<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended July 4, 1999
OR
( ) TRANSITION REPORT PRUSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________ to
---------------
Commission File Number 333-48299
SAUER INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3482074
- ------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2800 East 13th Street, Ames, Iowa 50010-8600
- ------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (515) 239-6000
----------------------
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
---- ---
As of August 11, 1999, 27,409,550 shares of Sauer Inc. common stock, $.01 par
value, were outstanding.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income:
Thirteen Weeks and Twenty-Six Weeks Ended June 28, 1998
and July 4, 1999 3
Consolidated Balance Sheets:
As of December 31, 1998 and July 4, 1999 4
Consolidated Statements of Cash Flows:
Twenty-Six Weeks Ended June 28, 1998 and July 4, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 17
</TABLE>
<PAGE>
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
---------------------------- ----------------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $160,410 $147,964 $313,286 $301,061
------------- -------------- ---------- -----------
COSTS AND EXPENSES:
Cost of sales 118,385 110,455 236,522 224,537
Selling, general and administrative 13,687 14,449 27,087 29,133
Research and development 5,479 5,426 11,229 11,528
------------- -------------- ------------- -----------
Total costs and expenses 137,551 130,330 274,838 265,198
------------- -------------- ------------- -----------
Operating income 22,859 17,634 38,448 35,863
------------- -------------- ------------- -----------
NONOPERATING INCOME (EXPENSES):
Interest expense, net (2,420) (2,281) (4,639) (4,768)
Royalty income 203 197 453 372
Other, net (261) (396) (320) (513)
------------- -------------- ------------- -----------
Nonoperating expenses, net (2,478) (2,480) (4,506) (4,909)
------------- -------------- ------------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 20,381 15,154 33,942 30,954
PROVISION FOR INCOME TAXES (6,152) (4,670) (10,083) (9,312)
------------- ----------- ------------- -----------
INCOME BEFORE MINORITY INTEREST 14,229 10,484 23,859 21,642
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES (3,605) (2,688) (6,763) (5,782)
------------ ------------ ---------- ----------
Net income $ 10,624 $ 7,796 $ 17,096 $ 15,860
------------ ------------ ---------- ----------
------------ ------------ ---------- ----------
Basic and diluted net income per
common share outstanding $ 0.41 $ 0.28 $ 0.68 $ 0.58
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Dividends declared per common share $ 0.07 $ 0.07 $ 0.15 $ 0.14
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
December 31, July 4,
ASSETS 1998 1999
---------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,891 $ 12,697
Accounts receivable, less allowances 73,661 92,963
Inventories 89,195 67,294
Other current assets 9,984 10,575
---------------- --------------
Total current assets 181,731 183,529
---------------- --------------
---------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 262,527 263,788
---------------- --------------
OTHER ASSETS:
Intangible assets, net 3,769 2,417
Deferred income taxes 2,328 1,495
Other 9,416 7,655
---------------- --------------
Total other assets 15,513 11,567
---------------- --------------
$459,771 $458,884
---------------- --------------
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts $ 41,767 $ 36,749
Long-term debt due within one year 2,398 1,633
Accounts payable 38,271 39,920
Accrued salaries and wages 7,683 9,924
Accrued warranty 8,601 8,413
Other accrued liabilities 12,884 23,447
---------------- --------------
Total current liabilities 111,604 120,086
---------------- --------------
---------------- --------------
LONG-TERM DEBT 106,862 101,701
---------------- --------------
OTHER LIABILITIES:
Long-term pension liability 33,044 31,054
Postretirement benefits other than pensions 13,608 13,608
Deferred income taxes 4,746 4,462
Other 5,419 2,586
---------------- --------------
Total other liabilities 56,817 51,710
---------------- --------------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES 35,584 35,927
---------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, authorized 45,000,000
shares in 1998 and 1999; issued 28,072,050
in 1998 and 28,084,550 in 1999; outstanding
27,397,050 in 1998 and 27,409,550 in 1999 281 281
Additional paid-in capital 120,092 120,217
Retained earnings 31,416 43,439
Accumulated other comprehensive income 1,813 (9,822)
Unamortized restricted stock compensation (1,998) (1,955)
Common stock in treasury (at cost),
675,000 shares in 1998 and 1999 (2,700) (2,700)
---------------- --------------
Total stockholders' equity 148,904 149,460
---------------- --------------
$459,771 $458,884
---------------- --------------
---------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
---------------------------------------
June 28, July 4,
1998 1999
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $17,096 $15,860
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 14,668 17,850
Minority interest in income of
consolidated companies 6,763 5,782
(Increase) decrease in working capital -
Accounts receivable, net (15,301) (25,299)
Inventories 6,266 15,540
Accounts payable 2,060 5,368
Accrued liabilities 10,637 13,348
Other 241 606
---------- ---------
Net cash provided by operating activities 42,430 49,055
