UNITED STATES
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 30, 2000 Commission file number 0-21835
SUN HYDRAULICS CORPORATION
--------------------------
(Exact Name of Registration as Specified in its Charter)
FLORIDA 59-2754337
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1500 WEST UNIVERSITY PARKWAY
SARASOTA, FLORIDA 34243
- --------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
941/362-1200
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant on February 26, 2001, was $23,013,273 based upon the closing sale
price of $7.125 on the Nasdaq Stock Market's National Market for that date. As
of February 26, 2001, there were 6,384,948 shares outstanding.
PART I
ITEM 1. BUSINESS
Certain statements contained in this "Item 1. Business" that are not historical
facts are "forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934. See "Item 7. Forward-Looking Information."
OVERVIEW
The Company is a leading designer and manufacturer of high-performance
screw-in hydraulic cartridge valves and manifolds, which control force, speed
and motion as integral components in fluid power systems. The innovative
floating construction of the Company's screw-in cartridge valves and the design
of the cavities in which they are installed provides demonstrable performance
and reliability advantages compared to other available screw-in cartridge
valves. The Company designs and manufactures one of the most comprehensive
lines of screw-in hydraulic cartridge valves and manifolds in the world. The
Company has generated a profit every year since 1972 and has paid a dividend
every quarter since its public offering in 1997. The Company believes that its
success is primarily a result of its innovative product design, consistent high
quality, superior product performance and the breadth of the markets it serves.
Fluid power (hydraulics and pneumatics) involves the transfer and
control of power through fluids (oil or air) under pressure. Fluid power
systems are integral to a wide variety of manufacturing, material handling,
agricultural and construction equipment and many other capital goods. Due to
its mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power systems are typically comprised of
valves and manifolds that control the flow of fluids, a pump that generates
pressure, and actuators such as cylinders and motors that translate pressure
into mechanical energy.
Management believes that screw-in hydraulic cartridge valves and
manifolds have captured approximately $750 million of the worldwide market for
all non-aerospace hydraulic valves and manifolds since their introduction in
the 1950s. Management believes this market to be in excess of $4 billion.
Screw-in cartridge valves are an accepted alternative to conventional forms of
hydraulic valving, offering significant design flexibility, as well as
substantial size, weight and efficiency benefits to designers of hydraulic
systems. A manifold is a solid block of metal, usually aluminum, steel or
ductile iron, that is machined to create threaded cavities and channels into
which screw-in cartridge valves are installed and through which the hydraulic
fluids flow. Fluid power engineers can package standard or customized manifolds
with screw-in cartridge valves to create application-specific,
multiple-function hydraulic control systems that are safe, reliable and provide
substantial control.
The Company's products include valves that provide directional
control, pressure and flow control, and motion and load control, as well as a
variety of other functions. Valves are currently available in up to five
different size ranges, and are suitable for flows from 1 to 400
2
gallons per minute and continuous operating pressures up to 5,000 pounds per
square inch. The Company believes its floating construction is a significant
competitive advantage due to its self-alignment characteristic that
accommodates potential manufacturing deviations common in the thread-making
operations of screw-in cartridge valves and manifolds. Floating construction
significantly differentiates the Company from most of its competitors, which
predominantly design and manufacture rigid screw-in cartridge valves that fit
into an industry common cavity. The Company believes that competing products
typically do not offer the inherent reliability of the Company's products and
cannot provide equivalent operating performance because of the design
constraints imposed by the industry common cavity. Some competitors have begun
to manufacture products that fit into the Company's cavity. Strategically, the
Company believes the markets for its products will expand more rapidly as other
competitors manufacture products that fit the Company's cavity. In addition to
screw-in cartridge valves, the Company also designs and produces the most
comprehensive line of standard, cataloged manifolds in the screw-in cartridge
valve and manifold industry, as well as custom manifolds that incorporate the
Company's screw-in cartridge valves.
The Company sells its products primarily through a global network of
independent fluid power distributors to a diverse universe of end users, for
use in various "mobile" applications, such as construction, agricultural and
utility equipment (approximately 66% of net sales), and a broad array of
"industrial" applications, such as machine tools and material handling
equipment (approximately 34% of net sales). While many of the Company's end
users are subject to cyclical demand for their products, the Company mitigates
this exposure through the wide variety of applications and industries it
serves. Sales to the Company's largest distributor represented less than 7.5%
of net sales in 2000, and the Company believes that aggregate sales by its
distributors to the largest end user represented less than 3% of net sales in
2000.
The Company believes that screw-in cartridge valves will continue to
achieve significant growth at the expense of conventional hydraulic valves as
design engineers recognize the inherent advantages of screw-in cartridge
valves. The Company believes that additional growth potential for screw-in
cartridge valve applications exists as a result of a trend toward
miniaturization as end users require smaller, lighter-weight and more efficient
components. Custom manifolds that utilize screw-in cartridge valves allow
customers to design an optimal solution for control of their fluid power
systems that significantly reduces assembly time and expense. The United States
and Western Europe are the largest developed markets for screw-in cartridge
valves and the Company believes these markets will continue to expand. The
Company believes the long-term future growth prospects are particularly
attractive in the Pacific Rim, Eastern Europe, and South America where the
adoption of screw-in cartridge valves is in the early stage. During 2000,
approximately 40% of the Company's net sales were outside the United States.
The Company's goal is to grow its business by helping to increase the
market awareness of the benefits of using screw-in cartridge valves, expanding
its geographic presence, and continuing to expand its product offerings to
increase its market share.
The Company was organized as a Florida corporation in 1986 to take
over the operations of the business of the Company's predecessor, Suninco, Inc.
(f/k/a Sun Hydraulics Corporation).
3
Suninco, Inc. was founded in 1970 by Robert E. Koski for the specific purpose
of developing and promoting screw-in cartridge valve technology. The address of
the Company's executive offices is 1500 West University Parkway, Sarasota,
Florida 34243, its telephone number is (941) 362-1200, and its website address
is www.sunhydraulics.com.
INDUSTRY BACKGROUND
Fluid power is one of three basic technologies, along with electrical
and mechanical, utilized to achieve power transmission and motion control. Due
to its mechanical advantage, fluid power is widely employed to move and
position materials, control machines, vehicles and equipment, and improve
industrial efficiency and productivity. Fluid power can perform work on very
light loads with a high degree of accuracy or develop enormous forces to move
and position materials and equipment that weigh many tons.
Screw-in hydraulic cartridge valves first appeared in the late 1950s
as an alternative to conventional forms of hydraulic valving. Conventional
hydraulic valves are generally larger in size, typically manufactured from
cumbersome iron castings, relatively limited in their ability to interface with
machinery and equipment, and are usually simple devices designed to control a
single task. Screw-in cartridge valves represent a miniaturization of hydraulic
valves, providing the same functional characteristics as conventional valves,
but in a smaller package size. In addition to being lighter-weight and more
compact, screw-in cartridge valves frequently offer significant advantages in
interface flexibility and cost over conventional hydraulic valves.
Screw-in cartridge valves have achieved greater marketplace acceptance
in recent years as hydraulic system design engineers increasingly use them to
develop multiple-function control systems. A number of screw-in cartridge
valves can be grouped together in a manifold, creating a hydraulic control
system that is functionally analogous to an electronic integrated circuit. End
users can utilize screw-in cartridge valves and custom manifolds to design an
optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense.
STRATEGY
The Company's objective is to enhance its position as one of the
world's leading designers and manufacturers of screw-in hydraulic cartridge
valves and manifolds by (i) broadening the market for screw-in cartridge valve
applications, (ii) continuing the geographic expansion of its markets, and
(iii) selectively expanding its product lines. Key elements of the Company's
strategy include the following:
Deliver Value Through High-Quality, High-Performance Products. The
Company's products are designed with operating and performance characteristics
that exceed those of many functionally similar products. Overall, the Company's
products provide high value because they generally operate at higher flow rates
and pressures than competitive offerings of the same size. The Company tests
100% of its screw-in cartridge valves to ensure the highest level of
performance on a consistent basis.
4
Offer a Wide Variety of Standard Products. The Company currently
offers one of the most comprehensive lines of non-solenoid screw-in cartridge
valves and manifolds in the world and has recently released solenoid screw-in
cartridge valves. The Company is committed to producing functionally superior,
standard products that contain a high degree of common content to minimize work
in process and maximize manufacturing efficiency. Products are designed for use
by a broad base of industries to minimize the risk of dependence on any single
market segment or customer. The Company, in the future, will seek to expand its
business through development of new products that are complementary to its
existing products. The Company will also consider expanding the size ranges of
products it offers by sizing certain products to larger sizes.
Expand the Product Line. The Company is continuously engaged in new
product development programs to offer new and better cartridge valve solutions
to its customers. New cartridge products generally fit into existing cavities,
often allowing them to be installed in existing standard manifolds. The Company
also sizes its products to meet different application requirements. The recent
introduction of the Series `0' products in 1996 halved the flow capacity of the
Company's Series `1' products. In the future, the Company may continue to size
some of its products with the intent of offering products suitable for
different application areas. In 1999, the Company introduced the first products
in a new range of electrically actuated (solenoid) cartridge valves. The new
solenoid cartridge valves establish a foundation to expand this range of
products into other electrically actuated control valves, including
proportional controls. With the introduction of these products, the Company
believes it gains the opportunity to obtain sales for which it previously could
not compete, and further believes that the solenoid cartridge valves will help
increase sales of the Company's other cartridge valve and manifold products.
Capitalize on Custom Manifold Opportunities. Because fluid power
system design engineers are increasingly incorporating screw-in cartridge
valves into custom control systems, the Company will concentrate its efforts in
custom manifolds in two ways. The Company will design and manufacture
manifolds, which incorporate the Company's screw-in cartridge valves for sale
to original equipment manufacturers ("OEMs"). The Company's
internally-developed, proprietary expert system software allows the Company to
manufacture manifolds efficiently in low quantities. The Company will also
encourage competitive manifold manufacturers to utilize the Company's screw-in
cartridge valves in their manifold designs. The Company sells tooling for
machining its cavities, allowing independent manifold manufacturers easily to
incorporate the Company's screw-in cartridge valves into their designs.
Expand Global Presence. The Company intends to continue to increase
its global presence through expansion of its distribution network and its
international manufacturing capabilities. In addition to operating units in the
United States, England, Germany, Korea and a joint venture in China, the
Company has strong distributor representation in most developed and developing
markets, including Canada, Western Europe, Taiwan, Singapore, Australia, and
Japan. In 2000, the Company generated approximately 40% of its net sales
outside the United States. Key areas for expansion where the Company has
minimal presence include Central and South America, China and Eastern Europe.
The Company believes that further expansion of its international manufacturing
facilities could enhance its competitive position in certain foreign
5
markets. In addition, custom manifolds provide an opportunity for operating
units and distributors to offer significant value-added content through the
local production of manifolds that incorporate the Company's screw-in cartridge
valves. This strategy helps minimize potential tariffs and duties that could
inflate the price of the Company's products in foreign markets.
Maintain a Horizontal Organization with Entrepreneurial Spirit. The
Company believes that maintaining its horizontal management structure is
critical to retaining key personnel and an important factor in attracting top
talent from within the hydraulic valve and manifold industry. The Company will
strive to maintain its horizontal management structure that encourages
communication, creativity, and entrepreneurial spirit and individual
responsibility among employees. Employee initiatives have led to continuous
process improvements, resulting in considerable operating efficiencies and
quality control, as well as the maintenance of a safe and comfortable working
environment. The Company believes that a lack of job titles and direct formal
reporting responsibilities eliminates perceived barriers to advancement and
reduces the potential for adversarial relationships to arise within the
organization. A workplace without walls in the Company's offices as well as on
the shop floor encourages informal employee consultation and provides the
opportunity for all personnel to interface across functional areas.
Leverage Manufacturing Capability and Know-how as Competitive
Advantages. The Company believes that one of its competitive advantages is its
ability to manufacture products to demanding specifications. The Company's
strong process capability allows it to machine parts to exacting dimensional
tolerances, resulting in the high performance characteristics of its screw-in
cartridge valves. The Company has the ability to control manufacturing
processes to replicate products consistently and can, if desired, manufacture
most of the components of its products with the exception of springs, elastomer
seals, and electrical coils. The Company has in-house heat treatment capability
to provide consistent and reliable control of this critical operation. Many of
the processes discovered and/or developed by the Company often allow cartridge
valve design engineers to create new products that otherwise may not have been
considered.
Sell Through Distributors. Due to the variety of potential customers
and the Company's desire to avoid unnecessary bureaucracy, the sales function
has been performed primarily by independent distributors. The Company has
approximately 75 distributors, 52 of which are located outside the United
States, and a majority of which have strong technical backgrounds or
capabilities, which enable them to develop practical, efficient, and
cost-effective fluid power systems for their customers. Many of these
distributors sell products manufactured by other companies that allow them to
provide a complete hydraulic system to the customer. The Company provides a
high level of technical support to its distributors through open access to the
Company's engineering staff, technical documentation, and technical training
programs. In addition, the Company maintains close relationships with many OEMs
and end users of its products to help it understand and predict future needs
for fluid power control devices and to test and refine new product offerings.
Brand Label and License Manufacturing where desirable. Two areas the
Company has not historically exploited to increase the market penetration of
its products are brand labeling and manufacturing licensing agreements. In
1999, the Company entered into a non-exclusive supply agreement with Mannesmann
Rexroth, A.G. ("Rexroth"), a German full-line hydraulic
6
component and systems manufacturer, under which the Company will manufacture
selected products carrying the Rexroth logo. In addition, the Company has a
non-exclusive licensing agreement whereby Rexroth will manufacture some of the
Company's products for use in its own fluid power systems. The Company may also
consider entering into similar agreements with other manufacturers of fluid
power components if it deems it to be of strategic benefit.
PRODUCTS
SCREW-IN CARTRIDGE VALVES
The Company designs and manufactures high-performance, screw-in
hydraulic cartridge valves in up to five size ranges, suitable for flows from
one to 400 gallons per minute and continuous operating pressures up to 5,000
pounds per square inch. The floating construction pioneered by the Company
provides demonstrable performance and reliability advantages compared to most
competitors' product offerings due to its self-alignment characteristic that
accommodates potential manufacturing deviations common in the thread-making
operations of screw-in cartridge valves and manifolds. This floating
construction significantly differentiates the Company from most of its
competitors, which design and manufacture rigid screw-in cartridge valves that
fit an industry common cavity. The floating construction of the Company's
screw-in cartridge valves eliminates the tendency of working parts inside the
cartridge valves to bind when screwed into the manifold, which leads to
unnecessary stress and, often, premature failure. Recently some competitors
have begun to manufacture products that fit the Company's cavity.
Strategically, the Company believes the markets for its products will expand
more rapidly if other sources are available for products that fit the Company's
cavity. One company specifically, Rexroth, has formally announced that it will
begin designing and manufacturing a line of screw-in cartridge valves that fit
the Company's cavity. The Company considers this announcement a strong
endorsement of its design principles and is working with Rexroth as it begins
its design program.
The Company has historically developed new market opportunities by
sizing its screw-in cartridge valves to accommodate application requirements
with various flow ranges. Most recently, the Company sized some of its products
downward and introduced its series `0' valve in 1996. Management believes that
these products contribute to increased sales because of their suitability to a
broad segment of market-application areas. Management believes that upward
sizing of the product line may represent an opportunity for future growth.
