SUN HYDRAULICS CORP, 10-Q, 1998-11-13

SUN HYDRAULICS CORP
10-Q, 1998-11-13
MISCELLANEOUS FABRICATED METAL PRODUCTS

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<PAGE> 1

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 September 30, 1998 Commission file number 0-21835

SUN HYDRAULICS CORPORATION
--------------------------------------------------------
(Exact Name of Registration as Specified in its Charter)

FLORIDA 59-2754337
------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

1500 WEST UNIVERSITY PARKWAY
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 6,360,922 shares of common stock, par value $.001,
outstanding as of November 12, 1998.

<PAGE> 2

Sun Hydraulics Corporation
INDEX
For the third quarter ended September 30, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 3

Consolidated Statements of Income for the
Three Months Ended September 30, 1998 and 1997 (unaudited) 4

Consolidated Statements of Income for the
Nine Months Ended September 30, 1998 and 1997 (unaudited) 5

Consolidated Statement of Changes in Shareholders' Equity for the
Nine Months Ended September 30, 1998 (unaudited) and the Year
Ended December 31, 1997 6

Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1998 and 1997 (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
</TABLE>

<PAGE> 3

PART I: FINANCIAL INFORMATION
Item 1.

SUN HYDRAULICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,474 $ 1,249
Accounts receivable, net of allowance for
doubtful accounts of $49 and $47 6,109 4,558
Inventories 7,990 6,775
Other current assets 907 932
------- -------

Total current assets 16,480 13,514

Property, plant and equipment, net 42,957 39,789
Other assets (Note 4) 689 86
------- -------

Total assets $60,126 $53,389
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,758 $ 2,847
Accrued expenses and other liabilities 2,440 2,174
Long-term debt due within one year 1,744 1,035
Notes payable to related parties due within one year 702 757
Dividends payable 254 221
Income taxes payable 1,136 380
------- -------

Total current liabilities 10,034 7,414

Long-term debt due after one year 6,724 6,620
Notes payable to related parties due after one year 649 1,152
Deferred income taxes 3,217 3,203
------- -------

Total liabilities 20,624 18,389
------- -------

Commitments and contingencies

Shareholders' equity:
Preferred stock - -
Common stock (Note 3) 6 6
Capital in excess of par value 24,386 24,163
Retained earnings 14,813 10,732
Equity adjustment for foreign currency translation 297 99
------- -------

Total shareholders' equity 39,502 35,000
------- -------

Total liabilities and shareholders' equity $60,126 $53,389
======= =======
</TABLE>

The accompanying Notes to the Consolidated Financial
Statements are an integral part of these financial statements.

<PAGE> 4

SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
NET SALES $17,664 $17,301

Cost of sales 13,132 11,842
------- -------
GROSS PROFIT 4,532 5,459

Selling, engineering and
administrative expenses 2,864 3,018
------- -------

OPERATING INCOME 1,668 2,441

Interest expense 216 285
Miscellaneous (income) expense (Note 8) (1,586) 27
------- -------

INCOME BEFORE INCOME TAXES 3,038 2,129

Income tax provision 1,015 777
------- -------

NET INCOME $ 2,023 $ 1,352
======= =======

BASIC NET INCOME PER COMMON SHARE (NOTE 8) $ 0.32 $ 0.21

WEIGHTED AVERAGE SHARES OUTSTANDING 6,354 6,309

DILUTED NET INCOME PER COMMON SHARE (NOTE 8) $ 0.31 $ 0.21

WEIGHTED AVERAGE SHARES OUTSTANDING 6,560 6,499
</TABLE>

The accompanying Notes to the Consolidated Financial
Statements are an integral part of these financial statements.

<PAGE> 5

SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
NET SALES $54,381 $47,176

Cost of sales 39,078 32,488
------- -------

GROSS PROFIT 15,303 14,688

Selling, engineering and
administrative expenses 8,911 8,584
------- -------

OPERATING INCOME 6,392 6,104

Interest expense 707 653
Miscellaneous (income) expense (Note 8) (1,588) 41
------- -------

INCOME BEFORE INCOME TAXES 7,273 5,410

Income tax provision 2,430 1,961
------- -------

NET INCOME $ 4,843 $ 3,449
======= =======

BASIC NET INCOME PER COMMON SHARE (NOTE 8) $ 0.76 $ 0.55

WEIGHTED AVERAGE SHARES OUTSTANDING 6,340 6,303

DILUTED NET INCOME PER COMMON SHARE (NOTE 8) $ 0.74 $ 0.53

WEIGHTED AVERAGE SHARES OUTSTANDING 6,561 6,487
</TABLE>

The accompanying Notes to the Consolidated Financial
Statements are an integral part of these financial statements.

