her lawful attorney-in-fact with
full power to execute and file any and all amendments to this report together
with exhibits thereto and generally to do all such things as such
attorney-in-fact may deem appropriate to enable Sauer Inc. to comply with the
provisions of the Securities Exchange Act of 1934 and all requirements of the
Securities and Exchange Commission.
 
<TABLE>
<S>                             <C>  <C>
                                SAUER INC.
 
                                By:             KENNETH D. MCCUSKEY
                                     -----------------------------------------
                                                Kenneth D. McCuskey
                                     TREASURER, SECRETARY, PRINCIPAL FINANCIAL
                                       OFFICER, PRINCIPAL ACCOUNTING OFFICER
</TABLE>
 
Date: March 31, 1999
 
    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.
 
<TABLE>
<CAPTION>
             NAME                         TITLE                    DATE
------------------------------  --------------------------  -------------------
 
<C>                             <S>                         <C>
       KLAUS H. MURMANN
------------------------------  Director, Chairman, and       March 31, 1999
       Klaus H. Murmann           Chief Executive Officer
 
       TONIO P. BARLAGE
------------------------------  Director, President, and      March 31, 1999
       Tonio P. Barlage           Chief Operating Officer
 
       DAVID L. PFEIFLE
------------------------------  Director and Executive        March 31, 1999
       David L. Pfeifle           Vice President
 
                                Treasurer, Secretary,
     KENNETH D. MCCUSKEY          Principal Financial
------------------------------    Officer, Principal          March 31, 1999
     Kenneth D. McCuskey          Accounting Officer
</TABLE>
 
                                       15
<PAGE>
<TABLE>
<CAPTION>
             NAME                         TITLE                    DATE
------------------------------  --------------------------  -------------------
 
<C>                             <S>                         <C>
         NICOLA KEIM
------------------------------  Director                      March 31, 1999
         Nicola Keim
 
         SVEN MURMANN
------------------------------  Director                      March 31, 1999
         Sven Murmann
 
    JOHANNES F. KIRCHHOFF
------------------------------  Director                      March 31, 1999
    Johannes F. Kirchhoff
 
      AGUSTIN A. RAMIREZ
------------------------------  Director                      March 31, 1999
      Agustin A. Ramirez
 
     RICHARD M. SCHILLING
------------------------------  Director                      March 31, 1999
     Richard M. Schilling
</TABLE>
 
                                       16
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                              1996          1997          1998
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
NET SALES...............................................................  $    467,566  $    535,173  $    564,524
                                                                          ------------  ------------  ------------
COSTS AND EXPENSES:
  Cost of sales.........................................................       354,034       404,065       428,311
  Selling, general and administrative...................................        51,856        52,575        54,513
  Research and development..............................................        20,505        20,655        22,089
                                                                          ------------  ------------  ------------
        Total costs and expenses........................................       426,395       477,295       504,913
                                                                          ------------  ------------  ------------
        Operating income................................................        41,171        57,878        59,611
                                                                          ------------  ------------  ------------
 
NONOPERATING INCOME (EXPENSES):
  Interest expense......................................................        (6,523)       (8,305)       (9,244)
  Interest income.......................................................           564           698           430
  Royalty income........................................................         1,156         1,150           986
  Other, net............................................................          (584)          144          (576)
                                                                          ------------  ------------  ------------
        Nonoperating expenses, net......................................        (5,387)       (6,313)       (8,404)
                                                                          ------------  ------------  ------------
 
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST........................        35,784        51,565        51,207
PROVISION FOR INCOME TAXES..............................................       (10,243)      (15,944)      (15,379)
                                                                          ------------  ------------  ------------
INCOME BEFORE MINORITY INTEREST.........................................        25,541        35,621        35,828
MINORITY INTEREST IN INCOME OF CONSOLIDATED COMPANIES...................        (6,643)       (8,492)       (9,494)
                                                                          ------------  ------------  ------------
        Net income......................................................  $     18,898  $     27,129  $     26,334
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Basic and diluted net income per common share...........................  $       0.78  $       1.12  $       1.01
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Weighted average basic shares outstanding...............................    24,225,000    24,225,000    26,148,288
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Weighted average diluted shares outstanding.............................    24,225,000    24,225,000    26,150,302
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       17
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
                        AS OF DECEMBER 31, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                               1997       1998
                                                                                             ---------  ---------
<S>                                                                                          <C>        <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents................................................................  $   7,363  $   8,891
  Accounts receivable (net of allowance for doubtful accounts of $3,195 and $3,166 in 1997
    and 1998, respectively)................................................................     77,170     73,661
  Inventories..............................................................................     89,031     89,195
  Other current assets.....................................................................      9,557      9,984
                                                                                             ---------  ---------
        Total current assets...............................................................    183,121    181,731
                                                                                             ---------  ---------
PROPERTY, PLANT AND EQUIPMENT, net.........................................................    191,690    262,527
                                                                                             ---------  ---------
OTHER ASSETS:
  Intangible assets, net...................................................................      2,964      3,769
  Deferred income taxes....................................................................      6,463      2,328
  Other....................................................................................      4,497      9,416
                                                                                             ---------  ---------
        Total other assets.................................................................     13,924     15,513
                                                                                             ---------  ---------
                                                                                             $ 388,735  $ 459,771
                                                                                             ---------  ---------
                                                                                             ---------  ---------
LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES:
  Notes payable and bank overdrafts........................................................  $  60,278  $  41,767
  Long-term debt due within one year.......................................................        952      2,398
  Accounts payable.........................................................................     46,392     38,271
  Accrued salaries and wages...............................................................      6,385      7,683
  Accrued warranty.........................................................................      9,398      8,601
  Other accrued liabilities................................................................     15,897     12,884
                                                                                             ---------  ---------
        Total current liabilities..........................................................    139,302    111,604
                                                                                             ---------  ---------
LONG-TERM DEBT.............................................................................     75,198    106,862
                                                                                             ---------  ---------
OTHER LIABILITIES:
  Long-term pension liability..............................................................     28,959     33,044
  Postretirement benefits other than pensions..............................................     12,784     13,608
  Deferred income taxes....................................................................      4,018      4,746
  Other....................................................................................     10,374      5,419
                                                                                             ---------  ---------
        Total other liabilities............................................................     56,135     56,817
                                                                                             ---------  ---------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES..................................     32,799     35,584
                                                                                             ---------  ---------
STOCKHOLDERS' EQUITY:
  Common stock, par value $.01 per share, authorized 45,000,000 shares in 1997 and 1998;
    issued 24,900,000 in 1997 and 28,072,050 in 1998; outstanding 24,225,000 in 1997 and
    27,397,050 in 1998.....................................................................        249        281
  Additional paid-in capital...............................................................     75,098    120,092
  Retained earnings........................................................................     12,773     31,416
  Accumulated other comprehensive income...................................................       (119)     1,813
  Unamortized restricted stock compensation................................................         --     (1,998)
  Common stock in treasury (at cost), 675,000 shares in 1997 and 1998......................     (2,700)    (2,700)
                                                                                             ---------  ---------
Total stockholders' equity.................................................................     85,301    148,904
                                                                                             ---------  ---------
                                                                                             $ 388,735  $ 459,771
                                                                                             ---------  ---------
                                                                                             ---------  ---------
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       18
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
    CONSOLIDATED STATEMENTS OF STOCKHOLDER' EQUITY AND COMPREHENSIVE INCOME
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                                         ACCUMULATED     UNAMORTIZED    COMMON
                                      NUMBER OF                 ADDITIONAL   RETAINED       OTHER        RESTRICTED      STOCK
                                        SHARES       COMMON      PAID-IN     EARNINGS   COMPREHENSIVE       STOCK         IN
                                     OUTSTANDING      STOCK      CAPITAL    (DEFICIT)       INCOME      COMPENSATION   TREASURY
                                     ------------  -----------  ----------  ----------  --------------  -------------  ---------
<S>                                  <C>           <C>          <C>         <C>         <C>             <C>            <C>
YEAR ENDED
  DECEMBER 31, 1996:
  Beginning balance................    24,225,000   $     249   $   75,098  $  (17,750)   $    4,594      $      --    $  (2,700)
  Comprehensive income:
    Net income.....................            --          --           --      18,898            --             --           --
    Pension adjustment.............            --          --           --          --           (92)            --           --
    Translation adjustment.........            --          --           --          --           329             --           --
  Total comprehensive income.......            --          --           --          --            --             --           --
  Cash dividends, ($.32 per
    share).........................            --          --           --      (7,752)           --             --           --
                                     ------------       -----   ----------  ----------       -------    -------------  ---------
        Ending Balance.............    24,225,000         249       75,098      (6,604)        4,831             --       (2,700)
 
YEAR ENDED
  DECEMBER 31, 1997:
  Comprehensive income:
    Net income.....................            --          --           --      27,129            --             --           --
    Pension adjustment.............            --          --           --          --          (177)            --           --
    Translation adjustment.........            --          --           --          --        (4,773)            --           --
  Total comprehensive income.......            --          --           --          --            --             --           --
  Cash dividends, ($.32 per
    share).........................            --          --           --      (7,752)           --             --           --
                                     ------------       -----   ----------  ----------       -------    -------------  ---------
        Ending Balance.............    24,225,000         249       75,098      12,773          (119)            --       (2,700)
YEAR ENDED
  DECEMBER 31, 1998:
  Comprehensive income:
    Net income.....................            --          --           --      26,334            --             --           --
    Pension adjustment.............            --          --           --          --           157             --           --
    Translation adjustment.........            --          --           --          --         1,775             --           --
  Total comprehensive income.......            --          --           --          --            --             --           --
  Sale of common stock under
    initial public offering, net of
    expenses.......................     3,000,000          30       48,070          --            --             --           --
  Restricted stock grant...........       172,050           2        2,697          --            --         (2,699)          --
  Amortization of restricted stock
    compensation...................            --          --           --          --            --            701           --
  Cash dividends, ($.29 per
    share).........................            --          --           --      (7,691)           --             --           --
  Purchase of Neumunster
    facility.......................            --          --       (5,773)         --            --             --           --
                                     ------------       -----   ----------  ----------       -------    -------------  ---------
        Ending balance.............    27,397,050   $     281   $  120,092  $   31,416    $    1,813      $  (1,998)   $  (2,700)
                                     ------------       -----   ----------  ----------       -------    -------------  ---------
                                     ------------       -----   ----------  ----------       -------    -------------  ---------
 
