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 31, 1998 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 34243
SARASOTA, FLORIDA (Zip Code)
(Address of Principal Executive Offices)
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 March 23, 1999, was $25,873,162 based upon the closing sale price
of $7.00 on the Nasdaq Stock Market's National Market for that date. As of
March 23, 1999, there were 6,383,148 shares outstanding.
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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 provides
demonstrable performance and reliability advantages compared to other available
screw-in cartridge valves. Screw-in cartridge valves are an increasingly
accepted alternative to conventional forms of hydraulic valving, offering
significant design flexibility, as well as substantial size, weight and
efficiency benefits afforded to designers of fluid power systems. Since the
introduction of screw-in hydraulic cartridge valves in the late 1950s,
management believes manufacturers of these and similar products have captured
approximately $650 million of the worldwide market for all non-aerospace
hydraulic valves and manifolds, which management believes to be in excess of $4
billion. The Company has generated a profit each year since 1972. The Company
believes that its success is primarily a result of its innovative product
design, consistent high quality and superior product performance.
Fluid power involves the transfer and control of power through fluids
under pressure. Fluid power systems are integral to a wide variety of
manufacturing, material handling, agricultural and construction equipment. 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 typically are
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.
The Company designs and manufactures one of the most comprehensive lines
of screw-in hydraulic cartridge valves in the world. These valves control
direction, pressure, flow and loads, are available in up to five size ranges,
and are suitable for flows from 5 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 many 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, who design and manufacture rigid screw-in
cartridge valves that fit an industry common cavity. The Company believes that
competitors' products that fit the industry common cavity 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. Recently, a number of competitors have begun to
manufacture products that fit into the
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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.
The Company also designs and manufactures the most comprehensive line of
standard, cataloged manifolds in the screw-in cartridge valve and manifold
industry. A manifold is a solid block of metal, usually aluminum, steel or
ductile iron, which 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 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). Sales to the Company's largest
distributor represented approximately 7.5% of net sales in 1998, and the
Company believes that aggregate sales by its distributors to the largest end
user represented less than 3% of net sales in 1998.
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. The Company believes the long-term future growth prospects are
particularly attractive in the Pacific Rim and Eastern Europe where the
adoption of screw-in cartridge valves is in the early stage. In 1998,
approximately 32.5% of the Company's net sales were outside the United States.
Management believes that the Company's success during its 29-year history
is due in large part to its emphasis on innovative product designs and
vertically integrated, state of the art manufacturing processes. Management
attributes the Company's ability to continuously implement process improvements
to its horizontal management structure that encourages employee contribution at
all levels. The Company does not have a formal organizational chart and
employee responsibilities are not derived from titles or narrow job
descriptions. This management philosophy is utilized throughout the Company's
operations.
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). 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.
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Immediately prior to the Company's initial public offering of common stock
in January 1997, the Company acquired all of the outstanding shares of capital
stock of Sun Hydraulik Holdings Limited, a private limited company organized
under the Laws of England and Wales ("SHHL"), pursuant to an exchange offer made
by the Company to all of the stockholders of SHHL. See "Item 13. Certain
Relationships and Related Transactions - Reorganization with Sun Hydraulik
Holdings Limited."
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. As a result, fluid power systems
are integral to a wide variety of manufacturing, material handling,
agricultural and construction equipment. Fluid power systems typically are
comprised of valves and manifolds that control the flow of fluids, a pump to
generate fluid pressure, and actuators, such as cylinders and rotary motors, to
translate pressure into mechanical energy.
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 inflexible 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. The
Company's breadth of products offers many custom "packaging" opportunities that
allow design engineers to create custom, application-specific solutions using
the Company's cataloged "off-the-shelf" screw-in cartridge valves and related
components. End users can utilize screw-in valves and custom manifolds to
design an optimal solution for control of their fluid power systems that
significantly reduces assembly time and expense.
The Company estimates the global market for non-aerospace hydraulic valves
to be in excess of $4 billion, and believes that manufacturers of screw-in
hydraulic cartridge valves and manifolds and similar products have captured
approximately $650 million of the total market. The United States and Western
Europe are the largest developed markets for screw-in cartridge valves. The
Company believes that the long-term future growth prospects are particularly
4
attractive in the Pacific Rim and Eastern Europe, where the adoption of
screw-in cartridge technology is in the early stage.
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 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 typically exceed those of 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.
Offer a Wide Variety of "Off-the-Shelf" Products. The Company currently
offers one of the most comprehensive lines of screw-in cartridge valves in the
world. The Company is committed to producing functionally superior, cataloged
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 products that are complementary to its existing
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, (i) by designing and manufacturing manifolds which
incorporate the Company's screw-in cartridge valves for sale to original
equipment manufacturers ("OEMs"), and (ii) by encouraging competitive manifold
manufacturers to utilize the Company's screw-in cartridge valves in their
manifold designs. The Company's internally developed, proprietary expert system
software allows the Company to efficiently design and manufacture smaller, more
efficient manifolds in low quantities. The Company provides free software to
aid manifold designers in designing the Company's unique cavity into their
manifolds and sells tooling at cost 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. Key areas for expansion where the
Company has minimal presence include Central and South America, China and
Eastern Europe. In addition to operating units in Germany, Korea and England,
and a joint venture in China, the Company has strong distributor representation
in most developed and developing markets, including Western Europe, Taiwan,
Singapore, Australia, and Japan. In 1998, the Company purchased its Korean
distributor, Korea Fluid
5
Power Ltd, Inc., ("KFP") and initiated a joint venture in Shanghai, China. KFP
has the ability to manufacture manifolds that incorporate the Company's
screw-in cartridge valves, and the joint venture will have this ability in the
future. In 1998, the Company generated approximately 32.5% of its net sales
outside the United States. The Company believes that further expansion of its
international manufacturing facilities could enhance its competitive position
in certain foreign 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, an entrepreneurial spirit and individual
responsibility among employees. Employee initiatives have led to continuous
process improvement, 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 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 it desires, manufacture all
components of its products with the exception of springs, elastomer seals and
electrical coils. Additionally, the Company has in-house heat treatment
capability to provide consistent and reliable control of this critical
operation.
Sell Through Distributors, Market to End Users. 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 currently has approximately 65 distributors, 42 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. The Company
provides a high level of technical support to its distributors through open
access to the Company's engineering staff, catalogs, technical documents and
technical training programs. In addition, the Company maintains close
relationships with many OEMs and end users of its products to understand and
predict future needs for fluid power control devices and to test and refine new
product offerings.
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PRODUCTS
The Company's products are integral components in fluid power systems for
both "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).
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 5 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, who 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 rigid
cartridge valves to bind when screwed into the manifold, which leads to
unnecessary stress and often premature failure. Recently, a number of
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.
The Company has developed new market opportunities by scaling its screw-in
cartridge valves to accommodate application requirements with various flow
ranges. Management believes that the series `0' valve introduced in 1996 will
allow the Company to gain entry to new market applications which it previously
had not been able to serve, including fork lift trucks, food processing
equipment, factory automation and robotics. Future upward scaling of the
product line is currently being reviewed.
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 unique 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. 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 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
7
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
is currently able to produce sufficient volume that would materially affect the
Company's revenues.
Pressure Control Valves. The Company manufactures screw-in cartridge
valves for limiting or regulating fluid pressure. Types of pressure controls
include relief valves, reducing valves, reducing/relieving valves and sequence
valves, each available in many variants and configurations. Most hydraulic
systems incorporate at least one pressure relief valve for over-pressure
protection.
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, 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. The Company also manufactures high-pressure spool-type solenoid
valves and other pilot devices that can be used to actuate other screw-in
cartridge valves that the Company manufactures. In 1999, the Company will
introduce a range of full flow poppet and spool solenoid cartridge valves that
can be used for directional control. These products will 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.
Other Products. The Company designs and manufactures a broad array of
screw-in cartridge valves that can be used 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.
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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 interface 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 five 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 valve package for common
hydraulic circuit requirements.
Custom Manifolds. Custom manifolds are designed for a
customer-specific application and typically combine many different
screw-in cartridge valves in a single package. The Company's
internally developed, proprietary expert system software allows the
Company to design and 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 similarly functional 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 also believes that manifolds containing
its screw-in cartridge valves do not require testing once assembled,
providing a significant
9
competitive advantage. Custom manifolds provide many benefits,
including 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 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 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 rarely considered if performance levels would be
compromised. The Company practices a continuous improvement process, and 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.
MANUFACTURING
The Company is a process intensive manufacturing operation that
extensively utilizes state of the art 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 furnace
to provide consistent and reliable control of this important operation. As the
current heat treatment furnace is operating at capacity, the Company is in the
process of adding an additional furnace of the same type.
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
10
lathes and machining centers. The Company also employs robots, including
programmable and traditional pick and place units, and a variety of vision
systems for inspection and decision making tasks. The Company utilizes
internally developed, proprietary, personal computer based software to program
machines off-line and to minimize setup times. This expert system also helps
the Company utilize compound angle holes in its manifold designs, a technique
that allows manifolds to be made smaller in size with fewer potential leak
points.
At its Sarasota, Florida, plant, 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 facility. Test equipment also is utilized by the
resident engineers at the Company's plants in England and Germany.
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's ability to machine components to exacting tolerances makes
it difficult for competitors to offer products of equal performance. 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 vendors. The Company is very selective in
establishing its vendor base and develops long-term relationships with vendors.
Recently, the Company has experienced rising costs of parts received from
vendors. In the fourth quarter of 1998, the Company began a review of all
vendors to improve quality of incoming parts and to assess opportunities for
better control of price and quality. The Company is capable of machining all
parts of its cartridge valves and manifolds in house, except elastomer seals,
springs and electrical coils. Manufacturing processes at the existing
facilities in the United States and England have been certified to ISO 9002
since 1993.
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. The Company believes
that it is in material compliance with all of such laws. Compliance with such
laws and regulations has not had, and is not expected to have, any material
adverse effect on the Company's earnings or competitive position. The Company
has not been required to make any material capital expenditures, nor does it
expect to have to make any material capital expenditures in connection with its
compliance with such laws and regulations.
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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), with two additional regional support offices in the
United States. Included in the Company's sales and marketing staff are
hydraulic engineers that have significant experience in the fluid power
industry. Discount pricing structures encourage distributors to buy in moderate
to high volumes to ensure there is a local inventory of products in the
marketplace. Domestic distributors are rewarded with additional pricing
discounts if payments are received within 10 days of invoicing, helping to
establish lower accounts receivable cycle times. The Company does not grant
extended payment terms to distributors. The Company has an exchange policy,
which encourages distributors to return standard screw-in cartridge valves and
standard manifolds for which they do not have a current need. All inventory
exchanges must be approved by the Company, and a distributor's quarterly total
list price value of inventory exchanges generally is not permitted to exceed 2%
of the distributor's prior year's annual shipments, up to a maximum of $50,000.
The Company currently has approximately 65 distributors, 42 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 1998, sales to
the Company's largest distributor represented approximately 7.5% of net sales
and net sales outside of the United States represented approximately 32.5% 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
must 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 1998, direct sales to other fluid power
component manufacturers accounted for approximately 3.2% of net sales.
While the Company generally does not sell directly to end-users, it
markets directly to end-users with catalogs that sometimes include suggested
list prices along with suggested customer discounts. This program is intended
to provide design engineers with all the information necessary to specify and
obtain the Company's products. Since the average price for a single screw-in
cartridge valve is about $22 and the typical order from an end user is for a
relatively small quantity, the Company recognizes that its products are often
"bought" and not "sold." Publishing and distributing technically comprehensive
catalogs in multiple languages make the Company's products easy to purchase.