<PAGE> 6

SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
CAPITAL IN FOR FOREIGN
COMMON EXCESS OF RETAINED CURRENCY
SHARES STOCK PAR VALUE EARNINGS TRANSLATION TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,000,002 $ 2,179 $ 2,719 $17,450 $ 49 $22,397

Net proceeds from stock offering 2,300,000 2 19,250 19,252
Distributions to shareholders (10,545) (10,545)
Dividends declared (883) (883)
Net income 4,710 4,710
Merger with Sun Holdings (Note 3) (2,175) 2,123 (52)
Exercise of stock options 22,000 71 71
Adjustment for foreign
currency translation 50 50
--------- --------- ------- ------- ---- -------

Balance, December 31, 1997 6,322,002 6 24,163 10,732 99 35,000

Dividends declared (762) (762)
Net income 4,843 4,843
Exercise of stock options 38,920 223 223
Adjustment for foreign
currency translation 198 198
--------- --------- ------- ------- ---- -------

Balance, September 30, 1998 (unaudited) 6,360,922 $ 6 $24,386 $14,813 $297 $39,502
========= ========= ======= ======= ==== =======
</TABLE>

The accompanying Notes to the Consolidated Financial
Statements are an integral part of these financial statements.

<PAGE> 7

SUN HYDRAULICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED)
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,843 $ 3,449
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 3,328 2,784
(Increase) decrease in:
Accounts receivable (1,208) (2,095)
Inventories (762) (2,211)
Other current assets 31 534
Other assets 162 1,011
Increase (decrease) in:
Accounts payable 591 (654)
Accrued expenses and other liabilities 92 545
Income taxes payable, net 770 371
Other liabilities - (20)
------- --------
Net cash provided by operating activities 7,847 3,714
------- --------

Cash flows from investing activities:
Investment in Korea Fluid Power (Note 4) (771) -
Capital expenditures (6,017) (4,889)
Proceeds from dispositions of equipment 128 40
------- --------
Net cash used in investing activities (6,660) (4,849)
------- --------

Cash flows from financing activities:
Proceeds from debt 5,882 5,230
Repayment of debt (5,977) (9,857)
Repayment of notes payable to related parties (558) (483)
Proceeds from exercise of stock options 223 71
Net proceeds from stock offering (Note 3) - 19,252
Cash paid for Sun Holdings merger (Note 3) - (52)
Dividends to shareholders (728) (662)
Distributions to shareholders - (10,832)
------- --------
Net cash (used in) provided by financing activities (1,158) 2,667
------- --------

Adjustment for foreign currency translation 196 (20)
------- --------
Net increase in cash and cash equivalents 225 1,512
Cash and cash equivalents, beginning of period 1,249 1,038
------- --------
Cash and cash equivalents, end of period $ 1,474 $ 2,550
======= ========

Supplemental disclosure of cash flow information:
Cash paid for:
Interest (including amounts capitalized) $ 737 $ 901
======= ========
Income taxes $ 1,660 $ 1,590
======= ========
</TABLE>

The accompanying Notes to the Consolidated Financial
Statements are an integral part of these financial statements.

<PAGE> 8

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, 1997, filed by Sun Hydraulics Corporation
(the "Company") with the Securities and Exchange Commission on March 30, 1998.

2. BUSINESS

Sun Hydraulics Corporation, and its wholly-owned subsidiaries, 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"), located in
Sarasota, Florida, designs, manufactures and sells through independent
distributors in the United States. Sun Hydraulik Holdings Limited ("Sun
Holdings"), a wholly-owned subsidiary of the Company, was formed to provide a
holding company vehicle for the European market operations; its wholly-owned
subsidiaries are Sun Hydraulics Limited (a British corporation, "Sun Ltd.") and
Sun Hydraulik GmbH (a German corporation, "GmbH"). Sun Ltd. operates a
manufacturing and distribution facility located in Coventry, England and GmbH,
located in Erkelenz, Germany, markets the Company's products in German-speaking
European markets. Korea Fluid Power Co. Ltd. ("KFP"), a wholly-owned subsidiary
of the Company, was acquired September 24, 1998, (see Note 4). KFP, located in
Inchon, South Korea, operates a manufacturing and distribution facility.

3. REORGANIZATION AND INITIAL PUBLIC OFFERING

The consolidated financial statements of the Company consist of the
financial position and results of operations of Sun Hydraulics, Sun Holdings,
and KFP. In January 1997, Sun Hydraulics effected a 9.90372627 for 1 stock
split. All prior year share amounts reflected in the financial statements
include the effect of the stock split. Additionally, Sun Hydraulics issued
374,811 shares of common stock and made a nominal cash payment of $52 in
exchange for all of the issued and outstanding stock of Sun Holdings (the
"Reorganization"). The Reorganization was accounted for in a manner similar to
a pooling of interests except for shares held by the minority shareholders
which were accounted for at the fair market value of their proportionate share
of related assets and liabilities, which approximated book value on the date of
the transaction.