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (53,438) (34,469)
Proceeds from sales of property, plant and equipment - 296
------------ -----------
Net cash used in investing activities (53,438) (34,173)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments)
on notes payable and bank overdrafts 7,515 (437)
Net repayments of long-term debt (21,271) (557)
Cash dividends (3,856) (3,837)
Net proceeds from initial public offering 48,100 -
Distributions to minority interest partners (6,416) (5,439)
------------- ------------
Net cash provided by (used in) financing activities 24,072 10,270)
------------- ------------
EFFECT OF EXCHANGE RATE CHANGES (714) (806)
------------- ------------
CASH AND CASH EQUIVALENTS:
Net increase during the period 12,350 3,806
Beginning balance 7,363 8,891
------------- ------------
Ending balance $19,713 $12,697
------------- ------------
------------- ------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $5,413 $3,336
Income taxes paid $5,222 $3,357
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES: During the twenty-six week period
ending June 28, 1998, the Company purchased the
real estate and building of its main facility in
Germany for $23,470. In conjunction with the
acquisition, assets were acquired at fair value
of $23,470, cash was paid of $15,680 and liabilities
of $7,790 were assumed.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
<PAGE>
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1) BASIS OF PRESENTATION AND USE OF ESTIMATES -
The consolidated financial statements of Sauer Inc. and subsidiaries
(the "Company") included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the financial statements, prepared
in accordance with generally accepted accounting principles, have
been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make the information presented not misleading. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those
estimates. In the opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature, necessary to
present fairly the Company's financial position as of December 31,
1998 and July 4, 1999, and results of operations for the thirteen
weeks and twenty-six weeks ended June 28, 1998, and July 4, 1999,
and cash flows for the twenty-six weeks ended June 28, 1998, and
July 4, 1999. These financial statements and notes are to be read in
conjunction with the financial statements and notes thereto included
in the Company's latest annual report on Form 10-K as filed with the
Securities and Exchange Commission dated March 31, 1999.
2) RECLASSIFICATION -
Certain previously reported amounts have been reclassified to
conform with the current period presentation.
3) COMPREHENSIVE INCOME -
Total comprehensive income, consisting of net income adjusted for
foreign currency translation, is as follows:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- -----------------------------
June 28, July 4, June 28, July 4,
1998 1999 1998 1999
-------------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Net income $10,624 $7,796 $17,096 $15,860
Translation adjustment (646) (5,293) (709) (11,635)
-------------- ------------ ------------- --------------
Comprehensive income $9,978 $2,503 $16,387 $4,225
-------------- ------------ ------------- --------------
-------------- ------------ ------------- --------------
</TABLE>
4) BASIC AND DILUTED PER SHARE DATA -
Basic net income per common share data has been computed by dividing
net income by the weighted average number of shares of common stock
outstanding for the period less those restricted stock shares issued in
connection with the Company's long-term incentive plan and subject to
risk of forfeiture. The dilutive effect of the restricted stock shares
is calculated using the treasury stock method which applies the
unamortized compensation expense to repurchase shares of common stock.
The reconciliation of basic net income per common share to diluted net
income per common share is shown in the following table for the
thirteen week and twenty-six week periods ending June 28, 1998, and
July 4, 1999:
<PAGE>
<TABLE>
<CAPTION>
JUNE 28, 1998 JULY 4, 1999
------------- ------------
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ --- ------------- ------ ---
<S> <C> <C> <C> <C> <C> <C>
THIRTEEN WEEKS:
- ---------------
Basic net income $10,624 25,807,418 $.41 $7,796 27,225,247 $.28
Effect of dilutive
securities:
Restricted stock - 8,077 - - 446 -
--------------- ------------------ ------- --------------- ------------------ --------
Diluted net income $10,624 25,815,495 $.41 $7,796 27,225,693 $.28
--------------- ------------------ ------- --------------- ------------------ --------
--------------- ------------------ ------- --------------- ------------------ --------
TWENTY-SIX WEEKS:
- -----------------
Basic net income $17,096 25,029,469 $.68 $15,860 27,225,122 $.58
Effect of dilutive
securities:
Restricted stock - 4,107 - - 219 -
--------------- ------------------ ------- --------------- ------------------ --------
Diluted net income $17,096 25,033,576 $.68 $15,860 27,225,341 $.58
--------------- ------------------ ------- --------------- ------------------ --------
--------------- ------------------ ------- --------------- ------------------ --------
</TABLE>
5) SEGMENT AND GEOGRAPHIC INFORMATION -
The Company's two reportable segments are defined by geographic region
due to the difference in economic characteristics in which these
segments operate. The activities of each reportable segment consist of
the design, manufacture and sale of hydraulic systems and other related
components.
