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 October 2, 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 November 12, 1999. Sun Hydraulics Corporation INDEX For the third quarter ended October 2, 1999
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of October 2, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Income for the Three Months Ended October 2, 1999 (unaudited) and September 30, 1998 (unaudited) 4 Consolidated Statements of Income for the Nine Months Ended October 2, 1999 (unaudited) and September 30, 1998 (unaudited) 5 Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income for the Nine Months Ended October 2, 1999 (unaudited) and the Year Ended December 31, 1998 6 Consolidated Statements of Cash Flows for the Nine Months Ended October 2, 1999 (unaudited) and September 30, 1998 (unaudited) 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Forward Looking Information 18 PART II. OTHER INFORMATION 20 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 20
2 PART I: FINANCIAL INFORMATION Item 1. SUN HYDRAULICS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
OCTOBER 2, DECEMBER 31, 1999 1998 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 1,087 $ 1,592 Accounts receivable, net of allowance for doubtful accounts of $219 and $169 6,750 5,342 Inventories 7,237 8,125 Other current assets 752 891 ------------ ------------- Total current assets 15,826 15,950 Property, plant and equipment, net 45,619 44,003 Investment in joint venture 162 246 Other assets 912 820 ------------ ------------- Total assets $ 62,519 $ 61,019 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,327 $ 2,877 Accrued expenses and other liabilities 1,633 2,065 Long-term debt due within one year 2,802 4,302 Notes payable to related parties due within one year 375 578 Dividends payable 255 254 Income taxes (receivable) payable (25) 245 ------------- ------------- Total current liabilities 7,367 10,321 Long-term debt due after one year 10,621 6,461 Notes payable to related parties due after one year 201 566 Deferred income taxes 3,641 3,656 ------------ ------------- Total liabilities 21,830 21,004 ------------ ------------- Commitments and contingencies Shareholders' equity: Preferred stock - - Common stock 6 6 Capital in excess of par value 24,486 24,386 Retained earnings 15,693 15,363 Accumulated other comprehensive income 504 260 ------------ ------------- Total shareholders' equity 40,689 40,015 ------------ ------------- Total liabilities and shareholders' equity $ 62,519 $ 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 OCTOBER 2, SEPTEMBER 30, 1999 1998 ---------- ------------- (UNAUDITED) NET SALES $ 17,664 $ 17,664 Cost of sales 13,174 13,132 -------- -------- GROSS PROFIT 4,490 4,532 Selling, engineering and administrative expenses 3,157 2,864 -------- -------- OPERATING INCOME 1,333 1,668 Interest expense 264 216 Miscellaneous expense (income) 151 (1,586) -------- -------- INCOME BEFORE INCOME TAXES 918 3,038 Income tax provision 303 1,015 -------- -------- NET INCOME BEFORE EQUITY LOSS IN JOINT VENTURE 615 2,023 Equity loss in joint venture 27 -- -------- -------- NET INCOME $ 588 $ 2,023 ======== ======== BASIC NET INCOME PER COMMON SHARE $ 0.09 $ 0.32 WEIGHTED AVERAGE SHARES OUTSTANDING 6,384 6,354 DILUTED NET INCOME (PER COMMON SHARE) $ 0.09 $ 0.31 WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 6,536 6,560
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)
NINE MONTHS ENDED OCTOBER 2, SEPTEMBER 30, 1999 1998 ---------- ------------- (UNAUDITED) NET SALES $ 52,050 $ 54,381 Cost of sales 40,100 39,078 -------- -------- GROSS PROFIT 11,950 15,303 Selling, engineering and administrative expenses 9,317 8,911 -------- -------- OPERATING INCOME 2,633 6,392 Interest expense 693 707 Miscellaneous expense (income) 228 (1,588) -------- -------- INCOME BEFORE INCOME TAXES 1,712 7,273 Income tax provision 532 2,430 -------- -------- NET INCOME BEFORE EQUITY LOSS IN JOINT VENTURE 1,180 4,843 Equity loss in joint venture 84 -- -------- -------- NET INCOME $ 1,096 $ 4,843 ======== ======== BASIC NET INCOME PER COMMON SHARE $ 0.17 $ 0.76 WEIGHTED AVERAGE SHARES OUTSTANDING 6,378 6,340 DILUTED NET INCOME PER COMMON SHARE $ 0.17 $ 0.74 WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING 6,531 6,561
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 (766) (766) Exercise of stock options 22 75 75 Issue of stock 2 13 13 Tax effect of non-qualified stock options 12 12 Comprehensive income: Net income 1,096 1,096 Other comprehensive income: Foreign currency translation adjustments 244 244 --------- Comprehensive income 1,340 ----- --------- -------- -------- --------- --------- Balance, October 2, 1999 (unaudited) 6,385 $ 6 $ 24,486 $ 15,693 $ 504 $ 40,689 ===== ========= ======== ======== ========= =========
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)