The Company manufactures screw-in cartridge valves for load control,
pressure control, flow control, and logic and directional control, with a broad
range of other functional offerings. Many variants of the same basic functional
products can be interchanged with each other to attain an optimum level of
performance in a customer's fluid power system. Some of the Company's screw-in
cartridge valves are described below:
Load Control Valves. The Company considers itself to be the
world's recognized leader in the design and manufacture of load
control valves and believes that it holds a dominant market share
position in multiple end use applications. Load control valves are
pressure devices that are used to control the motion and locking of
linear and rotary
7
hydraulic actuators (cylinders and motors) and often are used as
safety devices in many critical system areas. Typical applications for
these products include cranes, manlifts, and aerial platforms. The
uncompromising requirement for smooth and reliable operation in these
applications has helped build the Company's reputation as a high
quality, screw-in cartridge valve manufacturer. Load control valves
represent the Company's largest selling product family. The Company
believes that most valves that fit the Company's cavity that are being
manufactured by competitors are load control valves. The Company does
not believe any competitive manufacturer produces sufficient volume,
or offers the variety of different valve configurations that the
Company does, to materially affect the Company's revenues.
Pressure Control Valves. The Company manufactures a variety
of screw-in cartridge valves that control pressure in fluid power
systems. Types of pressure controls include relief valves, reducing
valves, reducing/relieving valves, sequence valves, and unloading
valves. Typically, the Company provides many alternatives of each
different type of pressure control valve, which allows machine
designers to more optimally design their fluid power systems. Most
hydraulic systems incorporate at least one pressure relief valve for
over-pressure protection. A new, patented "soft-ramp" relief valve
recently designed by the Company is being introduced in 2001.
Flow Control Valves. The Company manufactures a variety of
two-, three- and four-port valves to control the rate of flow of
fluids in fluid power systems. These valves typically are used to
control speed and are an integral component in most fluid power
systems. Variety and high flow capacity relative to physical size help
differentiate the Company in this product area.
Logic and Directional Control Valves. The Company
manufactures a variety of screw-in cartridge valves that can be used
as directional control devices. These valves are used to start, direct
and stop the flow of fluid in a fluid power system and can be actuated
electrically, pneumatically, manually or with hydraulic pressure. The
Company's logic control valves, some of which are patented, can be
used in combination with one another to provide complex directional
control functions.
Electrically Actuated Control Valves ("Solenoid") The Company
manufactures high-pressure spool-type pilot solenoid valves and other
pilot devices that can be used to actuate its logic and directional
control valves and other screw-in cartridge valves. Recognizing the
need for direct-acting solenoid valves, the Company, in 1999,
introduced a range of full-flow poppet and spool solenoid cartridge
valves that can be used for directional control. These products give
the Company entry into a large market not currently served by the
Company's other screw-in cartridge valves. In addition, the Company
believes that by offering its own solenoid cartridge valves, it will
be in a better position to compete for custom manifold business. The
basic design of the Company's solenoid cartridge valves establishes a
foundation to develop other electrical/hydraulic valves, including
proportional valves.
8
Other Complementary Products. The Company designs and
manufactures a broad array of screw-in cartridge valves that can be
applied in combination with other Company products to offer useful and
unique functionality. For example, the Company's Air-Bleed and
Start-Up cartridge valves help protect a fluid power system from
potential damage by releasing air trapped in the system when a machine
is shut down for maintenance. Many of these functional products are
not manufactured by any other competitors, providing the Company with
additional sales opportunities. While these products are not generally
demanded in high volumes, their usefulness across industries helps
strengthen the Company's brand name and market penetration. The
Company will continue to develop other complementary products in the
future.
MANIFOLDS
A manifold is a solid block of metal, usually aluminum or ductile
iron, which is machined to create threaded cavities and channels into which
screw-in cartridge valves can be installed and through which the hydraulic
fluid flows. The manifolds manufactured by the Company are described below:
Standard Manifolds. The variety of standard, catalogued manifolds
offered by the Company is unmatched by any screw-in cartridge valve
competitor. These products allow customers easily to integrate the
Company's screw-in cartridge valves into their systems in many
different ways. Once designed, standard manifolds require minimal, if
any, maintenance engineering over the life of the product. The
following are the types of standard manifolds manufactured by the
Company:
- Line Mounted Manifolds can be placed anywhere in a hydraulic
system and are easily connected to various standard
couplings. These specific products are suitable for both
mobile and industrial applications.
- Subplates and Sandwich Manifolds are offered in six different
sizes and industry standard interface patterns, and generally
are used in industrial applications. The Company believes
that the breadth of different functional screw-in cartridge
valves it manufactures allows it to offer more functionally
unique standard sandwich manifolds than any other cartridge
valve or conventional valve manufacturer.
- Motor Mount Manifolds fit a variety of the most common
commercially available hydraulic motor interface patterns.
These products allow users of hydraulic motors to buy
standard control elements to interface simply and easily with
their motors.
- Pre-packaged Valve Assemblies are pre-configured packages
designed to control common hydraulic circuits such as
hydrostatic drives, accumulator unloading, and cylinder
regeneration. These products typically contain at least two
dissimilar cartridges and allow designers to conveniently
purchase a standard valve package for common hydraulic
circuit requirements.
9
Custom Manifolds. Custom manifolds are designed for a
customer-specific application and typically combine many different
screw-in cartridge valves in a single package or multiple packages.
The Company's internally-developed, proprietary expert system software
allows the Company to manufacture manifolds efficiently in low
volumes. The innovative design of the Company's screw-in cartridge
valves allows manifolds to be physically smaller for certain
applications than functionally similar manifolds containing
competitors' screw-in cartridges that fit industry common cavities.
The Company believes many of the custom manifolds that incorporate
cartridge valves, which fit industry common cavities require testing
after assembly. The Company does not routinely test manifolds that
contain its screw-in cartridge valves because of the inherent
reliability of the cartridge valves and believes this provides a
significant competitive advantage. Custom manifolds provide many
benefits to end users and equipment manufacturers, including reduced
assembly time, reduced leakage points, neater packaging, potentially
fewer hose and fitting connections, and more control functions in a
single location.
ENGINEERING
The Company believes that it is critical for engineers to play an
important role in all aspects of the Company's business, including design,
manufacturing, sales and marketing and technical support. When designing
products, engineers work within a disciplined set of design parameters that
often results in repeated incorporation of existing screw-in cartridge valve
components in new functional products. The Company's focus on engineering has
served as the foundation of its ability to offer the expansive range of
screw-in cartridge valves that it brings to market.
Before designing functionally new screw-in cartridge valves, the
Company's engineers and sales and marketing personnel first establish
performance and operating requirements for the products. An iterative design
process is undertaken to meet the expected performance requirements in a
screw-in cartridge valve that fits the Company's cavity. Prototypes are
typically hand built and subject to extensive testing until the desired
performance levels are achieved. Before a new product is released for sale, the
Company's engineers will typically work with beta site customers to test the
product under actual field conditions.
During product development, engineers work closely with manufacturing
personnel to define the processes required to manufacture the product reliably
and consistently. The close link between engineering and manufacturing helps
smooth the transition from design to market. Design changes to facilitate
manufacturing processes are sometimes considered but not if product performance
levels would be compromised. The Company practices a continuous improvement
process, which it believes is largely attributable to its horizontal management
structure that empowers employees and encourages their creative contribution.
At various times the Company may incorporate design changes in a product to
improve its performance or life expectancy. All of the Company's engineers
provide application support to customers and distributors.
10
MANUFACTURING
The Company is a process intensive manufacturing operation that
extensively utilizes computer numerically controlled ("CNC") machinery to
manufacture its products. Where commercial machinery is not available for
specific manufacturing or assembly operations, the Company often designs and
builds its own machinery to perform these tasks. The Company makes extensive
use of automated handling and assembly technology (robotics) where possible to
perform repetitive tasks, thus promoting manufacturing efficiencies and
workplace safety. The Company has its own electric heat treatment furnaces to
provide consistent and reliable control of this important operation. A new heat
treatment furnace was installed in February 2000 in the Company's Manatee,
Florida, facility. The additional heat treatment furnace allows the Company to
increase capacity, reduce manufacturing cycle times and create redundant
capability for most of its in-house manufacturing processes.
The Company's manufacturing operations include turning, grinding,
honing and lapping operations for its screw-in cartridge valves and milling and
drilling operations for its manifolds. Most machinery employed by the Company
is computer numerically controlled, including CNC lathes and machining centers.
The Company also employs robots and a variety of vision systems for inspection
and decision making tasks. The Company utilizes internally developed,
proprietary, personal computer based software to program some machines off-line
and to minimize setup times. The Company also employs an expert system that
supports the use of compound angle holes in manifold designs, a technique that
allows manifolds to be made smaller in size with fewer potential leak points.
At its Sarasota, Florida, facility, the Company has extensive testing
facilities that allow its design engineers to test fully all cartridge valve
products at their maximum rated pressure and flow rates. A metallurgist and
complete metallurgical laboratory support the Company's design engineers and
in-house heat treatment. The resident engineers at the Company's other
facilities also utilize test equipment.
The Company employs a build-to-order philosophy and relies on its
distributors to purchase and maintain sufficient inventory to meet their
customers' demands. With this build-to-order philosophy, most raw materials,
including aluminum and steel, are delivered on a just-in-time basis. These and
other raw materials are commercially available from multiple sources.
The Company controls most critical finishing processes in-house but
does rely on a small network of outside manufacturers to machine cartridge
components to varying degrees of completeness. Many high-volume machining
operations are performed exclusively at outside suppliers. The Company is very
selective in establishing its supplier base and attempts to develop and
maintain long-term relationships with suppliers. The Company continually
reviews all of its suppliers to improve the quality incoming parts and to
assess opportunities for better control of both price and quality.
Manufacturing processes at the existing facilities in the United States,
England and Korea are certified to ISO 9002.
11
SALES AND MARKETING
The Company's products are sold globally, primarily through
independent fluid power distributors. Distributors are supported with product
education programs conducted by the Company at its facilities. Technical
support is provided by each of the Company's manufacturing operations (Florida,
England, Germany, Korea, and China). Included in the Company's sales and
marketing staff are hydraulic engineers who have significant experience in the
fluid power industry. Discount pricing structure encourage distributors to buy
in moderate to high volumes to ensure there is a local inventory of products in
the marketplace.
The Company currently has approximately 75 distributors, 52 of which
are located outside the United States and a majority of which have strong
technical backgrounds or capabilities, which enable them to develop practical,
efficient, and cost-effective fluid power systems for their customers. In 2000,
sales to the Company's largest distributor represented less than 7.5% of net
sales and net sales outside of the United States represented approximately 40%
of total net sales.
In addition to distributors, the Company sells directly to other
companies within the hydraulic industry under a pricing program that does not
undermine the primary distributors' efforts. Companies that participate in this
program utilize the Company's products in a value-added application,
integrating the Company's screw-in cartridge valves into other fluid power
products or systems of their manufacture. Management believes this strategy
strengthens the Company by encouraging other manufacturers to buy from the
Company. The "goodwill" relationships that result from this strategy also help
to keep the Company abreast of technological advances within the fluid power
industry, aiding in new product development.
In 1999, the Company signed a non-exclusive supply agreement with
Rexroth, a German manufacturer of fluid power components and systems, which
allows Rexroth to purchase the Company's standard products for incorporation
into its hydraulic systems. Rexroth is one of the largest hydraulic
manufacturers of fluid power systems in the world and has significant presence
in all major markets. Through this relationship, the Company believes that it
will gain entry into new markets, both geographically and for new applications.
Management anticipates that it will evaluate similar agreements with other
manufacturers' of fluid power components when to do so would be of strategic
benefit.
While the Company principally sells its products through distributors,
it provides end users with technical literature that sometimes include
suggested list prices along with suggested customer discounts. This program is
intended to provide design engineers with all information necessary to specify
and obtain the Company's products. Publishing and distributing technically
comprehensive catalogs in multiple languages makes the Company's products easy
to purchase.
12
CUSTOMERS
The Company believes that its single largest end use customer
represented less than 3% of net sales in 2000, minimizing risks of dependence
on major customers. Management does not believe that the loss of any one
customer would not have a material adverse effect on the Company's business.
End-users are classified by whether their primary applications for the
Company's products are "mobile" or "industrial."
Mobile applications involve equipment that generally is not fixed in
place and is often operated in an uncontrolled environment, such as
construction, agricultural and utility equipment. Mobile customers were the
original users of screw-in cartridge valves due to the premium that these
industries place on considerations of space, weight, and cost. Mobile customers
currently account for approximately 66% of the Company's net sales.
Industrial applications involve equipment that generally is fixed in
place in a controlled environment. Examples include presses, injection molding
equipment, and machine tools. The requirements of the industrial marketplace
are more demanding than most mobile applications since industrial equipment
typically operates at significantly higher cycles. The Company's products are
designed to withstand these operating imperatives, and industrial applications
currently account for approximately 34% of the Company's net sales. Many
conventional valve designs are still used in industrial applications and
represent substitution opportunities for the Company's products.
The Company's distributors are not authorized to approve the use of
its products in any of the following applications, (i) any product that comes
under the Federal Highway Safety Act, such as steering or braking systems for
passenger-carrying vehicles or on-highway trucks, (ii) aircraft or space
vehicles, (iii) ordnance equipment, (iv) life support equipment, and (v) any
product that, when sold, would be subject to the rules and regulations of the
United States Nuclear Regulatory Commission These "application limitations"
have alleviated the need for the Company to maintain the internal bureaucracy
necessary to conduct business in these market segments.
COMPETITION
The hydraulic valve industry is highly fragmented and intensely
competitive. The Company has a large number of competitors, some of which are
full-line producers and others that are niche suppliers similar to the Company.
Most competitors market globally. Full-line producers have the ability to
provide total hydraulic systems to customers, including components functionally
similar to those manufactured by the Company. There has been increasing
consolidation activity within the industry recent years, with large, full-line
producers filling out their product lines by acquiring or entering into
relationships with other hydraulics companies, and management expects there
will be further consolidation in the future. The Company believes that it
competes based upon quality, reliability, price, value, speed of delivery and
technological characteristics.
13
Most of the Company's screw-in cartridge valve competitors produce
screw-in cartridge valves that fit an industry common cavity that sometimes
allows their products to be interchangeable. The industry common cavity is not
currently supported by any national or global standards organizations. Although
the International Standards Organization (ISO) has developed a standard
screw-in cartridge cavity that is different from the industry common cavity,
the Company is not aware of any major competitor that currently produces a full
line of standard products conforming to the ISO standard. The Company does not
manufacture a product that fits either the industry common or the ISO standard
cavity. A few competitors manufacture selected screw-in cartridge valves that
fit the Company's cavity. The Company believes the majority of these products
are load control valves. To help expand market opportunities, the Company, in
late 1999, entered into a non-exclusive sales agreement and a non-exclusive
license agreement with Rexroth, under which products will be brand-labeled for,
or manufactured under, license by Rexroth using the Company's unique cavity.
Management believes that increased use of the Company's cavity will be
beneficial in the long term because, although competition will increase,
markets and applications for the Company's products also will increase.
The manifold business is also highly fragmented and intensely
competitive. All of the major screw-in cartridge valve manufacturers either
manufacture manifolds or have sources that they use on a regular basis. In
addition, there are many independent manifold suppliers that produce manifolds
incorporating various manufacturers' screw-in cartridge valves, including those
made by the Company. Finally, there are many small, independent machine shops
that produce manifolds at very competitive prices. Competition in the manifold
business is based upon quality, price, relationships based on proximity to the
customer, and speed of delivery.
EMPLOYEES
As of December 30, 2000, the Company had 545 full-time employees in
the United States, 86 in England, 20 in Germany, and 44 in Korea. The Company
continues to focus its efforts in designing and manufacturing standard
products, allowing it to maintain over 90% of its employees in manufacturing,
distribution, and engineering functions. No employees are represented by a
union in any of the Company's operating units, and management believes that
relations with its employees are good.
Employees are paid either hourly or with an annual salary at rates
that are competitive with other companies in the industry and geographic area.
Management believes that the combination of competitive salary, above average
health and retirement plans, and a safe and pleasant working environment
discourages employee turnover and encourages efficient, high-quality
production. Nevertheless, due to the nature of the Company's manufacturing
business, it is often difficult to attract skilled personnel.