The following table presents the significant items by segment for the
results of operations for each of the thirteen and twenty-six week
periods ending June 28, 1998, and July 4, 1999, and balance sheet data
as of December 31, 1998 and July 4, 1999, respectively:
<TABLE>
<CAPTION>
THIRTEEN WEEKS
ENDED: NORTH ALL
JUNE 28, 1998 AMERICA EUROPE OTHER ELIMINATIONS TOTAL
--------------- --------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Trade sales $ 103,368 $ 56,701 $ 341 $ - $160,410
Intersegment sales 9,261 9,745 224 (19,230) (1) -
Net income (loss) 8,691 4,053 (829) (1,291) (2) 10,624
Total assets 227,920 220,172 198,116 (186,437) (3) 459,771
JULY 4, 1999
------------
Trade sales $ 94,381 $ 51,677 $ 1,906 $ - $147,964
Intersegment sales 9,633 8,609 84 (18,326) (1) -
Net income (loss) 6,597 1,719 503 (1,023) (2) 7,796
Total assets 252,153 203,429 191,831 (188,529) (3) 458,884
</TABLE>
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS
ENDED: NORTH ALL
JUNE 28, 1998 AMERICA EUROPE OTHER ELIMINATIONS TOTAL
------------- --------- -------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Trade sales $ 200,886 $111,764 $ 636 $ - $313,286
Intersegment sales 18,583 20,528 389 (39,500) (1) -
Net income (loss) 15,158 5,705 (1,326) (2,441) (2) 17,096
Total assets 227,920 220,172 198,116 (186,437) (3) 459,771
JULY 4, 1999
------------
Trade sales $192,483 $ 105,381 $ 3,197 $ - $301,061
Intersegment sales 20,222 17,467 130 (37,819) (1) -
Net income (loss) 14,396 2,784 747 (2,067) (2) 15,860
Total assets 252,153 203,429 191,831 (188,529) (3) 458,884
</TABLE>
<PAGE>
Reconciliations:
(1) Elimination of intersegment sales.
(2) Net income eliminations - minority interest in German Operating Company.
(3) Total assets eliminations:
<TABLE>
<CAPTION>
1998 1999
--------- ----------
<S> <C> <C>
Investment in subsidiaries $(144,391) $(144,926)
Intersegment receivables (40,244) (42,279)
Intersegment profit in inventory and other (1,802) (1,324)
---------- ----------
Total assets eliminations $(186,437) $(188,529)
---------- ----------
---------- ----------
</TABLE>
A summary of the Company's net sales by product line is presented below:
<TABLE>
<CAPTION>
Net Sales
-----------------------------------------------------------
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------------- ---------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Hydrostatic transmissions $ 128,210 $ 121,320 $ 249,023 $ 246,770
Open circuit gear pumps and motors and piston pumps 21,235 16,882 42,446 34,820
Electrohydraulics and others 10,965 9,762 21,817 19,471
------------ ------------ ------------ ------------
Total $ 160,410 $ 147,964 $ 313,286 $ 301,061
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
A summary of the Company's net sales and long-lived assets by geographic area is
presented below:
<TABLE>
<CAPTION>
NET SALES (1)
-------------------- ---------------------- LONG-LIVED ASSETS
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED ASSETS (2)
-------------------- ---------------------- ----------
1998 1999 1998 1999 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $ 97,538 $ 86,744 $186,863 $177,770 $141,021 $153,043
Germany 11,502 12,462 26,071 26,389 46,930 48,137
United Kingdom 10,061 7,719 19,753 15,510 21,279 23,193
Slovakia 1,169 213 1,557 402 39,856 34,063
Other countries 40,140 40,826 79,042 80,990 17,210 15,424
-------- -------- -------- -------- -------- --------
Total $160,410 $147,964 $313,286 $301,061 $266,296 $273,860
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
(1) Net sales are attributed to countries based on location of customer.