<CAPTION>
 
                                       TOTAL
                                     ----------
<S>                                  <C>
YEAR ENDED
  DECEMBER 31, 1996:
  Beginning balance................  $   59,491
  Comprehensive income:
    Net income.....................          --
    Pension adjustment.............          --
    Translation adjustment.........          --
  Total comprehensive income.......      19,135
  Cash dividends, ($.32 per
    share).........................      (7,752)
                                     ----------
        Ending Balance.............      70,874
YEAR ENDED
  DECEMBER 31, 1997:
  Comprehensive income:
    Net income.....................          --
    Pension adjustment.............          --
    Translation adjustment.........          --
  Total comprehensive income.......      22,179
  Cash dividends, ($.32 per
    share).........................      (7,752)
                                     ----------
        Ending Balance.............      85,301
YEAR ENDED
  DECEMBER 31, 1998:
  Comprehensive income:
    Net income.....................          --
    Pension adjustment.............          --
    Translation adjustment.........          --
  Total comprehensive income.......      28,266
  Sale of common stock under
    initial public offering, net of
    expenses.......................      48,100
  Restricted stock grant...........          --
  Amortization of restricted stock
    compensation...................         701
  Cash dividends, ($.29 per
    share).........................      (7,691)
  Purchase of Neumunster
    facility.......................      (5,773)
                                     ----------
        Ending balance.............  $  148,904
                                     ----------
                                     ----------
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       19
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                     1996       1997       1998
                                                                                   ---------  ---------  ---------
<S>                                                                                <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income.....................................................................  $  18,898  $  27,129  $  26,334
  Adjustments to reconcile net income to net cash provided by operating
    activities
    Depreciation and amortization................................................     24,830     25,835     30,635
    Minority interest in income of consolidated companies........................      6,643      8,492      9,494
    (Increase) decrease in working capital --
      Accounts receivable, net...................................................       (428)   (16,620)     5,723
      Inventories................................................................      4,719    (17,260)     2,514
      Accounts payable...........................................................     (7,126)    13,174     (8,915)
      Accrued liabilities........................................................      2,930     (6,394)    (2,988)
      Other......................................................................     (2,796)     8,388        738
                                                                                   ---------  ---------  ---------
        Net cash provided by operating activities................................     47,670     42,744     63,535
                                                                                   ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property, plant and equipment.....................................    (56,284)   (66,750)   (98,582)
  Purchase of minority interest..................................................         --     (3,959)      (693)
  Proceeds from sales of property, plant and equipment...........................         86        398        325
                                                                                   ---------  ---------  ---------
        Net cash used in investing activities....................................    (56,198)   (70,311)   (98,950)
                                                                                   ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (repayments) on notes payable and bank overdrafts...............    (18,067)    10,555    (11,363)
  Net borrowings of long-term debt...............................................     36,647     25,171     13,916
  Sale of common stock...........................................................         --         --     48,100
  Cash dividends.................................................................     (7,752)    (7,752)    (7,691)
  Distribution to minority interest partners.....................................     (1,560)    (4,623)    (7,885)
                                                                                   ---------  ---------  ---------
        Net cash provided by financing activities................................      9,268     23,351     35,077
                                                                                   ---------  ---------  ---------
EFFECT OF EXCHANGE RATE CHANGES..................................................       (524)      (450)     1,866
                                                                                   ---------  ---------  ---------
CASH AND CASH EQUIVALENTS:
  Net increase (decrease) during the year........................................        216     (4,666)     1,528
  Beginning balance..............................................................     11,813     12,029      7,363
                                                                                   ---------  ---------  ---------
        Ending balance...........................................................  $  12,029  $   7,363  $   8,891
                                                                                   ---------  ---------  ---------
                                                                                   ---------  ---------  ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
  Interest paid..................................................................  $   6,826  $   8,107  $   9,447
  Income taxes paid..............................................................  $   7,625  $  18,495  $  14,846
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
  During 1998 the Company purchased the real estate and building of its main facility in Germany for $23,470. In
    conjunction with the acquisition, liabilities were assumed as follows:
      Fair value of assets acquired..............................................                        $  23,470
      Cash paid for the real estate and building.................................                          (15,680)
                                                                                                         ---------
          Liabilities assumed....................................................                        $   7,790
                                                                                                         ---------
                                                                                                         ---------
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       20
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(1)  THE COMPANY AND ITS OPERATIONS:
 
    Sauer Inc., a U.S. Delaware corporation, and subsidiaries (the "Company") is
a leading international manufacturer of components and systems that generate,
transmit and control fluid power in mobile equipment. The Company's products are
used by original equipment manufacturers of mobile equipment, including
construction, agricultural and turf care equipment. The Company's products are
sold throughout the world either directly, or through distributors.
 
    The Company, which is a holding company, conducts its business in North
America as Sauer-Sundstrand Company (the "U.S. Operating Company"), and in
Germany as Sauer-Sundstrand GmbH & Co. (the "German Operating Company"). The
Company also has manufacturing plants in the United Kingdom, Italy, Slovakia,
and China, as well as sales companies in other locations. Sauer-Sundstrand GmbH
(the "German Holding Company"), which is wholly owned by the Company, functions
as a management and holding company on behalf of the Company.
 
    The Company is majority owned by Mr. Klaus H. Murmann and certain of his
family members, directly and through Sauer GmbH and other wholly owned
companies. Sauer GmbH and Sauer GmbH and Co. Hydraulik K.G. ("Sauer Hydraulik")
("Murmann Limited Partners") hold limited partnership interests (the "Murmann
Limited Partnership Interests") in the German Operating Company as described
below. Sauer GmbH and Sauer Hydraulik, a German corporation and a German
partnership, respectively, are wholly owned by the Murmann family.
 
(2)  BUSINESS VENTURES:
 
    During 1991, the U.S. Operating Company and Agri-Fab, Inc. formed a business
venture organized as a U.S. limited partnership under the name Hydro-Gear
Limited Partnership ("Hydro-Gear"). The U.S. Operating Company contributed
inventories and machinery and equipment with a carrying amount of $4,066 for a
60% interest in Hydro-Gear. The principal business of Hydro-Gear is the
manufacture, sale, and distribution of hydrostatic and axle products to the turf
care market.
 
    On November 29, 1994, the German Holding Company and Povazske Strojarne,
a.s. formed a business venture organized as a Slovakian corporation under the
name Sauer Mechanika, a.s. The German Holding Company contributed approximately
$6,000 of cash, technology, and machinery and equipment for a 65% interest in
Sauer Mechanika. During 1997, the German Holding Company purchased the 35%
interest held by its partner, Povazske Strojarne, a.s., for $3,959. The
principal business of Sauer Mechanika is the manufacture of gear boxes for
transit mixers.
 
    On February 16, 1995, the Company and Shanghai Hydraulics and Pneumatics
formed a business venture organized as a Chinese Limited Liability Foreign
Investment Enterprise under the name Sauer Shanghai Hydraulic Transmission
Company, Ltd. ("SHC"). The Company contributed $5,400 of cash, machinery and
equipment and technology for a 50% interest in SHC. Operations commenced during
1996. During 1997, the Company contributed an additional $2,700 of cash to
increase its interest in SHC to 60%. The principal business of SHC is the
manufacture, sale and distribution of high power hydrostatic transmissions to
the Chinese market.
 
    On December 30, 1996, the German Holding Company and ZTS, a.s. formed a
business venture organized as a Slovakian corporation under the name Sauer ZTS,
a.s. The German Holding Company
 
                                       21
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
contributed approximately $5,800 of cash and technology for a 65% interest in
Sauer ZTS, a.s. During 1998, the Company contributed an additional $693 to
increase its interest in Sauer ZTS, a.s. to 80%. The principal business of Sauer
ZTS, a.s. is the manufacture of high power hydrostatic transmissions.
 
    On October 29, 1998, the Company and the U.S. Operating Company formed a
business venture organized as a Brazilian limited liability company under the
name Sauer-Sundstrand Ltda., (SAS Ltda.). On December, 2, 1998, the Company, the
U.S. Operating Company and SAS Ltda. entered into an agreement with the
Company's Brazilian licensee, Power Transmission Industries Overseas Corporation
(PTI) and certain parties related to PTI to purchase the assets and assume
liabilities of PTI for approximately $1,500. As a result of this agreement, the
license with PTI was terminated and SAS Ltda. acquired machinery and equipment,
inventory, goodwill and other intangibles. The principal business of SAS Ltda.
is the sale and distribution of hydrostatic transmissions and gear pumps and
motors to the South American market.
 
(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION--
 
    The accounts of the Company are stated in accordance with generally accepted
accounting principles in the U.S. The consolidated financial statements include
the accounts of Sauer Inc. and subsidiaries on a consolidated basis for all
periods presented. All significant intercompany balances and transactions have
been eliminated in consolidation.
 
    Sauer Inc. is the general partner and 80% owner of the German Operating
Company. The Murmann Limited Partners have certain rights which include an
annual cash payment equal to 7.9% of the income of Sauer Inc. and subsidiaries
before taxes and the Murmann Limited Partnership Interests and the right to
consent to certain actions of the German Operating Company. However, the Company
has the right to elect by the action of its independent directors or the holders
of its common stock other than the Murmann family, to terminate the Murmann
Limited Partnership Interests in exchange for 2,250,000 shares of common stock
of Sauer Inc. As such, the Company controls and consolidates the German
Operating Company. The Murmann Limited Partners have no other property rights in
the assets of the Company, the U.S. Operating Company, the German Operating
Company or any other related entity.
 
USE OF ESTIMATES--
 
    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
NEW ACCOUNTING PRINCIPLES--
 
    During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." Total comprehensive income,
consisting of net income and adjustments for minimum pension liability and
foreign currency translation is disclosed on the face of the Statements of
Stockholders' Equity and Comprehensive Income.
 
                                       22
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    The Company also adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises the disclosures made
with respect to pension and other postretirement benefit plans. SFAS No. 132
does not change the measurement or recognition of those plans.
 
    In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position, ("SOP"), 98-5, "Reporting on the Costs
of Start-up Activities," which requires that costs of start-up activities be
expensed as incurred. These costs are defined, among others, as one-time
activities relating to opening a new facility, introducing a new product or
initiating a new process in an existing facility. The Company currently expenses
these types of costs and therefore, does not believe that this statement will
have a material impact on the Company's financial position or results of
operations.
 
    In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999, which requires an entity to
recognize all derivatives as either assets or liabilities in the balance sheet
and to measure those instruments at fair value. As the Company does not
currently have any such instruments outstanding, the Company does not believe
that this statement will have any material effect on the Company's financial
position or results of operations.
 
RECLASSIFICATION--
 
    Certain previously reported amounts have been reclassified to conform with
the current period presentation.
 
MINORITY INTEREST--
 
    Minority interest in net assets and income reflected in the accompanying
consolidated financial statements consists of:
 
    (a) A minority interest held by Agri-Fab, Inc. in a U. S. limited
       partnership for 1996, 1997 and 1998.
 
    (b) The Murmann Limited Partners, as holders of limited partnership
       interests, in the results of the German Operating Company equal to 8.5%
       of the income of Sauer Inc. and subsidiaries before taxes and the Murmann
       Limited Partnership Interests for 1996 and 1997 and 7.9% for 1998.
 
    (c) A minority interest held by Povazske Strojarne, a.s. in a Slovakian
       corporation for 1996 and 1997.
 
    (d) A minority interest held by Shanghai Hydraulics and Pneumatics in a
       Chinese equity business venture for 1996, 1997 and 1998.
 
    (e) A minority interest held by ZTS, a.s. in a Slovakian corporation for
       1997 and 1998.
 
                                       23
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
    The following tables set forth the components of minority interest in the
consolidated balance sheets and consolidated statements of income:
 
           MINORITY INTEREST REFLECTED IN CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1997       1998
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Hydro-Gear..............................................................  $  15,216  $  18,928
German Operating Company................................................     11,203     11,334
SHC.....................................................................      3,438      3,929
Sauer ZTS, a.s..........................................................      2,942      1,393
                                                                          ---------  ---------
        Total...........................................................  $  32,799  $  35,584
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
                  MINORITY INTEREST (INCOME) LOSS REFLECTED IN
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                   YEARS ENDED DECEMBER 31,
                                                                -------------------------------
                                                                  1996       1997       1998
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Hydro-Gear....................................................  $  (4,345) $  (6,339) $  (7,631)
German Operating Company......................................     (2,707)    (4,001)    (3,573)
Sauer Mechanika, a.s..........................................        168        291         --
SHC...........................................................        241      1,480      1,319
Sauer ZTS, a.s................................................         --         77        391
                                                                ---------  ---------  ---------
        Total.................................................  $  (6,643) $  (8,492) $  (9,494)
                                                                ---------  ---------  ---------
                                                                ---------  ---------  ---------
</TABLE>
 
TRANSLATION OF FOREIGN CURRENCIES--
 
    Assets and liabilities of consolidated foreign subsidiaries are translated
into U. S. dollars at exchange rates in effect at year-end, while revenues and
expenses are translated at average exchange rates prevailing during the year.
The resulting translation adjustments are included in stockholders' equity.
Gains or losses on transactions denominated in foreign currencies and the
related tax effects, which are not material, are reflected in net income.
 
CASH AND CASH EQUIVALENTS--
 
    Cash equivalents are considered by the Company to be all highly liquid
instruments purchased with original maturities of three months or less.
 
                                       24
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES--
 
    Inventories are valued at the lower of cost or market, using various cost
methods, and include the cost of material, labor and factory overhead. The
percentage of year end inventory using average cost, last-in, first-out
("LIFO"), and first-in, first-out ("FIFO") was 61%, 32% and 7%, respectively,
for 1997 and 61%, 33% and 6%, respectively, for 1998.
 
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION--
 
    Property, plant and equipment are stated at historical cost, net of
accumulated depreciation. Assets under capital lease are stated at the lower of
fair market value or the present value of future minimum lease payments, net of
accumulated depreciation. Depreciation is generally computed on the
straight-line method for building equipment and buildings over 10-37 years and
for machinery and equipment over 3-12 years. Additions and improvements that
substantially extend the useful life of a particular asset are capitalized.
Repair and maintenance costs ($13,110, $15,184 and $15,410 in 1996, 1997 and
1998, respectively) are charged to expense. Upon the sale of property, plant and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in nonoperating income or expense.
 