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CUSTOMERS
The Company typically mails its catalogs to more than 15,000 potential end
users in the United States and Canada. Overseas marketing and catalog
distribution is executed primarily through distributors. The Company believes
that its single largest end use customer represented less than 3% of net sales
in 1998, minimizing risks of dependence on major customers. The loss of any one
customer would not have a material adverse effect on the Company's business.
End users are classified by whet their primary applications for the Company's
products are "mobile" or "industrial."
Mobile applications involve equipment that generally is not fixed in
place, 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 factories or processing plants. 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 some consolidation
activity in recent years, with large, full-line producers filling out their
product lines by acquiring, or entering into relationships with, smaller,
privately held screw-in cartridge valve producers. 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
supported by any national or global standards organizations. The International
Standards Organization (ISO) recently developed a standard screw-in cartridge
cavity that is different from the industry common cavity. The Company does not
manufacture a product that fits either the industry common or the ISO standard
cavity. Currently, the Company is not aware of any major competitor that
produces a full line of standard products conforming to the ISO standard.
Recently, a number of competitors have begun to manufacture screw-in cartridge
valves that fit the Company's cavity. The Company believes the majority of
these products are load control valves.
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.
EMPLOYEES
As of March 23, 1999, the Company had approximately 510 full-time
employees in the United States, approximately 86 in England, 16 in Germany, and
26 in Korea. Over 80% of its employees are in manufacturing functions, over 10%
are in engineering and marketing functions, and the balance are in other
support functions. None of the employees in any operating unit are represented
by a union, and the Company 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. Due to the nature of the Company's manufacturing business, it is
often difficult to attract skilled personnel, especially in times when the
economy is operating in a fully employed state.
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 globally in the following countries:
Australia, Canada, France, Germany, Italy, Japan, Korea, Mexico, 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.
ITEM 2. PROPERTIES
The Company's major locations include facilities in the United States,
United Kingdom, Germany, Korea, and China, 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 not have any financial encumbrances and is well-suited
for the design, testing and manufacture of the Company's products. The Company
believes the productive capacity of this facility is approximately $50.0
million and currently is operating at near full capacity.
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 7.875% are required. At December 31, 1998, $4.9 million
was outstanding under this credit facility. The Manatee County facility,
constructed in 1997, is a state-of-the-art facility, with a productive capacity
similar to the Sarasota facility. To improve its capacity utilization, the
Company is in the process of installing electric, plasma heat treatment
equipment required to produce some of the Company's products. The Manatee
County facility currently is operating at less than 40% of its productive
capacity. However, in the second half of 1999, this facility will be utilized
to alleviate capacity constraints at the Sarasota facility.
In addition to the two facilities in Florida, the Company recently
purchased vacant land in Manatee County, Florida, for future manufacturing
requirements. There is no mortgage on this property and the Company believes
the land to be well-suited to add 20,000 square feet of manufacturing capacity.
In September 1998, the Company purchased the assets of Korea Fluid Power,
Ltd., including a building in an industrial park in Incheon, Korea. The Company
believes that the Korean facility is acceptable for manifold production;
however, improvement plans are in process for certain aspects of the operation.
This facility is operating at approximately 75% 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 $15.0 million and currently, is operating at 90% of its
productive capacity. The Company has
15
completed designs to allow expansion of an additional 12,000 square feet of
manufacturing space for future requirements.
The Company's 45,000 square foot facility in Erkelenz, Germany has a
mortgage loan with a term of 12 years and a fixed interest rate of 6.47%. At
December 31, 1998, the principal balance was $1.7 million. This facility is
well-suited to house equipment used for manufacturing and testing of the
Company's products. The productive capacity of this facility is believed to be
approximately $50.0 million. Currently, a very small portion of the
manufacturing area is utilized. The Company intends to lease a portion of
manufacturing floor space until such time that it is ready to increase its own
production. The German factory will be used to produce the Company's products
for distribution to local (European) markets.
The Company's joint venture in Mainland China is operated from a rental
facility in Shanghai. This facility has the necessary infrastructure in place
for the manufacture of manifolds, and is still in the start-up phase. The
Company believes the productive capacity of this facility is approximately $6.0
million. The Chinese factory will be used to produce products for distribution
to local (Chinese) markets, and for export to Asian countries.
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 is not a party to any legal proceedings other than routine
litigation incidental to its business.
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 31, 1998.
16
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
1997
----
First quarter
(beginning January 9, 1997) $12.375 $10.250
Second quarter 11.875 10.375
Third quarter 12.500 11.250
Fourth quarter 12.500 11.000
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
Holders
There were 115 shareholders of record of Common Stock on March 18, 1999.
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.
Dividends
The Company declared a cash dividend of $.04 per share on February 26,
1999, to shareholders of record on March 31, 1999, payable on April 15, 1999.
The Company declared quarterly cash dividends of $.04 per share, to
shareholders of record on December 31, 1998, September 30, 1998, June 30, 1998
and March 31, 1998. These dividends were paid on January 15, 1999, October 15,
1998, July 15, 1998 and April 15, 1998, respectively. The Company declared
quarterly cash dividends of $.035 per share to shareholders of record on
December 31, 1997, October 1, 1997, July 3, 1997 and, March 31 1997. These
dividends were paid on January 15 , 1998, October 15 , 1997, July 15, 1997 and
April 15, 1997, respectively.
17
The Board of Directors currently intends to continue to pay a quarterly
dividend of $.04 per share during 1999. However, the declaration and payment of
future dividends is subject to the sole discretion of the Board of Directors of
the Company, 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 and Exhibit 11.1 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.
YEARS ENDED DECEMBER 31,
1998 1997 1996(4) 1995(4) 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales $ 71,881 $ 64,198 $ 54,572 $ 55,388 $ 42,853
Cost of sales 52,537 44,621 37,185 34,581 27,512
-------- -------- -------- -------- --------
Gross profit 19,344 19,577 17,387 20,807 15,341
Selling, engineering and
administrative expenses 11,656 11,275 12,097(1) 10,578 8,605
-------- -------- -------- -------- --------
Operating income 7,688 8,302 5,290 10,229 6,736
Interest expense 837 905 823 814 859
Miscellaneous (income)
expense (1,669) 133 267 (79) 66
-------- -------- -------- -------- --------
Income before income taxes 8,520 7,264 4,200 9,494 5,811
Deferred tax provision (2) -- -- 2,425 -- --
Income tax provision
(benefit) (3) 2,873 2,554 704 633 408
-------- -------- -------- -------- --------
Net income $ 5,647 $ 4,710 $ 1,071 $ 8,861 $ 5,403
======== ======== ======== ======== ========
Basic net income
per common share $ 0.89 $ 0.75 $ 0.27 $ .29 $ 1.41
Weighted average
shares outstanding 6,345 6,308 3,978 3,878 3,825
Diluted net income
per common share $ 0.87 $ 0.73 $ 0.26 $ 2.15 $ 1.30
Weighted average diluted
shares outstanding 6,531 6,499 4,178 4,123 4,156
18
YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
(IN THOUSANDS EXCEPT PER SHARE DATA)
OTHER FINANCIAL DATA:
Depreciation $ 4,387 $ 3,706 $ 2,857 $ 2,556 $ 2,197
Capital expenditures 8,137 6,490 16,963 7,657 5,130
Balance Sheet Data:
Cash and cash equivalents $ 1,592 $ 1,249 $ 1,038 $ 2,434 $ 2,371
Working capital 5,629 6,100 958 4,326 5,085
Total assets 61,019 53,389 48,416 33,864 27,868
Total debt 11,907 9,564 17,218 6,186 8,025
Shareholders' Equity 40,015 35,000 22,397 21,529 15,624
(1) Includes a non-recurring, non-cash compensation expense of $1.4 million
related to the termination of employee phantom stock compensation
agreements and the issuance of options to Directors. See Note 14 of the
Notes to Financial Statements. Excluding such expense, pro forma net
income for the twelve months ended December 31, 1996, would have been
approximately $3.8 million.
(2) Resulting from the termination of the Company's S Corporation status as of
December 31, 1996.
(3) The Company previously operated as an S Corporation. Therefore, the
historical income tax provision for the years ended December 31, 1993, to
December 31, 1996 represents primarily foreign taxes.
(4) 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. See Notes 2 and 13 of the Notes to the
Consolidated Financial Statements. Unaudited pro forma net income was
$2,617 and $5,883 for the years ended December 31, 1996 and 1995,
respectively. 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 net income per share was $0.40 and $0.92 for the years
ended December 31, 1996 and 1995, respectively.
19
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 through independent distributors.
Approximately 66% of product sales are used by the mobile equipment market and
34% are used by the industrial equipment market. In 1998, the Company generated
approximately 32.5% of its net sales outside the United States, and the
Company's single largest end-user customer represented less than 3% of net
sales.
Demand for the Company's products is dependent upon demand for the
capital goods into which the Company's products are incorporated. The capital
goods industry in general, and the fluid power industry in particular, is
subject to economic cycles. According to the National Fluid Power Association,
United States mobile hydraulic shipments were up 2.8% in 1998, from 1997 and
industrial hydraulic shipments were up 7.4%; however, industry orders were down
4.7% in 1998, compared to 1997. North American distributor inventories of Sun
products increased approximately 42% from December 1997 to December 1998.
During the fourth quarter of 1998, the Company improved its product delivery
times and significantly reduced its past due backlog. These improvements,
coupled with distributor inventory increases during 1998 and the slowdown of
business, could adversely affect orders, and thus, shipments, in the near term.
Net sales increased 12.0% in 1998 compared to 1997. Orders for 1998 were
1.5% below 1997. During 1998, product delivery times improved and past due
backlog was significantly reduced. This was due to the capacity expansion of
the United States manufacturing operation completed during the first half of
1997, a company-wide initiative to reduce production lead times, and the fact
that demand leveled off. Plans for additional capacity are in process, which
the Company anticipates will be put place during 1999. The high-volume
cartridge production cell will be moved from the Sarasota plant to the new
Manatee County plant that was completed in 1997. An automated assembly machine
and additional equipment will be added to the cell and a heat treat operation
will be installed by the end of the year. The Sarasota plant will be rearranged
to take advantage of the additional space created by the movement of the cell
and will manufacture new products and products required in lower volumes. The
expansion of the United Kingdom production facility has been postponed until a
significant increase in customer demand is foreseen. The plant in Germany is
proceeding with the start-up of prototype manifold production. Assembly of the
Company's new electrically actuated product line (solenoid) is also anticipated
to be performed in Germany for European customers.
Operating profits were adversely affected in 1998 due to increases in
manufacturing prime costs. This was a result of continued emphasis on improving
customer delivery times and product quality. Material costs were particularly
affected by outsourcing and increased costs of purchased parts. The Company has
developed a procurement strategy and instituted an ongoing program to source
quality parts more cost effectively. Management believes that the initiatives
20
to increase capacity and productivity and decrease prime costs will start to
have positive effects on operating profit by the second half of 1999.
The new Series "0" product line sales were less than 1% of total net sales
in 1998. There was little promotion of this product line due to production
capacity constraints and long lead times for existing product lines. Marketing
efforts will increase in 1999 as confidence is gained that customer delivery
requirements can be satisfactorily met.
An electrically actuated cartridge valve (solenoid) has been designed and
is undergoing "beta" testing at several customer sites. A multi-year contract
has been entered into with a supplier to provide the electrical assembly.
Production is planned for the second quarter of this year. This is a new
addressable market, which the Company believes is larger than the market for
non-solenoid cartridge valves. Most of the Company's competitors offer
solenoid cartridge valves as well as non-solenoid cartridge valves.