(2) Long-lived assets include property, plant and equipment net of accumulated
depreciation, intangible assets net of accumulated amortization and certain
other long-term assets.
No single customer accounted for 10% or more of total consolidated
sales in any period presented.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT - THE INFORMATION DISCUSSED BELOW IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTAINS "FORWARD-LOOKING STATEMENTS," STATEMENTS REGARDING MATTERS THAT ARE NOT
HISTORICAL FACTS, BUT RATHER ARE SUBJECT TO RISKS AND UNCERTAINTIES. THESE
STATEMENTS ARE BASED ON CURRENT FINANCIAL AND ECONOMIC CONDITIONS AND RELY
HEAVILY ON THE COMPANY'S INTERPRETATIONS OF WHAT IT CONSIDERS KEY ECONOMIC
ASSUMPTIONS. ACTUAL FUTURE RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY
OF FACTORS. THESE FACTORS, SOME OF WHICH ARE IDENTIFIED IN THE DISCUSSION
ACCOMPANYING SUCH FORWARD-LOOKING STATEMENTS, INCLUDE, BUT ARE NOT LIMITED TO,
GENERAL ECONOMIC CONDITIONS, FOREIGN CURRENCY MOVEMENTS, PRICING AND PRODUCT
INITIATIVES AND OTHER ACTIONS TAKEN BY COMPETITORS, ABILITY OF SUPPLIERS TO
PROVIDE MATERIALS AS NEEDED, LABOR RELATIONS, THE COMPANY'S EXECUTION OF
INTERNAL PERFORMANCE PLANS, AND OTHER CHANGES TO BUSINESS CONDITIONS.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 4, 1999 COMPARED TO THIRTEEN WEEKS ENDED JUNE 28, 1998
NET SALES - Net sales for second quarter 1999 of $148.0 million decreased by
$12.4 million, or 7.7% from second quarter 1998 net sales of $160.4 million. Net
sales decreased by 5.9% excluding the impact of currency fluctuation. Second
quarter 1999 sales for the specialty vehicle market were up 15.9%, road building
was level with 1998 and construction increased 9.3% over second quarter 1998.
Both turf care and agricultural sales were down 19.0% from second quarter 1998.
North American net sales for second quarter 1999 of $94.4 million decreased by
$9.0 million, or 8.7% from second quarter 1998 net sales of $103.4 million. The
Company's Sullivan, Illinois, operations experienced a decline of $6.0 million
in sales to the turf care market in the second quarter of 1999 due to a shortage
of engine supply to this market sector. Additionally, all of North America was
impacted by the decline in the agriculture market. European net sales for second
quarter 1999 of $51.7 million decreased by $5.0 million, or 8.8% from second
quarter 1998 net sales of $56.7 million. European net sales decreased by 2.5%
excluding the impact of currency fluctuation. Sales in Europe were adversely
impacted by the agriculture market with sales down 9.8% from second quarter
1998. The Company's Swindon, England, operations experienced a sales decline in
the second quarter of $5.1 million from 1998 second quarter levels of $15.2
million due to the agriculture market decline. East Asia net sales for second
quarter 1999 increased by $1.6 million from second quarter 1998.
The following table sets forth the Company's net sales by market, in dollars
(000's) and as a percentage of total net sales, for the thirteen weeks ended
July 4, 1999, and June 28, 1998:
<TABLE>
<CAPTION>
July 4, 1999 % of Total June 28, 1998 % of Total
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Agriculture $23,946 16.2 $29,601 18.5
Construction 24,217 16.4 22,150 13.8
Turf Care 30,190 20.4 37,179 23.2
Road-building 20,094 13.6 20,128 12.5
Specialty 12,325 8.3 10,632 6.6
Distribution and aftermarket 37,192 25.1 40,720 25.4
---------------- ------------- ------------- -------------
Total $147,964 100.0 $160,410 100.0
---------------- ------------- ------------- -------------
---------------- ------------- ------------- -------------
</TABLE>
COST OF SALES - Cost of sales for second quarter 1999 of $110.5 million was
74.7% of net sales, compared to 73.8% of net sales for second quarter 1998. Cost
of sales for second quarter 1999 did not decrease proportionately in line with
the sales decline due to the higher fixed costs in place for 1999 related to the
significant capital spending in prior years for facilities and equipment
expansion.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for second quarter 1999 of $14.4 million increased by
$0.7 million, or 5.1% from second quarter 1998 expenses of $13.7 million. The
increase reflects the on-going effects of the investments made during 1998 in
sales and marketing, information technology, and training to support the
Company's growth plans and the investments made in manufacturing and research
and development. The Company anticipates this trend to continue throughout 1999.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for second
quarter 1999 of $5.4 million decreased $0.1 million from second quarter 1998
expenses of $5.5 million due to the receipt of a research and development grant
in Europe of $0.1 million.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for second quarter 1999
of $2.5 million were level with second quarter 1998 net expenses of $2.5
million. Net interest expense for second quarter 1999 of $2.3 million decreased
by $0.1 million from second quarter 1998 net expense of $2.4 million. Other
expense, net, for second quarter 1999 increased by $0.1 million from second
quarter 1998 due to numerous immaterial items.