The Company recognizes the need for continuing employee education to
allow the workforce to remain effective in today's rapidly changing
technological environment. Significant time is dedicated to education programs
that assist employees in understanding technology and the change it brings to
their jobs. The Company also offers tuition reimbursement programs that
encourage employees to continue the education process outside the workplace.
14
PATENTS AND TRADEMARKS
The Company believes that the growth of its business will be dependent
upon the quality and functional performance of its products and its
relationship with the marketplace, rather than the extent of its patents and
trademarks. The Company's principal trademark is registered internationally in
the following countries: Argentina, Australia, Brazil, Canada, Chile, China,
France, Germany, Italy, Japan, Korea, Mexico, Peru, Spain, Sweden, Switzerland,
the United Kingdom and the United States. While the Company believes that its
patents have significant value, the loss of any single patent would not have a
material adverse effect on the Company.
BUSINESS RISK FACTORS
In addition to the other information in this Form 10-K Report, the
following should be considered in evaluating the Company's business and its
prospects:
POTENTIAL MARKETPLACE ADOPTION OF INDUSTRY STANDARD. The Company's
screw-in cartridge valves fit into a unique cavity for which, to date, few
other manufacturers have designed products. Accordingly, the Company's screw-in
cartridge valves are not interchangeable with those of other manufacturers.
Most competitive manufacturers produce screw-in cartridge valves that fit into
an industry common cavity. There is an ongoing effort in the United States to
produce a new international standard for screw-in hydraulic cartridge valve
cavities based on the industry common cavity. Additionally, the International
Standards Organization ("ISO") has an existing industry standard for screw-in
hydraulic cartridge valve cavities, which is different from the Company's
cavity and the industry common cavity. In the Company's view, the industry
common cavity as well as the suggested standardized form of this cavity and the
ISO standard cavity fail to address critical functional requirements, which
could result in performance and safety problems of significant magnitude for
end users. No major competitor has converted its products to fit the ISO
standard cavity. Any move by a substantial number of screw-in cartridge valve
and manifold manufacturers toward the adoption of ISO standard or another
standard, based on the existing industry common cavity, could have a material
adverse effect on the Company's business, financial condition and results of
operation. See "Business - Competition."
RISKS RELATING TO GROWTH STRATEGY. In pursuing its growth strategy,
the Company intends to expand its presence in its existing markets and enter
new geographic markets. In addition, the Company may pursue acquisitions and
joint ventures to complement its business. Many of the expenses arising from
the Company's expansion efforts may have a negative effect on operating results
until such time, if at all, these expenses are offset by increased revenues.
The Company initiated capacity expansion programs during 1997-1999, including
the construction of new manufacturing facilities in the United States and
Germany, plant improvements in England, equipment purchases and, through
acquisition, a facility in Korea. The Company, during 1999 and 2000, also
completed the implementation of new accounting and manufacturing computer
software systems at its Florida and U.K. facilities, and reconfigured its
manufacturing units at its two Florida facilities. In addition to monetary
expense, these matters required significant attention from senior management
and contributed to the Company's past delivery problems. Management has now
refocused its efforts on improving delivery times and customer responsiveness,
reducing
15
manufacturing costs, and achieving greater profitability. There can be no
assurance that the Company will be able to improve its market share or
profitability, recover its expenditures for these capital improvements, or
successfully implement its growth strategy. See "Business - Strategy."
The Company's expansion strategy also may require substantial capital
investment for the construction of new facilities and their effective
operation. The Company may finance the acquisition of additional assets using
cash from operations, bank, or institutional borrowings, or through the
issuance of debt or equity securities. There can be no assurance that the
Company will be able to obtain financing from bank or institutional sources or
through the equity or debt markets or that, if available, such financing will
be on terms acceptable to the Company.
DEPENDENCE ON KEY EMPLOYEES AND SKILLED PERSONNEL. The Company's
success depends, to a significant extent, upon a number of key individuals. The
loss of the services of one or more of these individuals could have a material
adverse effect on the business of the Company. The Company's future operating
results depend to a significant degree upon the continued contribution of its
key technical personnel and skilled labor force. Competition for management and
engineering personnel is intense, and the Company competes for qualified
personnel with numerous other employers, some of whom have greater financial
and other resources than the Company. The Company conducts a substantial part
of its operations at its facilities in Sarasota, Florida. The Company's
continued success depends on its ability to attract and retain a skilled labor
force at this location. While the Company has been successful in attracting and
retaining skilled employees in the past, there can be no assurance that the
Company will continue to be successful in attracting and retaining the
personnel it requires to develop, manufacture and market its products and
expand its operations. See "Business - Employees."
COMPETITION. The hydraulic valve and manifold industry is highly
fragmented and intensely competitive, with the Company facing competition from
a large number of competitors, some of which are full-line producers and others
that are niche suppliers like the Company. Full-line producers have the ability
to provide total hydraulic systems to customers, including components
functionally similar to those manufactured by the Company. The Company believes
that it competes based upon quality, reliability, price, value, speed of
delivery and technological characteristics. Many of the Company's screw-in
cartridge valve competitors are owned by corporations, which are significantly
larger than the Company and have greater financial resources than the Company.
There can be no assurance that the Company will continue to be able to compete
effectively with these companies.
The manifold business is also highly fragmented and intensely
competitive. All of the major screw-in cartridge valve manufacturers either
manufacture manifolds or have sources that they use on a regular basis. In
addition, there are a number of independent manifold suppliers that produce
manifolds incorporating various manufacturers' screw-in cartridge valves,
including those made by the Company. Finally, there are many small, independent
machine shops that produce manifolds at very competitive prices. Competition in
the manifold business is based upon quality, price, relationships based on
proximity to the customer, and speed of delivery. Many of the Company's
competitors have very low overhead structures and there can be no assurance
that the Company will continue to be able to compete effectively with these
companies.
16
In addition, the Company competes in the sale of hydraulic valves and
manifolds with certain of its customers. Generally, these customers purchase
special purpose valves from the Company to meet a specific need in a system,
which cannot be filled by any valve made by such customer. To the extent that
the Company introduces new valves in the future that increase the competition
between the Company and such customer, such competition could adversely affect
the Company's relationships with these customers.
CYCLICALITY. The capital goods industry in general, and the hydraulic
valve and manifold industry in particular, is subject to economic cycles.
Cyclical downturns could have a material adverse effect on the Company's
business, financial condition, and results of operation.
INTERNATIONAL SALES. In 2000, approximately 40% of the Company's net
sales were outside of the United States. The Company is expanding the scope of
its operations outside the United States, both through direct investment and
distribution and expects that international sales will continue to account for
a significant portion of net sales in future periods. International sales are
subject to various risks, including unexpected changes in regulatory
requirements and tariffs, longer payment cycles, difficulties in receivable
collections, potentially adverse tax consequences, trade or currency
restrictions and, particularly in emerging economies, potential political and
economic instability and regional conflicts. Furthermore, the Company's
international operations generate sales in a number of foreign currencies,
particularly British pounds, German marks, Korean Won, or the Euro. Therefore,
the Company's financial condition and results of operation are affected by
fluctuations in exchange rates between the United States dollar and these
currencies. Any or all of these factors could have a material adverse effect on
the Company's business, financial condition, and results of operations.
ENVIRONMENTAL COMPLIANCE. The Company's operations involve the
handling and use of substances that are subject to federal, state and local
environmental laws and regulations that impose limitations on the discharge of
pollutants into the soil, air and water and establish standards for their
storage and disposal. Management believes that the Company's current operations
are in substantial compliance with applicable environmental laws and
regulations, the violation of which could have a material adverse effect on the
Company. There can be no assurance, however, that currently unknown matters,
new laws and regulations, or stricter interpretations of existing laws or
regulations will not materially affect the Company's business or operations in
the future.
RISK OF PRODUCT LIABILITY. The application of many of the Company's
products entails an inherent risk of product liability. There can be no
assurance that the Company will not face any material product liability claims
in the future or that the product liability insurance maintained by the Company
at such time will be adequate to cover such claims.
TECHNOLOGICAL CHANGE. The fluid power industry and its component parts
are subject to technological change, evolving industry standards, changing
customer requirements and improvements in and expansion of product offerings.
If technologies or standards used in the Company's products become obsolete,
the Company's business, financial condition and results of operations will be
adversely affected. Although the Company believes that it has the technological
capabilities to remain competitive, there can be no assurance that developments
by others will not
17
render the Company's products or technologies obsolete or noncompetitive. See
"Business - Strategy."
RAW MATERIALS. The primary raw materials used by the Company in the
manufacture of its products are aluminum, ductile iron, and steel. There can be
no assurance that prices for such materials will remain stable. If the Company
is unable to pass through any price increases to its customers, the operating
results of the Company will be adversely affected.
PARTS SUPPLIERS. The Company's largest expense in the cost of sales is
purchased cartridge valve parts. There is no assurance that the Company's
manufacturing cost and output would not be materially and adversely effected by
operational or financial difficulties experienced by a supplier.
PAYMENT OF DIVIDENDS. Although the Company has paid a cash dividend
each quarter since its Common Stock has been publicly traded, there can be no
assurance that there will be funds available therefore. The declaration and
payment of dividends is subject to the sole discretion of the Board of
Directors of the Company and will depend upon the Company's profitability,
financial condition, capital needs, future prospects and other factors deemed
relevant by the Board of Directors, and may be restricted by the terms of the
Company's credit agreements.
CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Articles of
Incorporation provides for a classified Board of Directors. In addition, the
Articles of Incorporation gives the Board of Directors the authority, without
further action by the stockholders, to issue and fix the rights and preferences
of a new class, or classes, of preferred stock. These and other provisions of
the Articles of Incorporation and the Company's Bylaws may deter or delay
changes in control of the Company, including transactions in which shareholders
might otherwise receive a premium for the shares over then current market
prices. In addition, these provisions may limit the ability of shareholders to
approve transactions that they may deem to be in their best interests.
CONTROL BY CERTAIN SHAREHOLDERS AND MANAGEMENT. Members of the Koski
family, including two Directors, Robert E. Koski, the Company's founder and
former Chairman, and Christine L. Koski, own or control approximately 41% of
the outstanding shares of Common Stock. Accordingly, the members of the Koski
family have the ability to control the election of the Company's Directors and
the outcome of certain corporate actions requiring shareholder approval and to
control the business of the Company. Such control could preclude any
acquisition of the Company and could adversely affect the price of the Common
Stock. Additionally, all Directors and Executive Officers of the Company as a
group beneficially own or control approximately 50% of the outstanding shares
of Common Stock. (See Item 12. Security Ownership of Certain Beneficial Owners
and Management).
ITEM 2. PROPERTIES
The Company's major locations include facilities in the United States,
United Kingdom, Germany, and Korea, as set forth below.
The Company owns a 66,000 square foot facility in Sarasota, Florida,
which houses manufacturing, design, marketing and other administrative
functions. The Sarasota facility does
18
not have any financial encumbrances and is well suited for the design, testing
and manufacture of the Company's products.
The Company also owns a 60,000 square foot manufacturing facility in
Manatee County, Florida, which is encumbered by a mortgage loan due July 1,
2006. Under the mortgage loan, monthly payments of principal with interest on
the unpaid balance at 7.375% are required. At December 30, 2000, $4.6 million
was outstanding under this credit facility. The Manatee County facility,
constructed in 1997, has a productive capacity similar to the Sarasota
facility.
The close proximity of the United States facilities allows for quick
change and the ability to shift resources, including machinery and people, to
effectively meet changing business requirements. The Company believes the
combined productive capacity of these facilities is approximately $100 million.
The Company estimates its combined current capacity utilization to be
approximately 65%.
The Company also owns vacant land in Manatee County, Florida, for
future expansion requirements. There is no mortgage on this property and the
Company believes the land to be well-suited to add over 30,000 square feet of
manufacturing capacity.
The Company owns a 10,000 square foot manufacturing facility in
Inchon, Korea, free of any encumbrances. This facility is operating at
approximately 90% of capacity.
The Company owns a 25,000 square foot manufacturing facility in
Coventry, England, free of any encumbrances. This facility has a productive
capacity of approximately $15 million and currently, is operating at 90% of its
productive capacity. The Company is planning an expansion of the United Kingdom
facility in 2001, adding an additional 12,000 square feet.
The Company's 45,000 square foot facility in Erkelenz, Germany has a
mortgage loan with a term of eight years and a fixed interest rate of 6.05%. At
December 30, 2000, the principal balance was $1.1 million. This facility is
well suited to house equipment used for manufacturing and testing of the
Company's products. Currently, a small portion of the manufacturing area is
utilized. The productive capacity of this facility if fully equipped is
believed to be approximately $40.0 million.
The Company believes that its properties have been adequately
maintained, are generally in good condition, and are suitable and adequate for
its business as presently conducted. The extent of utilization of the Company's
properties varies from time to time and among its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation
incidental to the conduct of its business. The Company believes that no
litigation pending against it will have a material adverse effect on its
consolidated financial position or results of operations.
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of
the Company through the solicitation of proxies or otherwise during the fourth
quarter of the fiscal year ended December 30, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock of the Company has been trading publicly under the
symbol SNHY on the Nasdaq National Market since the Company's initial public
offering on January 9, 1997. The following table sets forth the high and low
closing sale prices of the Company's Common Stock as reported in the Nasdaq
National Market for the periods indicated:
High Low
1998
----
First quarter $14.250 $11.500
Second quarter 18.250 13.500
Third quarter 16.500 9.250
Fourth quarter 11.500 8.000
1999
----
First quarter $ 9.750 $ 6.375
Second quarter 9.500 6.750
Third quarter 9.250 6.875
Fourth quarter 8.000 5.750
2000
----
First quarter $12.000 $ 5.875
Second quarter 9.000 7.203
Third quarter 8.813 8.000
Fourth quarter 8.000 6.250
Holders
There were 89 shareholders of record of Common Stock on February 26,
2001. The number of record holders was determined from the records of the
Company's transfer agent and does not include beneficial owners of Common Stock
whose shares are held in the names of securities brokers, dealers, and
registered clearing agencies. The Company believes that there are approximately
2,000 beneficial owners of Common Stock.
20
Dividends
The Company declared cash dividends of $0.04 per share to shareholders
of record on the last day of each calendar quarter during 2000 and 1999. These
dividends were paid on the 15th day of each month following the date of
declaration.
The Company's Board of Directors currently intends to continue to pay
a quarterly dividend of at least $0.04 per share during 2001. However, the
declaration and payment of future dividends is subject to the sole discretion
of the Board of Directors, and any determination as to the payment of future
dividends will depend upon the Company's profitability, financial condition,
capital needs, future prospects and other factors deemed pertinent by the Board
of Directors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following summary should be read in conjunction with the
consolidated financial statements and related notes contained herein. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 1. Business."
As of January 1, 1999, the Company changed from a calendar reporting
year ending on December 31st to a fiscal year which will end on the Saturday
closest to December 31st. Each quarter consists of two 4-week periods and one
5-week period.
