=============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 3, 1999 Commission file number 0-21835 SUN HYDRAULICS CORPORATION (Exact Name of Registration as Specified in its Charter) FLORIDA 59-2754337 ------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1500 WEST UNIVERSITY PARKWAY SARASOTA, FLORIDA 34243 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) 941/362-1200 ----------------- (Registrant's Telephone Number, Including Area Code) 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 [ ] The Registrant had 6,384,948 shares of common stock, par value $.001, outstanding as of August 10, 1999. =============================================================================== Sun Hydraulics Corporation INDEX For the second quarter ended July 3, 1999
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of July 3, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Income for the Three Months Ended July 3, 1999 (unaudited) and June 30, 1998 (unaudited) 4 Consolidated Statements of Income for the Six Months Ended July 3, 1999 (unaudited) and June 30, 1998 (unaudited) 5 Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income for the Three Months Ended July 3, 1999 (unaudited) and the Year Ended December 31, 1998 6 Consolidated Statements of Cash Flows for the Six Months Ended July 3, 1999 (unaudited) and June 30, 1998 (unaudited) 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Forward Looking Information 19 PART II. OTHER INFORMATION 21 Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K 21
2 PART I: FINANCIAL INFORMATION Item 1. SUN HYDRAULICS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JULY 3, DECEMBER 31, 1999 1998 ------- ------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 844 $ 1,592 Accounts receivable, net of allowance for doubtful accounts of $262 and $169 5,977 5,342 Inventories 7,367 8,125 Other current assets 915 891 ------- ------- Total current assets 15,103 15,950 Property, plant and equipment, net 44,528 44,003 Investment in joint venture 189 246 Other assets 926 820 ------- ------- Total assets $60,746 $61,019 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,007 $ 2,877 Accrued expenses and other liabilities 1,670 2,065 Long-term debt due within one year 5,191 4,302 Notes payable to related parties due within one year 502 578 Dividends payable 255 254 Income taxes payable 349 245 ------- ------- Total current liabilities 9,974 10,321 Long-term debt due after one year 6,850 6,461 Notes payable to related parties due after one year 148 566 Deferred income taxes 3,624 3,656 ------- ------- Total liabilities 20,596 21,004 ------- ------- Commitments and contingencies Shareholders' equity: Preferred stock -- -- Common stock 6 6 Capital in excess of par value 24,473 24,386 Retained earnings 15,359 15,363 Accumulated other comprehensive income 312 260 ------- ------- Total shareholders' equity 40,150 40,015 ------- ------- Total liabilities and shareholders' equity $60,746 $61,019 ======= =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. 3 SUN HYDRAULICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JULY 3, JUNE 30, 1999 1998 ------- -------- (UNAUDITED) NET SALES $15,921 $17,584 Cost of sales 12,982 12,599 ------- ------- GROSS PROFIT 2,939 4,985 Selling, engineering and administrative expenses 3,068 3,033 ------- ------- OPERATING INCOME (LOSS) (129) 1,952 Interest expense 176 231 Miscellaneous (income) expense 13 (45) ------- ------- INCOME (LOSS) BEFORE INCOME TAXES (318) 1,766 Income tax provision (benefit) (125) 586 ------- ------- NET INCOME (LOSS) BEFORE EQUITY LOSS IN JOINT VENTURE (193) 1,180 Equity loss in joint venture 23 -- ------- ------- NET INCOME (LOSS) $ (216) $ 1,180 ======= ======= BASIC NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ 0.19 WEIGHTED AVERAGE SHARES OUTSTANDING 6,383 6,339 DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ 0.18 WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 6,537 6,553
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. 4 SUN HYDRAULICS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JULY 3, JUNE 30, 1999 1998 ------- ------- (UNAUDITED) NET SALES $34,386 $36,717 Cost of sales 26,927 25,946 ------- ------- GROSS PROFIT 7,459 10,771 Selling, engineering and administrative expenses 6,160 6,047 ------- ------- OPERATING INCOME 1,299 4,724 Interest expense 429 491 Miscellaneous (income) expense 76 (2) ------- ------- INCOME BEFORE INCOME TAXES 794 4,235 Income tax provision 230 1,415 ------- ------- NET INCOME BEFORE EQUITY LOSS IN JOINT VENTURE 564 2,820 Equity loss in joint venture 57 -- ------- ------- NET INCOME $ 507 $ 2,820 ======= ======= BASIC NET INCOME PER COMMON SHARE $ 0.08 $ 0.45 WEIGHTED AVERAGE SHARES OUTSTANDING 6,375 6,332 DILUTED NET INCOME PER COMMON SHARE $ 0.08 $ 0.43 WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 6,528 6,524