PROVISION FOR INCOME TAXES - Provision for income taxes for second quarter 1999
of $4.7 million decreased by $1.5 million from second quarter 1998 provision for
income taxes of $6.2 million. The decrease comes from the decrease in net income
before income taxes of $4.3 million offset slightly by an increase in the
effective tax rate for second quarter 1999 of 37.5% from the second quarter 1998
rate of 36.7%.
NET INCOME - Net income for second quarter 1999 of $7.8 million decreased by
$2.8 million, or 26.4% from second quarter 1998 net income of $10.6 million. Net
income was adversely impacted by the decline in sales for the quarter driven
primarily by the decline in the agriculture and turf care markets as discussed
above. North American second quarter 1999 net income of $6.6 million decreased
by $2.1 million, or 24.1%, from second quarter 1998 net income of $8.7 million.
North American net income was unfavorably impacted by the decline in the
agriculture and turf care markets in addition to the higher fixed costs from
capital investments as discussed above. European second quarter 1999 net income
of $1.7 million decreased by $2.4 million, or 58.5%, from second quarter 1998
net income of $4.1 million. The decline in European net income results directly
from the decline in the agriculture market related to the Company's Swindon,
England operation mentioned above coupled with the additional fixed costs that
have been added to increase production capability and capacity previously
discussed.
TWENTY-SIX WEEKS ENDED JULY 4, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED
JUNE 28, 1998
NET SALES - Net sales for first half 1999 of $301.1 million decreased by $12.2
million, or 3.9% from first half 1998 net sales of $313.3 million. Net sales
decreased by 3.1% excluding the impact of currency fluctuation. Sales of all of
the Company's product categories have declined as a result of the weak
agriculture market. North American net sales for the first half 1999 of $192.5
million decreased by $8.4 million, or 4.2% from first half 1998 net sales of
$200.9 million, driven primarily by the decrease in turf care sales of $8.5
million at the Company's Sullivan, Illinois, operations mentioned above. The
decline in agriculture sales in North America of $5.2 million was offset by
increases in construction of $3.3 million and specialty markets of $3.0 million.
European net sales for the first half 1999 of $105.4 million decreased by $6.4
million, or 5.7% from first half 1998 net sales of $111.8 million. European net
sales decreased by 3.5% excluding the impact of currency fluctuation. Sales in
Europe were adversely impacted by the agriculture market. The Company's Swindon,
England, operation has experienced a sales decline of $6.7 million from 1998
levels of $24.8 million due to the agriculture market decline. Net sales to East
Asia for the first half 1999 increased by $2.6 million from first half 1998.