Historically, new product line volume builds slowly and initially
generates low margins. Margins improve as volume increases and the design and
manufacturing processes mature. During 1999, profit should be positively
affected by the series "0" and solenoid cartridge valve shipments; however, the
percentage of cost of sales to sales will be adversely affected.
On September 30, 1998, the Company purchased Korea Fluid Power, Ltd.
("KFP"), which formerly acted as the Company's Korean distributor, and had net
sales in 1998 of approximately $2.5 million. In January 1999, the new
subsidiary's name was changed to Sun Hydraulics Korea Corporation ("Sun
Korea"). Sun Korea sells primarily to OEMs in the Korean mobile market and also
manufactures aluminum manifolds that incorporate the Company's and other
manufacturers screw-in cartridge valves.
On November 1, 1998, the Company entered into a joint venture with its
distributor for Taiwan to establish a distributorship and manifold
manufacturing operation in mainland China. The Company has invested $0.3
million and has 50% ownership. A building has been leased in Shanghai, and
start-up of operations is underway. Sales of the joint venture are not expected
to be significant in 1999.
Most of the Company's screw-in cartridge valve competitors produce
screw-in cartridge valves that fit an industry common cavity that allows their
products sometimes to be interchangeable. The industry common cavity is not
supported by any national or global standards organizations. The International
Standards Organization (ISO) recently developed a standard screw-in cartridge
cavity that is different from the industry common cavity. The Company does not
manufacture a product that fits either the industry common or the ISO standard
cavity. Currently, the Company is not aware of any major competitor that
produces a full line of standard products conforming to the ISO standard. The
Company is aware that several competitors are designing, and some are
producing, cartridge valves that are interchangeable with the Company's
cartridge valves. The Company has long encouraged the hydraulics industry to
recognize the benefits of the Company's cavity structure, which utilizes its
unique cartridge valve designs, and is hopeful that the recent action by
competition is an
21
endorsement to that end. The Company believes the adoption by others of the
cavity structure utilized by the Company will increase its total market
opportunities.
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 DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
Net sales 100.0% 100.0% 100.0%
Cost of sales 73.1 69.5 68.1
----- ----- -----
Gross profit 26.9 30.5 31.9
Selling, engineering and
administrative expenses 16.2 17.6 22.2
----- ----- -----
Operating income 10.7 12.9 9.7
Interest expense 1.2 1.4 1.5
Miscellaneous (income) expense (2.3) 0.2 0.5
----- ----- -----
Income before income taxes 11.8% 11.3% 7.7%
===== ===== =====
Comparison of Years Ended December 31, 1998 and 1997
Net Sales
Net sales increased 12.0%, or $7.7 million, to $71.9 million in 1998,
compared to $64.2 million in 1997. Domestic net sales increased 15.6%, or $6.6
million, to a total of $48.5 million in 1998, compared to $42.0 million in
1997. Domestic orders were flat year to year and the increase in domestic net
sales was due primarily to an equivalent backlog reduction as a result of
improved product delivery lead times. International net sales increased 5.0%,
or $1.1 million, to $23.4 million in 1998, compared to $22.2 million in 1997.
European net sales increased $1.6 million, or 10.7% in 1998 compared to 1997.
Asian net sales decreased $1.2 million or 29.8% in 1998 compared to 1997.
Gross Profit
Gross profit decreased slightly to $19.3 in 1998, compared to $19.6 in
1997. Gross profit as a percentage of net sales decreased to 26.9% in 1998 from
30.5% in 1997. The decrease in gross profit as a percent of sales was due
primarily to increased manufacturing prime costs in the United States
operation. Material costs increased as a percentage of net sales due to a full
year effect of increases incurred primarily in the second half of 1997. These
increases in 1997 related to parts cost increases primarily for engineering
design changes and the outsourcing of parts. Direct labor and related direct
expenses did not decrease appreciably as a percentage of net sales due to
inefficiencies incurred to improve product delivery lead times.
22
Selling, Engineering and Administrative Expenses
Selling engineering and administrative expenses increased $0.4 or 3.4% to
$11.7 million in 1998, compared to $11.3 million in 1997. Increases in
compensation, travel and meetings were offset by decreases in trade show,
catalogue and general business expenses. The acquisition of Sun Korea
contributed approximately $0.2 million to selling, engineering and
administrative expenses. These expenses as a percentage of net sales decreased
to 16.2% in 1998 from 17.6% in 1997.
Interest Expense
Interest expense was $0.8 million and $0.9 million in 1998 and 1997,
respectively. The interest expense related to long-term mortgages and related
party debt decreased; however, this was offset by increased interest on the
unsecured line of credit.
Miscellaneous (Income) Expense
Miscellaneous income was $1.7 million in 1998 compared to $0.1 million of
expense in 1997. 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.
Income Taxes
The provision for income taxes for the year ended December 31, 1998 was
33.7% of pretax income compared to 35.2% for the year ended December 31, 1997.
The decrease in the effective tax rate from 1997 to 1998, was due primarily to
the mix of pretax income between the Company's operating segments and the
resolution of tax audits.
Comparison of Years Ended December 31, 1997 and 1996
Net Sales
Net sales increased 17.6%, or $9.6 million, to $64.2 million in 1997,
compared to $54.6 million in 1996. Domestic net sales increased 16.7%, or $6.0
million, to a total of $42.0 million in 1997, compared to $35.9 million in 1996.
International net sales increased 19.4%, or $3.6 million, to $22.2 million in
1997, compared to $18.6 million in 1996. Demand was strong in all major markets
with an increase in orders of approximately 26% in 1997 compared to 1996. Sales
in the first half of the year were restricted by capacity constraints and the
disruptions of completing the capacity expansion in the United States. With the
additional space gained through bringing the new plant in the United States on
line in March 1997, worldwide shipments in the last six months of 1997 increased
27.4% over the same period in 1996 and increased 14.7% over the first six months
of 1997.
23
Gross Profit
Gross profit increased 12.6%, or $2.2 million, to $19.6 million in 1997,
compared to $17.4 million in 1996. Gross profit as a percentage of net sales
decreased to 30.5% in 1997 from 31.9% in 1996. The decrease in gross profit as
a percent of sales was due to a higher fixed cost base associated with the new
plants in the United States and Germany. In addition, there were production
start-up costs in the United States and incremental production costs associated
with expediting product shipments to meet the significant increase in customer
demand.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses decreased 6.8%, or $0.8
million, to $11.3 million in 1997, compared to $12.1 million in 1996. For the
year ended December 31, 1996, these expenses included a non-cash, non-recurring
compensation expense of $1.4 million related to the termination of phantom
stock compensation agreements and the issuance of options to directors.
Excluding this expense selling, engineering and administrative expenses
increased 5.2%, or $0.6 to $11.3 million compared to $10.7 million in 1996.
This increase was due to application software expenses in the United States and
the United Kingdom and increased fixed administrative expenses in the new
manifold plant in the United States. Expenses as a percentage of net sales
excluding the non-recurring charge in 1996 decreased to 17.6% in 1997 from
19.6% in 1996. The decrease in these expenses as a percentage of net sales
resulted from allocating these higher expenses over greater net sales.
Interest Expense
Interest expense increased $0.1 million or 10% to $0.9 million in 1997
compared to $0.8 million in 1996. This was due to the use of the unsecured
credit line in the United States throughout 1997, which required higher working
capital related to increased sales volumes.
Miscellaneous (Income) Expense
Miscellaneous (income) expense decreased $0.1 million to $0.1 million in
1997 due to interest income related to the temporary investment of cash
received from the Company's initial public offering, offset by currency
exchange losses, primarily in the German operation.
Income Taxes
The provision for income taxes for the year ended December 31, 1997 was
35.2% of pretax income. The 1996 provision for income taxes included a $2.4
million deferred charge resulting from the termination of the Company's S
Corporation status as of December 31, 1996. Excluding this charge, the pro
forma 1996 provision for income taxes was 37.7% of income before taxes. The
decrease in the effective tax rate from 1996 to 1997 was primarily due to the
mix of pretax income between the United States the United Kingdom and Germany.
24
Prior to January 1, 1997, the Company was an S Corporation for federal and
state income tax purposes. As a result, the Company was not subject to federal
and state income taxes, but was subject to foreign taxes. The Company
terminated its S Corporation status as of December 31, 1996, and since that
date has been subject to federal and state income taxes. Upon termination of
its S Corporation status, the Company recognized approximately $2.4 million of
deferred income taxes in the year ended December 31, 1996.
QUARTERLY RESULTS OF OPERATIONS
QUARTER ENDED
Dec 31 Sep 30 Jun 30 Mar 31 Dec 31 Sep 30 Jun 30 Mar 31
1998 1998 1998 1998 1997 1997 1997 1997
(in thousands)
Net Sales $ 17,500 $ 17,664 $ 17,584 $ 19,133 $ 17,022 $ 17,301 $ 15,276 $ 14,599
Cost of sales 13,459 13,132 12,599 13,347 12,133 11,842 10,444 10,202
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 4,041 4,532 4,985 5,786 4,889 5,459 4,832 4,397
Selling, engineering
and administrative
expenses 2,745 2,864 3,033 3,014 2,691 3,018 2,849 2,717
-------- -------- -------- -------- -------- -------- -------- --------
Operating income 1,296 1,668 1,952 2,772 2,198 2,441 1,983 1,680
Interest expense 130 216 231 260 252 285 216 152
Miscellaneous (income)
expense (81) (1,586)(1) (45) 43 92 27 72 (58)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes 1,247 3,038 1,766 2,469 1,854 2,129 1,695 1,586
Tax provision 443 1,015 586 829 593 777 616 568
-------- -------- -------- -------- -------- -------- -------- --------
Net Income $ 804 $ 2,023 $ 1,180 $ 1,640 $ 1,261 $ 1,352 $ 1,079 $ 1,018
======== ======== ======== ======== ======== ======== ======== ========
(1) Includes a business-interruption insurance claim of $1,661, net of
expenses.
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, make capital expenditures, pay dividends to shareholders and service
debt.
At December 31, 1998, the Company had working capital of $5.6 million.
Cash flow from operations in 1998 was $8.6 million, compared to $6.5 million in
1997 and $7.0 million in 1996. The increase in the Company's cash flow from
operations in 1998 compared to 1997 was due primarily to an increase in net
income of $0.9 million and an increase in depreciation of $0.7 million. The
decrease in the Company's cash flow from operations in 1997 compared to 1996
was due primarily to increased inventory levels in the plants in the United
States and increased
25
accounts receivable related to increased sales volume, offset partially by
increases in net income and depreciation.
Capital expenditures were $8.1 million in 1998 compared to $6.5 million in
1997, and $17.0 million in 1996. In 1998, $6.1 million was spent in the United
States operations, $1.2 million was spent in the United Kingdom, and $0.8 was
spent in Germany. In 1997, $1.1 million was spent to complete the new
facilities in the United States and Germany and the balance of $5.4 million for
machinery and equipment. Capital expenditures in 1996 included $12.6 million
for buildings and land improvements for the United States and German facilities
and $4.4 million for machinery and equipment.
In 1996, the Company was awarded a grant of $0.4 million by the German
government, which helped to offset the cost of the German facility. The grant
required that the German operation employ 26 people by June 30, 1998. This
deadline has now been extended until September 30, 1999, and if the requirement
is not met, 50% of the grant plus interest will have to be repaid. This amount
has been recorded as a deferred grant. The repayment of the $0.2 million would
only affect cash and would have effect on net income.
The Company has three revolving lines of credit: one in the United States,
one in England, and one in Germany. None of these arrangements contains
pre-payment penalties.