<PAGE> 9

The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission effective January 9, 1997, and issued
2,300,000 shares of common stock in an initial public offering ("IPO"), with an
initial offering price of $9.50. The IPO net proceeds of $19,252, the exchange
of shares with Sun Holdings, and the distribution of previously taxed S
Corporation retained earnings are reflected in the statement of changes in
shareholders' equity.

The $19,252 of net proceeds from the IPO were used as follows: an S
Corporation distribution of $9,446, representing 90% of the total distribution
of $10,545 was made, $7,676 was paid to extinguish debt, $1,000 was paid to
reduce the mortgage on the United States construction loan, and $1,130 was
retained as working capital.

The Company has 20,000,000 authorized shares of common stock, par value
$0.001, with 6,360,922 shares outstanding at September 30, 1998. The Company
also has 2,000,000 authorized shares of preferred stock, par value $0.001, with
no shares outstanding.

4. ACQUISITIONS

On September 24, 1998, Sun Hydraulics acquired 100% of the equity shares
of Korea Fluid Power Co. Ltd. ("KFP"). This wholly-owned subsidiary will
continue Korean operations under the name Korea Fluid Power. KFP had been the
Company's exclusive distributor in South Korea since 1988. The acquisition
price paid by the Company was $771, representing $500 over the net book value
of KFP's assets. The Company is currently undergoing an appraisal of the fair
market value of KFP's net assets. Values stated in this Form 10-Q are estimates
based on historical values, and the Company believes that the appraisal value
will not be materially different than the estimates used. Any amounts paid in
excess of the appraisal value will be capitalized as goodwill, and will be
amortized over a period of 15 years.

5. COMPREHENSIVE INCOME

Effective in the first quarter ended March 31, 1998, the Company adopted
SFAS 130, "Reporting Comprehensive Income." SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in the
Company's consolidated financial statements. Comprehensive income is defined in
SFAS 130 as the change in equity (net assets) of a business enterprise during a
period resulting from transactions and other events and circumstances from
non-owner sources. Total comprehensive income was $4,975 and $3,462 for the
nine months ended September 30, 1998 and 1997, respectively. The difference
between net income as reported and total comprehensive income is the tax
effected change in the cumulative foreign currency translation adjustment.

6. RECENT ACCOUNTING PRONOUNCEMENTS

Segment Reporting

In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 131, "Disclosure about Segments of an Enterprise and Related Information."
Under FAS 131, the basis for determining an enterprise's operating segments is
the manner in which management operates the businesses. The statement is
effective for fiscal years beginning after December 15, 1997, but does not
require compliance with interim reporting requirements until the second year

<PAGE> 10

of implementation. The standard addresses disclosure issues and therefore will
not affect the Company's financial position or results of operations.

Derivative Instruments And Hedging Activities

The FASB has issued FAS 133, "Accounting for Derivative Instruments and
Hedging Activities," which is effective for the Company's fiscal year beginning
December 31, 1999. This Statement requires that derivative instruments be
recognized as assets or liabilities and measured at fair value. The Company
does not anticipate a material effect upon adoption of this standard.

Computer Software Development Costs

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides
guidance for capitalizing and expensing the costs of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not anticipate a material impact on its results of operations from the adoption
of SOP 98-1.

7. LONG-TERM DEBT (in thousands)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
<S> <C> <C>
Lines of credit agreements $ 958 $ 666

Secured notes payable-Korea 824 -

Mortgage note payable-U.S. manifold facility ("Manatee") 4,895 4,990
Mortgage note payable-German facility 1,791 1,999
------- -------
8,468 7,655
Less amounts due within one year (1,744) (1,035)
------- -------
$ 6,724 $ 6,620
======= =======
</TABLE>

The Company has three revolving lines of credit: one in the United
States, one in England, and one in Germany. None of these arrangements contain
pre-payment penalties.

The United States had a $1,700 revolving credit agreement, secured by all
inventory and accounts receivable, bearing interest at the lender's prime rate
with a maturity date of March 1, 1997. In February 1997, the Company negotiated
a one-year, unsecured revolving credit facility to replace the $1,700 revolving
credit agreement. This credit facility provided for a maximum availability of
$10,000, payable on demand at the lender's prime rate of interest, and
contained

<PAGE> 11

no debt covenants. In February 1998, the Company renegotiated this unsecured
credit facility for an additional one year term and an interest rate equal to
the bank lender's prime rate less 1%, or LIBOR plus 1.9% for predetermined
periods of time at the Company's option. At September 30, 1998, $940 was
outstanding under this credit facility.

In England, the Company has a $1,200 line of credit, denominated in
British pounds, which bears interest at a floating rate equal to 2.25% over the
bank's base rate and is payable on demand. At September 30, 1998 there was no
balance outstanding on this credit facility.