The following table sets forth the Company's net sales by market application, in
dollars (000's) and as a percentage of total net sales, for the twenty-six weeks
ended July 4, 1999, and June 28, 1998:
<TABLE>
<CAPTION>
July 4, % of Total June 28, % of
1999 1998 Total
-------------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Agriculture $48,873 16.2 $58,043 18.5
Construction 47,302 15.7 43,291 13.8
Turf Care 66,792 22.2 75,203 24.0
Road-building 41,256 13.7 38,225 12.2
Specialty 24,734 8.2 20,701 6.6
Distribution and aftermarket 72,104 24.0 77,823 24.9
-------------- ----------- ------------ --------
Total $301,061 100.0 $313,286 100.0
-------------- ----------- ------------ --------
-------------- ----------- ------------ --------
</TABLE>
<PAGE>
COST OF SALES - Cost of sales for the first half 1999 of $224.5 million was
74.6% of net sales, compared to 75.5% of net sales for first half 1998. Cost of
sales for 1999 was impacted by the higher fixed costs mentioned above offset
somewhat by the Company's efforts to control manufacturing costs. In addition,
first half 1998 cost of sales was adversely impacted by costs relating to the
move of the Minneapolis operations to a larger facility, the construction of the
plant in Lawrence, Kansas, equipment repair and removal costs in the German
operation and the production start-up costs of a new product line in Slovakia.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the first half 1999 of $29.1 million increased by
$2.0 million, or 7.4% from first half 1998 expenses of $27.1 million. The
increase reflects the effects of the investments made during 1998 in sales and
marketing, information technology, and training to support the Company's growth
plans and the investments made in manufacturing and research and development. As
stated above, the Company expects this trend to continue for the remainder of
1999.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for the
first half 1999 of $11.5 million increased by $0.3 million, or 2.7% from first
half 1998 expenses of $11.2 million.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for first half 1999 of
$4.9 million increased by $0.4 million from first half 1998 net expenses of $4.5
million. Net interest expense for first half 1999 of $4.8 million increased by
$0.2 million from first half 1998 net expense of $4.6 million, reflecting higher
overall borrowings associated with on-going capital expenditures. Other expense,
net, for first half 1999 increased by $0.3 million from first half 1998 relating
primarily to a decrease in royalty income from the Company's Japanese licensee
and numerous other immaterial items.
PROVISION FOR INCOME TAXES - Provision for income taxes for first half 1999 of
$9.3 million decreased by $0.8 million from first half 1998 provision for income
taxes of $10.1 million. The decrease comes primarily from the decrease in net
income before income taxes of $2.0 million coupled with a slight decrease in the
effective tax rate for first half 1999 of 37.0% from the first half 1998 rate of
37.1%.
NET INCOME - Net income for the first half of 1999 of $15.9 million decreased by
$1.2 million, or 7.0% from first half 1998 net income of $17.1 million. North
American first half 1999 net income of $14.4 million decreased by $0.8 million,
or 5.3% from first half 1998 net income of $15.2 million. North American net
income was unfavorably impacted primarily by the decline in the agriculture and
turf care markets mentioned above. European first half 1999 net income of $2.8
million decreased by $2.9 million, or 50.9%, from first half 1998 net income of
$5.7 million. The primary reason for the decline in European net income results
directly from the decline in the agriculture market related to the Company's
Swindon, England, operation coupled with higher fixed costs mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been from internally generated
funds and from borrowings under it's credit facilities.
Net cash provided by operating activities for the twenty-six week period ended
July 4, 1999 of $49.1 million increased by $6.7 million from the twenty-six week
period ended June 28, 1998 of $42.4 million. The increase in operating cash flow
resulted from better overall management of working capital, specifically in the
areas of inventories, accounts payable and accrued liabilities, offset by the
increase in receivables.
Net borrowing repayments under short and long term credit facilities for the
twenty-six week period ended July 4, 1999 were $1.0 million compared to the
twenty-six week period ended June 28, 1998 of $13.8 million. Net borrowing
repayments were higher for first half 1998 due primarily to the net proceeds
received from the initial public offering in the second quarter of 1998.
The cash provided by operating activities of $49.1 million have funded 1999
first half capital expenditures of $34.5 million, dividends of $3.8 million,
distributions to minority interest partners of $5.4 million and net borrowing
repayments of $1.0 million.
<PAGE>
Capital expenditures for the first half of 1999 of $34.5 million decreased by
$18.9 million from the first half 1998 capital expenditures of $53.4 million.
First half 1998 capital expenditures were impacted by the purchase of the
Company's Neumunster, Germany, facility for $15.7 million. In light of the
agriculture and turf care market conditions mentioned above, the Company is
continuing to evaluate its capital expenditure requirements for the next few
years. The Company anticipates 1999 capital expenditures to reach approximately
$70.0 million, a decrease of $19.0 million from 1998 levels. The primary
emphasis will be on adding capacity to handle additional new programs, to
continue to improve long-term efficiency and to remain cost competitive. The
Lawrence, Kansas, plant completed in early 1999 is now in production of the
Company's medium power hydrostatic transmissions. This additional plant space
has provided incremental capacity at the Company's Ames facility which is
planned for expanding the production of high power hydrostatic transmissions for
new programs as well as production of a new product for the aerial lift market
introduced in the second quarter 1999. The Company's manufacturing plants in
Slovakia and China, which started production in 1995 and 1997, respectively, are
still under development and will require further investment in production
machinery to increase their operating capacity and efficiency, although this
will be done in consideration of economic conditions. The Company plans to
continue to fund its capital expenditures from internally generated funds and
increased borrowings under its credit facilities which have been reduced with
the funds obtained from the Company's initial public offering of common stock in
1998. These sources of funds are expected to be sufficient to support the
planned capital expenditures and the Company's working capital requirements.