In February 1997, the Company negotiated a one-year, unsecured revolving
credit facility in the United States. The new credit facility provided for a
maximum availability of $10.0 million, payable on demand at the lender's prime
rate of interest, and contained no debt covenants. At December 31, 1998, $3.9
million was outstanding under this credit facility. In February 1998, the
Company renegotiated this unsecured credit facility for a term of one year and
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.
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 31, 1998, there was no
balance outstanding on this credit facility.
The German line of credit is denominated in German marks and is payable on
demand, with interest payable at the lender's prime rate.
A 10-year mortgage note of $6.1 million was obtained in May 1996, at a
fixed interest rate of 8.25% for construction of the Manatee county facility.
Terms on the new mortgage note were interest-only on the balance drawn down
through the completion of construction and then conversion to a 10-year note
with a 15-year amortization schedule. In March 1998, this mortgage note was
renegotiated to an interest rate of 7.875%. In March 1999, this mortgage note
was renegotiated to an interest rate 7.375%. New terms are monthly principal
and interest payments with remaining principal due July 1, 2006.
26
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. The loan has a term of 12 years and bears interest at 6.47%. In
February 1999, the Company secured three loans in Germany, 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.
In addition, the Company has $1.1 million in notes payable to former
shareholders, which bear interest at a weighted rate of 15%, with terms
expiring in one to four years. These notes were issued by the Company in
connection with the repurchase of shares of common stock from former
shareholders, and do not allow for prepayment by the Company.
On September 30, 1998, the Company acquired its distributor in Korea for
$0.8 million. The Korean Company had approximately $0.8 million of loans
outstanding with interest rates from 6.0% to 15.0%. In December 1998, the
Company paid $0.6 million to pay off the higher interest rate loans. At
December 31, 1998, the outstanding balance of these loans was $0.2 million.
In January 1997, the Company received $20.3 million of proceeds from its
initial public offering of 2,300,00 shares of common stock. Net proceeds after
expenses were approximately $19.3 million of which $10.5 million was
distributed to shareholders of record as of December 31, 1996; $2.9 million was
used to repay an equipment note; $2.4 million was used to repay the mortgage on
the Sarasota facility; $1.0 million was paid on the mortgage on the Manatee
facility; $1.4 million was paid on the United States revolving line of credit;
and the remaining $1.1 million was used for working capital.
The Company received payment of $1.8 million (or $1.7 million, net of
expenses) related to a business-interruption insurance claim in September 1998.
The claim was related to a fire in the Manatee plant in the United States,
which occurred while the plant was under construction. This fire delayed the
opening of the new plant which, in turn, delayed the rearrangement of the
cartridge operation and the creation of the cellular production for high volume
models.
The Company believes that cash generated from operations and borrowing
availability under the $10 million bank line of credit will be sufficient to
satisfy the Company's operating expenses and capital expenditures for the
foreseeable future.
YEAR 2000 READINESS DISCLOSURE
Management continues to evaluate the issues associated with the year 2000
in an effort to minimize the impact of the millennium date change on its
business operations, information technology systems, and production
infrastructure. In general, these issues arise from the fact that many existing
computer systems, including hardware, software and embedded technology, only
use the last two digits to refer to a year. Accordingly, many of these computer
systems will not properly recognize a year that begins with "20" instead of the
familiar "19." If not corrected, these computer systems could fail or create
erroneous results.
27
The Company has established the following four-phased approach to address
the year 2000 issue: (1) assessment, (2) testing, (3) renovation and (4)
validation. With regard to its internal operations, the assessment phase
consist of (i) the inventory of all systems, including hardware, software and
embedded systems (such as the Company's CNC equipment) in all of Company's
locations, (ii) the identification of all critical applications, and (iii) the
collection of all internal source codes. Other than with regard to its embedded
systems, this phase is now substantially completed. The Company anticipates
full completion, including assessment of its embedded systems, by the end of
the second quarter of 1999.
With regard to its external relationships, the assessment phase includes
surveying the Company's material suppliers, distributors, and customers to
determine the potential exposure to the Company if such parties fail to correct
their year 2000 issues in a timely manner. The Company has now received
responses to approximately fifty percent of its third party questionnaires. The
Company anticipates the completion of this external assessment by the end of
the fourth quarter of 1999.
The Company is currently testing all critical applications for year 2000
readiness and anticipates completion of this testing by the second quarter of
1999. The Company defines "year 2000 ready" to mean that neither the
performance nor functionality of any of its critical systems, including both
information technology and non-information technology systems, will be
materially affected by dates prior to, during and after the year 2000. While
testing continues, the Company has entered its renovation phase by commencing
the replacement of the computer systems in two of its five locations (the
United States Sarasota facility and the United Kingdom operation) with
"enterprise manufacturing systems" that, according to representations made by
the systems' manufacturers, are currently year 2000 ready. The final phase of
the Company's year 2000 readiness plan is a validation phase, during which
upgraded systems will be re-tested.
The Company anticipates all phases of its year 2000 readiness plan,
including the validation phase, to be completed by the end of the fourth
quarter of 1999. There can, however, be no assurance that these deadlines will
be met or precisely when the Company will be year 2000 ready.
The Company has not yet obtained information sufficient to quantify the
potential effects of possible internal and external year 2000 non-compliance so
as to determine the likely worst-case scenarios or to develop contingency plans
to deal with such scenarios. A significant interruption in the company's
business due to a year 2000 non-compliance issue, however, could have a
material adverse effect on the Company's financial position, operations, and
liquidity. Also, there can be no assurance that the systems of other companies
on which the Company relies will be timely converted or that any such failure
to convert by another company will not have an adverse effect on the Company's
operations. While the Company intends to develop appropriate contingency plans
prior to the end of the fourth quarter of 1999, there can be no assurances that
the Company's contingency plans, once developed, will substantially reduce the
risk of year 2000 non-compliance.
28
The Company estimates that the total costs of its year 2000 project will
be approximately $0.9 million, including costs totaling $0.7 million incurred
through December 31, 1998. These expenditures are being funded through
operating cash flows. Although there can be no assurances thereof, the
estimated costs of the year 2000 project are not expected to have a material
impact on the Company's business, operations or financial condition in future
periods.
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 have been the lowest of any quarter during
the year. This was not true in 1997 because of the ramp-up in production
related to the increased capacity in the United States operations.
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
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their national currencies and the
"euro," which will ultimately result in the replacement of the currencies of
these participating countries with the euro (the "Euro Conversion"). The
Company is currently assessing the potential impact of the Euro Conversion and
has initiated an internal analysis to plan for the conversion and implement
remediation measures. The Company's analysis will encompass the costs and
consequences of incomplete or untimely resolution of any required systems
modifications, various technical and operational challenges and other risks
including possible effects on the Company's financial position and results of
operations. Costs associated with the Euro Conversion are being expensed by the
Company during the period in which they are incurred and are not currently
anticipated to be material. The Company presently believes that, with
remediation measures, any material risks associated with the Euro Conversion
can be mitigated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 31, 1998, the Company had approximately $4.0 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 debt financing at the bank's prime rate less 1%, or the
Libor rate plus 1.9%, whichever is the most advantageous.
29
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 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; (vi) the Company's Year 2000 readiness
plans and costs; and (vii) 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; (vi)
the Company's ability timely to become Year 2000 ready, including the Company's
ability to identify all critical systems that will be impacted by the Year
2000, the Company's ability, in a cost-efficient manner, to correct, upgrade or
replace such systems, and the Year 2000 readiness of third parties with which
the Company has material relationships; and (vii) 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 "Risk Factors" in the Form S-1
Registration Statement and Prospectus for the Company's initial public
offering, and "Business" and "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" in this Form 10-K for the year
ended December 31, 1998. 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 31, 1998 and 1997 33
Consolidated Statements of Income for the years ended
December 31, 1998, 1997, and 1996 34
Consolidated Statements of Shareholders' Equity and
and Comprehensive Income for the years ended
December 31, 1998, 1997, and 1996 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997, and 1996 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 (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards 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 the opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
March 5, 1999
32
SUN HYDRAULICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 1,592 $ 1,249
Accounts receivable, net of allowance for
doubtful accounts of $169 and $47 5,342 4,558
Inventories 8,125 6,775
Other current assets 891 932
------- -------
Total current assets 15,950 13,514
Property, plant and equipment, net 44,003 39,789
Other assets 1,066 86
------- -------
Total assets $61,019 $53,389
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,877 $ 2,847
Accrued expenses and other liabilities 2,065 2,174
Long-term debt due within one year 4,302 1,035
Notes payable to related parties due within one year 578 757
Dividends payable 254 221
Income taxes payable 245 380
------- -------
Total current liabilities 10,321 7,414
Long-term debt due after one year 6,461 6,620
Notes payable to related parties due after one year 566 1,152
Deferred income taxes 3,656 3,203
------- -------
Total liabilities 21,004 18,389
------- -------
Commitments and contingencies (Note 17)
Shareholders' equity:
Preferred stock - -
Common stock 6 6
Capital in excess of par value 24,386 24,163
Retained earnings 15,363 10,732
Accumulated other comprehensive income 260 99
------- -------
Total shareholders' equity 40,015 35,000
------- -------
Total liabilities and shareholders' equity $61,019 $53,389
======= =======
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)
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
NET SALES $71,881 $64,198 $54,572
Cost of sales 52,537 44,621 37,185
------- ------- -------
GROSS PROFIT 19,344 19,577 17,387
Selling, engineering and
administrative expenses 11,656 11,275 12,097
------- ------- -------
OPERATING INCOME 7,688 8,302 5,290
Interest expense 837 905 823
Other miscellaneous (income) expense (1,669) 133 267
------- ------- -------
INCOME BEFORE INCOME TAXES 8,520 7,264 4,200
Income tax provision 2,873 2,554 3,129
------- ------- -------
NET INCOME $ 5,647 $ 4,710 $ 1,071
======= ======= =======
BASIC NET INCOME PER COMMON SHARE $ 0.89 $ 0.75 $ 0.27
WEIGHTED AVERAGE SHARES OUTSTANDING 6,345 6,308 3,978
DILUTED NET INCOME PER COMMON SHARE $ 0.87 $ 0.73 $ 0.26
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 6,531 6,499 4,178
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, 1995 3,958 $ 2,181 $ 997 $ 18,676 $(325) $21,529
Issuance of stock options 2,110 2,110
Suninco step-up for purchase accounting 185 185
Exercise of stock options 42 70 70
Repurchase and retirement of shares (41) (41)
Exchange of shares in merger (2) (602) 604 -
Distributions to shareholders (2,901) (2,901)
Comprehensive income:
Net income 1,071 1,071
Other comprehensive income:
Foreign currency translation adjustments 374 374
-------
Comprehensive income 1,445
----- ------- ------- -------- ----- -------
Balance, December 31, 1996 4,000 2,179 2,719 17,450 49 22,397
Net proceeds from stock offering 2,300 2 19,250 19,252
Distributions to shareholders (10,545) (10,545)
Dividends declared (883) (883)
Merger with Sun Holdings (Note 2) (2,175) 2,123 (52)
Exercise of stock options 22 71 71
Comprehensive income:
Net income 4,710 4,710
Other comprehensive income:
Foreign currency translation adjustments 50 50
-------
Comprehensive income 4,760
----- ------- ------- -------- ----- -------
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
Other comprehensive income:
Foreign currency translation adjustments 161 161
-------
Comprehensive income 5,808
----- ------- ------- -------- ----- -------
Balance, December 31, 1998 6,361 $ 6 $24,386 $ 15,363 $ 260 $40,015
===== ======= ======= ======== ===== =======
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)
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 5,647 $ 4,710 $ 1,071
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 4,387 3,706 2,857
Compensation expense of stock options - - 2,110
Provision for deferred income taxes 453 625 2,494
(Increase) decrease in:
Accounts receivable (543) (1,023) 39
Inventories (877) (2,324) 27
Other current assets 38 200 (910)
Other assets 86 962 (1,021)
Increase (decrease) in:
Accounts payable (167) (426) 281
Accrued expenses and other liabilities (279) 213 773
Income taxes payable, net (135) (81) (29)
Other liabilities - (20) (732)
------- -------- --------
Net cash provided by operating activities 8,610 6,542 6,960
------- -------- --------
Cash flows from investing activities:
Investment in acquisition and joint venture (1,110) - -
Capital expenditures (8,137) (6,490) (16,963)
Proceeds from dispositions of equipment 143 207 23
------- -------- --------
Net cash used in investing activities (9,104) (6,283) (16,940)
------- -------- --------
Cash flows from financing activities:
Proceeds from debt 9,323 5,580 16,502
Repayment of debt (7,039) (12,579) (4,896)
Repayment of notes payable to related parties (765) (655) (574)
Purchase accounting -- Suninco - - 185
Proceeds from exercise of stock options 223 71 70
Repurchase of shares - - (41)
Net proceeds from stock offering - 19,252 -
Cash paid for Sun Holdings merger (Note 2) - (52) -
Dividends to shareholders (983) (663) -
Distributions to shareholders - (11,052) (3,036)
------- -------- --------
Net cash provided by (used in) financing activities 759 (98) 8,210
------- -------- --------
Adjustment for other comprehensive income 78 50 374
------- -------- --------
Net increase (decrease) in cash and cash equivalents 343 211 (1,396)
Cash and cash equivalents, beginning of period 1,249 1,038 2,434
------- -------- --------
Cash and cash equivalents, end of period $ 1,592 $ 1,249 $ 1,038
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 954 $ 1,206 $ 324
======= ======== ========
Income taxes $ 2,555 $ 2,010 $ 587
======= ======== ========
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, and Korea. 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 the Company, was formed to provide a holding company vehicle 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, "GmbH"). Sun Ltd. operates a manufacturing and
distribution facility located in Coventry, England and GmbH, located in
Erkelenz, Germany, markets the Company's products in German-speaking European
markets. Sun Hydraulics Korea Corporation ("Sun Korea"), a wholly-owned
subsidiary of the Company, was acquired September 24, 1998, (see Note 4). Sun
Korea, located in Inchon, South Korea, operates a manufacturing and
distribution facility.