INTANGIBLE ASSETS AND AMORTIZATION--
 
    Intangible assets include goodwill, patents and other intangibles. These
assets are stated at cost, net of accumulated amortization, and are being
amortized over the lesser of 20 years or the specific remaining identifiable
life on a straight-line basis. Goodwill was $1,201 and $2,294 as of December 31,
1997 and 1998, net of accumulated amortization of $4,950 and $6,409,
respectively. Amortization of goodwill and other intangibles was $2,449 for
1996, $756 for 1997 and $644 for 1998.
 
IMPAIRMENT OF LONG-LIVED ASSETS--
 
    Consistent with the requirements of SFAS 121, the Company periodically
assesses whether events or circumstances have occurred that may indicate the
carrying value of its long-lived tangible and intangible assets may not be
recoverable. The carrying value of long-lived tangible and intangible assets is
evaluated based on the expected future non-discounted operating cash flows. When
such events or circumstances indicate the carrying value of an asset may be
impaired, the Company recognizes an impairment loss. Based upon its most recent
analysis, the Company believes that no impairments existed at December 31, 1998.
 
REVENUE RECOGNITION--
 
    Net sales are recorded at the time of shipment to customers along with
related expenses including estimates for warranty expense.
 
                                       25
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(3)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES--
 
    The provision for income taxes has been determined using the asset and
liability approach of accounting for income taxes. Under this approach, deferred
taxes represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred taxes when it
is more likely than not that a tax benefit will not be realized.
 
(4)  BASIC AND DILUTED PER SHARE DATA:
 
    Basic and diluted net income per common share data is as follows:
 
<TABLE>
<CAPTION>
                                    DECEMBER 31, 1997                     DECEMBER 31, 1998
                           ------------------------------------  ------------------------------------
                              NET                   NET INCOME      NET                   NET INCOME
                            INCOME       SHARES      PER SHARE    INCOME       SHARES      PER SHARE
                           ---------  ------------  -----------  ---------  ------------  -----------
<S>                        <C>        <C>           <C>          <C>        <C>           <C>
Basic net income per
 share...................  $  27,129    24,225,000   $    1.12   $  26,334    26,148,288   $    1.01
Effect of Dilutive
 Securities:
  Restricted stock.......         --            --          --          --         2,014          --
                           ---------  ------------       -----   ---------  ------------       -----
Diluted net income per
 share...................  $  27,129    24,225,000   $    1.12   $  26,334    26,150,302   $    1.01
                           ---------  ------------       -----   ---------  ------------       -----
                           ---------  ------------       -----   ---------  ------------       -----
</TABLE>
 
    Basic net income per common share is based on the weighted average number of
common shares outstanding in each year. Diluted net income per common share
assumes that outstanding common shares were increased by shares issuable upon
exercise of those restricted stock shares for which market price exceeds
exercise price, if any, less shares which could have been purchased by the
Company with the related proceeds. Shares resulting in an antidilutive effect
are excluded in accordance with SFAS No. 128. There were no restricted stock
shares outstanding during 1997.
 
                                       26
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(5)  INVENTORIES:
 
    The composition of inventories is as follows:
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                          --------------------
                                                                            1997       1998
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Raw materials...........................................................  $  41,851  $  40,621
Work in process.........................................................     13,101     14,102
Finished goods and parts................................................     40,461     41,574
LIFO allowance..........................................................     (6,382)    (7,102)
                                                                          ---------  ---------
        Total...........................................................  $  89,031  $  89,195
                                                                          ---------  ---------
                                                                          ---------  ---------
</TABLE>
 
(6)  PROPERTY, PLANT AND EQUIPMENT:
 
    The cost and related accumulated depreciation of property, plant and
equipment are summarized as follows:
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                      ------------------------
                                                                         1997         1998
                                                                      -----------  -----------
<S>                                                                   <C>          <C>
Cost--
  Land and improvements.............................................  $     3,771  $     4,597
  Buildings and improvements........................................       43,527       64,908
  Machinery and equipment...........................................      307,364      380,562
  Construction in progress..........................................       27,485       30,506
  Plant and equipment under capital lease...........................          638          698
                                                                      -----------  -----------
        Total cost..................................................      382,785      481,271
 
Less--Accumulated depreciation......................................     (191,095)    (218,744)
                                                                      -----------  -----------
        Net property, plant and equipment...........................  $   191,690  $   262,527
                                                                      -----------  -----------
                                                                      -----------  -----------
</TABLE>
 
    Depreciation expense for 1996, 1997 and 1998 was $22,381, $25,079, and
$29,991, respectively.
 
(7)  PENSION BENEFITS:
 
    The Company has noncontributory defined benefit plans covering substantially
all employees. The benefits under these plans are based primarily on years of
service and compensation levels. The Company's funding policy outside of Germany
is to contribute annually an amount that falls within the range determined to be
deductible for federal income tax purposes. The net pension liabilities
reflected in the accompanying consolidated balance sheets result principally
from unfunded pension plans of the Company's operations in Germany, where it is
common practice to fund pension obligations at the time payments are made to
retirees.
 
                                       27
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(7)  PENSION BENEFITS: (CONTINUED)
    Pension expense for 1996, 1997 and 1998 for these defined benefit plans
consists of the following components:
 
<TABLE>
<CAPTION>
                                                                  1996       1997       1998
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Service cost..................................................  $   2,846  $   3,042  $   3,307
Interest cost.................................................      6,400      6,562      6,774
Expected return on plan assets................................     (4,578)    (6,395)    (5,277)
Amortization of prior service cost............................        321        318        454
Amortization of net loss......................................        166      1,428         93
Amortization of transition obligation.........................       (296)      (285)      (287)
                                                                ---------  ---------  ---------
        Net pension expense...................................  $   4,859  $   4,670  $   5,064
                                                                ---------  ---------  ---------
                                                                ---------  ---------  ---------
</TABLE>
 
    The following table sets forth the plans' funded status as of the respective
balance sheet dates:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31, 1997           DECEMBER 31, 1998
                                                            --------------------------  --------------------------
                                                               ASSETS     ACCUMULATED      ASSETS     ACCUMULATED
                                                               EXCEED       BENEFITS       EXCEED       BENEFITS
                                                            ACCUMULATED      EXCEED     ACCUMULATED      EXCEED
                                                              BENEFITS       ASSETS       BENEFITS       ASSETS
                                                            ------------  ------------  ------------  ------------
<S>                                                         <C>           <C>           <C>           <C>
Benefit obligation at January 1...........................   $  (15,371)   $  (70,312)   $  (15,919)   $  (75,842)
Service cost..............................................         (869)       (2,167)         (772)       (2,509)
Interest cost.............................................       (1,278)       (5,278)       (1,122)       (5,756)
Plan participant contributions............................         (343)           --          (373)           --
Plan amendments...........................................           --            --            --        (1,449)
Actuarial gain (loss).....................................        1,369        (2,297)         (494)       (2,995)
Benefit payments..........................................          573         4,264           424         2,539
Effect of exchange rate changes...........................           --           (52)           --        (1,700)
                                                            ------------  ------------  ------------  ------------
Benefit obligation at December 31.........................      (15,919)      (75,842)      (18,256)      (87,712)
                                                            ------------  ------------  ------------  ------------
Reconciliation of fair value of plan assets
Fair value of plan assets at January 1....................       20,127        45,167        22,560        50,527
Actual return on plan assets..............................        1,948         6,915         1,714         6,256
Employer contributions....................................          715         2,143           779         2,674
Plan participants' contributions..........................          343            --           373            --
Benefit payments..........................................         (573)       (3,698)         (424)       (1,933)
                                                            ------------  ------------  ------------  ------------
Fair value of plan assets at December 31..................       22,560        50,527        25,002        57,524
                                                            ------------  ------------  ------------  ------------
Funded status at December 31..............................        6,641       (25,315)        6,746       (30,188)
Unrecognized prior service cost...........................          567         1,285           518         2,335
Unrecognized actuarial gain...............................       (3,816)       (5,030)       (2,912)       (4,994)
Unrecognized net transition obligation....................       (1,149)           --          (862)           --
                                                            ------------  ------------  ------------  ------------
Net amount recognized.....................................   $    2,243    $  (29,060)   $    3,490    $  (32,847)
                                                            ------------  ------------  ------------  ------------
</TABLE>
 
                                       28
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(7)  PENSION BENEFITS: (CONTINUED)
 
    Amounts recognized in the balance sheet as of December 31:
 
<TABLE>
<CAPTION>
                                               DECEMBER 31, 1997            DECEMBER 31, 1998
                                          ---------------------------  ---------------------------
                                                         ACCUMULATED                  ACCUMULATED
                                          ASSETS EXCEED    BENEFITS    ASSETS EXCEED    BENEFITS
                                           ACCUMULATED      EXCEED      ACCUMULATED      EXCEED
                                            BENEFITS        ASSETS       BENEFITS        ASSETS
                                          -------------  ------------  -------------  ------------
<S>                                       <C>            <C>           <C>            <C>
Long-term pension asset (liability).....    $   2,243     $  (28,959)    $   3,490     $  (33,044)
Current pension liability...............           --           (738)           --           (984)
Intangible asset........................           --             71            --            869
Other accumulated comprehensive
 income.................................           --            566            --            312
                                               ------    ------------       ------    ------------
Net amount recognized...................    $   2,243     $  (29,060)    $   3,490     $  (32,847)
                                               ------    ------------       ------    ------------
</TABLE>
 
    Significant assumptions used in determining pension expense and related
pension obligations are as follows:
 
<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                           -------------------------------------
                                                                              1996         1997         1998
                                                                              -----        -----        -----
<S>                                                                        <C>          <C>          <C>
Discount rates--
  United States..........................................................         7.5%         7.5%         7.0%
  Germany................................................................         7.5          7.5          6.5
  United Kingdom.........................................................         9.0          9.0          7.0
Rates of increase in compensation levels--
  United States..........................................................         5.0          5.0          4.5
  Germany................................................................         3.5          3.5          2.5
  United Kingdom.........................................................         8.0          8.0          5.0
Expected long-term rate of return on assets--
  United States..........................................................         8.5          8.5          8.5
  United Kingdom.........................................................         9.0          9.0          7.0
</TABLE>
 
    The plans' assets consist principally of short-term U.S. Government
securities, UK Government securities, equity securities, fixed income contracts
and insurance contracts.
 
(8)  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
 
    The Company provides health benefits for retired employees and certain
dependents when the employee becomes eligible for these benefits by satisfying
plan provisions which include certain age and/or service requirements. Health
benefits for retirees of non-U.S. operations, where applicable, are provided
through government sponsored plans to which contributions by the Company are
required. The health benefit plans covering substantially all U.S. employees are
contributory, with contributions reviewed annually and adjusted as appropriate.
These plans contain other cost-sharing features such as deductibles and
coinsurance. The Company does not pre-fund these plans and has the right to
modify or terminate any of these plans in the future.
 
                                       29
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(8)  POSTRETIREMENT BENEFITS OTHER THAN PENSIONS: (CONTINUED)
    The components of the postretirement benefit provisions of the
Company-sponsored plans for 1996, 1997 and 1998 were as follows:
 
<TABLE>
<CAPTION>
                                                                     1996       1997       1998
                                                                   ---------  ---------  ---------
<S>                                                                <C>        <C>        <C>
Service cost.....................................................  $     323  $     365  $     402
Interest cost....................................................        948        997      1,085
Net deferral and amortization....................................         22         20         49
                                                                   ---------  ---------  ---------
Postretirement benefit provision.................................  $   1,293  $   1,382  $   1,536
                                                                   ---------  ---------  ---------
                                                                   ---------  ---------  ---------
</TABLE>
 
    The funded status of the Company-sponsored plans was as follows:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                        ----------------------
                                                                           1997        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Reconciliation of benefit obligation:
  Accumulated postretirement benefit liability at January 1...........  $  (13,603) $  (14,361)
  Service cost........................................................        (365)       (403)
  Interest cost.......................................................        (997)     (1,085)
  Actuarial gain (loss)...............................................          86      (1,489)
  Benefit payments....................................................         518         624
                                                                        ----------  ----------
  Accumulated postretirement benefit liability at December 31.........     (14,361)    (16,714)
                                                                        ----------  ----------
Reconciliation of fair value of plan assets:
  Fair value of plan assets at January 1..............................          --          --
  Employer contributions..............................................         518         624
  Benefit payments....................................................        (518)       (624)
                                                                        ----------  ----------
  Fair value of plan assets at December 31............................          --          --
                                                                        ----------  ----------
  Funded status.......................................................     (14,361)    (16,714)
  Unrecognized actuarial loss.........................................       1,577       3,106
                                                                        ----------  ----------
  Postretirement benefit liability....................................  $  (12,784) $  (13,608)
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>
 
    The assumed weighted average annual rate of increase in the per capita cost
of medical benefits is 8.0% for 1999 and is assumed to decrease ratably in 2000
and 2001 and remain level at 5.5% thereafter.
 