NINE MONTHS ENDED OCTOBER 2, SEPTEMBER 30, 1999 1998 ---------- ------------- (UNAUDITED) Cash flows from operating activities: Net income $ 1,096 $ 4,843 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,705 3,328 Loss on disposal of assets 139 -- Compensation expense-stock issued 13 -- Provision for deferred income taxes (3) -- (Increase) decrease in: Accounts receivable (1,408) (1,208) Inventories 888 (762) Other current assets 139 31 Other assets (8) 162 Increase (decrease) in: Accounts payable (550) 591 Accrued expenses and other liabilities (432) 92 Income taxes payable, net (270) 770 -------- -------- Net cash provided by operating activities 3,309 7,847 -------- -------- Cash flows from investing activities: Investment in Korea Fluid Power (Note 3) -- (771) Capital expenditures (5,517) (6,017) Proceeds from dispositions of equipment 56 128 -------- -------- Net cash used in investing activities (5,461) (6,660) -------- -------- Cash flows from financing activities: Proceeds from debt 10,357 5,882 Repayment of debt (7,697) (5,977) Repayment of notes payable to related parties (568) (558) Proceeds from exercise of stock options 75 223 Dividends to shareholders (764) (728) -------- -------- Net cash provided by (used in) financing activities 1,403 (1,158) -------- -------- Effect of exchange rate changes on cash and cash equivalents 244 196 -------- -------- Net (decrease) increase in cash and cash equivalents (505) 225 Cash and cash equivalents, beginning of period 1,592 1,249 -------- -------- Cash and cash equivalents, end of period $ 1,087 $ 1,474 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest (including amounts capitalized) $ 777 $ 737 ======== ======== Income taxes $ 805 $ 1,660 ======== ======== Non-cash tax effect of non-qualified stock options $ 12 $ -- ======== ======== Stock issued to employees $ 13 $ -- ======== ========
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, "Sun 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 $529, net of amortization as of October 2, 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. 8 This agreement provides for an initial capital contribution of $250, which is recorded in Investment in joint venture in the Company's financial statements. 4. LONG-TERM DEBT (in thousands)
October 2, December 31, 1999 1998 ---------- ------------ (unaudited) Lines of credit agreements-unsecured $ 2,316 $ 3,974 Lines of credit agreements-secured 3,859 -- Secured notes payable-Korea 28 177 Mortgage note payable-U.S. Manatee County facility 4,760 4,864 Mortgage note payable-German facility 1,468 1,748 Secured notes payable-German equipment 992 -- -------- -------- 13,423 10,763 Less amounts due within one year (2,802) (4,302) -------- -------- $ 10,621 $ 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. On July 23, 1999, the Company replaced its $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 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. At October 2, 1999, the interest rate for both the secured and unsecured facilities was 7.25%, and the balances outstanding were $3,859 and $2,300, respectively. 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 October 2, 1999, the outstanding balance on these facilities was $257, $0, and $735, respectively. 9 5. 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 NINE MONTHS ENDED OCTOBER 2, 1999 Sales to unaffiliated customers $ 36,933 $ 2,926 $ 8,240 $ 3,951 $ - $ 52,050 Intercompany sales 5,945 - 1,627 25 (7,597) - Operating profits 1,226 51 1,007 253 96 2,633 Identifiable assets 47,126 2,753 8,689 6,299 (2,348) 62,519 Depreciation expense 2,806 56 609 234 - 3,705 Capital expenditures 4,007 54 1,090 366 - 5,517 NINE MONTHS ENDED SEPTEMBER 30, 1998 Sales to unaffiliated customers $ 41,455 $ - $ 9,231 $ 3,695 $ - $ 54,381 Intercompany sales 6,397 - 1,740 34 (8,171) - Operating profits 4,652 - 1,669 131 (60) 6,392 Identifiable assets 43,602 2,430 8,416 5,900 (222) 60,126 Depreciation expense 2,643 - 529 156 - 3,328 Capital expenditures 4,342 77 1,123 475 - 6,017
10
United United States Korea Kingdom Germany Elimination Consolidated THREE MONTHS ENDED OCTOBER 2, 1999 Sales to unaffiliated customers $ 12,700 $ 1,052 $ 2,653 $ 1,259 $ - $ 17,664 Intercompany sales 2,108 - 546 11 (2,665) - Operating profits 917 14 339 70 (7) 1,333 Depreciation expense 946 37 205 77 - 1,265 Capital expenditures 1,816 8 534 24 - 2,382 THREE MONTHS ENDED SEPTEMBER 30, 1998 Sales to unaffiliated customers $ 13,445 $ - $ 3,006 $ 1,213 $ - $ 17,664 Intercompany sales 2,291 - 610 8 (2,909) - Operating profits 1,217 - 518 (1) (66) 1,668 Depreciation expense 817 - 182 60 - 1,059 Capital expenditures 1,460 77 438 413 - 2,388
Total liabilities attributable to foreign operations were $4,410, and $5,384, at October 2, 1999, and September 30, 1998, respectively. Net foreign currency losses reflected in results of operations were $123 and $97 for the nine months ended October 2, 1999, and September 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). 11 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. Orders in the third quarter of 1999 were $16.6 million, an increase of $1.1 million, or 6.9%, from the second quarter of 1999. Domestic orders increased $1.3 million, or 13.9%. As management expected, distributors reduced their orders and, thus, inventories during the second quarter partially in response to the Company's improved delivery times. Management believes that the increase in domestic orders in the third quarter represents demand in line with end-user requirements. An increase in Asian orders of $0.2 million was more than offset by decreases in European orders of $0.4 million, and Canadian orders of $0.1 million. Net sales in the third quarter were $17.7 million, an increase of $1.7 million, or 11.0%, compared to the second quarter of 1999, and approximately the same as net sales for the quarter ended September 