The German line of credit is a demand note denominated in German marks
with interest payable at the lender's prime rate. At September 30, 1998, $18
was outstanding under this credit facility.

The newly acquired Korean subsidiary has various secured notes,
denominated in Korean Won, and secured by property, plant and equipment, with
interest payable at rates ranging from 6% to 15.5% and maturities ranging from
December 1998 to March 2005. At September 30, 1998, $824 was outstanding under
these credit facilities.

A 10-year mortgage loan of $6,187 was obtained at a fixed interest rate
of 8.25% for construction of the Manatee facility. Terms on the construction
note were interest-only on the balance drawn down through the completion of
construction and then conversion to a 10-year mortgage note with a 15-year
amortization schedule. The Company applied $1,000 of the IPO proceeds toward
repayment of this note. In March 1998, this mortgage note was renegotiated to
an interest rate of 7.875%. Terms are monthly principal and interest payments
of $43 for 8.25 years with remaining principal due July 1, 2006. At September
30, 1998, $4,895 was outstanding under this credit facility.

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 September 30,
1998, $1,791 was outstanding under this credit facility.

8. INSURANCE SETTLEMENT

During the third quarter of 1998, the Company settled a business
interruption insurance claim related to a fire that occurred during
construction of the Company's facility in Manatee County in August of 1996. The
Company received a settlement of $1,821, or $1,661 net of expenses. Net income
without this settlement, for the three months ended September 30, 1998, would
have been $897. Net income without this settlement, for the nine months ended
September 30, 1998, would have been $3,717.

<PAGE> 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.

Orders in the third quarter of 1998, were $16.7 million, a decrease of
$0.7 million, or 4.0%, from the third quarter of 1997, and a $0.5 million
decrease, or 3.0%, from the second quarter of 1998. The decrease in orders from
the second quarter of 1998 was due largely to a general weakening in the
European market. Orders for North America and Asia were level with the second
quarter of 1998, with a decrease in manifold orders offset by an increase in
cartridge valve orders. The Company has seen a general slowdown in most
hydraulic markets around the world and continues to monitor this situation.
National Fluid Power Association data indicates that overall hydraulic orders
in North America are down 0.5% as of September 30, 1998, compared to December
31, 1997.

Net sales for the third quarter of 1998 were approximately the same as
the second quarter of 1998. European and Asian sales leveled off and a
continued decrease in United States manifold sales was offset by an increase in
United States cartridge valve sales. Weaker United States manifold sales
reflect the general economic slowdown in the hydraulics markets. Due to the
higher level of earnings contribution typically provided by the manifold
products, earnings were negatively impacted by the lower manifold sales volume.

Production of cartridge valves in the United States remained at previous
quarter levels despite a redeployment of manifold personnel to the cartridge
valve operation. Cartridge valve prime costs increased due to excessive scrap,
rework and parts expediting costs. Also, material costs continue to be
adversely affected by engineering design changes, supplier price increases and
rush procurements. The Company has allocated additional management resources to
the United States manufacturing operational area to assist in addressing
cartridge valve production activities. At the same time, the Company has
assembled a multi-functional team to complete a comprehensive review of
procurement processes and suppliers to address the material cost issues.

On September 24, 1998, the Company acquired 100% of the equity shares of
Korea Fluid Power Co. Ltd. ("KFP"), for $0.8 million. KFP had been the
Company's exclusive Korean distributor since 1988 and has developed a high
level of technical competence with the Company's products. Additionally, for
many years KFP has been manufacturing standard and custom manifolds that
incorporate the Company's screw-in cartridge valves for sale to the Korean
market. With this acquisition, the Company has an established base for
designing and manufacturing aluminum manifolds for sale to Pacific Rim markets
and has added an experienced and professional management and sales team.

<PAGE> 13

In August 1998, the Company settled a business interruption insurance
claim related to a fire that occurred during construction of the Company's
facility in Manatee County in August 1996. The fire delayed the opening of this
facility, which, in turn, delayed the rearrangement of other production
processes, adversely affecting the Company's ability to service its customers.
The settlement amount of $1.8 million, or $1.7 million net of expenses, is
recorded as miscellaneous income. Net income for the three months ended
September 30, 1998, would have been $0.9 million without this settlement, or
$0.15 and $0.14 basic and diluted earnings per share, respectively.

The completion of the move of the equipment for the cellular production
of high volume cartridge valves to the Company's Manatee facility, originally
planned for the fourth quarter of 1998, has been postponed to the first half of
1999. Additional cellular machinery and equipment is being added, which is
expected to increase high volume cartridge valve capacity. To supplement the
increased production capacity, a new heat treat facility will be constructed
before the end of the fourth quarter of 1999. The heat treat operation will be
installed in an addition that will be built at the Company's Manatee facility.