    U.S. employees retiring after March 1, 1993, and hired prior to January 1,
1993, will receive the standard health benefits up to age 65 and then will be
eligible for a Medicare reimbursement allowance based on years of service. U.S.
employees hired after January 1, 1993, will only be eligible after age 65 for a
Medicare reimbursement allowance based on years of service.
 
    A one percent increase in the annual health care trend rates would have
increased the accumulated postretirement benefit obligation at December 31,
1998, by $1,333, and increased postretirement benefit expense for 1998 by $160.
The weighted average discount rate used to estimate the accumulated
postretirement benefit obligation was 7.5% for 1997 and 7.0% for 1998.
 
                                       30
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(9)  LONG-TERM INCENTIVE PLAN:
 
    Effective June 1, 1998, the Company terminated its Phantom Share Plan.
Phantom Share Rights outstanding at the time of termination were replaced by
Restricted Common Stock as discussed below. Prior to termination, the grantee of
a Phantom Share Right was entitled to the market value of a common share as of
the December 31 immediately prior to the date the restrictions on such Phantom
Share Right lapsed, and until the restrictions lapsed, a quarterly payment in an
amount determined by the Board of Directors. At December 31, 1997, 110,400
Phantom Share Rights were outstanding. Compensation expense was recognized
ratably over the period from the date of grant to the date the restrictions on a
right lapsed. Earnings were also charged or credited for the aggregate
appreciation or depreciation of the rights during the period as well as any
quarterly payment to the grantees. Phantom share compensation expense included
in the accompanying consolidated financial statements was $902, $955 and $0 for
1996, 1997 and 1998, respectively. The total value of the Phantom Shares
outstanding as of December 31, 1997 was $3,257.
 
    On June 1, 1998, the Company awarded 172,050 shares of restricted stock to a
group of employees. The restricted stock award entitles the participants to full
dividend and voting rights. Unvested shares are restricted as to disposition and
subject to forfeiture under certain circumstances. The value of the award was
established based on the market value of the stock as of the grant date. The
shares vest beginning in year five after the date of grant at a rate of 20% per
year thereafter.
 
    Unearned compensation is shown as a reduction of stockholders' equity in the
accompanying consolidated balance sheets and is being amortized ratably over the
life of the grant. Unearned compensation was computed based on the market value
of the restricted shares. Compensation expense recognized in conjunction with
the restricted stock outstanding in 1998 amounted to $701.
 
    The Company's Long-Term Incentive Plan provides for the grant of stock
options, stock appreciation rights, restricted stock, performance units,
performance shares and other incentive awards to officers and key employees and
for the reimbursement to certain participants for the personal income tax
liability resulting from such awards. The total number of shares of common stock
which may be subject to awards or be issued under the Long-Term Incentive Plan
will not exceed 2,400,000 shares, of which no more than 1,200,000 shares may be
issued as restricted stock.
 
(10)  INCOME TAXES:
 
    The Company's income before income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                               -------------------------------
                                                                 1996       1997       1998
                                                               ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>
United States................................................  $  26,963  $  37,031  $  37,838
Europe and other.............................................      2,178      6,042      3,875
                                                               ---------  ---------  ---------
  Total......................................................  $  29,141  $  43,073  $  41,713
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
</TABLE>
 
    The Company's primary German operation is structured as a partnership. This
operation is subject to United States as well as German income tax regulations.
The above analysis of pretax income and the following analysis of the income tax
provision by taxing jurisdiction are therefore not directly related.
 
                                       31
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(10)  INCOME TAXES: (CONTINUED)
    The (provision) benefit for income taxes by taxing jurisdiction location are
as follows:
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                            ----------------------------------
                                                               1996        1997        1998
                                                            ----------  ----------  ----------
<S>                                                         <C>         <C>         <C>
Current:
  United States
    Federal...............................................  $   (4,994) $  (11,476) $   (8,029)
    State.................................................        (877)     (1,261)       (957)
  European and other......................................      (4,096)     (3,443)     (3,230)
                                                            ----------  ----------  ----------
  Total current...........................................      (9,967)    (16,180)    (12,216)
                                                            ----------  ----------  ----------
Deferred:
  United States
    Federal...............................................         400       1,593      (2,168)
    State.................................................         (67)       (204)       (310)
  European and other......................................        (609)     (1,153)       (685)
                                                            ----------  ----------  ----------
  Total deferred..........................................        (276)        236      (3,163)
                                                            ----------  ----------  ----------
Total income tax provision................................  $  (10,243) $  (15,944) $  (15,379)
                                                            ----------  ----------  ----------
                                                            ----------  ----------  ----------
</TABLE>
 
    A reconciliation of the statutory and effective income tax (provision)
benefit based on the Company's income before income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                            ----------------------------------
                                                               1996        1997        1998
                                                            ----------  ----------  ----------
<S>                                                         <C>         <C>         <C>
United States income tax provision at the statutory rate
  of 35%..................................................  $  (10,199) $  (15,076) $  (14,600)
Deferred tax benefit not previously recognized............       2,069       1,923       1,687
European and Asian locations' losses not tax benefited....      (1,224)     (1,168)     (2,140)
Taxes on European locations' income at rates which differ
  from the U.S. rate......................................         443        (270)        682
State income taxes, net of U.S. federal tax benefit.......        (614)       (871)       (704)
Other.....................................................        (718)       (482)       (304)
                                                            ----------  ----------  ----------
Total income tax provision................................  $  (10,243) $  (15,944) $  (15,379)
                                                            ----------  ----------  ----------
                                                            ----------  ----------  ----------
</TABLE>
 
                                       32
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(10)  INCOME TAXES: (CONTINUED)
    The components of the Company's net deferred tax assets and (liabilities),
determined on a jurisdictional basis, are as follows:
 
<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                   ----------------------------------------------
                                                            1997                    1998
                                                   ----------------------  ----------------------
                                                    ASSETS    LIABILITIES   ASSETS    LIABILITIES
                                                   ---------  -----------  ---------  -----------
<S>                                                <C>        <C>          <C>        <C>
U.S. tax credit carryforwards....................  $   1,575   $      --   $   1,474   $      --
Internal Revenue Code Section 743 and Other Tax
  Basis Step-Ups.................................      4,473          --       3,776          --
Deferred compensation, post-retirement and
  accrued pension benefits.......................     11,407        (923)     11,259      (1,082)
Tax over book depreciation.......................     (5,055)     (3,195)     (7,118)     (3,594)
Inventory and warranty reserves not deducted for
  tax............................................      5,283          --       5,652          --
Other items......................................      2,125         100       1,443         (70)
U.S. tax on unremitted earnings of foreign
  subsidiaries...................................     (2,168)         --      (2,400)         --
                                                   ---------  -----------  ---------  -----------
Gross deferred tax assets and (liabilities)......     17,640      (4,018)     14,086      (4,746)
Valuation allowance..............................     (3,187)         --      (3,057)         --
                                                   ---------  -----------  ---------  -----------
Net deferred tax assets and (liabilities)........     14,453      (4,018)     11,029      (4,746)
Less-current portion.............................     (7,990)         --      (8,701)         --
                                                   ---------  -----------  ---------  -----------
Net deferred tax assets and (liabilities),
  long-term......................................  $   6,463   $  (4,018)  $   2,328   $  (4,746)
                                                   ---------  -----------  ---------  -----------
</TABLE>
 
    In 1990, the Company issued common stock in exchange for a 40.404% interest
in the Sundstrand-Sauer Company partnership. The partnership filed an election
under Internal Revenue Code (IRC) Section 754 and, accordingly, a tax basis
step-up was provided to the Company under IRC Section 743. In 1994, certain
assets were sold from the German Operating Company to the German Holding Company
to facilitate the establishment of Sauer Mechanika a.s., described in Note 2.
For tax purposes, this was a taxable transaction and, accordingly, resulted in a
tax basis step-up when the assets were ultimately contributed to Sauer Mechanika
a.s. The remaining tax benefit from unamortized balances of these tax basis
step-ups were $4,473 and $3,776 at December 31, 1997 and 1998, respectively.
 
    During 1998 the valuation allowance relating to the Company's deferred
income tax asset decreased by $130.
 
    As of December 31, 1998, the Company had not provided federal income taxes
on $4,331 of undistributed earnings recorded by certain subsidiaries outside the
United States, exclusive of the UK, since these earnings were deemed permanently
invested. Although it is not practicable to determine the deferred tax liability
on the unremitted earnings, foreign tax credits would be available to reduce any
U.S. tax liability if these foreign earnings were remitted.
 
                                       33
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(10)  INCOME TAXES: (CONTINUED)
    The Company had the following tax return carryforwards available to offset
future years' taxes at December 31, 1998:
 
<TABLE>
<CAPTION>
                                                                                EXPIRATION
                                                                    AMOUNT         DATES
                                                                   ---------  ---------------
<S>                                                                <C>        <C>
German net operating losses......................................  $  56,000       None
U.S. foreign tax credits.........................................  $   2,680     1999-2002
</TABLE>
 
    The German net operating losses do not produce a deferred tax asset on a
consolidated basis due to the treatment of the German Operating Company as a
partnership combined with the impact of foreign tax credits.
 
(11)  NOTES PAYABLE AND LONG-TERM DEBT:
 
    Long-term debt consisted of the following:
 
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                         ---------------------
                                                                           1997        1998
                                                                         ---------  ----------
<S>                                                                      <C>        <C>
Company's Revolving Credit Agreement, due August 2001..................  $  15,000  $       --
U.S. Operating Company's Revolving Credit Facility, due March 2002.....     24,000      33,800
U.S. Operating Company's Senior Notes, due through December 2007.......     25,000      25,000
U.S. Operating Company's Industrial Development Revenue Bonds, due May
  2026                                                                       9,000       9,000
German Holding Company's Long-Term Bank Facilities maturing through
  June 2018............................................................         --      32,829
Other borrowings.......................................................      3,150       8,631
                                                                         ---------  ----------
    Total debt.........................................................     76,150     109,260
Less--scheduled current maturities.....................................       (952)     (2,398)
                                                                         ---------  ----------
    Total long-term debt...............................................  $  75,198  $  106,862
                                                                         ---------  ----------
                                                                         ---------  ----------
</TABLE>
 
    Prior to its initial public offering, the Company's Revolving Credit
Agreement ("Agreement") allowed the Company to borrow up to $15,000 at an
interest rate based on the London interbank offered rate ("LIBOR"). The company
repaid this debt using proceeds from the initial public offering. At December
31, 1997, the interest rate on outstanding borrowings under the Agreement was
7.05%. The Agreement required the maintenance of certain financial results
including maintaining minimum levels of net worth and cash flow and contained
limitations on the payment of cash dividends.
 
    The U.S. Operating Company's Revolving Credit Facility, dated November 6,
1997, permits the U.S. Operating Company to choose between two interest rate
options and to specify what portion of the loan is covered by a specific
interest rate option and the applicable funding period to which the interest
rate option is to apply. The interest rate options are based on the bank's prime
lending rate and LIBOR. The
 
                                       34
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(11)  NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
U.S. Operating Company's Revolving Credit Facility permits unsecured borrowings
up to $45,000. At December 31, 1997 and 1998, the weighted average interest rate
on outstanding borrowings was approximately 6.73% and 6.50%, respectively.
 
    The U.S. Operating Company's Revolving Credit Facility contains certain
restrictions and requires the U.S. Operating Company to maintain certain
financial ratios, including limitations on the payment of cash dividends and
maintaining profit before interest and taxes at least 2.5 times interest
expense. Additionally, the U.S. Operating Company's Revolving Credit Facility
requires the maintenance of net worth (as defined). The U.S. Operating Company
was in compliance with the requirements at December 31, 1998 and required net
worth was $64,986.
 