2. REORGANIZATION AND INITIAL PUBLIC OFFERING
The consolidated financial statements of the Company consist of the
financial position and results of operations of Sun Hydraulics, Sun Holdings,
and Sun Korea. Sun Hydraulics and Suninco, Inc. ("Suninco") completed a merger
on June 28, 1996 by exchanging Sun Hydraulics' common stock for all of the
outstanding stock of Suninco. The share exchange was accounted for in a manner
similar to a pooling of interest, except for shares held by the minority
shareholders which were accounted for at the fair market values of the
proportionate share of related assets and liabilities. The fair value of their
minority interest shares in excess of net book value were allocated to Sun
Hydraulics' long-term assets on a pro-rata basis, resulting in an increase of
$38 and $245 to land and buildings, respectively.
In January 1997, Sun Hydraulics effected a 9.90372627 for 1 stock
split. All prior year share amounts reflected in the financial statements
include the effect of the stock split. Additionally, Sun Hydraulics issued
374,811 shares of common stock and made a nominal cash payment of $52 in
exchange for all of the issued and outstanding stock of Sun Holdings (the
"Reorganization"). The Reorganization was accounted for in a manner similar to
a pooling of interests except for shares held by the minority shareholders
which were accounted for at the fair market value of their proportionate share
of related assets and liabilities, which approximated book value on the date of
the transaction.
The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission effective January 9, 1997, and issued
2,300,000 shares of common stock in an initial public offering ("IPO"), with an
initial offering price of $9.50. The IPO net proceeds of $19,252, the exchange
of shares with Sun Holdings, and the distribution of previously taxed S
Corporation retained earnings are reflected in the statement of changes in
shareholders' equity and comprehensive income.
37
Prior to December 31, 1996, Sun Hydraulics had elected to be taxed
under the S Corporation provisions of the Internal Revenue Code. Effective
December 31, 1996, Sun Hydraulics converted to C Corporation status and Sun
Hydraulics' subsequent earnings are subject to corporate income taxes.
The $19,252 of net proceeds from the IPO were used as follows: an S
Corporation distribution of $9,446, representing 90% of the total distribution
of $10,545 was made, $7,676 was paid to extinguish debt, $1,000 was paid to
reduce the mortgage on the United States construction loan, and $1,130 was
retained as working capital.
The Company has 20,000,000 authorized shares of common stock, par
value $0.001, with 6,360,922 shares outstanding at December 31, 1998. The
Company also has 2,000,000 authorized shares of preferred stock, par value
$0.001, with no shares outstanding.
3. ACQUISITION AND JOINT VENTURE
On September 30, 1998, Sun Hydraulics acquired 100% of the equity
shares of Korea Fluid Power Co. Ltd. ("KFP"), which had been the Company's
exclusive distributor in South Korea since 1988. This wholly-owned subsidiary's
name was changed to Sun Hydraulics Korea Corporation in January 1999. The
acquisition price paid by the Company was $860. The amounts paid in excess of
the net book value have been capitalized as goodwill, and are amortized over a
period of 15 years. Goodwill is recorded under other assets in the Company's
financial statements, and was $558 as of December 31, 1998.
On November 1, 1998, Sun Hydraulics entered into a 50/50 joint venture
agreement ("joint venture") with Links Lin, the owner of Sun Hydraulics
Corporation's Taiwanese distributor. This agreement provides for an initial
capital contribution of $250, which is recorded in other assets in the
Company's financial statements.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Reporting on the Costs of
Start-up Activities" ("SOP 98-5"). SOP 98-5 requires that all costs incurred in
start-up activities be expensed as incurred. Start-up activities include the
costs associated with one-time activities related to opening a new facility,
introducing a new product or service, conducting business with a new class of
customer or initiating a new process in an existing facility. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. The Company's organization cost of $41 related to the acquisition of
Sun Korea is required to be written off as a change in accounting policy in
fiscal 1999.
38
5. 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. As a result of the Reorganization in 1997 (See Note 2),
financial statements for 1998 and 1997 are on a consolidated basis and
financial statements for 1996 are on a combined basis.
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.
52 WEEK FISCAL YEAR
Commencing in fiscal year 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.
39
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
-----
Software and computer equipment 3 - 5
Machinery and equipment 4 - 12
Furniture and fixtures 4 - 10
Leasehold and land improvements 5 - 15
Buildings 40
Capitalized interest was $90, $160, and $293, for the years ended
December 31, 1998, 1997 and 1996, respectively.
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 amount recorded under SOP
98-1 as of December 31, 1998, was $681, is recorded as Project in Process, and
will be capitalized upon completion. Since the systems are still in process, no
depreciation expense related to capitalized software have been recorded as of
December 31, 1998.
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 31, 1998, management does not believe that an
impairment reserve is required.
OTHER ASSETS
Other assets include goodwill of $558 and other acquisition costs of
$144 related to the acquisition of Sun Korea, and an equity investment in the
Company's joint venture of $247, which are discussed further in Note 3.
Goodwill, which represents the excess of purchase price of acquisitions over
the fair value of the net assets acquired, is carried at cost, net of
accumulated amortization and amortized on a straight-line basis over fifteen
years. Other acquisition costs are carried at cost, net of accumulated
amortization and amortized on a straight-line basis over fifteen years. The
equity investment is established at cost and adjusted for investment income or
loss and dividend distributions for each period.
40
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
$466, $630, and $1,007 for the years ended December 31, 1998, 1997 and 1996,
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 $262, $719, and $641 for the years ended December
31, 1998, 1997 and 1996, 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 Deutsche Mark 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., GmbH, and Sun Korea are translated at the exchange
rate in effect at the balance sheet date, while all other assets, liabilities,
and shareholders' equity, 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 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.
Prior to December 31, 1996, Sun Hydraulics had elected to be taxed
under the S Corporation provisions of the Internal Revenue Code. Historically,
the shareholders of Sun Hydraulics included their pro rata share of income or
loss in their individual returns. A portion of the distributions to
shareholders was related to their individual income tax liabilities, resulting
From S Corporation taxable earnings (see Note 13). Effective December 31, 1996,
Sun Hydraulics converted to C Corporation status and Sun Hydraulics' subsequent
earnings are subject to corporate income taxes. Accordingly, for informational
purposes, the December 31,
41
1996 statement of income reflects an unaudited pro forma income tax provision
which would have been recorded if Sun Hydraulics had been a C Corporation,
based on the tax laws in effect during those periods.
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123") during 1996. Upon
adoption, the Company retained the intrinsic value method of accounting for
stock-based compensation and has disclosed the effects of adopting this
pronouncement in the notes to the financial statements (see Note 14).
RECLASSIFICATIONS
Certain prior year balances have been reclassified to be consistent
with current year presentation. Such reclassifications had no effect on total
assets, equity, net income, or total cash flows.
6. 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.
The fair value of the notes payable to related parties is estimated
based on the current rates offered to the Company for similar debt. The
estimated fair value of the Company's related party notes payable is
approximately $1,133, and $1,630 at December 31, 1998 and 1997, respectively.
42
7. INVENTORIES
December 31, December 31,
1998 1997
Raw materials $ 575 $ 214
Work in process 4,751 4,348
Finished goods 2,799 2,213
-------- --------
$ 8,125 $ 6,775
======== ========
8. PROPERTY, PLANT AND EQUIPMENT
December 31, December 31,
1998 1997
Machinery and equipment $ 33,736 $ 28,165
Office Furniture and EDP equipment 6,736 5,880
Buildings 18,408 17,663
Leasehold and land improvements 557 760
Construction in progress 2,005 838
Land 2,099 1,581
-------- --------
63,541 54,887
Less: Accumulated depreciation (19,538) (15,098)
-------- --------
$ 44,003 $ 39,789
======== ========
43
9. ACCRUED EXPENSES AND OTHER LIABILITIES
December 31, December 31,
1998 1997
Compensation and benefits $ 951 $ 1,348
Deferred grant 424 424
Taxes 20 117
Interest 40 75
Warranty expense 130 30
Other accrued expenses 157 180
Due to joint venture 245 -
Advertising 20 -
Professional Fees 78 -
-------- --------
$ 2,065 $ 2,174
10. LONG-TERM DEBT
December 31, December 31,
1998 1997
Lines of credit agreements $ 3,974 $ 666
Secured notes payable-Korea 177 -
Mortgage note payable-U.S. Manatee County facility 4,864 4,990
Mortgage note payable-German facility 1,748 1,999
-------- --------
10,763 7,655
Less amounts due within one year (4,302) (1,035)
-------- --------
$ 6,461 $ 6,620
======== ========
The remaining principal payments are due as follows: 2000 - $338; 2001
- - $351; 2002 - $365; 2003 - $379; and 2004 thereafter - $5028.
The Company has three revolving lines of credit: one in the United
States, one in England, and one in Germany. None of these arrangements contain
pre-payment penalties.