The relocation of high volume cartridge valve production to a separate
facility will create space in the Sarasota facility that will increase
production capacity for new products as well as the Company's broad range of
complementary products, which are produced in smaller quantities. In
conjunction with the move of high volume cartridge production to the Manatee
facility, plans are underway to construct a slightly smaller, new facility that
will house manifold production. The new facility will be located in close
proximity to the current Sarasota operations. The Company originally had
anticipated the completion of this facility by the end of 1999 but has
postponed commencement of construction pending a review of the outlook for the
economy.

The Company is in the process of converting its information system for
its Sarasota cartridge valve operations. A vendor for the new hardware and
software has been selected and data conversion, testing, and personnel training
are well underway. The Company expects to complete this conversion during the
first half of 1999. The Company is also completing the implementation of a new
information system for its Coventry, England, operation. As with any system
conversion, there can be no assurances that the timing of the conversions will
be met precisely and that the conversion process will not adversely impact
business operating results.

The production of manifolds for prototype and quick delivery
requirements, together with some assembly and conversion of cartridges, is
scheduled to begin in the German plant during the fourth quarter of 1998. Local
production in the German market is expected to provide significantly improved
market support and timely product deliveries.

Expansion plans for the production facility in Coventry, England are in
process and construction is anticipated to begin in the first quarter of 1999.
An additional 12,300 square feet will be added to the Coventry facility on
property currently owned by the Company. The additional space will be used to
increase further manufacturing and assembly capacity for the Company's products
sold in the European market.

<PAGE> 14

Sales of the newest addition to the cartridge valve product line, the
Series "0" products, have been limited as a result of restrictions on
production capacity. The Company will expand its marketing and sales activities
for these products as cartridge valve capacity becomes available.

The Company has finalized the design of an electrically actuated
cartridge valve product line (solenoid valves), and beta tests are underway at
various customer sites. Production is scheduled to begin in the first quarter
of 1999.

COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

Net sales increased 2.0%, or $0.4 million, to 17.7 million in the
three-month period ended September 30, 1998, compared to $17.3 million in the
three-month period ended September 30, 1997. Domestic net sales increased 3.4%,
or $0.4 million, to $11.9 million in the three-month period ended September 30,
1998. International net sales decreased 0.5% to $5.8 million. European net
sales increased 6.9%, Canadian net sales decreased 11.4%, and Asian net sales
decreased 23.2%.

Gross profit decreased 17.0%, or $0.9 million, to $4.5 million in the
three-month period ended September 30, 1998, compared to $5.5 million in the
three-month period ended September 30, 1997. This decrease was due primarily to
the lower net sales of manifold products in the United States, and a decline of
productivity and increased costs of purchased parts in the United States
cartridge operation. The cost of subcontracted parts for cartridge valves has
been rising steadily due to engineering design changes, quality standard
increases and an increase in outsourcing of parts and operations. Gross profit
as a percentage of net sales was 25.7% in the three-month period ended
September 30, 1998, compared to 31.6% in the three-month period ended September
30, 1997.

Selling, engineering and administrative expenses decreased 5.1%, or $0.2
million, to $2.9 million in the three-month period ended September 30, 1998,
compared to $3.0 million in the three-month period ended September 30, 1997.
Selling, engineering and administrative expenses as a percentage of net sales
decreased to 16.2% from 17.4% for the same quarter last year. This decrease was
primarily due to reduced spending in marketing expenses such as trade shows and
catalogues, offset by increased spending for support of new business systems in
the United Kingdom.

Interest expense was $0.2 million for the three-month period ended
September 30, 1998, compared to $0.3 million in the three-month period ended
September 30, 1997. Miscellaneous income for the three-month period ended
September 30, 1998, consisted primarily of the receipt of a business
interruption insurance claim of $1.8 million, or $1.7 million net of expenses.
(See Note 8)

The provision for income taxes in the three-month period ended September
30, 1998, was 33.4% of pretax income compared to 36.5% of pretax income in the
three-month period ended September 30, 1997. This decrease in rate was due
primarily to the change in mix of pretax income among the Company's four
operating units in Germany, Korea, the United Kingdom and the United States.
Additionally, tax savings were realized from the Sun Hydraulics Foreign Sales
Corporation in the United States.

<PAGE> 15

Net income, excluding the insurance settlement for the three-month period
ended September 30, 1998, decreased to $0.9 million, representing 5.2% of net
sales, compared to $1.4 million, representing 7.8% of net sales for the
three-month period ended September 30, 1997. Net income, including the
insurance settlement, represented 11.5% of net sales.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997

Net sales increased 15.3%, or $7.2 million, to $54.4 million in the
nine-month period ended September 30, 1998, compared to $47.2 million in the
nine-month period ended September 30, 1997. Domestic net sales increased 20.3%,
or $6.2 million, to $36.7 million in the nine-month period ended September 30,
1998. This increase reflected strength in both the mobile and industrial
equipment sectors of the fluid power industry and the Company's increased
production capacity versus the first half of 1997. International net sales
increased 6.1%, or $1.0 million, to $17.7 million in the nine-month period
ended September 30, 1998. European net sales increased 16.9% and sales to Asia
decreased 30.0%.