    On May 1, 1996, the U.S. Operating Company issued $9,000 of Industrial
Development Revenue Bonds ("Bonds"). The Bonds are at variable interest rates.
At December 31, 1997 and 1998, the interest rate on the bonds was 4.7% and
4.95%, respectively. The Bonds are secured by a bank letter of credit. The Bonds
contain certain covenants and restrictions similar to those included in the U.S.
Operating Company's Revolving Credit Facility. At December 31, 1998, the U.S.
Operating Company was in compliance with these requirements.
 
    On December 15, 1997, the U.S. Operating Company issued $25,000 of 6.68%
Senior Notes ("Senior Notes"). The Senior Notes have scheduled annual repayments
starting with December 15, 2001 through December 15, 2007. The Senior Notes
contain certain restrictions and require the maintenance of certain financial
ratios which are similar to the U.S. Operating Company's Revolving Credit
Facility. At December 31, 1998, the U.S. Operating Company was in compliance
with these requirements.
 
    The German Holding Company has a series of long-term bank facilities, with
an aggregate principle of $32,829 at December 31, 1998. These facilities
generally carry fixed rates of interest, ranging from 5.65% to 7.09%. These
facilities contain a variety of repayment schedules and have final maturities
ranging from December 2001 through June 2018.
 
    Payments required on long-term debt outstanding as of December 31, 1998,
during the years ending 1999 through 2003 and for years thereafter, are $2,398,
$2,918, $5,880, $39,531, $5,731 and $52,802, respectively.
 
    The Company from time to time employs off-balance sheet financial
instruments to reduce its exposure to fluctuations in interest rates. These
instruments include interest rate caps and swaps. The Company designates
interest rate swaps as hedges of LIBOR-based bank debt, and accrues as interest
expense the differential to be paid or received under the agreements as rates
change over the lives of the contracts. As of December 31, 1998, there were no
interest rate swap contracts outstanding.
 
    The Company continually monitors its positions with, and the credit quality
of, the financial institutions which are counterparties to its off-balance sheet
financial instruments and does not expect non-performance by the counterparties.
There were no interest rate contracts outstanding as of December 31, 1997 and
1998.
 
    The Company also maintains revolving credit facilities, notes payable and
bankers' acceptances for its European and other operations. The German Operating
Company's credit agreement contains restrictions
 
                                       35
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(11)  NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
similar to those in the U.S. Operating Company's agreements. The German
Operating Company was in compliance with the requirements at December 31, 1998
and required net worth was $11,597. At December 31, 1998, accounts receivables,
inventories, property, plant and machinery and equipment in the amount of
$46,708 were pledged as collateral under these European and other operations
credit facilities. All U.S. debt is unsecured.
 
    The weighted average interest rates on short-term borrowings at year-end
were 6.6% in 1996, 6.8% in 1997 and 6.1% in 1998.
 
    The status of lines of credit as of December 31, 1997, and 1998, is
summarized below:
 
<TABLE>
<CAPTION>
                                                                            1997       1998
                                                                          ---------  ---------
<S>                                                                       <C>        <C>
Lines of credit--
  Used..................................................................  $  74,696  $  75,567
  Unused................................................................     51,975     47,032
</TABLE>
 
    The fair market value of long-term debt at December 31, 1997 and 1998
approximates the amounts recorded in the balance sheet based on information
available to the Company with respect to interest rates and terms for similar
financial instruments.
 
(12)  STOCKHOLDERS' EQUITY:
 
    In 1998, the Board of Directors authorized a class of preferred stock with
4,500,000 shares authorized at $.01 par value. The issuance of preferred shares
may adversely affect the rights of the holders of common stock. No preferred
shares have been issued.
 
    On May 12, 1998, the Company completed an initial public offering of
9,000,000 shares of common stock at an initial public offering price of $18 per
share. Of the 9,000,000 shares of common stock offered, 3,000,000 were issued
and sold by the Company and 6,000,000 were sold by management and members of the
Murmann family. Prior to the offering, there was no public market for the
Company's common stock. The shares of common stock are not convertible and the
holders thereof have no preemptive subscription rights to purchase any
securities of the Company.
 
    The Company did not receive any of the proceeds from the sale of the shares
by management or members of the Murmann family. The net proceeds to the Company
from the initial public offering, after deducting applicable underwriting
discounts and offering expenses, was $48,100. The net proceeds to the Company
were used to repay long-term debt and for capital expenditures.
 
(13)  RELATED PARTY TRANSACTIONS:
 
    On May 1, 1998, the Company acquired the real estate and building of its
main facility in Germany, which was previously leased, from Sauer Hydraulik,
which is owned by the Murmann family. The transaction was accounted for under
the rules governing transactions occurring between entities under common
control. As such, the assets were recorded at their historical cost basis of
$17,697, debt outstanding of $7,790 was assumed, cash of $15,680 was paid to
Sauer Hydraulik and $5,773 was recorded
 
                                       36
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(13)  RELATED PARTY TRANSACTIONS: (CONTINUED)
as a reduction in additional paid-in-capital. The reduction to additional
paid-in-capital was computed as the excess of the facility's fair market value,
as determined by an independent appraisal, over the seller's historical cost
basis in accordance with common control accounting. Rent expense associated with
the property while under the lease agreement was $2,633, $2,278 and $751 for
1996, 1997 and 1998, respectively.
 
(14)  COMMITMENTS AND CONTINGENCIES:
 
    The Company leases certain facilities and equipment under operating leases,
many of which contain renewal options. Total rental expense on operating leases
during 1996, 1997 and 1998 was $5,484, $5,835 and $4,322, respectively.
 
    Minimum future rental commitments under all non-cancelable leases as of
December 31, 1998, during the years ending 1999 through 2003 and for years
thereafter are $4,353, $3,974, $3,630, $2,011, $1,830, and $1,892, respectively.
 
    The Company, from time to time, is involved in certain legal proceedings in
the ordinary course of its business. The Company intends to vigorously defend
against all such claims. However, no assurance can be given that such matters
will be resolved in the Company's favor.
 
(15)  QUARTERLY FINANCIAL DATA (UNAUDITED):
 
<TABLE>
<CAPTION>
                                     FIRST       SECOND      THIRD       FOURTH      TOTAL
                                   ----------  ----------  ----------  ----------  ----------
<S>                                <C>         <C>         <C>         <C>         <C>
1997
Net sales........................  $  135,860  $  146,273  $  118,906  $  134,134  $  535,173
Gross profit.....................      34,520      39,143      30,023      27,422     131,108
Net income.......................  $    7,894  $   10,258  $    5,512  $    3,465  $   27,129
Basic and diluted net income per
  common share...................  $      .33  $      .42  $      .23  $      .14  $     1.12
 
1998
Net sales........................  $  152,876  $  160,410  $  123,992  $  127,246  $  564,524
Gross profit.....................      34,739      42,025      31,829      27,620     136,213
Net income.......................  $    6,472  $   10,624  $    6,040  $    3,198  $   26,334
Basic and diluted net income per
  common share...................  $      .27  $      .41  $      .22  $      .11  $     1.01
</TABLE>
 
(16)  SEGMENT AND GEOGRAPHIC INFORMATION:
 
    The Company has two reportable segments defined by geographic region due to
the difference in economic characteristics in which these segments operate. The
activities of each reportable segment consists of the design, manufacture and
sale of hydraulic systems and other related components.
 
    The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates individual
segment performance based on net income.
 
                                       37
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(16)  SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
Intersegment sales are made at established transfer prices. The following table
presents the significant items by segment:
 
<TABLE>
<CAPTION>
                                NORTH
                               AMERICA      EUROPE    ALL OTHER    ELIMINATIONS      TOTAL
                              ----------  ----------  ----------  ---------------  ----------
<S>                           <C>         <C>         <C>         <C>              <C>
1996
Trade sales.................  $  272,780  $  194,627  $      159  $        --      $  467,566
Intersegment sales..........      25,343      28,344          --      (53,687)(1)          --
Interest income.............       1,377         212         411       (1,436)(2)         564
Interest expense............       2,760       3,864       1,335       (1,436)(2)       6,523
Depreciation and
  amortization..............      13,358      10,993         479           --          24,830
Net income (loss)...........      18,471       6,543      (3,094)      (3,022)(3)      18,898
Total assets................     173,325     173,655     133,287     (142,740)(4)     337,527
Capital expenditures........      24,556      31,550         178           --          56,284
 
1997
Trade sales.................  $  332,974  $  201,130  $    1,069  $        --      $  535,173
Intersegment sales..........      36,557      32,424         582      (69,563)(1)          --
Interest income.............       1,441         518         228       (1,489)(2)         698
Interest expense............       3,692       5,028       1,074       (1,489)(2)       8,305
Depreciation and
  amortization..............      13,834      11,230         771           --          25,835
Net income (loss)...........      26,873       6,142      (1,500)      (4,386)(3)      27,129
Total assets................     200,167     184,533     159,223     (155,188)(4)     388,735
Capital expenditures........      41,781      24,851         118           --          66,750
 
1998
Trade sales.................  $  360,641  $  201,991  $    1,892  $        --      $  564,524
Intersegment sales..........      32,255      37,996         685      (70,936)(1)          --
Interest income.............       1,592       1,458       1,381       (4,001)(2)         430
Interest expense............       5,128       7,437         680       (4,001)(2)       9,244
Depreciation and
  amortization..............      16,422      13,168       1,045           --          30,635
Net income (loss)...........      25,346       5,688      (1,127)      (3,573)(3)      26,334
Total assets................     227,920     220,172     198,116     (186,437)(4)     459,771
Capital expenditures........      51,728      46,331         523           --          98,582
</TABLE>
 
    Reconciliations:
 
       (1) Elimination of intersegment sales.
 
       (2) Elimination of intersegment interest income and expense from
           borrowings made between segments.
 
                                       38
<PAGE>
                          SAUER INC. AND SUBSIDIARIES
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
                        DECEMBER 31, 1996, 1997 AND 1998
 
            (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 
(16)  SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
       (3) Net income eliminations:
 
<TABLE>
<CAPTION>
                                                  1996         1997         1998
                                               -----------  -----------  -----------
<S>                                            <C>          <C>          <C>
Minority interest in German Operating
  Company....................................  $    (2,707) $    (4,001) $    (3,573)
Intersegment profit on intersegment sales....         (315)        (385)          --
                                               -----------  -----------  -----------
Total net income eliminations................  $    (3,022) $    (4,386) $    (3,573)
                                               -----------  -----------  -----------
                                               -----------  -----------  -----------
</TABLE>
 
       (4) Total assets eliminations:
 
<TABLE>
<S>                                   <C>        <C>        <C>
Investment in subsidiaries..........  $(127,415) $(137,095) $(144,391)
Intersegment receivables............    (13,783)   (16,230)   (40,244)
Intersegment profit in inventory and
  other.............................     (1,542)    (1,863)    (1,802)
                                      ---------  ---------  ---------
Total assets eliminations...........  $(142,740) $(155,188) $(186,437)
                                      ---------  ---------  ---------
                                      ---------  ---------  ---------
</TABLE>
 
    A summary of the Company's net sales by product line is presented below:
 
<TABLE>
<CAPTION>
                                                                       NET SALES
                                                           ----------------------------------
                                                              1996        1997        1998
                                                           ----------  ----------  ----------
<S>                                                        <C>         <C>         <C>
Hydrostatic transmissions................................  $  358,258  $  417,864  $  445,585
Open circuit gear pumps and motors and piston pumps......      77,762      79,883      78,384
Electrohydraulics and others.............................      31,546      37,426      40,555
                                                           ----------  ----------  ----------
    Total................................................  $  467,566  $  535,173  $  564,524
</TABLE>
 
    A summary of the Company's net sales and long-lived assets by geographic
area is presented below :
 
<TABLE>
<CAPTION>
                                             NET SALES (1)             LONG-LIVED ASSETS (2)
                                   ----------------------------------  ----------------------
                                      1996        1997        1998        1997        1998
                                   ----------  ----------  ----------  ----------  ----------
<S>                                <C>         <C>         <C>         <C>         <C>
United States....................  $  247,339  $  272,783  $  335,606  $  106,120  $  141,021
Germany..........................      45,909      49,931      47,400      26,517      46,930
United Kingdom...................      39,428      39,050      35,718      19,400      21,279
Slovakia.........................          58       5,911       4,740      33,222      39,856
Other countries..................     134,832     167,498     141,060      10,845      17,210
                                   ----------  ----------  ----------  ----------  ----------
    Total........................  $  467,566  $  535,173  $  564,524  $  196,104  $  266,296
                                   ----------  ----------  ----------  ----------  ----------
                                   ----------  ----------  ----------  ----------  ----------
</TABLE>
 
------------------------
 
(1) Net sales are attributed to countries based on location of customer.
 