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. 5 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, 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 Dividends declared (511) (511) Exercise of stock options 22 75 75 Tax effect of non-qualified stock options 12 12 Comprehensive income: Net income 507 507 Other comprehensive income: Foreign currency translation adjustments 52 52 ------- Comprehensive income 559 ------- -------- -------- ------- ---- ------- Balance, July 3, 1999 (unaudited) 6,383 $ 6 $ 24,473 $15,359 $312 $40,150 ======= ======== ======== ======= ==== =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. 6 SUN HYDRAULICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED JULY 3, JUNE 30, 1999 1998 ------- -------- (UNAUDITED) Cash flows from operating activities: Net income $ 507 $ 2,820 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,440 2,269 Loss on disposal of assets 127 -- Provision for deferred income taxes (20) -- (Increase) decrease in: Accounts receivable (635) (1,313) Inventories 758 (338) Other current assets (24) 118 Other assets (49) (130) Increase (decrease) in: Accounts payable (870) (180) Accrued expenses and other liabilities (395) 220 Income taxes payable, net 104 561 ------- ------- Net cash provided by operating activities 1,943 4,027 ------- ------- Cash flows from investing activities: Capital expenditures (3,135) (3,629) Proceeds from dispositions of equipment 43 122 ------- ------- Net cash used in investing activities (3,092) (3,507) ------- ------- Cash flows from financing activities: Proceeds from debt 5,128 4,261 Repayment of debt (3,850) (2,244) Repayment of notes payable to related parties (494) (365) Proceeds from exercise of stock options 75 81 Dividends to shareholders (510) (474) ------- ------- Net cash provided by financing activities 349 1,259 ------- ------- Effect of exchange rate changes on cash and cash equivalents 52 286 ------- ------- Net increase in cash and cash equivalents (748) 2,065 Cash and cash equivalents, beginning of period 1,592 1,249 ------- ------- Cash and cash equivalents, end of period $ 844 $ 3,314 ======= ======= Supplemental disclosure of cash flow information: Cash paid for: Interest (including amounts capitalized) $ 484 $ 496 ======= ======= Income taxes $ 146 $ 854 ======= ======= Non-cash tax effect of non-qualified stock options $ 12 $ -- ======= =======
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements. 7 SUN HYDRAULICS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands except per share data) 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnotes required by generally accepted accounting principles for complete financial statements are not included herein. The financial statements are prepared on a consistent basis (including normal recurring adjustments) and should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 1998, filed by Sun Hydraulics Corporation (the "Company") with the Securities and Exchange Commission on March 30, 1999. 2. 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 Sun Hydraulics, 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 Sun GmbH, located in Erkelenz, Germany, designs, manufactures and markets the Company's products in German-speaking European markets. Sun Hydraulics Korea Corporation ("Sun Korea"), a wholly-owned subsidiary of Sun Hydraulics, was acquired September 28, 1998 (see Note 3). Sun Korea, located in Inchon, South Korea, operates a manufacturing and distribution facility. 3. ACQUISITION AND JOINT VENTURE On September 28, 1998, Sun Hydraulics acquired 100% of the equity shares of Korea Fluid Power Co. Ltd., 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 $539, net of amortization as of July 3, 1999. 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 Investment in joint venture in the Company's financial statements. 8 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 start-up costs of $41 related to the acquisition of Sun Korea was written off as administrative expense in the first quarter of 1999. 5. LONG-TERM DEBT (in thousands)
July 3, December 31, 1999 1998 ----------- ------------ (unaudited) Lines of credit agreements $ 4,772 $ 3,974 Secured notes payable-Korea 43 177 Mortgage note payable-U.S. Manatee County facility 4,797 4,864 Mortgage note payable-German facility 1,461 1,748 Secured notes payable-German equipment 968 -- -------- -------- 12,041 10,763 Less amounts due within one year (5,191) (4,302) -------- -------- $ 6,850 $ 6,461 ======== ========
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. During the quarter ended July 3, 1999, the Company had a revolving credit facility in the United States, which provided for a maximum availability of $10,000, payable on demand with no debt covenants. In February 1999, 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 LIBOR plus 1.9% for predetermined periods of time at the Company's option. At July 3, 1999, the interest rate was 7.0%, and $4,750 was outstanding under this credit facility. On July 23, 1999, the Company replaced the $10,000 unsecured revolving credit facility with a five year, secured, revolving credit facility of $7,500, and a one year unsecured, revolving credit facility of $5,000. The $7,500 credit facility has an interest rate equal to the bank lender's prime rate less 1% for the first year, and the treasury bill rate plus 1.75% for the remaining four 9 years. The $5,000 credit facility has an interest rate equal to the bank lender's prime rate less 1% or LIBOR plus 1.9% for predetermined periods of time, at the Company's option. 