Gross profit increased 4.2%, or $0.6 million, to $15.3 million in the
nine-month period ended September 30, 1998, compared to $14.7 million in the
nine-month period ended September 30, 1997. Gross profit as a percentage of net
sales was 28.1% in the nine-month period ended September 30, 1998, compared to
31.1% in the nine-month period ended September 30, 1997. The gross profit
percentage decrease was due primarily to the increased material costs resulting
from product mix, product design improvements, parts expediting and
outsourcing.

Selling, engineering and administrative expenses increased 3.8%, or $0.3
million, to $8.9 million in the nine-month period ended September 30, 1998,
compared to $8.6 million in the nine-month period ended September 30, 1997.
This increase was due to additional personnel and expenses required in the
manifold plant in the United States, travel and trade show costs in the United
States, and new system implementation costs in the United Kingdom. Selling,
engineering and administrative expenses as a percentage of net sales decreased
to 16.4% for the nine-months ended September 30, 1998, from 18.2% for the
nine-months ended September 30, 1997.

Interest expense was $0.7 million for the nine-month period ended
September 30, 1998, approximately the same as the nine-month period ended
September 30, 1997. Miscellaneous income for the period ended September 30,
1998, consisted primarily of the settlement of a business interruption
insurance claim in the United States of $1.8 million, or $1.7 million net of
expenses. (See Note 8)

The provision for income taxes in the nine-month period ended September
30, 1998, was 33.4% of pretax income compared to 36.2% of pretax income in the
nine-month period ended September 30, 1997. This decrease in rate was due
primarily to the change in mix of pretax income among the Company's four
operating units in Germany, Korea, the United Kingdom and the United States.
Additionally, tax savings were realized from the Sun Hydraulics Foreign Sales
Corporation in the United States.

<PAGE> 16

Net income for the nine-month period ended September 30, 1998, increased
to $4.8 million representing 8.9% of net sales, compared to $3.4 million,
representing 7.3% of net sales for the nine month period ended September 30,
1997. Net income less the settlement of the insurance claim increased to $3.7
million, representing 6.9% of net sales for the nine month period ended
September 30, 1998.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company's primary source of capital has been cash
generated from operations, although short-term fluctuations in working capital
requirements have been met through borrowings under revolving lines of credit.
The Company's principal uses of cash have been to pay operating expenses, make
capital expenditures, pay dividends to shareholders and service debt.

At September 30, 1998, the Company had working capital of $6.4 million.
Cash flow from operations for the nine months ended September 30, 1998, was
$7.8 million compared to $3.7 million for the nine months ended September 30,
1997. Approximately, $1.4 million was due to the increase in net income, $0.5
million was due to depreciation and approximately $2.2 was due to a lower
percentage increase in working capital. Net cash used in investing activities
for the nine months ended September 30, 1998, was $6.7 million compared to $4.8
million for the nine months ended September 30, 1997. Approximately, $0.8
million of the $1.8 million increase was related to the acquisition of Korea
Fluid Power Co. Ltd., and the remainder was due to increased investments in
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.

In February 1998, the Company renegotiated its one-year, unsecured
revolving credit facility in the United States. The credit facility provides
for a maximum availability of $10.0 million, payable on demand and does not
contain any debt covenants. The interest rate is 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 September 30, 1998, there was $0.9 million outstanding
under this credit facility.

A 10-year mortgage loan of $6.2 million was obtained by the Company in
May 1996, at a fixed interest rate of 8.25% for construction of the new
manifold facility in Sarasota, Florida. Terms on the new mortgage note were
interest-only on the balance drawn down through the completion of construction
and then conversion to a 10-year note with a 15-year amortization schedule. In
March 1998, this mortgage note was renegotiated to an interest rate of 7.875%.
Terms are monthly principal and interest payments for 8.25 years with remaining
principal due July 1, 2006. At September 30, 1998, $4.9 million was outstanding
on this facility.

The Company has notes payable to former shareholders that bear interest
at a weighted rate of 15%, and have terms ranging from three to five 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 September 30, 1998, $1.4 million was
outstanding under these notes.

<PAGE> 17

In 1996, the Company was awarded a grant of $0.4 million by the German
government, which helped to offset the cost of the German facility. This grant
requires that the German operation have employed 26 people by September 30,
1998. The Company anticipates that this headcount requirement will be met in
the first half of 1999, and the Company believes that an extension may be
available from the German authorities. If the Company fails to obtain an
extension of time to meet the terms of the grant, then the $0.4 million will be
repaid. This amount has been recorded as a deferred grant. Therefore, the
repayment of the $0.4 million would affect only cash and would have no effect
on net income.