YEAR ENDED YEAR ENDED YEARS ENDED DECEMBER 31,
------------ ----------- ---------------------------------
DEC 30, 2000 JAN 1, 2000 1998 1997 1996(1)
------------ ----------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales $79,967 $70,449 $72,720 $64,947 $55,209
Gross profit 21,465 16,416 19,234 19,479 17,304
Operating income 7,356 4,038 7,688 8,302 5,290
Income before income taxes 5,919 2,664 8,520 7,264 4,200
Net income $ 3,921 $ 1,831 $ 5,647 $ 4,710 $ 1,071
Basic net income
per common share $ 0.61 $ 0.29 $ 0.89 $ 0.75 $ 0.27
Diluted net income
per common share $ 0.60 $ 0.28 $ 0.87 $ 0.73 $ 0.26
OTHER FINANCIAL DATA:
Depreciation and amortization $ 5,594 $ 5,043 $ 4,387 $ 3,706 $ 2,857
Capital expenditures 4,374 7,897 8,137 6,490 16,963
21
YEAR ENDED YEAR ENDED YEARS ENDED DECEMBER 31,
------------ ----------- ---------------------------------
DEC 30, 2000 JAN 1, 2000 1998 1997 1996(1)
------------ ----------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,698 $ 1,122 $ 1,592 $ 1,249 $ 1,038
Working capital 12,658 8,717 5,629 6,100 958
Total assets 64,374 64,074 61,019 53,389 48,416
Total debt 12,012 14,342 11,907 9,564 17,218
Shareholder's equity 43,836 41,176 40,015 35,000 22,397
- ----------
(1) Pro forma net income is based on historical income as adjusted to reflect
a provision for income taxes calculated using the statutory rates in
effect during the applicable periods, as if the Company had been a C
Corporation since inception. Unaudited pro forma net income was $2,617 for
the year ended December 31, 1996. Pro forma net income per share is based
on estimated weighted average number of shares outstanding during the
period, after giving effect to the reorganization and the initial public
offering. Unaudited diluted pro forma net income per share was $0.40 for
the year ended December 31, 1996.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Sun Hydraulics Corporation is a leading designer and manufacturer of
high-performance screw-in hydraulic cartridge valves and manifolds, which
control force, speed and motion as integral components in fluid power systems.
The Company sells its products globally, primarily though independent
distributors. Approximately 66% of product sales are used by the mobile market,
characterized by applications where the equipment is not fixed in place, the
operating environment is often unpredictable, and duty cycles are generally
moderate to low. The remaining 34% of sales are used by industrial markets,
which are characterized by equipment that is fixed in place, typically in a
controlled environment, with higher pressures and duty cycles. The Company
sells to both markets with a single product line. In 2000, the Company
generated approximately 40% of its net sales outside of the United States, and
its single largest end-user customer represented less than 3% of net sales.
Demand for the Company's products is dependent on demand for the
capital goods into which the products are incorporated. The capital goods
industries in general, and the fluid power industry specifically, are subject
to economic cycles. According to the National Fluid Power Association (the
fluid power industry's trade association in the United States), United States
orders for mobile hydraulic product increased 4.7% in 2000 compared to 1999,
and orders of industrial hydraulic products increased 6.1% for the same time
period.
Company orders for the year were $76.5 million, an increase of $7.0
million, or 10.1%, over 1999. Orders in the United States operation increased
5.0% in 2000, compared to 1999. Orders in the first half of 2000 in the United
States increased 26.1% over 1999 and orders in the second half of 2000
decreased 13.1% compared to the same period in 1999. The order slowdown in the
second half of 2000 was experienced throughout the United States fluid power
industry. Orders in the European operations increased 16.1% in 2000 over 1999
with some slowdown occurring in the second half. The Korean operation's orders
increased 54.5% in 2000 over 1999.
Net sales for the year were $80.0 million, an increase of $9.5
million, or 13.5%, over 1999. Gross profit as a percentage of net sales
increased from 23.3% to 26.8%. Net income was $3.9 million, or 4.9% of net
sales. This compares with $1.8 million, or 2.6% of sales, in 1999.
The Company's past investments in facilities, machinery, automated
processes equipment and business systems produced favorable results in the year
2000. A significant decrease in production lead times greatly improved the
Company's response to its customer product delivery requirements. Productivity
improvements reduced product costs. Capacity constraints, which have hampered
operating results in the past, are no longer an issue.
The Company is currently focusing on marketing programs to stimulate
demand by increasing the availability of product information to distributors
and end users. The Company plans to expand the production space in the United
Kingdom operation during the year 2001.
23
This production capacity increase is in anticipation of future growth in
Europe. The Company continues to explore new channels to market, including
licensing, brand labeling, and other collaborative efforts within the industry.
Outlook
Prime manufacturing costs as a percent of sales in the first half of
2000 showed marked improvement over 1999. Customer order reductions in the
second half of 2000 necessitated a lower level of production. Despite the lower
volume, prime manufacturing, or variable costs as a percentage of sales,
remained in line with the first half of 2000. Therefore, management believes
that an increase in demand will result in gross profit levels as a percent of
sales in excess of recent historical levels.
The order rate to date in the first quarter of 2001 is running
approximately 26.6% higher than the fourth quarter of 2000. Management projects
that net sales in the first quarter of 2001 will be in the range of $18.5 to
$19.5 million.
Results of Operations
The following table sets forth, for the periods indicated, certain
items in the Company's statements of income as a percentage of net sales.
YEARS ENDED
YEAR ENDED YEAR ENDED DECEMBER 31,
---------- ---------- ------------
DEC 30, 2000 JAN 1, 2000 1998 1997
------------ ----------- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 26.8 23.3 26.4 30.0
Operating income 9.2 5.7 10.6 12.8
Income before income taxes 7.4% 3.8% 11.7% 11.3%
Comparison of Years Ended December 30, 2000 and January 1, 1999
Net Sales
Net sales for the year were $80.0 million, an increase of $9.5
million, or 13.5%, over 1999. This increase was due to strong orders in the
first half of the year across all business segments. North American net sales
increased 9.8% over 1999. European operations increased 19.0% over 1999. Net
sales to Asian distributors increased 27.3% and Korean net sales increased
31.8% over 1999.
Gross Profit
Gross profit increased to $21.5 million in 2000, compared to $16.4
million in 1999. Gross profit as a percentage of net sales increased to 26.8%
in 2000, compared to 23.3% in 1999. The increase in gross profit as a percent
of sales was primarily due to prime manufacturing cost
24
reductions in the United States operation resulting from lower material costs
and increased productivity.
Selling, Engineering, and Administrative Expenses
Selling, engineering and administrative expenses increased $1.7
million, or 14.0%, to $14.1 million in 2000, compared to $12.4 million in 1999.
$0.4 million of the increase was for product catalogues and $0.3 million of the
increase was related to systems and network development costs. The balance of
the increase was primarily due to wage and fringe benefit increases.
Interest Expense
Interest expense was $1.1 million and $1.0 million in 2000 and 1999,
respectively. The interest expense related to the unsecured line of credit,
long-term mortgages and related party debt decreased $0.2 million, while
interest on the secured line of credit in the United States, which was
converted to a four year note on July 23, 2000 (See Note 9 to the Financial
Statements), increased $0.3 million.
Miscellaneous (Income) Expense
Miscellaneous expense was $0.3 million in 2000, compared to $0.4
million in 1999. The $0.1 decrease was due to a decrease in equity losses on
the joint venture in China and a decrease in foreign currency exchange losses.
Income Taxes
The provision for income taxes for the year ended December 30, 2000,
was 33.8% of pretax income compared to 31.3% for the year ended January 1,
2000. This increase is due to Korean tax provision requirements that were not
previously believed to be applicable. In both years, tax savings were realized
in the United States from the Sun Hydraulics Foreign Sales Corporation.
Comparison of Years Ended January 1, 2000 and December 31, 1998
Net Sales
Net sales decreased 3.1%, or $2.3 million, to $70.4 million in fiscal
1999, compared to $72.7 million in 1998. Excluding the Korean operation,
acquired in September 1998, net sales decreased approximately 6.2%, or $4.4
million. This decrease was due primarily to a slowdown in the capital goods
industry, and thus, the fluid power industry. Many agricultural, mining, paper
and machine tool equipment makers saw significant volume declines in 1999.
Domestic net sales decreased $4.9 million, European net sales decreased $0.6
million, and Asian net sales, excluding Korea, were flat for the year, with a
large increase in the fourth quarter of 1999 over the fourth quarter of 1998.
25
Gross Profit
Gross profit decreased to $16.4 million in fiscal 1999, compared to
$19.2 million in 1998. Gross profit as a percentage of net sales decreased to
23.3% in 1999, from 26.4% in 1998. The decrease in gross profit as a percent of
sales was due primarily to lower net sales spread over a higher fixed cost base.
Also, productivity in the United States and United Kingdom operations was
adversely affected by the implementation of new, fully integrated manufacturing
systems. The resultant increases in direct labor and related expenses were
partially offset by reduced material costs related to the Company's supplier
initiative program.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses increased $0.9
million, or 7.8%, to $12.4 million in 1999, compared to $11.5 million in 1998.
Approximately $0.3 million of the increase was due to the Korean operation
acquired in September 1998. The balance of the increase represents higher
wages, increased advertising, and one time system implementation costs offset
by lower pension costs.
Interest Expense
Interest expense was $1.0 million and $0.8 million in 1999 and 1998,
respectively. The interest expense related to long-term mortgages and related
party debt decreased while interest on the unsecured and secured lines of
credit in the United States increased $0.2 million. The new secured line of
credit was used to facilitate cash flow related to specific capital
acquisitions over a four-year term.
Miscellaneous (Income) Expense
Miscellaneous expense was $0.4 million in 1999 compared to $1.7
million of income in 1998. In 1998, the Company received a $1.7 million payment
in settlement of a business- interruption insurance claim. This claim was
related to a fire in September 1996, at the Manatee County facility while it
was under construction, and delayed the opening of operations. Other expenses
increased primarily as the result of the disposal of certain equipment in the
United States operation no longer used in production, equity losses on the
joint venture in China, and foreign currency exchange transactions.
Income Taxes
The provision for income taxes for the year ended January 1, 2000, was
31.3% of pretax income compared to 33.7% for the year ended December 31, 1998.
Excluding income from the Korean operation, the provision for income taxes in
the twelve months ended January 1, 2000, was 32.5%, compared to 33.2% in 1998.
Tax savings were realized in the United States from the Sun Hydraulics Foreign
Sales Corporation and in Korea from provisions of local law.
26
QUARTERLY RESULTS OF OPERATIONS
Quarter Ended
(in thousands)
Dec 30 Sep 30 Jul 1 Apr 1 Jan 1 Sep 30 Jun 30 Mar 31
2000 2000 2000 2000 2000 1999 1999 1999
------- ------- ------- ------- ------- -------- -------- -------
Net Sales $17,537 $20,137 $22,060 $20,233 $17,801 $ 17,863 $ 16,120 $18,665
Gross profit 4,721 5,486 6,176 5,082 4,562 4,458 2,907 4,489
Operating income 1,377 1,887 2,653 1,439 1,404 1,333 (129) 1,430
Income before income
taxes 1,021 1,550 2,148 1,200 1,035 891 (341) 1,079
Net Income $ 667 $ 1,021 $ 1,376 $ 857 $ 735 $ 588 $ (216) $ 724
======= ======= ======= ======= ======= ======== ======== =======
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of capital has been cash
generated from operations, although short-term fluctuations in working capital
requirements have been met through borrowings under revolving lines of credit
as needed. The Company's principal uses of cash have been to pay operating
expenses, dividends to shareholders, to make capital expenditures, and to
service debt.
Cash flow from operations in 2000 was $9.5 million, compared to $5.6
million in 1999 and $8.6 million in 1998. The increase in the Company's cash
flow from operations in 2000 compared to 1999 was due primarily to an increase
in net income of $2.1 million and an increase in depreciation and amortization
of $0.6 million. The decrease in the Company's cash flow from operations in
1999 compared to 1998 was due primarily to a decrease in net income of $3.8
million, offset by an increase in depreciation and amortization of $0.7 million
Capital expenditures were $4.4 million in 2000, compared to $7.9
million in 1999 and $8.1 million in 1998. Capital expenditures in the year 2001
will include approximately $2.2 million to cover the cost of an expansion of
the United Kingdom operation.
On July 23, 2000, the Company replaced its $5.0 million unsecured,
revolving credit facility with a two year, unsecured, revolving credit facility
of $7.5 million and converted the outstanding balance of $5.7 million on its
$7.5 million secured, revolving credit facility to a four year, secured, term
loan. The $7.5 million credit facility has an interest rate equal to the bank
lender's prime rate less 1% or LIBOR plus 1.9% for predetermined periods of
time, at the Company's option. The term loan has an interest rate equal to the
bank lender's prime rate less 1%. At December 30, 2000, the interest rate for
both facilities was 7.99%. At December 30, 2000, the balances outstanding on
the unsecured and secured facilities were $0 and $5.2 million, respectively.
Both credit facilities are subject to certain debt covenants.
A 10-year mortgage loan of $6.2 million was obtained, at a fixed
interest rate of 8.25%, for construction of the Manatee County facility. Terms
on the construction note were interest-only on the balance drawn down through
the completion of construction and then conversion to a 10-year mortgage note
with a 15-year amortization schedule. In April 1999, this mortgage note
27
was renegotiated to an interest rate of 7.375%. Terms are monthly principal and
interest payments with remaining principal due July 1, 2006. At December 30,
2000, $4.6 million was outstanding under this mortgage loan.
In Germany, the Company has a $0.9 million line of credit, denominated
in Euros, which bears interest at a variable rate equal to 1.5% over the
Euribor and expires on October 31, 2002. At December 30, 2000, there was no
balance outstanding on this credit facility.
In February 1999, the Company negotiated three loans in Germany
secured by equipment, a ten year 5.1% fixed interest rate loan for
approximately $0.3 million, a ten year 5.1% fixed interest rate loan for
approximately $0.1 million, and a ten year 3.5% fixed interest rate loan for
approximately $0.8 million. At December 30, 2000, the outstanding balances on
these facilities were $0.2 million, $0, and $0.6 million, respectively.
In May 1996, the Company obtained a mortgage loan of approximately
$2.4 million, denominated in German marks, for the new facility in Erkelenz,
Germany. This loan had a term of 12 years with variable interest of 6.47%.
During 1999, the Company renegotiated this loan with a mortgage note, bearing
fixed interest at 6.05%, with monthly payments and a maturity date of September
30, 2008. At December 30, 2000, $1.1 million was outstanding under this
mortgage note.
On September 8, 2000, the Company obtained a loan in Korea for
approximately $0.1 million, secured by equipment. The loan has a fixed interest
rate of 10.2%. Monthly payments of interest and principle began in November
2000, with the final payment due in September 2001. At December 30, 2000 the
outstanding balance was $0.1 million.
In April 2000, the Company obtained a loan in Korea for approximately
$0.1 million, secured by equipment. The loan has a variable interest rate of
between 3% and 5%; the current rate on the loan is 4%. Terms are monthly
interest payments only through April 2003, and monthly principal and interest
payments from May 2003 through April 2006.
Sun Korea has a secured note denominated in Korean Won, with interest
payable at a fixed rate of 6%, with a maturity date of June 25, 2001. At
December 30, 2000, $0 was outstanding under this credit facility.
In England, the Company has a $1.2 million line of credit, denominated
in British pounds, which bears interest at a floating rate equal to 2.25% over
the bank's base rate and is payable on demand. At December 30, 2000, there was
no balance outstanding on this credit facility.
The Company believes that cash generated from operations and its
borrowing availability under its revolving lines of credit will be sufficient
to satisfy the Company's operating expenses and capital expenditures for the
foreseeable future.
28
The Company declared quarterly dividends of $0.04 per share to
shareholders of record on the last day of each calendar quarter in 2000 and
1999. These dividends were paid on the 15th day of each month following the
date of declaration.
The Company's Board of Directors currently intends to continue to pay
a quarterly dividend of at least $0.04 per share during 2001. However, the
declaration and payment of future dividends is subject to the sole discretion
of the Board of Directors, and any determination as to the payment of future
dividends will depend upon the Company's profitability, financial condition,
capital needs, future prospects and other factors deemed pertinent by the Board
of Directors.
SEASONALITY
The Company generally has experienced reduced activity during the
fourth quarter of the year, largely as a result of fewer working days due to
holiday shutdowns. As a result, the Company's fourth quarter net sales, income
from operations, and net income typically are the lowest of any quarter during
the year. However, during fiscal 1999, due to the Company's poor second quarter
results, this was not the case.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy. While inflation has not had, and the Company does not expect that it
will have, a material impact upon operating results, there is no assurance that
the Company's business will not be affected by inflation in the future.