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 lender's base rate and is payable on demand. At July 3, 1999, 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 July 3, 1999, the interest rate was 5.25%, and $22 was outstanding under this credit facility. Sun Korea has two notes denominated in Korean Won, and secured by property, plant and equipment, with interest payable at fixed rates of 6% and 6.5% with maturities up to March of June 25, 2001, and September 25, 1999, respectively. At July 3, 1999, $40 and $3 was outstanding under these credit facilities, respectively. In 1996, a 10-year mortgage loan of $6,187 was obtained at a fixed interest rate of 8.25% for construction of the Manatee County facility. Terms on the construction note were interest-only on the balance drawn down through the completion of construction and then conversion to a 10-year mortgage note with a 15-year amortization schedule. In April 1999, this mortgage note was renegotiated to an interest rate of 7.375%. Terms are monthly principal and interest payments of $42 with remaining principal due July 1, 2006. At July 3, 1999, $4,797 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 July 3, 1999, $1,461 was outstanding under this mortgage note. In February 1999, the Company negotiated three loans in Germany, secured by equipment; a ten year 5.1% fixed interest rate loan for approximately $300, a ten year 5.1% fixed interest rate loan for approximately $100, and a ten year 3.5% fixed interest rate loan for approximately $800. At July 3, 1999, the outstanding balance on these facilities was $256, $0, and $712, respectively. 10 6. 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 operational decisions and addressing performance as the source of determining the Company's reportable segments. Management bases its financial decisions by the geographical location of its operations. The individual subsidiaries comprising the Company operate predominantly in a single industry as manufacturers and distributors of hydraulic components. The subsidiaries are multinational with operations in the United States, the United Kingdom, Germany, and Korea. In computing earnings from operations for the foreign subsidiaries, no allocations of general corporate expenses, interest or income taxes have been made. Identifiable assets of the foreign subsidiaries are those assets related to the operation of those companies. United States assets consist of all other operating assets of the Company. Segment information is as follows:
United United States Korea Kingdom Germany Elimination Consolidated ------- ------ ------- ------- ----------- ------------ SIX MONTHS ENDED JULY 3, 1999 Sales to unaffiliated customers $24,233 $1,874 $5,587 $2,692 $ -- $34,386 Intercompany sales 3,837 -- 1,081 14 (4,932) -- Operating profits 308 37 668 183 103 1,299 Identifiable assets 45,529 742 8,422 6,297 (244) 60,746 Depreciation expense 1,860 19 404 157 -- 2,440 Capital expenditures 2,191 46 556 342 -- 3,135 SIX MONTHS ENDED JUNE 30, 1998 Sales to unaffiliated customers $28,010 -- $6,225 $2,482 $ -- $36,717 Intercompany sales 4,106 -- 1,130 26 (5,262) -- Operating profits 3,435 -- 1,151 132 6 4,724 Identifiable assets 43,693 -- 9,274 5,544 (156) 58,355 Depreciation expense 1,826 -- 347 96 -- 2,269 Capital expenditures 2,882 -- 685 62 -- 3,629
11
United United States Korea Kingdom Germany Elimination Consolidated ------- ------ ------- ------- ----------- ------------ THREE MONTHS ENDED JULY 3, 1999 Sales to unaffiliated customers $10,691 $1,152 $2,803 $1,275 $ -- $15,921 Intercompany sales 2,139 -- 483 7 (2,629) -- Operating profits (410) 9 215 40 17 (129) Depreciation expense 944 19 203 75 -- 1,241 Capital expenditures 1,575 63 101 42 -- 1,781 THREE MONTHS ENDED JUNE 30, 1998 Sales to unaffiliated customers $13,193 -- $3,129 $1,262 $ -- $17,584 Intercompany sales 2,376 -- 555 9 (2,940) -- Operating profits 1,427 -- 506 33 (14) 1,952 Depreciation expense 913 -- 179 50 -- 1,142 Capital expenditures 1,747 -- 313 48 -- 2,108
Total liabilities attributable to foreign operations were $5,276, and $4,265, at July 3, 1999, and June 30, 1998, respectively. Net foreign currency gains (losses) reflected in results of operations were $22 and $(48) for the six months ended July 3, 1999, and June 30, 1998, respectively. Operating profit is total sales and other operating income less operating expenses. In computing segment operating profit, interest expense and net miscellaneous income (expense) have not been deducted (added). 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Company sells its products globally through independent distributors. Net sales in the second quarter were $15.9 million, a decrease of $2.5 million, or 13.8%, from the first quarter of 1999, and $1.7 million, or 9.5%, from the quarter ended June 30, 1998. The decrease in net sales was due primarily to the implementation, on May 1, 1999, of a new "Y2K" compliant operating system in the United States operation. The fully-integrated system affects all aspects of the business, and many difficulties were encountered during implementation. None of these difficulties by themselves were large, but, taken collectively, caused shipment delays and created production inefficiencies. Management estimates that at least one week's worth of shipments were missed in the second quarter of 1999, and further expects that the system conversion will continue to have a negative impact on third quarter 1999 operating income. Since the system implementation on May 1, 1999, shipments have been increasing each week and as of the end of July had reached pre-implementation levels. The Company is also in the process of implementing