The United States had a $1,700 revolving credit agreement, secured by
all inventory and accounts receivable, bearing interest at the lender's prime
rate with a maturity date of March 1, 1997. In February 1997, the Company
negotiated a one-year, unsecured revolving credit facility to replace the
$1,700 revolving credit agreement. This credit facility provided for a maximum
availability of $10,000, payable on demand at the lender's prime rate of
interest, and contained no debt covenants. In February 1998, the Company
renegotiated this unsecured credit facility for an additional one year term and
an interest rate equal to the bank lender's prime rate less 1%, or
44
LIBOR plus 1.9% for predetermined periods of time at the Company's option. At
December 31, 1998, the interest rate was 6.75%, and $3,940 was outstanding
under this credit facility.
In England, the Company has a $1,200 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 31, 1998, there was no
balance outstanding on this credit facility.
The German line of credit is a demand note denominated in German marks
with interest payable at the lender's prime rate. At December 31, 1998, the
interest rate was 8.5%, and $34 was outstanding under this credit facility.
In February 1999, the Company secured three loans in Germany, a ten
year 5.1% fixed interest rate loan for approximately $300, a ten year 5.1%
fixed interest rate loan for approximately $1,000, and a ten year 3.5% fixed
interest rate loan for approximately $800.
Sun Korea has various notes denominated in Korean Won, and secured by
property, plant and equipment, with interest payable at fixed rates ranging
from 6% to 7.5% and maturities ranging from February 1999 to March 2005. At
December 31, 1998, $177 was outstanding under these credit facilities.
A 10-year mortgage loan of $6,187 was obtained at a fixed interest
rate of 8.25% for construction of the Manatee 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. The Company applied $1,000 of the IPO proceeds
toward repayment of this note. In February 1998, this mortgage note was
renegotiated to an interest rate of 7.875%. Effective April 1999, this mortgage
note will have an interest rate of 7.375%. Terms are monthly principal and
interest payments of $43 for 8.25 years with remaining principal due July 1,
2006. At December 31, 1998, $4,864 was outstanding under this mortgage note.
In May 1996, the Company obtained a mortgage loan of approximately
$2,400, denominated in German marks, for the new facility in Erkelenz, Germany.
The loan has a term of 12 years and bears interest at 6.47%. At December 31,
1998, $1,748 was outstanding under this mortgage note.
45
11. RELATED PARTIES
Notes payable to related parties include the following:
December 31, December 31,
1998 1997
15% unsecured note payable for repurchase and
retirement of stock, quarterly principal and
interest installments ranging from $1 to $70
through 2001. $ 950 $1,680
10% unsecured notes payable for phantom
compensation, quarterly principal and
interest payments of $14 payable through
2002. 194 229
------ -------
1,144 1,909
Less amounts due within one year (578) (757)
------ -------
$ 566 $ 1,152
====== =======
The remaining principal payments are due as follows: 2000 - $365; 2001
- - $135; 2002 - $52; and 2003 - $14.
The 15% notes payable represent the repurchase and retirement of stock
to related parties for the years 1989 to 1993. These notes represent the
repurchase of shares of common stock from four retiring employees, one employee
of retirement age who was still employed by the Company at the time the shares
were repurchased, and former shareholders related to the principal shareholder
of the Company. These agreements contain a provision disallowing prepayment.
During 1995, Sun Hydraulics entered into a 35-month agreement with
SunOpTech, Ltd. ("SunOpTech"), a limited partnership formed to further the
development of the manufacturing software used in the Company's production
process. A significant shareholder of Sun Hydraulics, who owns approximately
36% of the Company, owns 51% of the stock of the general partner of SunOpTech.
In exchange for the development of computer software and computer support, Sun
Hydraulics paid approximately $1,000 over the three-year period. Fees paid
under this agreement for the year ended December 31, 1998 were $33. For the
years ended December 31, 1998, 1997 and 1996, Sun Hydraulics paid SunOpTech's
expenses of $45, $291, and $203, respectively. These expenses are included in
selling, engineering and administrative expenses. Additionally, Sun Hydraulics
provided certain administrative support and office space to SunOpTech at no
charge.
12. DISTRIBUTIONS AND DIVIDENDS TO SHAREHOLDERS
The Company declared distributions of $1,016, $10,545 and $2,901 to
shareholders in 1998, 1997 and 1996, respectively. A portion of the 1996
distributions were to fund shareholders' individual income tax liabilities
related to the S Corporation taxable earnings.
Subsequent to the IPO, the Company distributed all of Sun Hydraulics'
previously undistributed retained earnings totaling $10,545 related to the S
Corporation. A distribution of
46
$9,446 representing 90% of the total undistributed retained earnings was paid
in January 1997. The remaining 10% of $1,099 was paid in May 1997.
The Company declared a cash dividend of $.04 per share on February 26,
1999, to shareholders of record on March 31, 1999, payable on April 15, 1999.
The Company declared quarterly cash dividends of $.04 per share, to
shareholders of record on December 31, 1998, September 30, 1998, June 30, 1998
and March 31, 1998. These dividends were paid on January 15, 1999, October 15,
1998, July 15, 1998 and April 15, 1998, respectively. The Company declared
quarterly cash dividends of $.035 per share, to shareholders of record on
December 31, 1997, October 1, 1997, July 3, 1997 and, March 31 1997. These
dividends were paid on January 15 , 1998, October 15 , 1997, July 15, 1997 and
April 15, 1997, respectively.
13. INCOME TAXES
Pretax income from continuing operations is taxed under the following
jurisdictions:
Years ended December 31,
-------------------------------------------
1998 1997 1996
------ ------ ------
United States $6,854 $4,962 2,190
Foreign 1,666 2,302 2,010
------ ------ ------
Total $8,520 $7,264 $4,200
====== ====== ======
The income tax provision consists of the following:
Years ended December 31,
-------------------------------------------
1998 1997 1996
------ ------ ------
Current tax expense:
United States $1,662 $1,157 $ 7
State and local 159 75 -
Foreign 600 697 621
------ ------ ------
Total current 2,421 1,929 628
------ ------ ------
Deferred tax expense (benefit):
United States 411 615 2,170
State and local 36 14 255
Foreign 5 (4) 76
------ ------ ------
Total deferred 452 625 2,501
------ ------ ------
Total income tax provision $2,873 $2,554 $3,129
====== ====== ======
47
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
Years ended December 31,
-------------------------------------------
1998 1997 1996
------ ------ ------
U.S. federal taxes at statutory rate $2,897 $2,461 $1,428
Increase(decrease)
Benefit of foreign sales corporation (60) - -
Foreign income taxed at higher rate (59) (80) 14
Conversion of S to C Corporation - - 2,354
S Corporation income - - (724)
Nondeductible items 41 39 57
State and local taxes, net 137 138 -
Other (83) (4) -
------ ------ ------
Income tax provision $2,873 $2,554 $3,129
====== ====== =======
Deferred tax assets and liabilities at December 31 are as follows:
December 31,
-----------------------
1998 1997
------ -------
Deferred taxes, non-current:
Assets
Accrued expenses and reserves
not currently deductible $ 132 $ 139
Compensation expense recognized
for book, not yet deductible for tax 388 451
Florida NOL carry forward - -
------ ------
Deferred tax asset, non-current 520 590
Liabilities
Depreciation 4,176 3,793
------ ------
Net deferred tax liability, non-current $3,656 $3,203
====== ======
Upon termination of the S Corporation status (see Note 2), the Company
was required to recognize deferred income taxes for cumulative temporary
differences.
48
Pro forma deferred tax assets and liabilities at December 31, 1996 are
as follows:
Pro forma deferred taxes, non-current:
Assets
Accrued expenses and reserves not currently deductible $ 182
Compensation expense recognized for book,
not yet deductible for tax 558
Florida NOL carry forward 18
------
Pro forma deferred tax asset, non-current 758
Liabilities
Depreciation 3,336
------
Pro forma net deferred tax liability, non-current $2,578
======
14. STOCK OPTION PLANS
During 1995 and part of 1996, the Company maintained a phantom stock
option plan (the "Plan"). Compensation cost was measured as the amount by which
the market value, as defined in the Plan, of the stock on the measurement date
exceeded the market value on the date the phantom stock options were granted.
The market value was defined in the Plan as the higher of: the last arm's
length sale price of said stock between unrelated parties if there had been a
sale in the preceding six-months period, or the book value of said stock.
Compensation cost was accrued over the service period and adjusted in periods
subsequent to the measurement date for changes in the market value of the
stock.
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 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.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 establishes new
standards for computing and presenting earnings per share (EPS). Specifically,
SFAS 128 replaces the presentation of primary EPS with a presentation of basic
EPS, requires dual presentation of basic and diluted EPS on the face of the
income statement, and requires a reconciliation of the basic EPS computation to
the diluted EPS computation.
49
A summary of the Company's stock option plan for each of the three
years ended December 31, 1998, is summarized as follows:
Exercise Weighted
Number price average
of shares range exercise price
Under option, December 31, 1995 42 $.001 - 18.68 $ 1.68
( 42 shares exercisable)
Granted 320 $ 3.00 - 5.05 $ 3.96
Exercised (42) $ .66 - 18.68 $ 1.68
--- ---------------
Under option, December 31, 1996 320 $ 3.00 - 5.05 $ 3.91
(320 shares exercisable)
Granted 289 $ 9.50 $ 9.50
Exercised (22) $ 3.00 - 3.47 $ 3.21
--- ----------------
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)
A summary of outstanding and exercisable options at December 31, 1998
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 66,666 5.24 $ 3.00 66,666 $ 3.00
3.43-5.05 207,374 7.75 4.33 207,374 4.33
9.50 274,348 7.54 9.50 111,311 9.50
10.00 50,000 9.92 10.00 - 10.00
16.75 170,000 9.33 16.75 - 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 1998, 1997 and 1996 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:
50
Years ended December 31,
-----------------------------------------
1998 1997 1996
------ ------ ------
Net income:
As reported $5,647 $4,710 $1,071
Pro forma 5,188 4,394 989
Basic earnings per common share:
As reported 0.89 0.75 0.27
Pro forma 0.82 0.70 0.25
Diluted earnings per common share:
As reported 0.87 0.73 0.26
Pro forma 0.79 0.68 0.24
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 1998, 1997 and 1996: cumulative
volatility of 43.09%, 39.56%, and 36.71% for 1998, 1997 and 1996, respectively;
dividend yields of 1.68%, 1.68%, and 1.35% for 1998, 1997 and 1996,
respectively; risk-free interest rate of 5.57%, 5.72%, and 6.60% for 1998, 1997
and 1996, respectively; and expected term of 6.59 years. 6.04 and 5.0 years for
1998, 1997 and 1996, respectively.
15. EARNINGS PER COMMON SHARE
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes new
standards for computing and presenting earnings per share ("EPS").
Specifically, SFAS 128 replaces the presentation of primary EPS with a
presentation of basic EPS, requires dual presentation of basic and diluted EPS
computation on the face of the income statement, and requires a reconciliation
of the basic EPS computation to the diluted EPS computation.
Basic EPS is calculated as net income divided by the weighted average
number of shares of common stock outstanding.
Diluted EPS is calculated using the treasury stock method under which
net income is divided by the weighted average number of common and common
equivalent shares outstanding during the year. Common stock equivalents consist
of options.
51
Presented below is basic and diluted EPS under SFAS 128 for the years
ended December 31, 1996, 1997 and 1998:
Weighted
Average
Shares Per share
Income Outstanding amount
1996
Earnings per share -- common stock 1,071 3,978 $ .27
Effect of dilutive securities:
Stock options 200
Earnings per share -- common stock
assuming dilution 1,071 4,178 $ .26
1997
Earnings per share -- common stock 4,710 6,308 $ .75
Effect of dilutive securities:
Stock options 191
Earnings per share -- common stock
assuming dilution 4,710 6,499 $ .73
1998
Earnings per share -- common stock $5,647 6,345 $ .89
Effect of dilutive securities:
Stock options 186
Earnings per share -- common stock
assuming dilution 5,647 6,531 $ .87
16. 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 $982, $993
and $586 during 1998, 1997 and 1996, respectively.