(2) Long-lived assets include property, plant and equipment net of accumulated
    depreciation, intangible assets net of accumulated amortization and certain
    other long-term assets.
 
    No single customer accounted for 10% or more of total consolidated sales in
any year presented.
 
                                       39
<PAGE>
                              REPORT OF MANAGEMENT
 
    The consolidated financial statements and other financial information of
Sauer Inc. in this report were prepared by management, which is responsible for
their contents. They reflect amounts based upon management's best estimates and
informed judgments. In management's opinion, the financial statements present
fairly the financial position, results of operations and cash flows of the
company in conformity with generally accepted accounting principles.
 
    The company maintains a system of internal accounting controls and
procedures which is intended, consistent with reasonable cost, to provide
reasonable assurance that transactions are executed as authorized, that they are
included in the financial records in all material respects, and that
accountability for assets is maintained. This system is augmented by written
policies and procedures, careful selection and training of personnel,
examinations by an internal auditing department and a continuing management
commitment to the integrity of the system.
 
    The financial statements have been audited to the extent required by
generally accepted auditing standards by Arthur Andersen LLP, independent
auditors. The independent auditors have evaluated the company's internal control
structure and performed tests of procedures and accounting records in connection
with the issuance of their report on the fairness of the financial statements.
 
    The Board of Directors, through its Audit Committee composed entirely of
outside directors, oversee management's responsibilities in the preparation of
the financial statements and selects the independent auditors, subject to
stockholder ratification. The Audit Committee meets regularly with the
independent auditors, representatives of management, and the internal auditors,
both separately and jointly, to review the activities of each and to assure that
each is properly discharging its responsibilities. To ensure complete
independence, the internal auditors and representatives of Arthur Andersen LLP
have full access to meet with the Audit Committee, with or without management
representatives present, to discuss the results of their examinations and their
opinions on the adequacy of internal controls and the quality of financial
reporting.
 
<TABLE>
<S>                                             <C>
Tonio P. Barlage                                Kenneth D. McCuskey
President and Chief Operating Officer           Treasurer
</TABLE>
 
                                       40
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
    To the Shareholders of Sauer Inc. and Subsidiaries: We have audited the
accompanying consolidated balance sheets of SAUER INC. (a Delaware corporation)
AND SUBSIDIARIES as of December 31, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the three years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of
SAUER INC. AND SUBSIDIARIES as of December 31, 1997 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
<TABLE>
<S>                                           <C>
                                              /s/ ARTHUR ANDERSEN LLP
                                                -------------------------------------
                                                Arthur Andersen LLP
</TABLE>
 
Chicago, Illinois
February 17, 1999
 
                                       41
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS
 
SAFE HARBOR STATEMENT
 
    THIS ANNUAL REPORT AND OTHER WRITTEN REPORTS AS WELL AS ORAL STATEMENTS MADE
FROM TIME TO TIME BY THE COMPANY MAY CONTAIN "FORWARD-LOOKING STATEMENTS,"
STATEMENTS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS, BUT RATHER ARE
SUBJECT TO RISKS AND UNCERTAINTIES. THESE STATEMENTS ARE BASED ON CURRENT
FINANCIAL AND ECONOMIC CONDITIONS AND RELY HEAVILY ON THE COMPANY'S
INTERPRETATIONS OF WHAT IT CONSIDERS KEY ECONOMIC ASSUMPTIONS. ACTUAL FUTURE
RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF FACTORS. THESE FACTORS,
SOME OF WHICH ARE IDENTIFIED IN THE DISCUSSION ACCOMPANYING SUCH FORWARD-LOOKING
STATEMENTS, INCLUDE, BUT ARE NOT LIMITED TO, GENERAL ECONOMIC CONDITIONS,
FOREIGN CURRENCY MOVEMENTS, PRICING AND PRODUCT INITIATIVES AND OTHER ACTIONS
TAKEN BY COMPETITORS, ABILITY OF SUPPLIERS TO PROVIDE MATERIALS AS NEEDED, LABOR
RELATIONS, THE COMPANY'S EXECUTION OF INTERNAL PERFORMANCE PLANS, AND OTHER
CHANGES TO BUSINESS CONDITIONS.
 
OVERVIEW
 
    Sauer Inc. designs, manufactures and sells its products in North America and
Europe and sells its products throughout the rest of the world either directly
or through distributors. The Company also manufactures and sells its products in
East Asia through its manufacturing plant and sales office in Shanghai, China.
Sauer's products are used by original equipment manufacturers ("OEMs") of off-
highway mobile equipment, including construction, road building, agriculture,
turf care and specialty markets.
 
    1998 was a year in which Sauer Inc. continued to grow, achieving record
sales levels. As planned, the Company continued to make substantial investments
in manufacturing capacity and product development to support new customer
programs and additional growth in future years. The Minneapolis operations moved
into a facility nearly doubling the available capacity, the Company's Slovakian
operations continued to expand, and the Hydro-Gear plant completed an expansion
of over 30,000 square feet. In addition, in early 1999, the Company completed
construction of a new manufacturing facility in Lawrence, Kansas. In support of
these and future expansions, the Company completed an initial public offering in
May 1998 which helped fund these capital expenditures and the repayment of
long-term debt. Management feels that the combination of these efforts positions
the Company to support its goal of continuous, profitable growth.
 
    During 1998, the economic climate in many parts of the world deteriorated.
Asia continued to experience a recession, Brazil entered a period of economic
instability and the agriculture markets in many parts of the world have been hit
by a recession due in part to low commodity prices. These impacts, coupled with
higher costs of growth created by investments in capacity and product
development, led to 1998 net income slightly below the record level of 1997.
 
IMPACT OF CURRENCY FLUCTUATIONS
 
    The Company has operations and sells its products in many different
countries of the world and therefore conducts its business in various
currencies. The Company's financial statements, which are presented in U.S.
dollars, can be impacted by foreign exchange fluctuations through both
translation risk and transaction risk. Translation risk is the risk that the
financial statements of the Company, for a particular period or as of a certain
date, may be affected by changes in the exchange rates that are used to
translate the financial statements of the Company's operations from foreign
currencies into dollars. Transaction risk is the risk from the Company receiving
its sale proceeds or holding its assets in a currency different from that in
which it pays its expenses and holds its liabilities.
 
    With respect to translation risk, fluctuations of currencies against the
U.S. dollar can be substantial and therefore significantly impact comparisons
with prior periods. The impact is a reporting consideration
 
                                       42
<PAGE>
only and does not affect the underlying results of operations. As shown in the
table below, the translation impact on making prior period comparisons with
respect to the Company's net sales can be material. However, historically the
translation impact on net income has not been significant.
 
<TABLE>
<CAPTION>
                                                                           PERCENTAGE SALES GROWTH OVER PRIOR
                                                                                          YEAR
                                                                           -----------------------------------
                                                                              1996        1997        1998
                                                                              -----     ---------     -----
<S>                                                                        <C>          <C>        <C>
As Reported..............................................................         4.7%       14.5%        5.5%
Without Currency Impact..................................................         6.1%       18.9%        5.7%
</TABLE>
 
    With respect to transaction risk, the impact on the Company's operating
results is not significant. With its various manufacturing plants located
primarily in its customers' countries of operation, generally the Company sells
in the same currency in which it incurs its expenses.
 
RESULTS OF OPERATIONS
 
THIRTEEN WEEKS ENDED DECEMBER 31, 1998 COMPARED TO THE THIRTEEN WEEKS ENDED
  DECEMBER, 31, 1997
 
    NET SALES-- Net sales for the fourth quarter 1998 of $127.2 million
decreased by $6.9 million or 5.1% from fourth quarter 1997 net sales of $134.1
million, or a 6.9% decrease excluding the impact of currency fluctuation. The
decrease in sales reflects the declining economic market mentioned above,
particularly in the agriculture industry. In addition, 1997 fourth quarter net
sales were increased by shipping delinquencies due to capacity constraints from
the first half of 1997 which were subsequently shipped in the latter part of
1997. North American net sales of $87.6 million were $7.4 million less than 1997
fourth quarter sales of $95.0 million, a 7.8% decrease. Sales in Europe for the
fourth quarter 1998 of $52.8 million were $1.5 million less than fourth quarter
1997 net sales of $54.3 million or a decrease of 2.8%. Net sales in Europe were
down 10.7% from fourth quarter 1997, excluding the impact of currency
fluctuation.
 
    COST OF SALES-- Cost of sales for fourth quarter 1998 of $99.6 million was
78.3% of net sales, compared to 1997 fourth quarter cost of sales of $106.7
million which was 79.6% of net sales. Fourth quarter 1998 cost of sales was
impacted by an inventory adjustment of $1.1 million at the Swindon, UK,
operations related to the integration of a new business system. The Company also
incurred one-time adjustments of $0.2 million for severance payments related to
a 30% reduction in the workforce at the Swindon plant, as well as an adjustment
for import duties of $1.1 million related to reclassification of imported
production material at the Sullivan, Illinois, facility. Despite these one-time
adjustments and the impact of start-up costs related to the Lawrence, Kansas,
facility, the Company achieved lower cost of sales as a percentage of net sales
in fourth quarter 1998 due to its efforts to reduce and control costs in light
of the softening economic climate.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES-- Selling, general and
administrative expenses for fourth quarter 1998 of $14.0 million decreased by
$0.6 million or 4.1% from fourth quarter 1997 expenses of $14.6 million. This
decrease reflects the Company's efforts to slow the investments in sales and
marketing, information technology, and training to support the Company's growth
plans to keep these costs in line with the current and projected sales growth.
The Company anticipates these costs to level off in 1999 as a percentage of net
sales as the Company focuses on keeping expenses in line with projected sales.
 
    RESEARCH AND DEVELOPMENT EXPENSES-- Research and development expenses
totaled $5.6 million in the fourth quarter 1998, $0.1 million below the $5.7
million in the fourth quarter of 1997.
 
    NONOPERATING EXPENSES, NET-- Net nonoperating expenses of $2.0 million in
the fourth quarter 1998 were $.8 million more than the $1.2 million of net
nonoperating expenses incurred in the fourth quarter of 1997. Net interest
expense of $2.3 million in fourth quarter 1998 decreased by $0.1 million from
the $2.4 million incurred in fourth quarter 1997. Other, net expenses for fourth
quarter 1998 of $0.3 million
 
                                       43
<PAGE>
differ from the other, net income reported in fourth quarter 1997 of $1.2
million relating to numerous immaterial items.
 
    PROVISION FOR INCOME TAXES-- Provision for income taxes in fourth quarter
1998 of $1.4 million was
$0.6 million less than fourth quarter 1997 taxes of $2.0 million. The decrease
in provision for income taxes results from the decrease in net income before
income taxes of $0.9 million and the decrease in the effective tax rate from
37.0% in 1997 to 30.3% in fourth quarter 1998.
 
    NET INCOME-- Net income for fourth quarter 1998 of $3.2 million was $0.3
million or 8.6% less than fourth quarter 1997 net income of $3.5 million. The
decrease in net income in the fourth quarter is a result of decreased sales and
the one-time adjustments mentioned above.
 
1998 COMPARED TO 1997
 
    NET SALES-- Net sales for 1998 of $564.5 million increased by $29.3 million
or 5.5% from 1997 net sales of $535.2 million. Net sales increased by 5.7%
excluding the impact of currency fluctuation. Net sales in North America of
$392.9 million and in Europe of $240.0 million in 1998 showed improvement over
1997 of 6.3% and 2.7%, respectively. However, the majority of this increase
occurred during the first half of 1998. Increased sales of hydrostatic
transmissions, led by a $21.1 million increase in the turf care market,
accounted for the major portion of the growth in net sales. Electrohydraulics
and valves contributed $3.1 million to the increased sales levels. Gear pumps
and motors experienced a decline in sales of $1.5 million due primarily to the
slumping agriculture market in both Europe and North America.
 