a new software system for its Coventry, England, operation. This system has been running parallel for some time and management expects to convert to the new system by the end of the third quarter of 1999. However, as with any system conversion there can be no assurances that the timing of the conversion will be met precisely and that the conversion process will not adversely impact operating results. The Company's orders in the second quarter of 1999 were $15.5 million, a decrease of $1.7 million, or 9.6%, from the first quarter of 1999. United States distributors' inventories at the end of the second quarter of 1999 decreased over $1.0 million from the first quarter of 1999. Management believes these decreases, at least in part, are related to the Company's improved delivery times in the first quarter and the subsequent adjustments distributors made in their order patterns. The National Fluid Power Association reported that orders for the first quarter of 1999 for the United States hydraulics industry decreased 9.8% and continued to be negative year over year in the second quarter. However, the weekly order rate for the Company's United States operation has shown an increase since the end of the second quarter of 1999. Net sales in the United States operations in the second quarter of 1999 decreased $2.9 million, or 21.0%, from the first quarter of 1999. This net sales decrease, coupled with production inefficiencies, resulted in an operating loss in the United States operations of $0.4 million, compared to operating income of $0.7 million in the first quarter of 1999. The consolidated operating loss in the second quarter of 1999 was $0.1 million, compared to operating income in the first quarter of 1999 of $1.4 million. Production capacity expansion plans are on track for the relocation of the high-volume cartridge production cell from the Sarasota facility to the Manatee facility by year-end. The new 13 fully automated assembly machine for the production cell is operational in the Manatee facility, and is in the final testing stage. Test stands and other equipment for the production cell are also in place and the new heat treat operation is on schedule for completion by the end of the year. The Korean operation, acquired in September of 1998, received ISO 9002 certification in June 1999. Net sales for this operation for the quarter ended July 3, 1999, increased 59.6%, or $0.4 million, to $1.2 million, compared to $0.7 million, in the quarter ended April 3, 1999. Sun Korea's largest customer is Daewoo Group. Daewoo has recently indicated that it is restructuring its finances, which may delay payments to vendors due to cash flow problems. Orders for the Company's electrically actuated cartridge valve products (solenoid valves), introduced in Europe in April 1999, are not yet significant. However, quotations for custom manifolds have been steadily increasing and it is estimated that 20% of these quotes incorporate the new solenoid product. The solenoid valve products address a new market for the Company, and management believes that, in time, solenoid sales will bring additional demand for manifolds and non-solenoid cartridge valve sales. COMPARISON OF THREE MONTHS ENDED JULY 3, 1999 AND JUNE 30, 1998 Net sales decreased 9.5%, or $1.7 million, to $15.9 million in the quarter ended July 3, 1999, compared to $17.6 million in the quarter ended June 30, 1998. Adjusting for the incremental net sales related to the Korean operation acquired in September 1998, net sales decreased 13.9%, or $2.5 million. As described in the Overview, the decrease in net sales was due primarily to shipment delays and productivity problems in the United States operations, which were caused by the implementation of a fully-integrated operating system. Net sales to Asia (excluding Korea) and Canada were adversely affected because the United States operation sells product directly to distributors in Asia and Canada as well as the United States. Net sales in the United Kingdom operation decreased $0.3 million or 10.4% due to a slowdown in orders. Net sales in Germany increased 1.1%, compared to the period ended June 30, 1998. Gross profit decreased 41.0%, or $2.0 million, to $2.9 million in the quarter ended July 3, 1999, compared to $5.0 million in the quarter ended June 30, 1998. Gross profit as a percentage of net sales was 18.5% for the second quarter of 1999, compared to 28.3% for the second quarter of 1998. The decrease in gross profit as a percentage of net sales was mainly due to the productivity decrease and lower net sales in the United States operation. Material cost as a percentage of net sales in the United States operation, which increased throughout 1998, showed approximately 1% improvement in the second quarter of 1999 compared to the second quarter of 1998. Decreases in gross profit in the United Kingdom operation decreased 21.0% in the quarter ended July 3, 1999, compared to the quarter ended June 30, 1998, mainly due to lower net sales. Selling, engineering and administrative expenses were $3.1 million in the quarter ended July 3, 1999, approximately the same as the quarter ended June 30, 1998. Expenses increased due to advertising and the implementation of a new software system in the United Kingdom operation, as well as incremental costs from the Korean operation acquired in September. These expenses were offset by decreased expenses in the United States operation related to fringe benefits and advertising and catalog costs. Interest expense was $0.2 million for the quarter ended July 3, 1999, approximately the same as the quarter ended June 30, 1998. 