EURO In January 2000 the German Operation adopted the Euro as its
primary currency. The Company presently believes that, with remediation
measures, any material risks associated with the Euro Conversion can be
mitigated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates
on borrowed funds, which could affect its results of operations and financial
condition. At December 30, 2000, the Company had approximately $5.4 million in
variable-rate debt outstanding and, as such, the market risk is immaterial
based upon a 10% increase or decrease in interest rates. The Company manages
this risk by selecting unsecured debt financing at its lenders' prime rate less
1%, or the Libor rate plus 1.9%, whichever is the more advantageous.
FORWARD-LOOKING INFORMATION
Certain oral statements made by management from time to time and
certain statements contained herein that are not historical facts are
"forward-looking statements" within the
29
meaning of Section 21E of the Securities Exchange Act of 1934 and, because such
statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Forward-looking statements, including those in Management's Discussion and
Analysis of Financial Condition and Results of Operations are statements
regarding the intent, belief or current expectations, estimates or projections
of the Company, its Directors or its Officers about the Company and the
industry in which it operates, and assumptions made by management, and include
among other items, (i) the Company's strategies regarding growth, including its
intention to develop new products; (ii) the Company's financing plans; (iii)
trends affecting the Company's financial condition or results of operations;
(iv) the Company's ability to continue to control costs and to meet its
liquidity and other financing needs; (v) the declaration and payment of
dividends; and (vi) the Company's ability to respond to changes in customer
demand domestically and internationally, including as a result of
standardization. Although the Company believes that its expectations are based
on reasonable assumptions, it can give no assurance that the anticipated
results will occur.
Important factors that could cause the actual results to differ
materially from those in the forward-looking statements include, among other
items, (i) the economic cyclicality of the capital goods industry in general
and the hydraulic valve and manifold industry in particular, which directly
affect customer orders, lead times and sales volume; (ii) conditions in the
capital markets, including the interest rate environment and the availability
of capital; (iii) changes in the competitive marketplace that could affect the
Company's revenue and/or cost bases, such as increased competition, lack of
qualified engineering, marketing, management or other personnel, and increased
labor and raw materials costs; (iv) changes in technology or customer
requirements, such as standardization of the cavity into which screw-in
cartridge valves must fit, which could render the Company's products or
technologies noncompetitive or obsolete; (v) new product introductions, product
sales mix and the geographic mix of sales nationally and internationally; and
(vi) changes relating to the Company's international sales, including changes
in regulatory requirements or tariffs, trade or currency restrictions,
fluctuations in exchange rates, and tax and collection issues. Further
information relating to factors that could cause actual results to differ from
those anticipated is included but not limited to information under the headings
"Business," particularly under the subheading, "Business Risk Factors" and
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations" in this Form 10-K for the year ended December 30, 2000. The Company
disclaims any intention or obligation to update or revise forward-looking
statements, whether as a result of new information, future events or otherwise.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to financial statements:
Report of Independent Certified Public Accountants 32
Consolidated Balance Sheets as of December 30, 2000
and January 1, 2000 33
Consolidated Statements of Income for the years ended
December 30, 2000, January 1, 2000,
and December 31, 1998 34
Consolidated Statements of Shareholders' Equity and and
Comprehensive Income for the years ended
December 30, 2000, January 1, 2000, and
December 31, 1998 35
Consolidated Statements of Cash Flows for the years
ended December 30, 2000, January 1, 2000,
and December 31, 1998 36
Notes to Consolidated Financial Statements 37
31
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sun Hydraulics Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and of cash flows present fairly, in all material
respects, the financial position of Sun Hydraulics Corporation and its
subsidiaries at December 30, 2000, January 1, 2000, and December 31, 1998, and
the results of their operations and their cash flows for the three years then
ended, in conformity with accounting principles which, as described in Note 2,
are generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
March 2, 2001
32
SUN HYDRAULICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
ASSETS
Current assets:
Cash and cash equivalents $ 2,698 $ 1,122
Accounts receivable, net of allowance for
doubtful accounts of $163 and $196 6,112 6,260
Inventories 9,033 8,131
Taxes receivable -- 455
Other current assets 536 591
------- -------
Total current assets 18,379 16,559
Property, plant and equipment, net 44,984 46,529
Other assets 1,011 986
------- -------
Total assets $64,374 $64,074
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,787 $ 2,712
Accrued expenses and other liabilities 1,585 1,464
Long-term debt due within one year 1,779 3,411
Dividends payable 255 255
Income taxes payable 315 --
------- -------
Total current liabilities 5,721 7,842
Long-term debt due after one year 10,233 10,931
Deferred income taxes 4,106 4,125
Deferred royalties 478 --
------- -------
Total liabilities 20,538 22,898
------- -------
Commitments and contingencies (Note 17)
Shareholders' equity:
Preferred stock, 2,000,000 shares authorized,
par value $0.001, no shares outstanding -- --
Common stock, 20,000,000 shares authorized,
par value $0.001, 6,384,948 shares outstanding 6 6
Capital in excess of par value 24,486 24,486
Retained earnings 19,073 16,173
Accumulated other comprehensive income 271 511
------- -------
Total shareholders' equity 43,836 41,176
------- -------
Total liabilities and shareholders' equity $64,374 $64,074
======= =======
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these financial statements.
33
SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
----------------------------------------
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------- ------- --------
NET SALES $79,967 $70,449 $ 72,720
Cost of sales 58,502 54,033 53,486
------- ------- --------
GROSS PROFIT 21,465 16,416 19,234
Selling, engineering and
administrative expenses 14,109 12,378 11,546
------- ------- --------
OPERATING INCOME 7,356 4,038 7,688
Interest expense 1,114 954 837
Other miscellaneous (income) expense 323 420 (1,669)
------- ------- --------
INCOME BEFORE INCOME TAXES 5,919 2,664 8,520
Income tax provision 1,998 833 2,873
------- ------- --------
NET INCOME $ 3,921 $ 1,831 $ 5,647
======= ======= ========
BASIC NET INCOME PER COMMON SHARE $ 0.61 $ 0.29 $ 0.89
WEIGHTED AVERAGE SHARES OUTSTANDING 6,385 6,380 6,345
DILUTED NET INCOME PER COMMON SHARE $ 0.60 $ 0.28 $ 0.87
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 6,574 6,569 6,531
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these financial statements.
34
SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(IN THOUSANDS)
ACCUMULATED
CAPITAL IN OTHER
COMMON EXCESS OF RETAINED COMPREHENSIVE
SHARES STOCK PAR VALUE EARNINGS INCOME TOTAL
------ ------ ---------- -------- ------------- -----
Balance, December 31, 1997 6,322 $ 6 $24,163 $10,732 $ 99 $35,000
Dividends declared (1,016) (1,016)
Exercise of stock options 39 223 223
Comprehensive income:
Net income 5,647 5,647
Foreign currency translation adjustments 161 161
-------
Comprehensive income 5,808
----- ---- ------- ------- ---- -------
Balance, December 31, 1998 6,361 6 24,386 15,363 260 40,015
Dividends declared (1,021) (1,021)
Exercise of stock options 22 75 75
Issue of stock 2 13 13
Tax effect of non-qualified stock options 12 12
Comprehensive income:
Net income 1,831 1,831
Foreign currency translation adjustments 251 251
-------
Comprehensive income 2,082
----- ---- ------- ------- ---- -------
Balance, January 1, 2000 6,385 6 24,486 16,173 511 41,176
Dividends declared (1,021) (1,021)
Comprehensive income:
Net income 3,921 3,921
Foreign currency translation adjustments (240) (240)
-------
Comprehensive income 3,681
----- ---- ------- ------- ---- -------
Balance, December 30, 2000 6,385 $ 6 $24,486 $19,073 $271 $43,836
===== ==== ======= ======= ==== =======
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these financial statements.
35
SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
---------------------------------------------
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
Cash flows from operating activities:
Net income $ 3,921 $ 1,831 $ 5,647
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,594 5,043 4,387
Loss on disposal of assets 273 281 --
Compensation expense of stock options -- 13 --
Provision for deferred income taxes (19) 481 453
(Increase) decrease in:
Accounts receivable 181 (945) (665)
Allowance for doubtful accounts (33) 27 122
Inventories (902) (6) (877)
Income tax receivable, net 455 (700) --
Other current assets 55 300 38
Other assets 19 30 86
Increase (decrease) in:
Accounts payable (925) (165) (167)
Accrued expenses and other liabilities 121 (601) (279)
Income taxes payable, net 315 -- (135)
Deferred royalties 478 -- --
------- -------- -------
Net cash provided by operating activities 9,533 5,589 8,610
------- -------- -------
Cash flows from investing activities:
Investment in acquisition and joint venture (100) -- (1,110)
Capital expenditures (4,374) (7,897) (8,137)
Proceeds from dispositions of equipment 108 96 143
------- -------- -------
Net cash used in investing activities (4,366) (7,801) (9,104)
------- -------- -------
Cash flows from financing activities:
Proceeds from debt 2,999 13,206 9,323
Repayment of debt (4,951) (10,106) (7,039)
Repayment of notes payable to related parties (378) (663) (765)
Proceeds from exercise of stock options -- 75 223
Dividends to shareholders (1,021) (1,021) (983)
------- -------- -------
Net cash provided by (used in) financing activities (3,351) 1,491 759
------- -------- -------
Adjustment for other comprehensive income (240) 251 78
------- -------- -------
Net increase (decrease) in cash and cash equivalents 1,576 (470) 343
Cash and cash equivalents, beginning of period 1,122 1,592 1,249
------- -------- -------
Cash and cash equivalents, end of period $ 2,698 $ 1,122 $ 1,592
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,114 $ 1,002 $ 954
======= ======== =======
Income taxes $ 1,247 $ 1,052 $ 2,555
======= ======== =======
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these financial statements.
36
SUN HYDRAULICS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
1. BUSINESS
Sun Hydraulics Corporation and its wholly-owned subsidiaries (the
"Company") design, manufacture and sell screw-in cartridge valves and manifolds
used in hydraulic systems. The Company has facilities in the United States, the
United Kingdom, Germany, Korea, and China. Sun Hydraulics Corporation ("Sun
Hydraulics"), with its main offices located in Sarasota, Florida, designs,
manufactures and sells through independent distributors in the United States.
Sun Hydraulik Holdings Limited ("Sun Holdings"), a wholly-owned subsidiary of
Sun Hydraulics, was formed to provide a holding company for the European market
operations; its wholly-owned subsidiaries are Sun Hydraulics Limited (a British
corporation, "Sun Ltd.") and Sun Hydraulik GmbH (a German corporation, "Sun
GmbH"). Sun Ltd. operates a manufacturing and distribution facility located in
Coventry, England, and Sun GmbH, operates a manufacturing and distribution
facility located in Erkelenz, Germany. Sun Hydraulics Korea Corporation ("Sun
Korea"), a wholly-owned subsidiary of Sun Hydraulics, located in Inchon, South
Korea, operates a manufacturing and distribution facility. Sun Hydraulics
Systems (Shanghai) Co., Ltd., ("Sun China"), a 50/50 joint venture between Sun
Hydraulics and Links Lin, the owner of Sun Hydraulics Corporation's Taiwanese
distributor, is located in Shanghai, China, and operates a manufacturing and
distribution facility.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed in the
preparation of the Company's consolidated financial statements is set forth
below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts and
operations of Sun Hydraulics and its direct and indirect subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
RECLASSIFICATION
Certain amounts shown in the 1998 and 1999 consolidated financial
statements have been reclassified to conform with the 2000 presentation. These
reclassification did not have any effect on total assets, total liabilities,
stockholders' equity or net income.
MANAGEMENT ESTIMATES AND ASSUMPTIONS
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.
37
52 WEEK FISCAL YEAR
Commencing in 1999, the Company implemented a fiscal year which ends
on the Saturday nearest to the end of the month of December. Each quarter
consists of two 4-week periods and one 5-week period.
CASH AND CASH EQUIVALENTS
The Company considers all short-term highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
INVENTORIES
Inventories are valued at the lower of cost or market, cost being
determined on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Expenditures for
repairs and improvements that significantly add to the productive capacity or
extend the useful life of an asset are capitalized. Repairs and maintenance are
expensed as incurred. Depreciation is computed using the straight line method
over the following useful lives:
Years
-----
Computer equipment 3 - 5
Machinery and equipment 4 - 12
Furniture and fixtures 4 - 10
Leasehold and land improvements 5 - 15
Buildings 40
CAPITALIZED SOFTWARE COSTS
Capitalized software costs are accounted for under "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1")
and are recorded at cost less accumulated depreciation. Software is capitalized
upon the successful testing of the system. Depreciation is charged to income
over the estimated useful life of the software. The amounts capitalized during
2000 and 1999 were $152 and $528, respectively.
VALUATION ASSESSMENT OF LONG-LIVED ASSETS
Management periodically evaluates long-lived assets for potential
impairment and will reserve for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. As of December 30, 2000, management does not believe that any
assets are impaired.
OTHER ASSETS
Other assets consists of goodwill and an equity investment. Goodwill,
which represents the excess of the purchase price of acquisitions over the fair
value of the net assets acquired and other acquisition costs are carried at
cost, net of accumulated amortization and amortized on a straight-line basis
over fifteen years. The equity investment represents the Company's joint
38
venture in China. The equity investment was recorded at cost and adjusted for
investment income or loss and dividend distributions for each period.
REVENUE RECOGNITION
Sales are recognized when products are shipped. Sales incentives are
granted to customers based upon the volume of purchases. These sales incentives
are recorded at the time of sales as a reduction of gross sales.
RESEARCH AND DEVELOPMENT EXPENSE
Included in selling, engineering and administrative expenses are
amounts incurred for research and development costs paid to third parties for
the Company's manufacturing processes and related software which approximated
$61, $50, and $466 for the years ended December 30, 2000, January 1, 2000, and
December 31, 1998, respectively.
ADVERTISING COSTS
The Company expenses the costs for advertising and promotional
literature during the year incurred. Included in selling, engineering and
administrative expenses are amounts incurred for advertising and promotional
literature which approximated $1,095, $728, and $262 for the years ended
December 30, 2000, January 1, 2000, and December 31, 1998, respectively.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company follows the translation policy provided by Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation." The
Pound Sterling is the functional currency of Sun Ltd. The Euro is the
functional currency of GmbH. The South Korean Won is the functional currency of
Sun Korea. The U.S. Dollar is the functional currency for Sun Hydraulics and
the reporting currency for the consolidated group. The monetary assets and
liabilities of Sun Ltd., Sun GmbH, and Sun Korea are translated at the exchange
rate in effect at the balance sheet date, and income and expense items are
translated at the average annual rate of exchange for the period. The resulting
unrealized translation gains and losses are included in the component of
shareholders' equity designated as "accumulated other comprehensive income."
Realized gains and losses from foreign currency translations are included in
miscellaneous (income) expense.
INCOME TAXES
The Company follows the income tax policy provided by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
Statement provides for a liability approach under which deferred income taxes
are provided for based upon enacted tax laws and rates applicable to the
periods in which the taxes become payable. These differences result from items
reported differently for financial reporting and income tax purposes, primarily
depreciation and stock options.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation
39
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (Statement 123).
3. FAIR VALUE OF INVESTMENTS
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments.
The carrying amounts of cash and cash equivalents, accounts
receivable, other current assets, accounts payable, accrued expenses and other
liabilities approximate fair value due to the nature of their short maturities.
The carrying amount of long-term debt approximates fair value, as the
interest rates on the debt approximate rates currently available to the Company
for debt with similar terms and remaining maturities.