    COST OF SALES-- Cost of sales for 1998 of $428.3 million was 75.9% of net
sales, slightly higher than the 75.5% of net sales for 1997. Higher cost of
sales due to initial start-up costs of the Lawrence, Kansas, facility coupled
with the one-time adjustment for import duties reclassification and the reduced
higher margin sales in Asia drove this percentage up, but was mostly offset by
the Company's efforts to reduce and control costs during the latter part of 1998
in light of the economic softening.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES-- Selling, general and
administrative expenses for 1998 of $54.5 million increased by $1.9 million or
3.6% from 1997 expenses of $52.6 million, representing general inflation. Early
in 1998, the Company was continuing to invest in sales and marketing,
information technology, and training to support the Company's growth plans and
investments being made in manufacturing and research and development. However,
the Company began to curb such investment later in the year to keep these costs
in line with the current and projected sales growth. The Company anticipates
these costs to remain level in 1999 as a percentage of sales as the Company
focuses on keeping expenses in line with future sales projections.
 
    RESEARCH AND DEVELOPMENT EXPENSES-- Research and development expenses of
$22.1 million increased by $1.4 million or 6.8% from 1997 and represent 3.9% of
total net sales for 1998. This continued high level of spending on research and
development reflects the Company's ongoing development of new customer programs
and demonstrates the Company's emphasis on being the technology leader.
 
    NONOPERATING EXPENSES, NET-- Net nonoperating expenses for 1998 of $8.4
million were $2.1 million higher than 1997 net expenses of $6.3 million. Net
interest expense for 1998 of $8.8 million increased by $1.2 million over 1997
net expense of $7.6 million, reflecting higher bank borrowings from increased
capital expenditures and working capital to support ongoing growth in sales and
plans for future growth. Other, net expenses for 1998 increased by $0.9 million
from 1997 relating to a loss on disposal of fixed assets at the West Branch,
Iowa, facility of $0.5 million and numerous immaterial items.
 
    PROVISION FOR INCOME TAXES-- Provision for income taxes for 1998 of $15.4
million decreased by $0.5 million from 1997 provision for income taxes of $15.9
million. The decrease is a result of the decline in net income before income
taxes of $1.4 million. The effective tax rates for 1998 and 1997 were 36.9% and
37.0%, respectively.
 
                                       44
<PAGE>
    NET INCOME-- Net income fell slightly in 1998 to $26.3 million from $27.1
million in 1997, a decrease of $0.8 million or 3.0%. Degrading economic
conditions as mentioned above, coupled with the significant one-time adjustment
related to the import duties reclassification and start-up costs mentioned in
the fourth quarter discussion above led to the net income decline. As a result,
North American 1998 net income of $25.3 million decreased by $1.6 million, or
5.9%, from 1997 net income of $26.9 million. Europe's 1998 net income of $5.7
million was down $0.4 million, or 6.6% from 1997 net income of $6.1 million.
 
    ORDER BACKLOG-- Total order backlog at the end of 1998 was $261.7 million,
compared to $277.5 million at the end of 1997, a decrease of 5.7%. During the
fourth quarter of 1998, only $130.3 million in new orders were written, a drop
of 27.4% compared to the fourth quarter of 1997. However, the Company received a
large order during the fourth quarter of 1997 at its Hydro-Gear facility which
was received during the third quarter of 1998. Adjusting for this, orders in the
fourth quarter 1998 were down by 12.4% from a year ago. The primary driver in
the decline in order backlog was the significant downturn in the agriculture
market.
 
1997 COMPARED TO 1996
 
    NET SALES-- Net sales for 1997 of $535.2 million increased by $67.6 million
or 14.5% from 1996 net sales of $467.6 million. Net sales increased by 18.9%
excluding the impact of currency fluctuation. Unit volume growth accounted for
the majority of the growth in net sales, with net price increases accounting for
less than 1% of the growth. Sales of hydrostatic transmissions accounted for the
major portion of the growth in net sales, growing by 21.5%, excluding the impact
of currency fluctuation. This growth came from the strong North American and
European growth of 22.6% and 14.8%, respectively. Gear pumps and motors showed
little growth in net sales, affected by the slower growing European markets, the
principal market for the Company's gear pumps and motors, compared to the North
American market. Electrohydraulics and other products' net sales grew by 21.5%,
excluding the impact of currency fluctuation, reflecting the strong growth of
the Company's electrohydraulic valve business in North America.
 
    COST OF SALES-- Cost of sales for 1997 of $404.1 million was 75.5% of net
sales compared to 75.7% of net sales for 1996. The slight improvement (decrease
in cost of sales as a percent of net sales) can be attributed to the favorable
impact of increased production volumes from net sales growth offsetting the
current year's unfavorable impact of increased capital investment in
manufacturing capacity. Cost of sales as a percentage of net sales improved in
North America, while that in Europe worsened in 1997 compared to 1996.
 
    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES-- Selling, general and
administrative expenses for 1997 of $52.6 million increased by $0.7 million or
1.4% from 1996 expenses of $51.9 million. The small increase reflects general
inflation, partially offset by the cost reduction efforts in Germany and the
favorable impact of currency fluctuations in translation. As a percentage of net
sales, 1997 expenses were 9.8% compared to 11.1% in 1996. This improvement is a
result of the growth in net sales compared to the relatively fixed nature of
these expenses, along with the cost reduction efforts referred to above.
 
    RESEARCH AND DEVELOPMENT EXPENSES-- Research and development expenses for
1997 of $20.7 million increased by $0.2 million, or 1.0% from 1996 expenses of
$20.5 million. Without the impact of currency fluctuations the increase was
4.2%. This reflects normal increases in wage rates and other general inflation.
 
    NONOPERATING EXPENSES, NET-- Net nonoperating expenses for 1997 of $6.3
million increased by $0.9 million from 1996 net nonoperating expenses of $5.4
million. Net interest expense for 1997 of $7.6 million increased by $1.6 million
from 1996 net expense $6.0 million due to the increase of one percentage point
in the weighted average interest rate for 1997 compared to 1996 and the increase
of $4.1 million in the average daily short-term borrowings for 1997 compared to
1996. Other income increased by $.0.7 million due to changes in gains and losses
relating to disposals of fixed assets and currency transactions.
 
                                       45
<PAGE>
    PROVISION FOR INCOME TAXES-- Provision for income taxes for 1997 of $15.9
million increased by $5.7 million from the 1996 provision of $10.2 million. The
increase comes from the increase in net income before income taxes of $13.9
million and the increase in the effective tax rate for 1997 of 37.0% from the
1996 rate of 35.1%
 
    NET INCOME-- Net income of $27.1 million increased by $8.2 million from 1996
net income of $18.9 million, driven by the 14.5% increase in net sales. North
America accounted for the increase which was in line with its increase in net
sales. European 1997 net income remained unchanged compared to 1996, due to
level sales between years and the weaker Deutsche mark, which had a negative
impact on U.S. dollar intersegment purchases from North America, but from which
North America benefited on intersegment purchases from Europe.
 
    ORDER BACKLOG-- Total order backlog at the end of 1997 was $277.5 million
compared to $227.0 million at the end of 1996, an increase of $50.5 million or
22.3%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
    The Company's principal sources of liquidity have been from internally
generated funds, from borrowings under it's credit facilities and from the
Company's initial public offering during 1998.
 
    Net cash provided by operating activities for 1998 of $63.5 million
increased by $20.8 million from $42.7 million for 1997. The increase between
periods arose primarily from cash flow relating to improved management of
inventories and receivables and increases in accrued liabilities.
 
    Net borrowing increases under short and long-term credit facilities for 1998
were $2.6 million compared to the net increases in 1997 of $35.7 million. Net
borrowings for 1998 showed little net change due to the net proceeds from the
Company's initial public offering of $48.1 million during the second quarter.
 
    Capital expenditures for 1998 of $98.6 million increased by $31.8 million
from 1997 capital expenditures of $66.8 million. In 1998, the Company continued
a trend in recent years of significant capital expenditures intended to increase
the Company's production capacity, flexibility and efficiency and to improve
product quality. Some of the more significant expenditures during 1998 included
the acquisition of the real estate and building of the Company's main facility
in Germany during the second quarter, the building of the recently completed
manufacturing plant in Lawrence, Kansas, the addition of 30,000 square feet to
the Hydro-Gear facility and the increased production capacity added in the
Slovakian plants. In all, approximately 52% of 1998 capital expenditures
occurred in North America, while 47% were in Europe and some small amounts in
Asia.
 
    The cash provided by operating activities and the initial public offering
funded 1998 capital expenditures of $98.6 million, dividends of $7.7 million and
distributions to minority interest partners of $7.9 million.
 
    In light of the economic conditions mentioned in the "Overview" above, the
Company is in the process of reevaluating its capital expenditure requirements
for the next few years. The primary emphasis will be on adding capacity to
handle additional new programs, to continue to improve long-term efficiency and
to remain cost competitive. For example, the recently completed Lawrence plant
will produce medium power hydrostatic transmissions. This additional plant space
will free up capacity at the Company's Ames facility which will be used to
expand the production of high power hydrostatic transmissions for new programs.
However, in light of the economic softening referred to earlier, the Company is
slowing its plans to transition production to the new Lawrence facility. The
Company's manufacturing plants in Slovakia and China, which started production
in 1995 and 1997, respectively, are still under development and will require
further investment in production machinery to increase their operating capacity
and efficiency, although this will be done in consideration of economic
conditions. The Company plans to continue to fund its capital expenditures from
internally generated funds and increased borrowings under its credit
 
                                       46
<PAGE>
facilities which have been reduced with the funds obtained from the Company's
initial public offering of common stock. These sources of funds are expected to
be sufficient to support the planned capital expenditures and the Company's
working capital requirements.
 
    Effective May 15, 1998, the Company completed its initial public offering of
common stock. The net proceeds to the Company from the sale amounted to
approximately $48.1 million. The net proceeds were used to repay $15.0 million
of long-term indebtedness, to purchase $15.7 million of real estate and
buildings for the Company's main facility in Germany previously leased from
Sauer Hydraulik, and the balance was used to fund capital expenditures.
 
    DIVIDEND RESTRICTIONS-- At December 31, 1998, the Company had $47.0 million
of unused lines of credit, consisting primarily of committed U.S. lines of
credit and uncommitted European lines of credit. The Company's ability to pay
dividends to its stockholders is effectively limited by certain restrictive
covenants contained in the U.S. Operating Company's and German Operating
Company's credit agreements, which limit the amount of dividends the U.S.
Operating Company and German Operating Company can distribute to the Company.
During 1998, the U.S. Operating Company made distributions to the Company of
$12.0 million. At December 31, 1998, an additional $14.0 million was not
restricted as to payment of dividends by the U.S. Operating Company. The German
Operating Company did not make distributions to the Company during 1998 and at
December 31, 1998, $3.0 million was not restricted as to the payment of
dividends.
 
OTHER MATTERS
 
    YEAR 2000 COMPLIANCE-- The Year 2000 computer issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's systems or applications that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in a range of issues from system failures
to miscalculations. Incomplete or untimely resolution of the Year 2000 issue by
the Company or critically important suppliers or customers of the Company could
have a materially adverse effect on the Company's business, operations or
financial condition.
 
    To mitigate this risk, the Company has established a company-wide initiative
to identify, evaluate and address Year 2000 issues. Included in the scope of
this initiative are the operational and financial information technology
systems, embedded software contained in machinery and equipment, and other
end-user computing resources and building systems. In addition, the project
includes a review and evaluation of the Year 2000 compliance efforts of the
Company's key suppliers and customers.
 
    The Company's overall Year 2000 project approach and status is as follows:
 
<TABLE>
<CAPTION>
                                                                                   TIMETABLE FOR
DESCRIPTION OF APPROACH                                     STAGE OF COMPLETION     COMPLETION
----------------------------------------------------------  -------------------  -----------------
<S>                                                         <C>                  <C>
Inventory and assessment for Y2K impact of all systems....              90%      March 31, 1999
Compliance of operational and financial systems...........              85%      March 31, 1999
Compliance of computer-dependent machine tools and
 equipment................................................              50%      June 30, 1999
Compliance of personal computers..........................              50%      June 30, 1999
Compliance of building-related systems....................              25%      June 30, 1999
</TABLE>
 
    In addition to assessing the Company's Year 2000 readiness, the Company has
contacted its major production suppliers via a confirmation letter program and
received responses from approximately 95% of all those suppliers stating that
Year 2000 readiness will be achieved by December 31, 1999. The Company cannot
guarantee that third parties on whom it depends for essential supplies and
materials will convert their critical systems and processes in a timely manner.
Failure or delay by any of these parties could
 
                                       47
<PAGE>
significantly disrupt the Company's business. Although no specific testing of
the readiness of the Company's suppliers is currently planned, an on-going
evaluation of the Company's suppliers will be continued.
 