14 The income tax benefit in the quarter ended July 3, 1999, was 39.3% of pretax loss compared to a provision of 33.2% of pretax income in the quarter ended June 30, 1998. Excluding income from the Korean operation, the benefit was 34.2% of pretax loss. Tax savings were realized in the United States from the Sun Hydraulics Foreign Sales Corporation and in Korea from provisions of local law. COMPARISON OF SIX MONTHS ENDED JULY 3, 1999 AND JUNE 30, 1998 Net sales decreased 6.3%, or $2.3 million, to $34.4 million in the six month period ended July 3, 1999, compared to $36.7 million in the six month period ended June 30, 1998. Adjusting for the incremental net sales related to the Korean operation acquired in September 1998, net sales decreased 10.0%, or $3.7 million, to $33.0 million, in the six month period ended July 3, 1999 compared to the six month period ended June 30, 1998. As described in the Overview, the decrease in net sales of $3.7 million was due primarily to reduced production in the second quarter connected with the implementation of a new operating system in the United States. Additionally, shipments of manifolds and "assemblies" (a combination of manifolds and cartridges), in the United States operation for the six month period ended July 3, 1999, were significantly less than the same period last year. Gross profit decreased 30.8%, or $3.3 million, to $7.5 million in the six month period ended July 3, 1999, compared to $10.8 million in the six month period ended June 30, 1998. Gross profit as a percentage of net sales was 21.7% in the six month period ended July 3, 1999, compared to 29.3% in the six month period ended June 30, 1998. The gross profit percentage decrease was due to the lower net sales spread over an increased cost base and production inefficiencies related to the implementation of the new operating system in the United States. Additionally, the United States operation's net sales of manifolds and "assemblies", which have a higher margin than individual cartridges, were a lower percentage of total net sales for the six month period ended July 3, 1999. Selling, engineering and administrative expenses increased 1.9%, or $0.1 million, to $6.2 million in the six month period ended July 3, 1999, compared to $6.0 million in the six month period ended June 30, 1998. This increase was due to the incremental expenses of the Korean operation acquired in September 1998, operating system implementation costs and increased wages. These increases were partially offset by decreases in fringe benefit costs, and advertising and catalog costs. Interest expense was $0.4 million for the six month period ended July 3, 1999, approximately the same as the six month period ended June 30, 1998. Miscellaneous expense for the period ended July 3, 1999, consisted primarily of a loss of $0.1 million on the disposal of certain equipment in the United States operations, no longer used in production, partially offset by exchange rate gains. The provision for income taxes in the six month period ended July 3, 1999, was 29.0% of pretax income compared to 33.4% of pretax income in the six month period ended June 30, 1998. Tax savings were realized from the Sun Hydraulics Foreign Sales Corporation in the United States and in Korea from provisions of local law. Excluding income from Korea, the provision for income taxes in the six month period ended July 3, 1999, was 32.4%. 15 Net income for the six month period ended July 3, 1999, decreased to $0.5 million, or 1.5% of net sales, compared to $2.8 million, or 7.7% of net sales, for the six month period ended June 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of capital has been cash generated from operations, although fluctuations in working capital requirements have been met through borrowings under revolving lines of credit. The Company's principal uses of cash have been to pay operating expenses, make capital expenditures, pay dividends to shareholders and service debt. At July 3, 1999, the Company had working capital of $5.1 million. Cash flow from operations for the quarter ended July 3, 1999, decreased $2.1 million, to $1.9 million, compared to $4.0 million for the quarter ended June 30, 1998. This decrease was due primarily to a $2.3 million decrease in net income. Net cash used in investing activities for the quarter ended July 3, 1999, was $3.1 million, compared to $3.5 million for the quarter ended June 30, 1998, and was used primarily for the purchase of machinery and equipment. 