OTHER MATTERS
YEAR 2000 COMPLIANCE - The Year 2000 computer issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's systems or applications that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in a range of issues from system failures
to miscalculations. Incomplete or untimely resolution of the Year 2000 issue by
the Company or critically important suppliers or customers of the Company could
have a materially adverse effect on the Company's business, operations or
financial condition.
To mitigate this risk, in 1998 the Company directed each location to pursue Year
2000 remediation locally. Included in the scope of this initiative are the
operational and financial information technology systems, embedded software
contained in machinery and equipment, and other end-user computing resources and
building systems. In addition, the project includes a review and evaluation of
the Year 2000 compliance efforts of the Company's key suppliers and customers.
The Company's overall Year 2000 project approach and status is as follows:
<TABLE>
<CAPTION>
STAGE OF
DESCRIPTION OF APPROACH COMPLETION TIMETABLE FOR COMPLETION
- ----------------------- ----------- ------------------------
<S> <C> <C>
Inventory and assessment for Y2K impact of
all systems 95% August 31, 1999
Compliance of operational and
financial systems 95% August 31, 1999
Compliance of computer-dependent machine
tools and equipment 65% September 30, 1999
Compliance of personal computers 75% September 30, 1999
Compliance of building-related systems 95% September 30, 1999
</TABLE>
In addition to assessing the Company's Year 2000 readiness, the Company has
contacted its major production suppliers via a confirmation letter program and
received responses from approximately 95% of all those suppliers stating that
Year 2000 readiness will be achieved by December 31, 1999. The Company cannot
guarantee that third parties on whom it depends for essential supplies and
materials will convert their critical systems and processes in a timely manner.
Failure or delay by any of these parties could significantly disrupt the
Company's business. Although no specific testing of the readiness of the
Company's suppliers is currently planned, an on-going evaluation of the
Company's suppliers is being continued.
<PAGE>
The Company's Year 2000 project is being completed primarily through the use of
its internal information technology staff, with support from outside contractors
where necessary. In addition, the Company's internal audit staff is performing
periodic evaluations of all of the Company's business units to assess Year 2000
readiness. On-site Year 2000 reviews were completed at the end of 1998.
Follow-up reviews for the manufacturing locations have been completed during the
second quarter of 1999. The results of these reviews have shown that all
locations have substantially completed their Year 2000 preparations. The cost of
the Company's information technology and internal audit staff to evaluate and
upgrade the systems has not been separately accounted for or estimated as the
Company does not believe this to be material. Although the Year 2000 project is
a primary focus for each business unit, there have not been any material
information technology projects which have been deferred due to the Year 2000
efforts, although resource priority has been given to the Year 2000 project. The
cost of obtaining the operational and business system upgrades is part of the
on-going maintenance of the systems to remain current with new releases and
accordingly, has not been separately accounted for or estimated.
The Company believes its greatest risk lies within its operating and financial
computer systems. The majority of the necessary changes to make these systems
Year 2000 ready were made as of December 31, 1998. Testing of these systems will
continue through the summer of 1999. If these systems were to fail, the Company
would encounter difficulty performing functions such as compiling financial
data, invoicing customers, paying suppliers and communicating production
requirements to its manufacturing plants. While some of these functions could be
performed manually, the Company presently is not certain of the impact on
operations.
Individual Company locations are adding Year 2000 specifics to standard
contingency plans where warranted. There is no company-wide contingency plan
relating purely to the Year 2000 as the Company intends to have completed the
essential Year 2000 changes by December 31, 1999. The Company's plans and the
date on which the Company believes it will complete its Year 2000 computer
modifications are based on it's best estimates, which, in turn, are based on
numerous assumptions of future events, including third-party modification plans,
continued availability of resources and other factors. The Company cannot be
sure that these assumptions are accurate or that these estimates will be
achieved and actual results could differ materially from those anticipated.
EURO CURRENCY CONVERSION - The Company began handling transactions in the Euro
as of the beginning of 1999. The Company`s business systems are multi-currency
functional and the Company's European operations transact business today in
various European currencies, including the Euro. The Company does not have an
estimate of the cost it incurred to implement the Euro currency, but does not
believe the costs have had a material effect on the Company's financial
condition or results of operations.