4. INVENTORIES
December 30, January 1,
2000 2000
------------ ----------
Raw materials $3,300 $2,602
Work in process 3,145 3,452
Finished goods 2,588 2,077
------ ------
$9,033 $8,131
====== ======
5. PLANT, PROPERTY, and EQUIPMENT
December 30, January 1,
2000 2000
------------ --------
Machinery and equipment $ 41,443 $ 37,065
Office furniture and equipment 8,755 8,124
Buildings 19,618 18,518
Leasehold and land improvements 1,038 881
Construction in progress 1,125 3,518
Land 2,481 2,481
-------- --------
74,460 70,587
Less: Accumulated depreciation (29,476) (24,058)
-------- --------
$ 44,984 $ 46,529
======== ========
Depreciation expense for the years ended December 30, 2000, January 1,
2000, and December 31, 1998 totaled $5,538, $4,993, and $4,387, respectively.
40
6. OTHER ASSETS
December 30, January 1,
2000 2000
------------ ----------
Goodwill and other acquisition
costs - Sun Korea $ 758 $817
Equity investment in joint venture 194 146
Other 59 23
------ ----
$1,011 $986
====== ====
7. ACCRUED EXPENSES AND OTHER LIABILITIES
December 30, January 1,
2000 2000
------------ ----------
Compensation and benefits $1,161 $ 677
Deferred grant -- 424
Insurance 207 177
Other accrued expenses 217 186
------ ------
$1,585 $1,464
====== ======
8. LONG-TERM DEBT
December 30, January 1,
2000 2000
------------ ----------
$7,500 two year, unsecured, revolving credit line
in U.S., interest at Bank lender's prime rate less
1% or LIBOR plus 1.9% (7.99% at December 30, 2000),
due July 23, 2002 $ -- $ 2,215
$5,677 four year, note, secured by U.S. equipment,
interest at Bank lender's prime rate less 1% or LIBOR
plus 1.9% (7.99% at December 30, 2000), due July 23, 2004 5,167 4,616
$6,187 10-year mortgage note with 15-year amortization
schedule on the U.S. Manatee County facility,
fixed interest rate of 7.375%, due July 1, 2006 4,575 4,725
$2,400 12-year mortgage note on the German facility,
fixed interest rate of 6.05%, due September 30, 2008 1,118 1,352
10-year notes, fixed interest rates ranging from of 3.5- 5.1%,
secured by equipment in Germany and due in February, 2009 811 933
41
Notes, fixed and variable interest ranging from 3-10.2%,
secured by equipment in Korea 240 22
Other 101 479
-------- --------
12,012 14,342
Less amounts due within one year (1,779) (3,411)
-------- --------
$ 10,233 $ 10,931
======== ========
The remaining principal payments are due as follows: 2002 - $2,098;
2003 - $1,979; 2004 - $1,418; 2005 - $514; and 2006 thereafter - $4,224.
The Company has three revolving lines of credit agreements totaling
$9,576 with various banks. Interest rates on these credit facilities are
variable based on the prime rate in the U.S. and the equivalent rate in the
U.K. and Germany, respectively. All lines of credit expire in 2002. None of
these arrangements contain pre-payment penalties. The total outstanding on
these credit facilities at December 30, 2000 and January 1, 2000 was $0 and
$2,215, respectively.
Capitalized interest was $90 for the year ended December 31, 1998.
Certain of these debt instruments are subject to debt covenants
including consolidated net working capital not less than $2,000,000 and a
current ratio not less than 1.2:1.0 at all times during the term of the loan.
Subsequent to December 30, 2000, Germany has obtained two loans: a
government backed loan of $381, secured by equipment, and a bank loan of $191
for the remainder of the equipment not covered by the government loan. The
loans are due on March 31, 2011 and December 31, 2010, respectively.
9. DISTRIBUTIONS AND DIVIDENDS TO SHAREHOLDERS
The Company declared distributions of $ 1,021, $1,021, and $1,016 to
shareholders in 2000, 1999, and 1998, respectively.
On March 3, 2001, the Company declared a cash dividend of $0.04 per
share to shareholders of record on March 31, 2001, payable on April 15, 2001.
The Company declared quarterly dividends of $0.04 per share to shareholders of
record on the last day of each quarter in 2000 and 1999. These dividends were
paid on the 15th day of each month following the date of declaration.
42
10. INCOME TAXES
Pretax income is taxed under the following jurisdictions:
For the year ended
----------------------------------------
December 30, January 1, December 31,
2000 2000 1998
------ ------ ------
United States $3,807 $1,439 $6,854
Foreign 2,112 1,325 1,666
------ ------ ------
Total $5,919 $2,764 $8,520
====== ====== ======
The income tax provision consists of the following:
For the year ended
----------------------------------------
December 30, January 1, December 31,
2000 2000 1998
------- ----- ------
Current tax expense:
United States $ 1,300 $ 38 $1,662
State and local 110 1 159
Foreign 594 326 600
------- ----- ------
Total current 2,004 365 2,421
------- ----- ------
Deferred tax expense (benefit):
United States 0 573 411
State and local 0 51 36
Foreign (6) (156) 5
------- ----- ------
Total deferred (6) 468 452
------- ----- ------
Total income tax provision $ 1,998 $ 833 $2,873
======= ===== ======
43
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
For the year ended
----------------------------------------
December 30, January 1, December 31,
2000 2000 1998
------- ----- -------
U.S. federal taxes at statutory rate $ 2,012 $ 940 $ 2,897
Increase(decrease)
Benefit of foreign sales corporation (30) (59) (60)
Foreign income taxed at lower rate (129) (104) (59)
Nondeductible items 70 27 (42)
State and local taxes, net 75 29 137
------- ----- -------
Income tax provision $ 1,998 $ 833 $ 2,873
======= ===== =======
Deferred tax assets and liabilities at fiscal year end are as follows:
December 30, January 1, December 31,
2000 2000 1998
------------ ---------- ------------
Deferred taxes, non-current:
Assets
Accrued expenses and reserves
not currently deductible $ 161 $ 109 $ 132
Compensation expense recognized
for book, not yet deductible for tax 329 329 388
Deferred royalty income 177 -- --
------- ------- -------
Deferred tax asset, non-current 667 438 520
Liabilities
Depreciation (4,773) (4,563) (4,176)
------- ------- -------
Net deferred tax liability, non-current $(4,106) $(4,125) $(3,656)
======= ======= =======
11. STOCK OPTION PLANS
During 1996, the Company adopted the 1996 Stock Option Plan (the
"Stock Option Plan"), which provides for the grant of incentive stock options
and nonqualified stock options for the purchase of up to an aggregate of 1,000
shares of the Company's common stock by officers, employees and Directors of
the Company. Under terms of the plan, incentive stock options may be granted to
employees at an exercise price per share of not less than the fair value per
common share on the date of the grant (not less than 110% of the fair value in
the case of holders of more than 10% of the Company's voting stock).
Nonqualified stock options may be granted at the
44
discretion of the Company's Board of Directors. The maximum term of an option
may not exceed 10 years, and options become exercisable at such times and in
such installments as determined by the Board of Directors.
A summary of the Company's stock option plan for each of the three
years ended December 30, 2000, is summarized as follows:
Exercise Weighted
Number price average
of shares range exercise price
--------- -------- --------------
(share amounts are in thousands)
Under option, December 31, 1997 587 $ 3.00 - 9.50 $ 6.69
(357 shares exercisable)
Granted 220 $ 10.00 - 16.75 $ 15.22
Exercised (39) $ 3.00 - 9.50 $ 5.75
--- ----------------
Under option, December 31, 1998 768 $ 3.00 - 16.75 $ 9.18
(385 shares exercisable)
Exercised (22) $ 3.00 - 3.47 $ 3.39
Forfeitures (80) $ 9.50 $ 9.50
--- ----------------
Under option, January 1, 2000 666 $ 3.00 - 16.75 $ 9.19
(453 shares exercisable)
Granted 103 $ 6.00 - 8.00 $ 7.36
Forfeitures (13) $ 10.00 - 16.75 $ 15.19
--- ----------------
Under option, December 30, 2000 756 $ 3.00 - 16.75 $ 7.84
(526 shares exercisable)
A summary of outstanding and exercisable options at December 30, 2000
is summarized as follows:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------- ------------------------------
Weighted- Weighted- Weighted-
Range of Number of average remaining average Number of average
exercise prices shares contractual life exercise price shares exercise price
- --------------- --------- ----------------- -------------- --------- --------------
$ 3.00 62,746 3.08 $ 3.00 62,746 $ 3.00
3.43-5.05 189,068 5.75 4.41 189,068 4.41
6.00 10,000 9.00 6.00 60,000 6.00
6.75 37,000 9.83 6.75 -- 6.75
8.00 56,000 9.67 8.00 -- 8.00
9.50 194,385 5.35 9.50 150,592 9.50
10.00 47,000 7.92 10.00 47,000 10.00
16.75 160,000 7.33 16.75 67,000 16.75
The Company has adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for the stock option
plans other than for nonqualified stock options. Had compensation costs for the
stock option plans been determined based on the fair value at the grant date
for awards in 2000 and 1998 (there were no options
45
granted in 1999) consistent with the provisions of SFAS No. 123, the Company's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
For the year ended
--------------------------------------------------
December 30, January 1, December 31,
2000 2000 1998
------------ ---------- ------------
Net income:
As reported $ 3,921 $ 1,831 $ 5,647
Pro forma 3,418 1,404 5,188
Basic earnings per common share:
As reported 0.61 0.29 0.89
Pro forma 0.54 0.22 0.82
Diluted earnings per common share:
As reported 0.60 0.28 0.87
Pro forma 0.52 0.21 0.79
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period and additional options may be granted in future
years. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2000 and 1998: cumulative
volatility of 40.0%, and 43.09% for 2000 and 1998, respectively; dividend
yields of 2.41%, and 1.68%, for 2000 and 1998, respectively; risk-free interest
rate of 5.11%, and 5.72%, for 2000 and 1998, respectively; and expected terms
of 3.00 to 6.00 years for 2000 and 6.59 years for 1998.
12. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan covering
substantially all of its eligible United States employees. Employer
contributions under the retirement plan amounted to approximately $1,195, $702,
and $982 during 2000, 1999, and 1998, respectively.
The Company provides supplemental pension benefits to its employees of
foreign operations in addition to mandatory benefits included in local country
payroll tax statutes. These supplemental pension benefits amounted to
approximately $110, $124, and $93 during 2000, 1999, and 1998 respectively.
13. SEGMENT REPORTING
In 1998, the Company adopted Statement of Accounting Standards No.
131, "Disclosures about Segments of Enterprise and Related Information" ("SFAS
131"). SFAS 131 supercedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach of determining reportable segments of an organization.
The management approach designates the internal organization that is used by
46
management for making operational decisions and addressing performance as the
source of determining the Company's reportable segments. Management bases its
financial decisions by the geographical location of its operations.
The individual subsidiaries comprising the Company operate
predominantly in a single industry as manufacturers and distributors of
hydraulic components. The subsidiaries are multinational with operations in the
United States, the United Kingdom, Germany, and Korea. In computing earnings
from operations for the foreign subsidiaries, no allocations of general
corporate expenses, interest or income taxes have been made.
Identifiable assets of the foreign subsidiaries are those assets
related to the operation of those companies. United States assets consist of
all other operating assets of the Company.
Segment information is as follows:
United United
States Korea Kingdom Germany Elimination Consolidated
------- ------- ------- ------- ----------- ------------
2000
Sales to unaffiliated
customers $55,488 $ 5,537 $13,026 $ 5,916 $ -- $79,967
Intercompany sales 11,232 -- 1,814 29 (13,075) --
Operating profits 5,021 307 1,834 281 (87) 7,356
Identifiable assets 48,717 1,966 10,285 4,757 (1,351) 64,374
Depreciation
and amortization 4,283 166 874 271 5,594
Capital expenditures 3,213 450 762 (51) 4,374
1999
Sales to unaffiliated
customers $50,327 $ 4,202 $10,858 $ 5,062 $ -- $70,449
Intercompany sales 8,354 -- 2,016 43 (10,413) --
Operating profits 2,492 81 1,059 354 52 4,038
Identifiable assets 49,539 857 8,044 5,902 (268) 64,074
Depreciation
and amortization 3,802 112 827 302 5,043
Capital expenditures 5,953 119 1,323 502 7,897
1998
Sales to unaffiliated
customers $55,768 556 $11,719 $ 4,677 $ -- $72,720
Intercompany sales 8,340 -- 2,281 40 (10,661) --
Operating profits 5,902 (169) 1,937 190 (172) 7,688
Identifiable assets 47,850 329 8,882 4,032 (74) 61,019
Depreciation
and amortization 3,434 -- 732 221 -- 4,387
Capital expenditures 6,104 (26) 1,254 805 -- 8,137
Net foreign currency gains (losses) reflected in results of operations
were ($39), ($168), and ($35), for the years 2000, 1999, and 1998,
respectively. Operating profit is total sales and other operating income less
operating expenses. In computing segment operating profit, interest expense and
net miscellaneous income (expense) have not been deducted (added).
47
Included in U.S. sales to unaffiliated customers were export sales,
principally to Canada and Asia, of $7,134, $6,056, and $6,415, during 2000,
1999, and 1998, respectively.
14. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any legal proceedings other than routine
litigation incidental to its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially affect
the results of operations, financial position or cash flows of the Company.
48
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
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors ("Board") of the Company currently consists of
eight members. The Board is divided into three classes of Directors serving
staggered three-year terms. Directors hold their positions until the annual
meeting of shareholders in the year in which their term expires, and until
their respective successors are elected and qualified or until their earlier
resignation, removal from office or death. Executive Officers serve at the
pleasure of the Board of Directors.
The following table sets forth the names and ages of the Company's
Directors and Executive Officers and the positions they hold with the Company.
NAME AGE POSITION
- ---- --- --------
Clyde G. Nixon................ 65 Chairman of the Board of Directors
(term expiring in 2001)
Allen J. Carlson ............ 50 President, Chief Executive Officer,
Director (term expiring in 2003)
Jeffrey Cooper................ 59 Engineering Manager
Richard J. Dobbyn............. 57 Chief Financial Officer
Peter G. Robson ............ 56 General Manager, Sun Hydraulics Limited
John S. Kahler................ 61 Director (term expiring in 2003),
and a member of the Audit and
Compensation Committees
Christine L. Koski............ 43 Director (term expiring in 2002)
49
Robert E. Koski ............ 71 Director (term expiring in 2003), and a
member of the Compensation Committee
Ferdinand E. Megerlin......... 61 Director (term expiring in 2001) and a
member of the Compensation Committee
Taco van Tijn ................ 77 Director (term expiring in 2002) and a
member of the Audit Committee
David N. Wormley.............. 61 Director (term expiring in 2002) and a
member of the Compensation Committee
MR. NIXON joined the Company in January 1988, and served as its
President and Chief Executive Officer from November 1988 until May 2000, at
which time he was named Chairman of the Board. From September 1985 to January
1988, he served as Vice President of Cross & Trecker Corporation and was
President of Warner & Swasey Company, its wholly-owned subsidiary. From 1964 to
1985, he served in various management capacities with Brown & Sharpe
Manufacturing Corporation, most recently as Vice President of its fluid power
division and President of Double A Products Company, its wholly-owned
subsidiary. Mr. Nixon is a graduate of Cornell University and the Harvard
Business School, and is Past Chairman of the Board of the National Fluid Power
Association. Mr. Nixon has over 32 years experience in the fluid power
industry.
MR. CARLSON joined the Company in March 1996 and served as Vice
President from January 2000 until May 2000, when he was named President and
Chief Executive Officer. From October 1977 to March 1996, Mr. Carlson held
various engineering, marketing and management positions for Vickers
Incorporated, a wholly-owned subsidiary of Trinova Corporation. He is a
graduate of the Milwaukee School of Engineering and the Advanced Management
Program at the Harvard Business School. Mr. Carlson has over 29 years
experience in the fluid power industry.