During 1997, the Company terminated its medical benefit trust and
established a new health care plan. These plans cover substantially all
eligible United States employees. Employer contributions to the health care
plan and the trust amounted to approximately $2,569, $1,954 and $1,348 during
1998, 1997 and 1996, respectively. Long-term disability and life insurance
benefits are also provided to employees, the premiums for which are paid
directly by Sun Hydraulics. Payments amounted to approximately $166, $159 and
$157 for 1998, 1997 and 1996, 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 $93, $81 and $69 during 1998, 1997 and 1996, respectively.
52
17. 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 supersedes 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
management for making operation 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
1996
Sales to unaffiliated
customers $42,180 $ - $ 8,866 $3,526 $ - $54,572
Intercompany sales 5,194 - 1,895 - (7,089) -
Operating profits 3,225 - 1,785 293 (13) 5,290
Identifiable assets 37,565 - 6,750 4,544 (443) 48,416
Depreciation expense 2,203 - 570 84 - 2,857
Capital expenditures 12,626 - 1,175 3,162 - 16,963
1997
Sales to unaffiliated
customers $49,393 - $10,779 $4,026 $ - $64,198
Intercompany sales 6,584 - 2,346 69 (8,999) -
Operating profits 5,717 - 2,410 149 26 8,302
Identifiable assets 41,541 - 7,611 3,973 264 53,389
Depreciation expense 2,840 - 634 232 - 3,706
Capital expenditures 5,972 - 617 286 - 6,490
1998
Sales to unaffiliated
customers $54,940 556 $11,708 $4,677 $ - $71,881
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 expense 3,434 - 732 221 - 4,387
Capital expenditures 6,105 (26) 1,254 805 - 8,137
53
Total liabilities attributable to foreign operations were $4,182,
$3,867, and $4,940 at December 31, 1998, 1997 and 1996, respectively. Net
foreign currency gains (losses) reflected in results of operations were ($35),
($192) and ($104) for the years ended 1998, 1997 and 1996, 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).
Included in U.S. sales to unaffiliated customers were export sales,
principally to Canada and Asia, of $6,415, $7,431, and $6,090 during 1998, 1997
and 1996, respectively.
18. 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 financial position of the Company.
In 1996, the Company was awarded a grant of 711 Deustche Marks
(approximately $426), by the German government, which helped to offset the cost
of the German facility. This grant required that the German operation employ 26
people by June 30, 1998. The Company did not meet this headcount requirement
and was granted an extension to September 30,1999. If the Company fails to meet
the terms of the grant, approximately 50% of the grant will be repaid. This
amount has been recorded as a deferred grant. The repayment would affect cash
and would have no effect on net income.
The Company received a business interruption insurance claim of $1,821
($1,661, net of expenses), from its insurance carrier in 1998. The claim was
related to a fire in the Manatee County facility which occurred while the plant
was under construction. The Company believes that this fire delayed the opening
of the new plant which in turn delayed the rearrangement of the cartridge
operation and the creation of the cellular production for high volume models.
54
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 six
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
- ---- --- --------
Robert E. Koski . . . 69 Chairman of the Board of Directors (term expiring in 2000) and
a member of the Compensation Committee
Clyde G. Nixon. . . . 63 President, Chief Executive Officer, Director (term expiring in
2001)
Jeffrey Cooper. . . . 57 Engineering Manager
Russell G. Copeman. . 60 Manufacturing Manager
Richard J. Dobby. . . 55 Chief Financial Officer
Peter G. Robson . . . 54 General Manager, Sun Hydraulics Limited
John S. Kahler . . . 59 Director (term expiring in 2000) and a member of the Audit
Committee
James G. March . . . 71 Director (term expiring in 2000) and a member of the Compensation
Committee
55
Ferdinand E. Megerlin. . . 59 Director (term expiring in 2001) and a member of the Compensation
Committee
Taco van Tijn . . . . . . . 75 Director (term expiring in 1999) and a member of the Audit
Committee
David N. Wormley. . . . . . 59 Director (term expiring in 1999) and a member of the
Compensation Committee
MR. KOSKI is a co-founder of the Company and has served as its Chairman of the
Board since it began operations in 1970. He was also its President and Chief
Executive Officer from that time 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 37 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.
MR. NIXON joined the Company in January 1988, and was named its President and
Chief Executive Officer in November 1988. 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
Chairman of the Board of the National Fluid Power Association. Mr. Nixon has
over 31 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 30 years experience in the
fluid power industry.
MR. COPEMAN joined the Company in July 1996, as Manufacturing Manager, in
charge of manufacturing operations and processes. From January 1996, to July
1996, Mr. Copeman was the principal of Copeman Consulting, and performed
consulting services for the Company from March 1996 to July 1996. From January
1994, to October 1995, Mr. Copeman was a partner with Coopers & Lybrand,
Australia; from July 1989, to December 1993, he was a Director of Coopers &
Lybrand's International Manufacturing Practice. From January 1985, to July
1989, he served in various management positions with Vickers, Incorporated,
most recently as Vice President. From August 1967, to January 1985, he served
in various management positions with Double A Products Company, most recently
as Vice President. Mr. Copeman is a Certified Manufacturing Engineer and a
graduate of Georgia Institute of Technology and the Krannert
56
Business School of Purdue University. Mr. Copeman has over 24 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 Schlumberger company. Mr.
Dobbyn is a Certified Public Accountant and a graduate of Boston College.
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.
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 32 years
experience in the fluid power industry.
DR. MARCH is a Professor Emeritus at Stanford University, Palo Alto,
California. He was a senior member of the faculty at Stanford University and
the Stanford Business School from September 1970, to August 1995, and is the
author of numerous books and articles on organizational behavior and decision
making. From September 1964, to August 1970, Dr. March was a Professor of
Psychology and Sociology at the University of California, Irvine, where he was
Dean of the School of Social Sciences from 1964 to 1969. Dr. March served as a
Director of the Company from 1989 to 1992, and rejoined the Company's Board of
Directors in November 1995. He also is a member of the Board of Directors of
Wally Industries and Chair of the Citicorp Behavioral Sciences Research
Council. Dr. March is a graduate of the University of Wisconsin and received
his Ph.D. from Yale University.
DR. MEGERLIN is Chairman and Joint Managing Director of Linde Lift Truck
Corporation'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 Baker Material Handling Corp., Sommerville, South
Carolina. Within VDMA, German's association for mechanical and plant
engineering, Dr. Megerlin serves as Chairman of the German Fluid Power
Association and as a member of the main Board of Directors. He is an engineer
and received his PhD from TH Aachen, Germany. Dr. Megerlin has over 27 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 affiliated 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
57
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.
No family relationships exist between any of the Company's Directors and
executive officers, except that Mr. Koski and Dr. March are step-brothers.
There are no arrangements or understandings between Director 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 two meetings
in 1998. 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 full Board of Directors carried out the
responsibilities of the Compensation Committee directly during 1998.
The Board of Directors held four meetings during 1998. Except for one
Director, who was unable to attend the December 1998 Board meeting, each
Director attended all of the meetings of the Board and of each committee of
which he was a member in 1998.
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 wit the Section 16(a) filing requirements in 1998,
except Clyde G. Nixon, who filed two late reports covering four transactions.
58
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 other most highly compensated
executive officers who earned more than $100,000 from the Company in 1998 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 (3)
- ------------------ ---- ------ --------------- ----------------
Robert E. Koski, 1998 $106,000 -- $ 14,045
Chairman of the 1997 106,000 -- 20,175
Board of Directors 1996 106,000 -- 28,158 (4)
Clyde G. Nixon, 1998 191,300 $ 17,084
President and 1997 180,000 58,781 (1) 22,927
Chief Executive Officer 1996 180,000 94,765 (2) 12,239
Jeffrey Cooper 1998 126,525 $ 11,683
Engineering Manager 1997 121,000 27,100 (1) 13,567
1996 116,000 43,689 (2) 9,314
Russell G. Copeman 1998 135,075 $ 6,099
Manufacturing Manager 1997 134,000 65,000 (1) 35,547 (5)
1996 64,500 -- 92,931 (5)
Richard J. Dobbyn 1998 107,575 5,773
Chief Financial Officer 1997 97,000 35,000 (1) 7,054
1996 88,000 --
(1) Represents incentive stock options granted on January 9, 1997, the date of
the Company's initial public offering, at an exercise price equal to the
public offering price.
(2) Represents nonqualified stock options granted in conjunction with the
termination of the executive's phantom stock compensation agreement.
59
(3) 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.
(4) Includes payment of $18,728 by the Company for certain professional fees
on behalf of Mr. Koski.
(5) Includes payment by the Company of certain consulting fees and moving
expenses.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE OF STOCK PRICE APPRECIATION FOR OPTION TERM (1)
5% ($) 10% ($) 0% $
(A) (B) (C) (D) (E) (F) (G) (H)
Robert E. Koski -- -- -- -- -- -- --
Clyde G. Nixon -- -- -- -- -- -- --
Jeffrey Cooper 20,000 10.9% 16.75 05/22/08 $184,695 $454,91 --
4,000 10.00 12/05/08 36,939 90,982 --
Russell G. Copeman -- -- -- -- -- -- --
Richard J. Dobbyn 10,000 5.5% 16.75 05/22/08 92,347 92,347 --
2,000 10.00 12/05/08 18,469 18,469 --
(1) The options were granted on May 22, 1998, and December 5, 1998, at
exercise prices of $16.75 and $10.00, respectively, the closing prices for
the shares of Common Stock on such dates. The 5% and 10% assumed annual
rates of stock price appreciation are provided in compliance with
Regulation S-K under the Securities Exchange Act of 1934. The Company does
not necessarily believe that these appreciation calculations are indicative
of actual future stock option values or that the price of Common Stock will
appreciate at such rates.
60
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FISCAL AT FISCAL
SHARES YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
(a) (b) (c) (d) (e)
Robert E. Koski -- -- 0/0 0/0
Clyde G. Nixon -- -- 115,817/37,729 $ 469,087/0
Jeffrey Cooper -- -- 54,529/40,260 $ 149,853/0
Russell G. Copeman -- -- 21,052/43,948 0/0
Richard J. Dobbyn -- -- 14,000/33,000 0/0
(1) Based upon the December 31, 1998, closing stock price of $8.313 per share,
as reported on the Nasdaq National Market.
EXECUTIVE COMPENSATION AGREEMENTS
In September 1996, in connection with the termination of certain
individual phantom stock compensation agreements, the Company issued to eight
employees of the Company, including Messrs. Cooper, Nixon and Robson, who are
Executive Officers of the Company, options to purchase 305,260 shares of Common
Stock. The exercise prices for such options ranged from $3.00 to $5.05, with a
weighted average of $3.95. Such options are exercisable and have a term of 10
years. As part of the same agreements, following its initial public offering,
the Company also issued to such employees incentive stock options to purchase
189,348 shares of Common Stock at the initial public offering price of the
Common Stock of $9.50 per share. Such incentive stock options vest over varying
periods of up to seven years.
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 31, 1998, and the initial compensation for the current fiscal year
through the date hereof. In the future, the Compensation Committee of the Board
of Directors, comprised of Robert E. Koski, James G. March, Ferdinand E.
Megerlin, and David N. Wormley, will determine the compensation of the
Company's Directors. See "Item 10. Directors and Executive Officers of the
Registrant."