    The Company's Year 2000 project is being completed primarily through the use
of its internal information technology staff, with support from outside
contractors where necessary. In addition, the Company's internal audit staff is
performing periodic evaluations of all of the Company's business units to assess
Year 2000 readiness. On-site Year 2000 reviews were completed at the end of 1998
with follow up reviews scheduled to be completed by the end of the second
quarter of 1999. The cost of the Company's information technology and internal
audit staff to evaluate and upgrade the systems has not been separately
accounted for or estimated as the Company does not believe this to be material.
Although the Year 2000 project is a primary focus for each business unit, there
have not been any material information technology projects which have been
deferred due to the Year 2000 efforts. The cost of obtaining the operational and
business system upgrades is part of the on-going maintenance of the systems to
remain current with new releases, and accordingly, has not been separately
accounted for or estimated.
 
    The Company believes its greatest risk lies within its operating and
financial computer systems. Necessary changes to make these systems Year 2000
ready were made as of December 31, 1998. Testing of these systems will continue
during the first half of 1999. If these systems were to fail, the Company would
encounter difficulty performing functions such as compiling financial data,
invoicing customers, paying suppliers and communicating production requirements
to its manufacturing plants. While some of these functions could be performed
manually, the Company presently is not certain what the extent of the impact on
operations would be.
 
    Company locations are adding Year 2000 specifics to standard contingency
plans where warranted. There is no company-wide contingency plan relating to the
Year 2000. The Company intends to have completed the essential Year 2000 changes
by December 31, 1999. The Company's plans and the date on which the Company
believes it will complete its Year 2000 computer modifications are based on its
best estimates. These estimates, in turn, are based on numerous assumptions of
future events, including third-party modification plans, continued availability
of resources and other factors. The Company cannot be sure that these
assumptions are accurate or that these estimates will be achieved, and actual
results could differ materially from those anticipated.
 
    EURO CURRENCY CONVERSION-- The Company has prepared for the conversion to
the euro currency and has begun handling transactions in the euro as of the
beginning of 1999. The Company's business systems are multi-currency functional
and the Company's European operations transact business today in various
European currencies, including the euro. The Company does not have an estimate
of the cost it incurred to implement the euro currency, but does not believe the
costs have had a material effect on the Company's financial condition or results
of operations.
 
    ASIAN CRISIS IMPACT-- Several countries in Asia continue to experience a
severe economic crisis, characterized by reduced economic activity, lack of
liquidity, highly volatile foreign currency exchange and interest rates and
unstable stock markets. The Company has a 60% interest in a joint venture
located in Shanghai, China, which manufactures and sells high power hydrostatic
transmissions. The Company also has export sales into Asia. The joint venture
business and export sales have been and will continue to be affected by the
economic crisis. Sales for 1998 were down 31.7% from 1997 levels. With total
assets of $13.5 million located in China and total Asian sales for 1998 of $12.2
million, the Company has experienced some adverse effect on the results of its
operations, particularly given the higher margins attributable to such sales.
Many of the Company's customers also sell into Asia. Any impact on their sales
could have an adverse impact on the Company's sales. The Company does not
believe that the Asian crisis will have as significant an impact in 1999 as in
1998. Sales for 1999 are expected to improve slightly over 1998. As a result,
the Company does not believe the impact on its sales, either individually or
together with the impact of the Asian crisis on export sales and the joint
venture business, will have a material adverse effect on its financial condition
or results of operations, although there can be no assurance in this regard.
 
                                       48
<PAGE>
    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS-- During 1998, the Company
adopted two newly-issued accounting standards relating to presentation and
disclosure of certain information. The Company has also evaluated the effects of
two additional standards issued in 1998 and has concluded that these, coupled
with the two standards adopted, do not have any material effect on the Company's
financial position or results of operations. See Note 3 of the Notes to
Consolidated Financial Statements.
 
    OUTLOOK-- Since mid-1998, the general level of global economic confidence
appears to have fallen considerably. In particular, the agriculture market has
been severely hit with falling commodity prices, Asia continues to struggle,
Brazil has now devalued its currency, and there are concerns over the general
economy in North America. The Company derives less than 20% of its worldwide
sales from the agriculture market, less than 3% from Asia and less than 1% from
Brazil. While the Company expects to see a downturn in its core business of
perhaps 10% in 1999, overall sales are expected to remain flat to slightly
higher in 1999 due to a number of new customer programs which begin production
in 1999. The Company expects to experience pressure on profit margins, although
steps have already been taken to contain operating expenses and other fixed
costs in order to lessen this pressure. The Company believes it will continue to
out pace the growth in its markets due to ever-increasing opportunities in a
broad range of applications coupled with an emphasis on controlling costs.
 
                                       49
<PAGE>
                                   SCHEDULE I
                            SAUER INC. (PARENT ONLY)
                            CONDENSED BALANCE SHEETS
                        AS OF DECEMBER 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                                                               1997        1998
                                                                                            ----------  ----------
<S>                                                                                         <C>         <C>
ASSETS
Current assets--
  Cash....................................................................................  $       19  $       35
  Other current assets....................................................................       2,116       4,151
                                                                                            ----------  ----------
    Total current assets..................................................................       2,135       4,186
 
Receivables from subsidiaries.............................................................       4,669      33,631
Intangible assets, net....................................................................         391       1,031
Equity investment in subsidiaries*........................................................     101,924     116,411
Other.....................................................................................       4,479       1,409
                                                                                            ----------  ----------
                                                                                            $  113,598  $  156,668
                                                                                            ----------  ----------
                                                                                            ----------  ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities.......................................................................  $    1,913  $      280
Long-term debt............................................................................      15,000          --
Payables to subsidiaries..................................................................       3,023       1,261
Other long term liabilities...............................................................       8,361       6,223
                                                                                            ----------  ----------
    Total liabilities.....................................................................      28,297       7,764
                                                                                            ----------  ----------
Stockholders' equity--
  Common stock, par value $.01 per share, authorized 45,000,000 in 1997 and 1998; issued
    24,900,000 in 1997 and 28,072,050 in 1998; outstanding 24,225,000 shares in 1997 and
    27,397,050 in 1998....................................................................         249         281
  Additional paid-in capital..............................................................      75,098     120,092
  Retained earnings.......................................................................      12,773      31,416
  Accumulated other comprehensive income..................................................        (119)      1,813
  Unamortized restricted stock compensation...............................................          --      (1,998)
Common stock in treasury (at cost), 675,000 shares in 1997 and 1998.......................      (2,700)     (2,700)
                                                                                            ----------  ----------
      Total stockholders' equity..........................................................      85,301     148,904
                                                                                            ----------  ----------
                                                                                            $  113,598  $  156,668
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>
 
------------------------
 
*Equity investment in subsidiaries, net, reported in the above condensed balance
sheet as of December 31, 1998, includes $72,057 and $14,463 of net worth related
to the U.S. and German Operating Companies, respectively. The U.S. Operating
Company is subject to financial covenants related to its Revolving Credit
Facility that, among other things, require that the U.S. Operating Company
maintain net worth (as defined) of not less than the sum of $46,800, plus 35% of
the U.S. Operating Company's quarterly net income, if positive, for each fiscal
quarter ending on or after March 31, 1997. At December 31, 1998, restricted net
worth was $64,986. The German Operating Company is subject to similar financial
covenants that require the German Operating Company to maintain net worth of not
less than 15% of total assets. At December 31, 1998, restricted net worth was
$11,597.
 
                                       50
<PAGE>
                               SCHEDULE I (CONT.)
                            SAUER INC. (PARENT ONLY)
                         CONDENSED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                                              1996          1997          1998
                                                                          ------------  ------------  ------------
<S>                                                                       <C>           <C>           <C>
Equity earnings of subsidiaries.........................................  $     16,990  $     28,567  $     24,859
 
Expenses, net--
  Selling, general and administrative...................................         3,298         5,921         2,857
  Interest (income) expense.............................................           927           735          (900)
  Other expense, net....................................................           389           (31)          112
                                                                          ------------  ------------  ------------
    Expenses, net.......................................................         4,614         6,625         2,069
 
    Income from operations before income taxes..........................        12,376        21,942        22,790
 
Benefit for income taxes................................................         6,522         5,187         3,544
                                                                          ------------  ------------  ------------
 
  Net income............................................................  $     18,898  $     27,129  $     26,334
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Basic and diluted net income per common share...........................  $        .78  $       1.12  $       1.01
                                                                          ------------  ------------  ------------
 
Weighted average basic shares outstanding...............................    24,225,000    24,225,000    26,148,288
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
Weighted average diluted shares outstanding.............................    24,225,000    24,225,000    26,150,302
                                                                          ------------  ------------  ------------
                                                                          ------------  ------------  ------------
</TABLE>
 
                                       51
<PAGE>
                               SCHEDULE I (CONT.)
                            SAUER INC. (PARENT ONLY)
                       CONDENSED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                                                   1996        1997        1998
                                                                                ----------  ----------  ----------
<S>                                                                             <C>         <C>         <C>
Cash flows from operating activities--
  Net income..................................................................  $   18,898  $   27,129  $   26,334
  Adjustments to reconcile net income to net cash provided by operating
    activities--
    Equity earnings of subsidiaries...........................................     (16,990)    (28,567)    (24,859)
    Dividends received from subsidiaries......................................      16,200      21,879      12,000
    Depreciation and amortization.............................................         422         421         360
    Change in working capital.................................................      (3,522)     (6,415)     (1,979)
    Other.....................................................................        (272)      3,353          70
                                                                                ----------  ----------  ----------
    Net cash provided by operating activities.................................      14,736      17,800      11,926
                                                                                ----------  ----------  ----------
Cash flows used in investing activities--
  Contributions to subsidiaries...............................................      (4,442)     (9,680)     (6,595)
                                                                                ----------  ----------  ----------
Cash flows from financing activities--
  Repayments of long-term debt................................................      (5,000)         --     (15,000)
  Net financing from (to) subsidiaries........................................       2,982        (895)    (30,724)
  Sale of common stock........................................................          --          --      48,100
  Cash dividends..............................................................      (7,752)     (7,752)     (7,691)
                                                                                ----------  ----------  ----------
  Net cash used in financing activities.......................................      (9,770)     (8,647)     (5,315)
                                                                                ----------  ----------  ----------
Cash--
  Net increase (decrease) during the year.....................................         524        (527)         16
  Beginning balance...........................................................          22         546          19
                                                                                ----------  ----------  ----------
Ending balance................................................................  $      546  $       19  $       35
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
</TABLE>
 
                                       52
<PAGE>
                                  SCHEDULE II
                          SAUER INC. AND SUBSIDIARIES
                       VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                      BALANCE AT   CHARGED TO
                                                       BEGINNING    COSTS AND   RECEIVABLES  BALANCE AT
                                                        OF YEAR     EXPENSES    WRITTEN OFF  END OF YEAR
                                                      -----------  -----------  -----------  -----------
 
<S>                                                   <C>          <C>          <C>          <C>
For the year ended December 31, 1996:
  Allowance for Doubtful Accounts...................   $   3,406    $    (429)   $    (287)   $   2,690
 
For the year ended December 31, 1997:
  Allowance for Doubtful Accounts...................   $   2,690    $   1,110    $    (605)   $   3,195
 
For the year ended December 31, 1998:
  Allowance for Doubtful Accounts...................   $   3,195    $     128    $    (157)   $   3,166
</TABLE>
 
                                       53
<PAGE>
                              REPORT ON SCHEDULES
 
    We have audited in accordance with generally accepted auditing standards,
the financial statements included in Sauer Inc.'s annual report to stockholders
and included in this Form 10-K (File No. 333-48299), and have issued our report
thereon dated February 17, 1999. Our audits were made for purposes of forming an
opinion on those statements taken as a whole. Schedules I and II listed in Item
14.(a)(2) are the responsibility of the company's management and are presented
for purposes of complying with the Securities and Exchange Commission's rules
and are not part of the basic financial statements. These schedules have been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
 
Chicago, Illinois
February 17, 1999
 
                                       54