30, 1998. The net sales increase from the previous quarter was due primarily to an increase in production output in the United States operations. Second quarter production output in the United States was adversely affected by the implementation of a fully-integrated operating system that began on May 1, 1999. The system affects all aspects of the business, and many difficulties were encountered during implementation. Third quarter production output, and the related net sales increase, compared to the second quarter, represents a return to shipment volumes achieved in the first quarter of 1999. Management believes productivity will continue to improve as a result of the ongoing efforts to "fine tune" the new operating system. The Company implemented a new software system on November 1, 1999, in its Coventry, England, operation. This system has been running parallel for several months, and management expects minimal disruption to business operations due to the implementation. However, as with any system conversion, there can be no assurance that the timing of the conversion will be met precisely and that the conversion process will not adversely impact operating results. Production capacity expansion plans in the United States operation is scheduled for completion by the end of 1999. The high-volume cartridge production cell, currently operating in the Sarasota facility, will be moved to the Manatee facility in December during the holiday shutdown to minimize production disruptions associated with the physical movement of machinery. A new, fully-automated assembly machine, that will become part of the high-volume production cell, is currently operating in the Manatee facility. New test stands and additional equipment for the cell are installed and operating in the Manatee plant, and a new heat treat facility is scheduled for completion by the end of the year. Orders for the Company's electrically actuated cartridge valve products (solenoid valves), introduced in Europe in April 1999, are not yet significant. These new products were officially 12 released to the Company's North American distributors in September 1999. Management anticipates that demand for these products will build slowly as distributors evaluate the products' performance in initial applications and begin to stock products. 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. The Company's joint venture in China has begun production of manifold products and had a minimal amount of sales in the third quarter. The Korean operation is seeing an improved business climate and has not experienced any cash flow problems related to financial restructuring at it largest customer, Daewoo Group. Management will continue to monitor this situation. Gross profit as a percent of sales was 25.4%, in the quarter ended October 2, 1999, an increase over the previous three quarters. The gross profit improvement is due primarily to reduced material costs in the United States operation. Management anticipates there will be further improvements in the cost and quality of purchased parts for cartridge valves resulting from a supplier improvement initiative started at the end of 1998. Management also anticipates that investments made in equipment for the manufacture of high volume cartridge valves will result in increased productivity for these products during the first quarter of 2000. COMPARISON OF THREE MONTHS ENDED OCTOBER 2, 1999 AND SEPTEMBER 30, 1998 Net sales were $17.7 million for the quarter ended October 2, 1999, and for the quarter ended September 30, 1998. The Korean operation, acquired in September 1998, provided additional net sales of $0.7 million for the quarter ended October 2, 1999. Excluding the Korean operation, net sales decreased 4.2%, or $0.7 million. Approximately $0.3 million of the decrease was due to a slowdown in orders in the United Kingdom. Additionally, sales declined in the United States operation as production output continued to be hampered by problems associated with the implementation of a fully-integrated operating system. Gross profit was $4.5 million for the quarter ended October 2, 1999; approximately the same as the quarter ended September 30, 1998. Gross profit as a percentage of net sales was 25.4% for the third quarter of 1999, compared to 25.7% for the third quarter of 1998. Direct labor and manufacturing overhead increases were offset by decreased material costs. The decrease in material cost is due primarily to a supplier improvement initiative started at the end of 1998. Selling, engineering and administrative expenses increased 10.2%, or $0.3 million, to $3.2 million in the quarter ended October 2, 1999, compared to $2.9 million in the quarter ended September 30, 1998. This increase is due primarily to the acquisition of the Korean operation. Interest expense was $0.3 million for the quarter ended October 2, 1999, compared to $0.2 million for the quarter ended September 30, 1998. This increase was due to an increase in the average indebtedness outstanding under secured and unsecured lines of credit. Miscellaneous expense was $0.2 million for the quarter ended October 2, 1999, compared to miscellaneous income of $1.5 million in the quarter ended September 30, 1998. The expense in 13 the quarter ended October 2, 1999, is due primarily to foreign currency exchange losses, and the income in the quarter ended