In Korea, the Company has various secured notes, denominated in Korean
Won, and secured by property, plant and equipment, with interest payable at
rates ranging from 6% to 15.5% and maturities ranging from December 1998 to
March 2005. At September 30, 1998, $0.8 million was outstanding under these
credit facilities.

In August 1998, the Company settled a business interruption insurance
claim of $1.8 million with its insurance carrier. The claim was related to a
fire in the manifold plant in the United States which occurred while the plant
was under construction. The Company believes that this fire delayed the opening
of the new plant which, in turn, delayed the rearrangement of the cartridge
operation and the creation of the cellular production for high volume models.
Expenses of $0.1 million, and a tax effect of $0.6 million were recorded in the
third quarter of 1998 in the Company's financial statements related to this
claim.

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 March 31, June 30, and September 30, 1998, which were
paid on April 15, and July 15, and October 15, 1998, respectively.

YEAR 2000 READINESS DISCLOSURE

Management continues to evaluate the issues associated with the Year
2000. In general, these issues arise from the fact that many existing computer
programs only use the last two digits to refer to a year. Accordingly, many of
these computer programs will not properly recognize a year that begins with
"20" instead of the familiar "19." If not corrected, these computer
applications could fail or create erroneous results.

The Company currently is assessing the extent of its Year 2000 problem by
(i) conducting an inventory of its systems, including hardware, software and
embedded systems (such as the Company's CNC equipment), (ii) identifying
critical applications, (iii) gathering internal source codes, and (iv)
surveying the Company's material suppliers, distributors, and customers to
determine their respective Year 2000 exposure.

The assessment phase will be followed by (i) a testing phase, during
which all critical applications will be tested for Year 2000 readiness, (ii) a
renovation phase, during which faulty systems will be corrected, replaced or
retired, and (iii) a validation phase, during which upgraded systems will be
re-tested. While the assessment phase remains underway in all locations, the
Company has already commenced the replacement of the computer systems in two of
its five

<PAGE> 18

locations (the United States cartridge operation and the United Kingdom
operation) with "enterprise manufacturing systems" that, according to
representations made by the systems' manufacturers, are currently Year 2000
ready.

The Company expects all phases of its Year 2000 readiness plan to be
completed by the end of the fourth quarter of 1998. There can, however, be no
assurance that these deadlines will be met or precisely when the Company will
be Year 2000 ready. The Company defines "Year 2000 ready" to mean that neither
the performance nor functionality of any of its critical systems, including
both information technology and non-information technology systems, will be
materially affected by dates prior to, during and after the year 2000.

While management believes the Company could operate in a manual
environment for a short period of time, the Company cannot currently estimate
with any certainty the impact a failure to be Year 2000 ready would have on the
Company's business and results of operations, nor has the Company developed a
complete contingency plan to deal with this possibility, although it does
anticipate establishing such a plan in the future. The Company does not expect
the costs of the Company's readiness plan, including the cost of renovating any
non-compliant systems, to significantly impact its results of operations. As
with any new system implementation, however, there can be no assurance that the
conversion will not significantly impact operations. 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.

SEASONALITY AND INFLATION

The Company does not believe that inflation had a material effect on its
operations for the nine months ended September 30, 1998 and September 30, 1997.
There can be no assurance, however, that the Company's business will not be
affected by inflation in the future.

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.

<PAGE> 19

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, and "Business" in the Company's Form 10-K for the year ended December
31, 1997. 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.

<PAGE> 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.
None.

Item 5. Other Information.

Shareholder Proposals for Presentation at the 1999 Annual Meeting of
Shareholders

As stated under the caption "Shareholder Proposals for Presentation at
the 1999 Annual Meeting" in the Company's proxy statement dated April 24, 1998,
the Board of Directors of the Company has requested that any shareholder
proposals intended for presentation at the 1999 Annual Meeting be submitted in
writing to Gregory C. Yadley, Secretary, no later than November 1, 1998, for
consideration for inclusion in the Company's proxy materials for such meeting.

Further, the members of the Company's proxy committee will have
discretionary voting authority with respect to all shares represented by
proxies held by them at the Annual Meeting for any matters raised at the
meeting about which the Company did not receive notice prior to March 8, 1999.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

<PAGE> 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).

4.1 Revolving Credit Agreement, dated March 9, 1992, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida/Sarasota, N.A.
(previously filed as Exhibit 4.1 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).

4.2 Modification Agreement, dated March 25, 1993, amending Revolving Credit
Agreement dated March 9, 1992, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.2
in the Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183) and incorporated herein by reference).

4.3 Second Modification to Revolving Credit Agreement, dated May __, 1995,
between Sun Hydraulics Corporation and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.3 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).