MR. COOPER joined the Company in December 1990 as an engineer and has
been Engineering Manager since September 1991. From August 1987 to December
1990, he was Engineering Manager, Mobile Valves, of Vickers, Incorporated, a
wholly-owned subsidiary of Trinova Corporation, and from September 1979 to
August 1986, he served as Vice President of Engineering for Double A Products
Company. Mr. Cooper is an engineering graduate of Willesden College of
Technology, London, England. Mr. Cooper has over 31 years experience in the
fluid power industry.
MR. DOBBYN joined the Company in October 1995 and was named Chief
Financial Officer in July 1996. From June 1995 to October 1995, Mr. Dobbyn
served as the Controller of Protek Electronics. From July 1994 to June 1995, he
served as the Fiscal Director of a non-profit child care agency. From September
1984 to July 1994, Mr. Dobbyn was Senior Vice President-Finance and
Administration for Loral Data Systems, formerly Fairchild Weston Systems, a
50
Schlumberger company. Mr. Dobbyn is a Certified Public Accountant and a
graduate of Boston College.
MR. ROBSON has served as a Director of Sun Hydraulics Limited,
Coventry, England, since May 1993, and has been employed by the Company as the
General Manager of its United Kingdom operations since 1982. Mr. Robson is a
Chartered Engineer and a graduate of Coventry University. Mr. Robson has over
33 years experience in the fluid power industry.
MR. KAHLER is the President, CEO and a Director of Cincinnati
Incorporated. Mr. Kahler has served in various management positions with
Cincinnati Incorporated since 1989. He is a graduate of Carnegie-Mellon
University and the Harvard Business School.
MS. KOSKI since 1980 held various positions in sales, product
management, purchasing, sales management, and international marketing with
Celanese Ltd. or its former affiliates, including Hoechst AG and Hoechst
Celanese Chemical Group Ltd. From April 1996 through March 2000, Ms. Koski was
Global Marketing Manager - Acrylic Acid and Monomers business line of Celanese
AG. Ms. Koski currently is pursuing an MBA degree from Southern Methodist
University.
MR. KOSKI is a co-founder of the Company and served as its Chairman of
the Board from the Company's inception in 1970 until his retirement in May of
2000. He was also its President and Chief Executive Officer from 1970 until
November 1988. He is a graduate of Dartmouth College and past Chairman of the
Board of the National Fluid Power Association. Mr. Koski has over 38 years
experience in the fluid power industry, and has served as Chairman of the Fluid
Power Systems and Technology Division of the American Society of Mechanical
Engineers, and as a member of the Board of Directors of the National
Association of Manufacturers.
DR. MEGERLIN is Chairman and Joint Managing Director of Linde AG's
Industrial Trucks and Hydraulics Division in Aschaffenburg, Germany. He is also
Chairman of Linde's U.S. subsidiaries Linde Hydraulics Corp., Canfield, Ohio,
and Linde Lift Truck Corp., Sommerville, South Carolina. Within VDMA, German's
association for mechanical and plant engineering, Dr. Megerlin serves as Vice
Chairman of the German Fluid Power Association. He is a mechanical engineer and
received his Dipl-Ing (M.S.) degree from the Technical University of Karlsruhe,
Germany, and his Dr.-Ing. (Ph.D.) from TH Aachen, Germany. Dr. Megerlin has
over 30 years of experience in the fluid power industry.
MR. VAN TIJN is an attorney (solicitor), who has practiced law in
London, England, since May 1977. Since June 1998, he has been a consultant with
Rooks Rider. Mr. van Tijn has been a Director of the Company since February
1989, and the principal statutory officer of Sun Hydraulik Holdings Limited
since January 1991.
DR. WORMLEY is the Dean of the Engineering School at Pennsylvania
State University, where he has taught since 1992. He previously was a member of
the engineering faculty at the Massachusetts Institute of Technology. Dr.
Wormley has served as a Director of the Company since December 1992. He is an
engineer and earned his Ph.D. from the Massachusetts Institute of Technology.
51
No family relationships exist between any of the Company's Directors
and executive officers, except that Ms. Koski is the daughter of Mr. Koski. Ms.
Koski and Mr. Koski beneficially own 37.6% and 41%, respectively, of the
outstanding shares of Common Stock. There are no arrangements or understandings
between Directors and any other person concerning service as a Director.
The Board of Directors has Audit and Compensation Committees. The
Company does not have a Nominating Committee; instead, the entire Board of
Directors functions as a Nominating Committee.
The Audit Committee was appointed in February 1997 and held four
meetings in 2000. The functions of the Audit Committee are to recommend
annually to the Board of Directors the appointment of the independent public
accountants of the Company, to discuss and review the scope of and the fees for
the prospective annual audit with the independent public accountants, to review
the results thereof with the independent public accountants, to review and
approve non-audit services of the independent public accountants, to review
compliance with existing major accounting and financial policies of the
Company, to review the adequacy of the financial organization of the Company,
to review management's procedures and policies relative to the adequacy of the
Company's internal accounting controls, to review compliance with federal and
state laws relating to accounting practices and to review and approve (with the
concurrence of a majority of the disinterested Directors of the Company)
transactions, if any, with affiliated parties.
A Compensation Committee was formed in December 1996 to review,
approve and recommend to the Board of Directors the terms and conditions of all
employee benefit plans or changes thereto, to administer the Company's stock
option plans and carry out the responsibilities required by the rules of the
Securities and Exchange Commission. The Committee met twice during 2000.
The Board of Directors held four meetings during 2000. Each Director
attended all of the meetings of the Board and of each committee of which he was
a member in 2000.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors, officers and holders of more than 10% of the Company's
Common Stock to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
any other equity securities of the Company. To the Company's knowledge, based
solely upon a review of the forms, reports and certificates filed with the
Company by such persons, all of them complied with the Section 16(a) filing
requirements in 2000.
52
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table is a summary of the compensation paid or accrued
by the Company for the last three fiscal years for services in all capacities
to the Company's Chief Executive Officer and each of its four most highly
compensated executive officers who earned more than $100,000 from the Company
in 2000 under the rules of the Securities and Exchange Commission (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS--
SECURITIES
NAME AND UNDERLYING OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS(#) COMPENSATION(1)
- ------------------------------- ---- ------- --------------- ----------------
Clyde G. Nixon, 2000 205,200 -- $19,816(2)
Chairman of the 1999 205,200 -- 11,703
Board of Directors 1998 191,300 -- 17,084
---- ------- ------- ------
Allen J. Carlson 2000 157,500 -- $10,230
President and Chief Executive 1999 122,000 -- 2,850
Officer 1998 110,350 -- 2,466
---- ------- ------- ------
Jeffrey Cooper 2000 138,100 -- $14,677
Engineering Manager 1999 133,100 -- 7,246
1998 126,525 -- 11,683
---- ------- ------- ------
Richard J. Dobbyn 2000 130,000 -- $ 9,560
Chief Financial Officer 1999 118,000 -- 4,228
1998 107,575 -- 5,773
---- ------- ------- ------
Peter G. Robson 2000 103,976 -- $18,589
General Manager, 1999 100,181 -- 18,402
Sun Hydraulics Limited 1998 95,628 -- 17,772
---- ------- ------- ------
- ---------------
(1) Except as otherwise noted, reflects primarily contributions made by the
Company on behalf of the employee to the Company's 401(k) plan and excess
life insurance premiums.
(2) Includes dues of $750.
53
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------
PERCENT
NUMBER OF OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED
OPTIONS TO
GRANTED EMPLOYEES EXERCISE OR POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL
(#) IN FISCAL BASE PRICE EXPIRATION RATES OF STOCK PRICE APPRECIATION FOR OPTION
NAME YEAR ($/SH) DATE TERM (1)
--------------------------------------------
5%($) 10%($) 0%($)
(a) (b) (c) (d) (e) (f) (g) (h)
- --------------------- ---------- --------- ----------- ---------- -------- -------- --------
Clyde G. Nixon 20,000 19.4% 8.00 09/09/10 $66,159 $162,954 --
------ ----- --------- -------- ------- -------- -------
Allen Carlson 10,000 35.0% 6.00 01/03/10 33,080 81,477 --
26,000 8.00 09/09/10 86,007 211,840
------ ----- --------- -------- ------- -------- -------
Jeffrey Cooper 2,000 1.9% 6.75 11/16/10 6,616 16,295 --
------ ----- --------- -------- ------- -------- -------
Richard J. Dobbyn 2,000 1.9% 6.75 11/16/10 6,616 16,295 --
------ ----- --------- -------- ------- -------- -------
Peter G. Robson 5,000 4.9% 6.75 11/16/10 16,540 40,738 --
------ ----- --------- -------- ------- -------- -------
- ---------------
(1) The options were granted on January 3, 2000, September 9, 2000, and
November 16, 2000, at exercise prices of $6.00, $8.00, and $6.75,
respectively, the closing prices for the shares of Common Stock on such
dates. The 5% and 10% assumed annual rates of stock price appreciation are
provided in compliance with Regulation S-K under the Securities Exchange
Act of 1934. The Company does not necessarily believe that these
appreciation calculations are indicative of actual future stock option
values or that the price of Common Stock will appreciate at such rates.
54
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL AT FISCAL
SHARES VALUE YEAR-END(#) YEAR-END($)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------- ----------- -------- -------------- -------------
(a) (b) (c) (d) (e)
Clyde G. Nixon -- -- 136,869/16,677 $ 627,818/0
Allen J. Carlson -- -- 22,000/38,000 $ 66,250/0
Jeffrey Cooper -- -- 77,369/19,420 $ 289,440/0
Richard J. Dobbyn -- -- 34,000/15,000 0/0
Peter G. Robson -- -- 89,574/13,421 $ 370,245/0
- ---------------
(1) Based upon the December 30, 2000, closing stock price of $6.625 per share,
as reported on the Nasdaq National Market.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Board of Directors determined the compensation, including salary
and bonus, of the Executive Officers of the Company for the fiscal year ended
December 30, 2000. The initial compensation for the current fiscal year through
the date hereof and future compensation of the Company's Executive Officers
will be determined by the Compensation Committee of the Board of Directors,
comprised of John Kahler, Robert E. Koski, Ferdinand E. Megerlin, and David N.
Wormley. See "Item 10. Directors and Executive Officers of the Registrant."
DIRECTOR COMPENSATION
Directors who are not officers of the Company are paid $2,500 for
attendance at each meeting of the Board of Directors, as well as each meeting
of each Board Committee on which they serve when the committee meeting is not
held within one day of a meeting of the Board of Directors. Directors also are
reimbursed for their expenses incurred in connection with their attendance at
such meetings.
55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of February 26, 2001, information as
to the beneficial ownership of the Company's Common Stock by (i) each person or
entity known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each Director, (iii) Each Named
Executive Officer of the Company, and (iv) all Directors and executive officers
of the Company as a group.
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF
OWNER(1) BENEFICIAL OWNERSHIP(2) CLASS
- -------------------------------------------------------------------------------
Robert E. Koski(3)(4)(5) 2,618,921 41.0
Beverly Koski(3)(4)(5) 2,618,921 41.0
Christine L. Koski(3)
3525 Turtle Creek Boulevard #19B
Dallas, Texas 75219 2,397,838 37.6
Robert C. Koski(3)(5)
315 Sycamore Street
Decatur, Georgia 30030 2,375,543 37.2
Koski Family Limited Partnership
3525 Turtle Creek Boulevard #19B
Dallas, Texas 75219 2,333,543 36.5
Thomas L. Koski(3)
Six New Street
East Norwalk, Connecticut 06855 2,333,543 36.5
Royce & Associates, Inc.(6)
Royce Management Company
Charles M. Royce
1414 Avenue of the Americas
New York, NY 10019 597,500 9.4
Bradley S. Ferrell(7)
5924 Cranbrook Way, #101
Naples, Florida 34112 460,642 7.2
Robert S. and Ann R. Ferrell(8)
5924 Cranbrook Way, #101
Naples, Florida 34112 323,537 5.1
Clyde G. Nixon(9) 239,144 3.7
Peter G. Robson(10) 97,995 1.5
Jeffrey Cooper(10) 82,789 1.3
Richard J. Dobbyn(11) 42,500 *
Taco van Tijn(12) 23,920 *
Allen J. Carlson(13) 22,500 *
David N. Wormley(14) 3,940 *
John S. Kahler(15) 3,200 *
Ferdinand E. Megerlin 0 --
All Directors and Executive Officers as
a Group (11 persons) 3,199,204 50.1
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the persons listed who
own more than 5% of the Company's Common Stock is 1500 West University
Parkway, Sarasota, Florida 34243.
56
(2) This column sets forth shares of the Company's Common Stock which are
deemed to be "beneficially owned" by the persons named in the table under
Rule 13d-3 of the Securities and Exchange Commission. Except as otherwise
indicated, the persons listed have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent
such power may be shared with a spouse.
(3) Includes 2,333,543 shares owned by the Koski Family Limited Partnership,
over which Christine L. Koski, Robert C. Koski, Thomas L. Koski, Robert E.
Koski and Beverly Koski share voting and investment power as the general
partners in the Partnership. Christine L. Koski, Robert C. Koski and
Thomas L. Koski are the adult children of Robert E. Koski and Beverly
Koski.
(4) Includes 141,216 shares owned by Beverly Koski and 117,162 shares owned by
Robert E. Koski. Beverly Koski is the spouse of Robert E. Koski.
(5) Includes 27,000 shares owned by the Koski Family Foundation, Inc., over
which Robert E. Koski, Beverly Koski and Robert C. Koski share voting and
investment power.
(6) According to Amendment No. 2 to the Schedule 13G, filed February 5, 2001,
by Royce & Associates, Inc. ("Royce") and Royce Management Company
("RMC"), registered investment advisors, and Charles M. Royce, Royce has
sole voting and investment power with respect to 590,700 shares, and RMC
has sole voting and investment power with respect to 6,800 shares.
According to the Schedule 13G, Charles M. Royce may be deemed to be a
controlling person of Royce and RMC, and as such may be deemed to
beneficially own the shares beneficially owned by Royce and RMC. According
to the Schedule 13G, Mr. Royce does not own any shares outside of Royce
and RMC, and disclaims beneficial ownership of the shares held by Royce
and RMC.
(7) Includes 38,205 shares owned by Mr. Ferrell, over which Mr. Ferrell has
sole voting and investment power, and 422,437 shares beneficially owned by
Mr. Ferrell in his capacity as trustee of various trusts, over which Mr.
Ferrell has shared voting and investment power.
(8) Includes 6,500 shares owned by the Robert S. Ferrell Trust, of which
Robert S. Ferrell is the sole trustee, 186,125 shares owned by Bradley S.
Ferrell, Trustee of Robert S. Ferrell Flint Trust, dated 06/16/98, 6000
shares owned by the Ann R. Ferrell Trust, of which Ann R. Ferrell is the
sole trustee, 125,312 shares owned by Bradley S. Ferrell, Trustee of Ann
R. Ferrell Flint Trust dated 06/16/98, and 600 shares owned individually
by Ann R. Ferrell. Robert S. Ferrell is the spouse of Ann R. Ferrell.
(9) Includes 147,395 shares subject to currently exercisable options and
49,522 shares in the Joan Nixon Trust.
(10) Represents shares subject to currently exercisable options.
(11) Includes 41,000 shares subject to currently exercisable options.
(12) Includes 3,920 shares subject to currently exercisable options, 2,500
shares owned by Mr. van Tijn's spouse, and 15,000 shares owned by Taco van
Tijn Settlement, of which Mr. van Tijn and his spouse have a life
interest.
(13) Includes 22,000 shares subject to currently exercisable options.
(14) Includes 2,940 shares subject to currently exercisable options.