61
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.
In September 1996, the Company granted non-statutory options to
Director van Tijn, and to former Directors Timm and Bodley, to purchase 3,920
shares of the Company's common stock. The Company also granted non-statutory
options to Director Wormley to purchase 2,940 shares of the Company's Common
Stock. All of the foregoing options were exercisable upon grant, at an exercise
price of $3.00 per share, and they expire in January 2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 23, 1998, 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
- ------------------------------ ------------------------ ----------
Koski Family Limited Partnership
5619 Preston Oaks Road
Dallas, Texas 75240 2,258,543 35.4
Christine L. Koski (3)
5619 Preston Oaks Road
Dallas, Texas 75240 2,322,838 36.4
Robert C. Koski (3)(5)
315 Sycamore Street
Decatur, Georgia 30030 2,285,543 35.8
Thomas L. Koski (3)
Six New Street
East Norwalk, Connecticut 06855 2,258,543 35.4
Robert E. Koski (3)(4)(5) 2,543,920 39.9
Beverly Koski (3)(4)(5) 2,543,920 39.9
Bradley S. Ferrell (6)
5924 Cranbrook Way, #101
Naples, Florida 34112 449,642 7.0
Beck, Mack & Oliver (7)
330 Madison Avenue
New York, NY 10017 434,550 6.8
62
Royce & Associates, Inc. (8)
Royce Management Company
Charles M. Royce
1414 Avenue of the Americas
New York, NY 10019 359,600 5.6
Clyde G. Nixon (9) 218,092 3.4
Peter G. Robson (10) 81,152 1.3
James G. March (11) 53,572 *
Jeffrey Cooper (10) 59,949 *
Russell G. Copeman (10) 31,578 *
Taco van Tijn (12) 8,920 *
Richard J. Dobbyn (13) 22,500 *
David N. Wormley (14) 3,940 *
John S. Kahler 1,000 *
Ferdinand E. Megerlin 0 -
All Directors and Executive Officers as a
Group (11 persons) 3,026,823 45.1
- --------------
* 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.
(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 2,258,543 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 141,215 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) Includes 38,205 shares owned by Mr. Ferrell, over which Mr. Ferrell has
sole voting and investment power, and 411,437 shares beneficially owned by
Mr. Ferrell in his capacity as trustee of various trusts, over which Mr.
Ferrell has shared voting and investment power.
(7) According to the Schedule 13G, filed January 25, 1999, by Beck Mack &
Oliver, LLC, a registered investment advisor, Beck Mack & Oliver has
shared investment power with respect to such shares, which are owned by
its investment advisory clients.
(8) According to the Schedule 13G, filed February 10, 1999, 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 356,400 shares, and RMC has
sole voting and investment power with respect to 3,200 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.
(9) Includes 126,343 shares subject to currently exercisable options.
(10) Represents shares subject to currently exercisable options.
(11) Shares are owned by The March Family Trust, of which Dr. March and his
spouse are trustees.
(12) Includes 3,920 shares subject to currently exercisable options.
(13) Includes 21,000 shares subject to currently exercisable options.
(14) Includes 2,940 shares subject to currently exercisable options.
63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth herein briefly describes transactions during the
past fiscal year between the Company and its Directors, officers and 5%
shareholders. Management of the Company believes that such transactions have
been on terms no less favorable to the Company than those that could have been
obtained from unaffiliated parties. These transactions have been approved by a
majority of the Company's disinterested Directors. Future transactions, if any,
with affiliated parties will be approved by a majority of the Company's
disinterested Directors and the Audit Committee and will be on terms no less
favorable to the Company than those that could be obtained from unaffiliated
parties.
REORGANIZATION WITH SUN HYDRAULIK HOLDINGS LIMITED
Immediately prior to the Company's initial public offering of Common Stock
in January 1997, the Company effected a 9.90372627 for 1 stock split of its
capital stock. The Company at the same time acquired all of the outstanding
shares of capital stock of Sun Hydraulik Holdings Limited, a private limited
company organized under the Laws of England and Wales ("SHHL"), pursuant to an
exchange offer made by the Company to all of the stockholders of SHHL (the
"Reorganization"). Pursuant to the terms of the exchange offer, the Company
issued 1.17013 shares of Common Stock (for a total of 374,811 shares of Common
Stock) and $0.16 in cash for each share of stock of SHHL acquired by it. No
registration rights were granted to the SHHL stockholders, and the shares of
the Company's Common Stock issued to them in the Reorganization are "restricted
securities" under the Securities Act of 1933.
Prior to the Reorganization, the Company and SHHL were controlled by the
same group of stockholders and were operated as a common enterprise, with all
of the Company's European operations carried out through subsidiaries of SHHL
operating in England and Germany. The relative values of the Company and SHHL
for purposes of the Reorganization were established by appraisals conducted for
this purpose. These appraisals also were used to establish the relative values
of the Company and Suninco, Inc. for the June 1996 merger of those two
corporations. See "Suninco Merger" below.
SUNOPTECH, LTD.
In October 1995, the Company contributed certain intangible assets to
SunOpTech, Ltd. ("SunOpTech"), a limited partnership formed to further the
development of manufacturing software. In January 1996, the Company distributed
to its stockholders the 65% limited partnership interest in SunOpTech which it
received in exchange for the contributed intangible assets. Robert E. Koski
owns 51% of the common stock of the general partner of SunOpTech, and is a
member of the Board of Directors of the general partner. The Company currently
has no ownership interest in SunOpTech.
The Company entered into a contract with SunOpTech for a 35-month term
beginning November 1995, for the development of computer software and computer
support to the Company. The Company paid approximately $1,000,000 over the
contract term, provided office space and equipment and reimbursed SunOpTech for
reasonable expenses related to the software
64
development. During 1998, the Company paid fees of $33,000 and expenses of
$45,000 under the agreement, and provided certain administrative support to
SunOpTech at no charge. The software is being utilized in the Company's plants
in Sarasota and Germany. Under its agreement with SunOpTech, the Company has a
perpetual, nonexclusive license to use the software, as well as any future
enhancements, without charge other than the development and support fees to be
provided during the 35-month term of the agreement. The 35-month contract
expired in November 1998, and no further payments are due under this
arrangement.
65
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 31, 1998 and 1997 33
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 34
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 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 S-1 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 Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).
66
4.1 Revolving Credit Agreement, dated March 9, 1992, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida/Sarasota, N.A. (previously
filed as Exhibit 4.1 in the Company's Registration Statement on Form S-1
filed on October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).
4.2 Modification Agreement, dated March 25, 1993, amending Revolving Credit
Agreement dated March 9, 1992, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.2 in
the Company's Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183) and incorporated herein by reference).
4.3 Second Modification to Revolving Credit Agreement, dated May __, 1995,
between Sun Hydraulics Corporation and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.3 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
4.4 Revolving Line of Credit Renewal Note, dated May __, 1995, in the amount
of $1,700,000.00 given by Sun Hydraulics Corporation to Northern Trust
Bank of Florida, N.A. (previously filed as Exhibit 4.4 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).
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 S-1 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 S-1 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 S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
67
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 S-1
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 S-1
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 S-1 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 S-1 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 S-1 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 S-1 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 S-1 filed on
October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).
68
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 S-1 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 S-1 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 L.800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
(previously filed as Exhibit 4.17 in the Company's Registration Statement
on Form S-1 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 250,000, between Sun Hydraulics Ltd. and Lloyds Bank
Plc. (previously filed as Exhibit 4.18 in the Company's Registration
Statement on Form S-1 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 S-1 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 S-1 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).
69
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 Modification Note, dated March 1, 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.)
10.1 Form of Distributor Agreement (Domestic) (previously filed as Exhibit 10.1
in the Company's Registration Statement on Form S-1 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 S-1 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 S-1 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 S-1 filed on December 19, 1996 (File No. 333-14183) and incorporated
herein by reference).
21.1 Subsidiaries of the Company (previously filed as Exhibit 21 in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
23.1 Consent of Independent Certified Public Accountants.
70
27.1 Financial Data Schedule for year ended December 31, 1998 (for SEC purposes
only)
+ Executive management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
1. Report on Form 8-K filed October 19, 1998, announcing that the Company
expected operating income for the third quarter of 1998 to fall below analysts'
expectations.
2. Report on Form 8-K filed October 17, 1998, announcing (i) earnings for the
quarter ended September 30, 1998, (ii) the decision to form a joint venture to
establish a distributorship and manifold manufacturing operation in mainland
China, and (iii) a $0.04 per share dividend on the Company's common stock,
payable on October 15, 1998, to shareholders of record on September 30, 1998.
3. Report on Form 8-K filed December 15, 1998, announcing a $0.04 per share
dividend on the Company's common stock, payable on January 15, 1999, to
shareholders of record on December 31, 1998.
71
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 29, 1998.
SUN HYDRAULICS CORPORATION
By: /s/ Clyde G. Nixon
----------------------------------
Clyde G. Nixon, 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 29, 1998.
Signature Title
- --------- -----
/s/ Robert E. Koski
- ---------------------------------
Robert E. Koski Chairman of the Board of Directors
/s/ Clyde G. Nixon
- ---------------------------------
Clyde G. Nixon President, Chief Executive Officer
and Director
/s/ Richard J. Dobbyn
- ---------------------------------
Richard J. Dobbyn Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ James G. March
- ---------------------------------
James G. March Director
/s/ Taco van Tijn
- ---------------------------------
Taco van Tijn Director
/s/ David N. Wormley
- ---------------------------------
David N. Wormley Director
/s/ John S. Kahler Director
- ---------------------------------
John S. Kahler
/s/ Ferdinand E. Megerlin Director
- ---------------------------------
Ferdinand E. Megerlin
72
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 S-1 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 Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).
4.1 Revolving Credit Agreement, dated March 9, 1992, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida/Sarasota, N.A. (previously
filed as Exhibit 4.1 in the Company's Registration Statement on Form S-1
filed on October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).
4.2 Modification Agreement, dated March 25, 1993, amending Revolving Credit
Agreement dated March 9, 1992, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.2 in
the Company's Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183) and incorporated herein by reference).
4.3 Second Modification to Revolving Credit Agreement, dated May __, 1995,
between Sun Hydraulics Corporation and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.3 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
4.4 Revolving Line of Credit Renewal Note, dated May __, 1995, in the amount
of $1,700,000.00 given by Sun Hydraulics Corporation to Northern Trust
Bank of Florida, N.A. (previously filed as Exhibit 4.4 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).
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 S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
73
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 S-1 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 S-1 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 S-1
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 S-1
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 S-1 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 S-1 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 S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
74
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 S-1 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 S-1 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 S-1 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 S-1 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 L.800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
(previously filed as Exhibit 4.17 in the Company's Registration Statement
on Form S-1 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 L.250,000, between Sun Hydraulics Ltd. and Lloyds Bank
Plc. (previously filed as Exhibit 4.18 in the Company's Registration
Statement on Form S-1 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 S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).
75
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 S-1 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 Modification Note, dated March 1, 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.)
10.1 Form of Distributor Agreement (Domestic) (previously filed as Exhibit 10.1
in the Company's Registration Statement on Form S-1 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 S-1 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 S-1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).
76
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 S-1 filed on December 19, 1996 (File No. 333-14183) and incorporated
herein by reference).
21.1 Subsidiaries of the Company (previously filed as Exhibit 21 in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
and incorporated herein by reference).
23.1 Consent of Independent Certified Public Accountants.
27.1 Financial Data Schedule for year ended December 31, 1998 (for SEC purposes
only).
+ Executive management contract or compensatory plan or arrangement.
77