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. During the quarter ended July 3, 1999, the Company had a revolving credit facility in the United States, which provided for a maximum availability of $10.0 million, payable on demand with no debt covenants. The interest rate was 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. At July 3, 1999, the interest rate was 7.0%, and $4.8 million was outstanding under this credit facility. On July 23, 1999, the Company replaced the $10.0 million unsecured revolving credit facility with a five year, secured, revolving credit facility of $7.5 million, and a one year unsecured, revolving credit facility of $5.0 million. The $7.5 million credit facility has an interest rate equal to the bank lender's prime rate less 1% for the first year, and the treasury bill rate plus 1.75% for the remaining four years. The $5.0 million credit facility has an interest rate equal to the bank lender's prime rate less 1% or LIBOR plus 1.9% for predetermined periods of time, at the Company's option. A 10-year mortgage loan of $6.2 million was obtained at a fixed interest rate of 8.25% for construction of the Manatee County facility. Terms on the construction note were interest-only on the balance drawn down through the completion of construction and then conversion to a 10-year mortgage note with a 15-year amortization schedule. In April 1999, this mortgage note was renegotiated to an interest rate of 7.375%. Terms are monthly principal and interest payments with remaining principal due July 1, 2006. At July 3, 1999, $4.8 million was outstanding on this facility. In February 1999, the Company negotiated three loans in Germany secured by equipment, a ten year 5.1% fixed interest rate loan for approximately $0.3 million, a ten year 5.1% fixed interest rate loan for approximately $0.1 million, and a ten year 3.5% fixed interest rate loan for approximately $0.8 million. At July 3, 1999, the outstanding balance on these facilities was $1.0 million. 16 The Company has notes payable to five former shareholders that bear interest at a weighted rate of 15% and have terms expiring in one to four years. These notes were issued by the Company in 1989 and 1990, in connection with the repurchase of shares of common stock from former shareholders and do not allow for prepayment by the Company. At July 3, 1999, $0.6 million was outstanding under these notes. The Company believes that cash generated from operations and its borrowing availability under its revolving lines of credit will be sufficient to satisfy the Company's operating expenses and capital expenditures for the foreseeable future. The Company declared quarterly dividends of $0.04 per share to shareholders of record on June 30, 1999, and March 31, 1999, which were paid on July 15, 1999, and April 15, 1999, respectively. 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. 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. The internal assessment phase is now substantially completed. 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 seventy percent of its third party questionnaires. The Company anticipates the completion of this external assessment prior to November 1, 1999. The Company is currently testing all critical applications for year 2000 readiness and anticipates completion of this testing by the third 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. Certain software subsystems and routines have been identified which require modification to be fully year 2000 compliant. Management believes that these modifications will be completed prior to the end of the fourth quarter of 1999. As a result of such testing, the Company has entered its renovation phase by replacing the computer systems in its United States Sarasota facility, and is in the process of replacing its computer system in its United Kingdom facility with "enterprise manufacturing systems" that, 17 according to representations made by the systems' manufacturers, are currently year 2000 ready. The implementation of these new "enterprise manufacturing systems" has negatively impacted the Company's sales. See the Overview of Management's Discussion and Analysis. The Company believes that its other locations' systems are 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. However, there can 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. However, a significant interruption in the Company's business due to a year 2000 non-compliance issue 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, there can be no assurances that the Company's contingency plans, once developed, will substantially reduce the risk of year 2000 non-compliance. The Company estimates that the total costs of its year 2000 project will be $1.3 million, including costs of approximately $1.0 million incurred through July 3, 1999. 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 AND INFLATION 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. The Company does not believe that inflation had a material effect on its operations for the periods ended July 3, 1999, and June 30, 1998. There can be no assurance, however, 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. 18 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 July 3, 1999, the Company had approximately $4.8 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 its U.S. bank lender's prime rate less 1%, or the Libor rate plus 1.9%, whichever is the most advantageous. FORWARD-LOOKING INFORMATION Certain oral statements made by management from time to time and certain statements contained herein that are not historical facts are "forward- looking statements" within the 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 19 public offering, "Business" in the Company's Form 10-K for the year ended December 31, 1998, and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Form 10-Q for the quarter ended July 3, 1999. 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. 20 PART II OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. The Annual Meeting of Shareholders of the Company was held on May 22, 1999. At the meeting, the following actions were taken by the shareholders: Taco van Tijn and David N. Wormley were reelected as Directors to serve until the Annual Meeting in 2002, and until their successors are elected and qualified or until their earlier resignation, removal from office or death. The votes cast for and against each were as follows: For Withheld Taco van Tijn 5,255,000 71,021 David N. Wormley 5,257,100 68,921