(15) Includes 2,200 shares owned in trust, of which Mr. Kahler's spouse is the
trustee and beneficiary.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2000, neither the Company nor either of its subsidiaries
entered into or proposed to enter into any transactions with a value in excess
of $60,000 with any director, or executive officer, or security holder known to
own of record or beneficially more than 5% of the Company's common stock.
Further, no director or executive officer had a business relationship with or
was indebted to the Company or either of its subsidiaries reportable under the
rules of the Securities and Exchange Commission during fiscal 2000.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are included in
Part II, Item 8:
Report of Independent Certified Public Accountants 32
Consolidated Balance Sheets as of December 30, 2000,
and January 1, 2000 33
Consolidated Statements of Income for the years ended
December 30, 2000, January 1, 2000, and December 31, 1998 34
Consolidated Statements of Shareholders' Equity for the
years ended December 30, 2000, January 1, 2000, and
December 31, 1998 35
Consolidated Statements of Cash Flows for the years
ended December 30, 2000, January 1, 2000, and
December 31, 1998 36
Notes to Consolidated Financial Statements 37
2. All schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission
of the schedule or because the information required is included in
the financial statements or notes thereto or the schedule is not
required or inapplicable under the related instructions.
3. Exhibits:
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of the Company
(previously filed as Exhibit 3.1 in the Pre-Effective Amendment No. 4
to the Company's Registration Statement on Form S1 filed on December
19, 1996 (File No. 333-14183) and incorporated herein by reference).
3.2 Amended and Restated Bylaws of the Company (previously filed as
Exhibit 3.2 in the Company's Quarterly report on Form 20-Q for the
quarter ended October 2, 1999 and incorporated by reference herein).
58
4.5 Mortgage and Security Agreement, dated January 9, 1992, between
Suninco, Inc., Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.5 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).
4.6 Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.6 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.7 Security Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.7 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.8 Modification and Additional Advance Agreement, dated March 29, 1996,
between Suninco, Inc. and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.8 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.9 Consolidated Note, dated March 29, 1996, in the amount of
$2,475,000.00, given by Suninco, Inc. to Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.9 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).
4.10 Loan Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.10 in the Company's Registration Statement on Form
S1 filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
4.11 Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.11 in the Company's Registration Statement on Form
S1 filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
59
4.12 Consolidated Note, dated May 20, 1996, in the amount of
$3,063,157.00, given by Sun Hydraulics Corporation to Northern Trust
Bank of Florida, N.A. (previously filed as Exhibit 4.12 in the
Company's Registration Statement on Form S1 filed on October 15, 1996
(File No. 333-14183) and incorporated herein by reference).
4.13 Loan Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.13 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.14 Mortgage, dated June 14, 1996, between Sun Hydraulics Corporation,
Suninco Inc., and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.14 in the Company's Registration Statement on Form
S1 filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
4.15 Security Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.15 in the Company's Registration Statement on Form
S1 filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
4.16 Promissory Note, dated June 14, 1996, in the amount of $6,187,000.00,
given by Sun Hydraulics Corporation and Suninco, Inc. to Northern
Trust Bank of Florida, N.A. (previously filed as Exhibit 4.16 in the
Company's Registration Statement on Form S1 filed on October 15, 1996
(File No. 333-14183) and incorporated herein by reference).
4.17 Revolving Loan Facility letter agreement, dated July 30, 1996, in the
amount of (pound)800,000, between Sun Hydraulics Ltd. and Lloyds Bank
Plc. (previously filed as Exhibit 4.17 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.18 Overdraft and Other Facilities letter agreement, dated June 7, 1996,
in an amount not to exceed (pound)250,000, between Sun Hydraulics
Ltd. and Lloyds Bank Plc. (previously filed as Exhibit 4.18 in the
Company's Registration Statement on Form S1 filed on October 15, 1996
(File No. 333-14183) and incorporated herein by reference).
4.19 Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and
Dresdner Bank (previously filed as Exhibit 4.19 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).
60
4.20 Amendment to Recommended Offer by Sun Hydraulics Corporation to
acquire the whole of the issued share capital of Sun Hydraulics
Holdings Limited, dated December 17, 1996 (previously filed as
Exhibit 2.1 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S1 filed on December 19, 1996 (File
No. 333-14183) and incorporated herein by reference).
4.21 Master Note, dated February 3, 1997, in the amount of $10,000,000.00,
made by the Company to evidence a line of credit granted to the
Company by Northern Trust Bank of Florida, N.A. (previously filed as
Exhibit 4.21 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference).
4.22 Renewal Master Note, dated February 3, 1998, in the amount of
$10,000,000.00, made by the Company to evidence a line of credit
granted to the Company by Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.22 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference).
4.23 Modification Agreement, dated March 1, 1998, between the Company and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit
4.23 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and incorporated herein by reference).
4.24 Renewal Master Note, dated as of February 3, 1998, in the amount of
$4,965,524.51, between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.24 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference).
4.25 Renewal Master Note, dated of February 3, 1999, in the amount of
$4,965,524.51, between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.25 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and
incorporated herein by reference).
4.26 Renewal Master Note, dated July 23, 1999, in the amount of
$5,000,000.00 between the Company and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.26 to the Company's Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999 and
incorporated herein by reference).
61
4.27 Loan Agreement, dated July 23, 1999, in the amount of $7,500,000.00,
between the Company and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.27 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 3, 1999 and incorporated
herein by reference).
4.28 Security Agreement, dated July 23, 1999, between the Company and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit
4.28 to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 and incorporated herein by reference).
4.29 Promissory Note, dated July 23, 1999, in the amount of $7,500,000.00,
between the Company and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.29 to the Company's Quarterly Report
on Form 10-Q for the quarter ended July 3, 1999 and incorporated
herein by reference).
4.30 Loan Agreement, dated July 23, 2000, by and among Northern Trust Bank
of Florida, N.A. as Lender, Sun Hydraulics Corporation as Borrower,
and Sun Hydraulik Holdings Limited, Sun Hydraulics Limited and Sun
Hydraulik GmbH as Guarantors. (previously filed as Exhibit 4.30 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000 and incorporated herein by reference).
4.31 First Amendment to Security Agreement, dated July 23, 2000, by and
among Northern Trust Bank of Florida, N.A. and Sun Hydraulics
Corporation. (previously filed as Exhibit 4.31 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
4.32 Master Note, dated July 23, 2000, in the amount of $7,500,000.00,
made by Sun Hydraulics Corporation in favor of Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.32 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
4.33 Amended and restated Loan Agreement by and among Northern Trust Bank
of Florida, N.A., Sun Hydraulics Corporation, Sun Hydraulik Holdings
Limited, Sun Hydraulics Limited and Sun Hydraulik GmbH dated November
1, 2000.
10.1 Form of Distributor Agreement (Domestic) (previously filed as Exhibit
10.1 in the Company's Registration Statement on Form S1 filed on
October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).
62
10.2 Form of Distributor Agreement (International) (previously filed as
Exhibit 10.2 in the Company's Registration Statement on Form S1 filed
on October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).
10.3+ 1996 Sun Hydraulics Corporation Stock Option Plan (previously filed
as Exhibit 10.3 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S1 filed on December 19, 1996 (File
No. 333-14183) and incorporated herein by reference).
10.4+ Amendment No. 1 to 1996 Stock Option Plan (previously filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference).
10.5+ Form of Indemnification Agreement (previously filed as Exhibit
10.4 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S1 filed on December 19, 1996 (File
No. 333-14183) and incorporated herein by reference).
10.6+ Sun Hydraulics Corporation Employee Stock Award Program (previously
filed as Exhibit 4 to the Company's registration statement on Form
S-8 filed on July 20, 1999, and incorporated herein by reference).
23.1 Consent of Independent Certified Public Accountants.
- ---------------
+ Executive management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
1. Report on Form 8-K (dated November 7, 2000) filed November 7, 2000,
announcing the Company's third quarter financial results.
2. Report on Form 8-K (dated December 15, 2000) filed December 15, 2000,
announcing a regular quarterly dividend of $0.04.
63
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, in the City of
Sarasota, State of Florida on March 9, 2001.
SUN HYDRAULICS CORPORATION
By: /s/ Allen J. Carlson
------------------------------------
Allen J. Carlson, President and
Chief Executive Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 9, 2001.
Signature Title
/s/ Allen J. Carlson
- ---------------------------------
Allen J. Carlson President, Chief Executive Officer
and Director
/s/ Richard J. Dobbyn
- ---------------------------------
Richard J. Dobbyn Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ John S. Kahler
- ---------------------------------
John S. Kahler Director
/s/ Christine L. Koski
- ---------------------------------
Christine L. Koski Director
/s/ Robert E. Koski
- ---------------------------------
Robert E. Koski Director
/s/ Ferdinand E. Megerlin
- ---------------------------------
Ferdinand E. Megerlin Director
/s/ Clyde G. Nixon
- ---------------------------------
Clyde G. Nixon Chairman of the Board of Directors
/s/ Taco van Tijn
- ---------------------------------
Taco van Tijn Director
/s/ David N. Wormley
- ---------------------------------
David N. Wormley Director
64
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
3.1 Amended and Restated Articles of Incorporation of the Company
(previously filed as Exhibit 3.1 in the Pre-Effective Amendment No.
4 to the Company's Registration Statement on Form S1 filed on
December 19, 1996 (File No. 333-14183) and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of the Company (previously filed as
Exhibit 3.2 in the Company's Quarterly report on Form 20-Q for the
quarter ended October 2, 1999 and incorporated by reference
herein).
4.5 Mortgage and Security Agreement, dated January 9, 1992, between
Suninco, Inc., Sun Hydraulics Corporation, and Northern Trust Bank
of Florida, N.A. (previously filed as Exhibit 4.5 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File
No. 333-14183) and incorporated herein by reference).
4.6 Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.6 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.7 Security Agreement, dated March 29, 1996, between Suninco, Inc.,
Sun Hydraulics Corporation, and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.7 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.8 Modification and Additional Advance Agreement, dated March 29,
1996, between Suninco, Inc. and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.8 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.9 Consolidated Note, dated March 29, 1996, in the amount of
$2,475,000.00, given by Suninco, Inc. to Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.9 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File
No. 333-14183) and incorporated herein by reference).
65
4.10 Loan Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.10 in the Company's Registration Statement on
Form S1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
4.11 Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.11 in the Company's Registration Statement on
Form S1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
4.12 Consolidated Note, dated May 20, 1996, in the amount of
$3,063,157.00, given by Sun Hydraulics Corporation to Northern
Trust Bank of Florida, N.A. (previously filed as Exhibit 4.12 in
the Company's Registration Statement on Form S1 filed on October
15, 1996 (File No. 333-14183) and incorporated herein by
reference).
4.13 Loan Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.13 in the Company's Registration
Statement on Form S1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).
4.14 Mortgage, dated June 14, 1996, between Sun Hydraulics Corporation,
Suninco Inc., and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.14 in the Company's Registration Statement on
Form S1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
4.15 Security Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously
filed as Exhibit 4.15 in the Company's Registration Statement on
Form S1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
4.16 Promissory Note, dated June 14, 1996, in the amount of
$6,187,000.00, given by Sun Hydraulics Corporation and Suninco,
Inc. to Northern Trust Bank of Florida, N.A. (previously filed as
Exhibit 4.16 in the Company's Registration Statement on Form S1
filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
66
4.17 Revolving Loan Facility letter agreement, dated July 30, 1996, in
the amount of (pound)800,000, between Sun Hydraulics Ltd. and
Lloyds Bank Plc. (previously filed as Exhibit 4.17 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File
No. 333-14183) and incorporated herein by reference).
4.18 Overdraft and Other Facilities letter agreement, dated June 7,
1996, in an amount not to exceed (pound)250,000, between Sun
Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as Exhibit
4.18 in the Company's Registration Statement on Form S1 filed on
October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).
4.19 Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and
Dresdner Bank (previously filed as Exhibit 4.19 in the Company's
Registration Statement on Form S1 filed on October 15, 1996 (File
No. 333-14183) and incorporated herein by reference).
4.20 Amendment to Recommended Offer by Sun Hydraulics Corporation to
acquire the whole of the issued share capital of Sun Hydraulik
Holdings Limited, dated December 17, 1996 (previously filed as
Exhibit 2.1 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S1 filed on December 19, 1996 (File
No. 333-14183) and incorporated herein by reference).
4.21 Master Note, dated February 3, 1997, in the amount of
$10,000,000.00, made by the Company to evidence a line of credit
granted to the Company by Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 and incorporated
herein by reference).
4.22 Renewal Master Note, dated February 3, 1998, in the amount of
$10,000,000.00, made by the Company to evidence a line of credit
granted to the Company by Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.22 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference).
4.23 Modification Agreement, dated March 1, 1998, between the Company
and Northern Trust Bank of Florida, N.A. (previously filed as
Exhibit 4.23 to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by reference).
67
4.24 Renewal Master Note, dated as of February 3, 1998, in the amount of
$4,965,524.51, between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.24 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
and incorporated herein by reference).
4.25 Renewal Master Note, dated of February 3, 1999, in the amount of
$4,965,524.51, between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.25 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 3, 1999
and incorporated herein by reference).
4.26 Renewal Master Note, dated July 23, 1999, in the amount of
$5,000,000.00 between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.26 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
and incorporated herein by reference).
4.27 Loan Agreement, dated July 23, 1999, in the amount of
$7,500,000.00, between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.27 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
and incorporated herein by reference).
4.28 Security Agreement, dated July 23, 1999, between the Company and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit
4.28 to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 3, 1999 and incorporated herein by reference).
4.29 Promissory Note, dated July 23, 1999, in the amount of
$7,500,000.00, between the Company and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.29 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
and incorporated herein by reference).
4.30 Loan Agreement, dated July 23, 2000, by and among Northern Trust
Bank of Florida, N.A. as Lender, Sun Hydraulics Corporation as
Borrower, and Sun Hydraulik Holdings Limited, Sun Hydraulics
Limited and Sun Hydraulik GmbH as Guarantors. (previously filed as
Exhibit 4.30 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by
reference).
4.31 First Amendment to Security Agreement, dated July 23, 2000, by and
among Northern Trust Bank of Florida, N.A. and Sun Hydraulics
Corporation. (previously filed as Exhibit 4.31 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
68
4.32 Master Note, dated July 23, 2000, in the amount of $7,500,000.00,
made by Sun Hydraulics Corporation in favor of Northern Trust Bank
of Florida, N.A. (previously filed as Exhibit 4.32 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
4.33 Amended and restated Loan Agreement by and among Northern Trust
Bank of Florida, N.A., Sun Hydraulics Corporation, Sun Hydraulik
Holdings Limited, Sun Hydraulics Limited and Sun Hydrualik GmbH
dated November 1, 2000.
10.1 Form of Distributor Agreement (Domestic) (previously filed as
Exhibit 10.1 in the Company's Registration Statement on Form S1
filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
10.2 Form of Distributor Agreement (International) (previously filed as
Exhibit 10.2 in the Company's Registration Statement on Form S1
filed on October 15, 1996 (File No. 333-14183) and incorporated
herein by reference).
10.3+ 1996 Sun Hydraulics Corporation Stock Option Plan (previously filed
as Exhibit 10.3 in the Pre-Effective Amendment No. 4 to the
Company's Registration Statement on Form S1 filed on December 19,
1996 (File No. 333-14183) and incorporated herein by reference).
10.4+ Amendment No. 1 to 1996 Stock Option Plan (previously filed as
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference).
10.5+ Form of Indemnification Agreement (previously filed as Exhibit 10.4
in the Pre-Effective Amendment No. 4 to the Company's Registration
Statement on Form S1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).
10.6+ Sun Hydraulics Corporation Employee Stock Award Program (previously
filed as Exhibit 4 to the Company's registration statement on Form
S-8 filed on July 20, 1999, and incorporated herein by reference).
23.1 Consent of Independent Certified Public Accountants.
- ---------------
+ Executive management contract or compensatory plan or arrangement.
69