September 30, 1998, is due primarily to the settlement of a business interruption insurance claim. The provision for income taxes for the quarter ended October 2, 1999, was 33.0% of pretax income, compared to 33.4% of pretax income for the quarter ended September 30, 1998. Tax savings were realized in the United States from the Sun Hydraulics Foreign Sales Corporation and in Korea from provisions of local law. Excluding income from the Korean operation, the provision for income taxes was 33.2% of pretax income, approximately the same as the quarter ended September 30, 1998. COMPARISON OF NINE MONTHS ENDED OCTOBER 2, 1999 AND SEPTEMBER 30, 1998 Net sales decreased 4.3%, or $2.3 million, to $52.1 million in the nine month period ended October 2, 1999, compared to $54.4 million in the nine month period ended September 30, 1998. Adjusting for the incremental net sales related to the Korean operation, acquired in September 1998, net sales decreased 8.2%, or $4.4 million, to $50.0 million, in the nine month period ended October 2, 1999, compared to the nine month period ended September 30, 1998. The decrease in net sales was due primarily to reduced production associated with the implementation of a new fully integrated operating system in the United States. Additionally, shipments and orders of manifolds and "assemblies" (a combination of manifolds and cartridges), in the United States operation were significantly less in the nine months ended October 2, 1999, compared to the same period last year. Sales in the United Kingdom declined $1.0 million for the nine months ended October 2, 1999, which was partially offset by an increase in sales in the German operation of $0.3 million. Gross profit decreased 21.9%, or $3.4 million, to $12.0 million in the nine month period ended October 2, 1999, compared to $15.3 million in the nine month period ended September 30, 1998. Gross profit as a percentage of net sales was 23.0% in the nine month period ended October 2, 1999, compared to 28.1% in the nine month period ended September 30, 1998. The gross profit percentage decrease was due to the 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 nine month period ended October 2, 1999. Selling, engineering and administrative expenses increased 4.6%, or $0.4 million, to $9.3 million in the nine month period ended October 2, 1999, compared to $8.9 million in the nine month period ended September 30, 1998. This increase was due primarily to the incremental expenses of the Korean operation acquired in September 1998. Incremental operating system implementation costs and increased wages were partially offset by decreases in fringe benefit costs, and advertising and catalog costs. Interest expense was $0.7 million for the nine month period ended October 2, 1999, approximately the same as the nine month period ended September 30, 1998. Miscellaneous expense of $0.2 million for the period ended October 2, 1999, consisted primarily of a loss on the disposal of certain equipment in the United States operation no longer used in production, and 14 losses on foreign currency exchange transactions. Miscellaneous income of $1.6 million for the nine months ended September 30, 1998, consisted primarily of a business interruption insurance claim. The provision for income taxes in the nine month period ended October 2, 1999, was 31.1% of pretax income compared to 33.4% of pretax income in the nine month period ended September 30, 1998. Excluding income from the Korean operation, the provision for income taxes in the nine months ended October 2, 1999, was 32.8%. Tax savings were realized in the United States from the Sun Hydraulics Foreign Sales Corporation and in Korea from provisions of local law. 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 October 2, 1999, the Company had working capital of $8.5 million. Cash flow from operations for the quarter ended October 2, 1999, decreased $4.5 million, to $3.3 million, compared to $7.8 million for the quarter ended September 30, 1998. This decrease was due primarily to a decrease in income from operations, reduced levels of inventory on hand, and the receipt, in 1998, of a business insurance interruption claim. Capital expenditures, consisting primarily of purchases of machinery and equipment, were $5.5 million for the quarter ended October 2, 1999, compared to $6.0 million of capital expenditures for the quarter ended September 30, 1998. 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. As of 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 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. 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. At October 2, 1999, the interest rate for both the secured and unsecured facilities was 7.25%, and the balances outstanding were $3.9 million and $2.3 million, respectively. 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- 15 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 October 2, 1999, $4.8 million was outstanding under this mortgage loan. 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 October 2, 1999, the outstanding balance on these facilities was $1.0 million. 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 October 2, 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 September 30, 1999, June 30, 1999, and March 31, 1999, which were paid on October 15, 1999, 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. All material aspects of the internal assessment phase are now complete. 