The appointment of Pricewaterhouse Coopers, LLP, as the Company's independent certified public accountants for the year 1999 was ratified and approved. The voting on the proposal was as follows: FOR 5,321,445 AGAINST 3,476 ABSTAIN 1,100
Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 21
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). 4.5 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). 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).
22 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). 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 (pound)800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as Exhibit 4.17 in the Company's Registration Statement on Form 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 (pound)250,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as Exhibit 4.18 in the Company's Registration Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183) and incorporated herein by reference).
23 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). 4.22 Renewal Master Note, dated February 3, 1998, in the amount of $10,000,000.00, made by the Company to evidence a line of credit granted to the Company by Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 4.23 Modification Agreement, dated March 1, 1998, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 4.24 Renewal Master Note, dated as of February 3, 1998, in the amount of $4,965,524.51, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 4.25 Renewal Master Note, dated of February 3, 1999, in the amount of $4,965,524.51, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference). 4.26 Renewal Master Note, dated July 23, 1999, in the amount of $5,000,000.00 between the Company and Northern Trust Bank of Florida, N.A. 4.27 Loan Agreement, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A.
24 4.28 Security Agreement, dated July 23, 1999, between the Company and Northern Trust Bank of Florida, N.A. 4.29 Promissory Note, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A. 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). 27.1 Financial Data Schedule for period ended July 3, 1999 (for SEC purposes only).
+ Executive management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. Report on Form 8-K dated June 4, 1999, announcing a $0.04 per share dividend on its common stock payable on July 15, 1999, to shareholders of record on June 30, 1999, as well as year end and fourth quarter results. 25 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 August 12, 1999. SUN HYDRAULICS CORPORATION By: /s/ Richard J. Dobbyn --------------------------------- Richard J. Dobbyn Chief Financial Officer (Principal Financial and Accounting Officer) 26 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). 4.5 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). 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).
27 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). 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 (pound)800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as Exhibit 4.17 in the Company's Registration Statement on Form 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 (pound)250,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as Exhibit 4.18 in the Company's Registration Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183) and incorporated herein by reference).
28 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). 4.22 Renewal Master Note, dated February 3, 1998, in the amount of $10,000,000.00, made by the Company to evidence a line of credit granted to the Company by Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.22 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 4.23 Modification Agreement, dated March 1, 1998, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.23 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 4.24 Renewal Master Note, dated as of February 3, 1998, in the amount of $4,965,524.51, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.24 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference). 4.25 Renewal Master Note, dated of February 3, 1999, in the amount of $4,965,524.51, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 3, 1999 and incorporated herein by reference). 4.26 Renewal Master Note, dated July 23, 1999, in the amount of $5,000,000.00 between the Company and Northern Trust Bank of Florida, N.A. 4.27 Loan Agreement, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A.
29 4.28 Security Agreement, dated July 23, 1999, between the Company and Northern Trust Bank of Florida, N.A. 4.29 Promissory Note, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A. 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). 27.1 Financial Data Schedule for period ended July 3, 1999 (for SEC purposes only).
+ Executive management contract or compensatory plan or arrangement. 30