4.4 Revolving Line of Credit Renewal Note, dated May __, 1995, in the
amount of $1,700,000.00 given by Sun Hydraulics Corporation to Northern
Trust Bank of Florida, N.A. (previously filed as Exhibit 4.4 in the
Company's Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183) and incorporated herein by reference).

4.5 Mortgage and Security Agreement, dated January 9, 1992, between
Suninco, Inc., Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.5 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).

<PAGE> 22

4.6 Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.6 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).

4.7 Security Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.7 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).

4.8 Modification and Additional Advance Agreement, dated March 29, 1996,
between Suninco, Inc. and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.8 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).

4.9 Consolidated Note, dated March 29, 1996, in the amount of
$2,475,000.00, given by Suninco, Inc. to Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.9 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183) and incorporated herein by reference).

4.10 Loan Agreement, dated May 20, 1996, between Sun Hydraulics Corporation
and Northern Trust Bank of Florida, N.A. (previously filed as Exhibit
4.10 in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).

4.11 Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A. (previously filed
as Exhibit 4.11 in the Company's Registration Statement on Form S-1
filed on October 15, 1996 (File No. 333-14183) and incorporated herein
by reference).

4.12 Consolidated Note, dated May 20, 1996, in the amount of $3,063,157.00,
given by Sun Hydraulics Corporation to Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.12 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No. 333-14183)
and incorporated herein by reference).

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).

<PAGE> 23

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).

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).

<PAGE> 24

4.22 Renewal Master Note, dated February 3, 1998, in the amount of
$10,000,000.00, made by the Company to evidence a line of credit
granted to the Company by Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.22 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and incorporated herein
by reference).

4.23 Modification Agreement, dated March 1, 1998, between the Company and
Northern Trust Bank of Florida, N.A. (previously filed as Exhibit 4.23
to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 and incorporated herein by reference).

4.24 Modification Note, dated March 1, 1998, in the amount of $4,965,524.51,
between the Company and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.24 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and incorporated herein
by reference).

10.1 Form of Distributor Agreement (Domestic) (previously filed as Exhibit
10.1 in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).

10.2 Form of Distributor Agreement (International) (previously filed as
Exhibit 10.2 in the Company's Registration Statement on Form S-1 filed
on October 15, 1996 (File No. 333-14183) and incorporated herein by
reference).

10.3+ 1996 Sun Hydraulics Corporation Stock Option Plan (previously filed as
Exhibit 10.3 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on December 19, 1996 (File No.
333-14183) and incorporated herein by reference).

10.4+ Amendment No. 1 to 1996 Stock Option Plan (previously filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 and incorporated herein by reference).

10.5+ Form of Indemnification Agreement (previously filed as Exhibit 10.4 in
the Pre-Effective Amendment No. 4 to the Company's Registration
Statement on Form S-1 filed on December 19, 1996 (File No. 333-14183)
and incorporated herein by reference).

27.1 Financial Data Schedule for quarter ended September 30, 1998 (for SEC
purposes only)

+ Executive management contract or compensatory plan or arrangement.

<PAGE> 25

(b) Reports on Form 8-K.

None

<PAGE> 26

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 12, 1998.

SUN HYDRAULICS CORPORATION

By /s/ Richard J. Dobbyn
: ----------------------------------
Richard J. Dobbyn
Chief Financial Officer (Principal
Financial and Accounting Officer)

<PAGE> 27

EXHIBIT INDEX
EXHIBIT DESCRIPTION
EXHIBIT
NUMBER
- -------

4.1 Revolving Credit Agreement, dated March 9, 1992, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida/Sarasota, N.A.
(previously filed as Exhibit 4.1 in the Company's Registration Statement
on Form S-1 filed on October 15, 1996 (File No. 333-14183) and
incorporated herein by reference).

<PAGE> 28

<PAGE> 29

<PAGE> 30

27.1 Financial Data Schedule for quarter ended September 30, 1998 (for SEC
purposes only).

+ Executive management contract or compensatory plan or arrangement.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF THE REGISTRANT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,474
<SECURITIES> 0
<RECEIVABLES> 6,109
<ALLOWANCES> 49
<INVENTORY> 7,990
<CURRENT-ASSETS> 16,480
<PP&E> 61,444
<DEPRECIATION> 18,487
<TOTAL-ASSETS> 60,126
<CURRENT-LIABILITIES> 10,034
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 39,496
<TOTAL-LIABILITY-AND-EQUITY> 60,126
<SALES> 54,381
<TOTAL-REVENUES> 54,381
<CGS> 39,078
<TOTAL-COSTS> 39,078
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 707
<INCOME-PRETAX> 7,273
<INCOME-TAX> 2,430
<INCOME-CONTINUING> 4,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,843
<EPS-PRIMARY> .76
<EPS-DILUTED> .74

</TABLE>