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 all but five of its critical third party questionnaires. 16 The Company is testing its critical applications for year 2000 readiness and anticipates completion of this testing during December 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 during December 1999. As a result of such testing, the Company has entered its renovation phase by replacing the computer operating systems in its United States Sarasota facility, and is in the process of replacing its computer operating system in its United Kingdom facility, with "enterprise manufacturing systems" that, according to representations made by the systems' manufacturers, are currently year 2000 ready. 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, will be completed during December 1999. The most likely worst-case scenario which might result from a lack of Company or third party year 2000 readiness would be a temporary but significant interruption in the Company's production capability. The Company has developed contingency plans that focus primarily on continued production without the availability of internal computer systems. Alternative sources for external supply of critical components have been identified, although no backup or contingent orders have been placed. Most critical components can be produced in-house at additional cost. Major manufacturing equipment is capable of being reset to an appropriate date that mirrors the year 2000 to allow continued production as necessary. Production scheduling and related administrative functions necessary to maintain production output can be accomplished manually until alternative processes can be put in place. 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. There can be no assurance that the Company will be year 2000 ready or that the systems of other companies upon which the Company relies similarly will be year 2000 ready by December 31, 1999. Additionally, there can be no assurance that the Company's contingency plans 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 $1.2 million incurred through October 2, 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 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 October 2, 17 1999, and September 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. 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 October 2, 1999, the Company had approximately $6.2 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. 18 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 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, "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 October 2, 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. 19 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. None Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 20 EXHIBIT EXHIBIT DESCRIPTION NUMBER ------------------- ------- 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 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). 21 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). 22 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. (previously filed as Exhibit 4.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 4.27 Loan Agreement, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.27 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 23 4.28 Security Agreement, dated July 23, 1999, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.28 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 4.29 Promissory Note, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.29 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 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 July 29, 1999, announcing an expected second quarter loss of between $0.03 and $0.05 per share. Reports on Form 8-K and 8-K/A dated August 11, 1999, announcing results for the quarter ended July 3, 1999. Report on Form 8-K dated September 20, 1999, announcing a $0.04 per share dividend on its common stock payable on October 15, 1999, to shareholders of record on September 30, 1999. 24 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 November 15, 1999. SUN HYDRAULICS CORPORATION By: /s/ Richard J. Dobbyn ---------------------------------- Richard J. Dobbyn Chief Financial Officer (Principal Financial and Accounting Officer) 25 EXHIBIT INDEX EXHIBIT EXHIBIT DESCRIPTION NUMBER ------------------- ------ 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 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). 26 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). 27 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. (previously filed as Exhibit 4.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 28 4.27 Loan Agreement, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.27 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 4.28 Security Agreement, dated July 23, 1999, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.28 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 4.29 Promissory Note, dated July 23, 1999, in the amount of $7,500,000.00, between the Company and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.29 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 3, 1999 and incorporated herein by reference). 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. 29