ASIAN CRISIS IMPACT - Prior to 1999, several countries in Asia had experienced a
severe economic crisis, characterized by reduced economic activity, lack of
liquidity, highly volatile foreign currency exchange and interest rates and
unstable stock markets. The Company has a 60% interest in a joint venture
located in Shanghai, China, which manufactures and sells high power hydrostatic
transmissions, and the Company also has export sales into Asia. The joint
venture business and export sales were affected by the economic crisis, however,
the Company continues to see improvement in 1999 over 1998 business levels.
Total sales into Asia for first half 1999 increased $2.6 million over first half
1998 sales. With total assets of $13.0 million located in China and total Asian
sales for 1998 of $12.2 million, the Company experienced some adverse effect on
the results of its operations in 1998, particularly given the higher margins
attributable to such sales. Many of the Company's customers also sell into Asia.
Any impact on their sales could have an adverse impact on the Company's sales.
The Company now believes that its 1999 results in its Asian operations will
surpass 1998 results. As a result, the Company does not believe the impact on
its sales, either individually or together with the impact of the Asian crisis
on export sales and the joint venture business, will have a material adverse
effect on its financial condition or results of operations, although there can
be no assurance in this regard.
OUTLOOK - The Company now expects 1999 sales to be in line with or slightly
lower than 1998 sales. The agricultural markets continue to be weak. Several of
the Company's major agriculture OEM's have now planned production shutdowns in
the latter part of 1999. In addition, European economies as a whole, are weaker
that what was projected in late 1998. These economic impacts are offset by the
continued strong North American economy, as well as new program production
startups such as occurred in the specialty market during the second quarter. Net
income for 1999 is expected to be less than the 1998 level.
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on April 22, 1999,
at which stockholders re-elected two directors and ratified the
appointment of Arthur Andersen LLP as the Company's independent
auditors for 1999.
Results of the voting in connection with each issue were as follows:
<TABLE>
<CAPTION>
VOTING ON DIRECTORS FOR WITHHELD TOTAL
- ------------------- ---------- -------- ----------
<S> <C> <C> <C>
Klaus H. Murmann 20,394,619 43,733 20,438,352
Nicola Keim 20,395,529 42,823 20,438,352
RATIFICATION OF INDEPENDENT AUDITORS
- ------------------------------------
In Favor 20,424,809
Against 3,925
Abstain 9,618
-------------
Total 20,438,352
-------------
-------------
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
No. Description of Document
- ------- -----------------------
3.1 The Restated Certificate of Incorporation of the Company dated March
13, 1998, is attached as Exhibit 3.1 to the Company's Form S-1
Registration Statement filed on March 20, 1998, and is incorporated
herein by reference.
3.2 The Restated Bylaws of the Company dated March 13, 1998, are attached
as Exhibit 3.2 to the Company's Form S-1 Registration Statement filed
on March 20, 1998, and is incorporated herein by reference.
4 The form of Certificate of the Company's Common Stock, $.01 Par Value,
is attached as Exhibit 4.1 to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(a) The Amended and Restated Agreement Regarding the Establishment of a
Silent Partnership Agreement is attached as Exhibit 10.1(a) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(b) The Registration Rights Agreement is attached as Exhibit 10.1(b) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(c) The form of Indemnification Agreement entered into between the Company
and each of its directors and certain officers is attached as Exhibit
10.1(c) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(d) The Lease Agreement for the Company's Dubnica, Slovakia facility is
attached as Exhibit 10.1(f) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(e) The Lease Agreement for the Company's Swindon, England facility is
attached as Exhibit 10.1(g) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(f) The Lease Agreement for the Company's Minneapolis, Minnesota facility
is attached as Exhibit 10.1(h) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
<PAGE>
10.1(g) The Lease Agreement for the Company's Newtown, Pennsylvania facility is
attached as Exhibit 10.1(i) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(h) The Lease Agreement for the Company's Shanghai/Pudong, China facility
is attached as Exhibit 10.1(j) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(i) The Employment Contract with Klaus Murmann is attached as Exhibit
10.1(k) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(j) The Employment Contract with Tonio Barlage is attached as Exhibit
10.1(l) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(k) The Employment Contract with Thomas Kittel is attached as Exhibit
10.1(m) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(l) The Sauer Inc. Management Incentive Plan is attached as Exhibit 10.1(r)
to Amendment No. 1 to the Company's Form S-1 Registration Statement
filed on April 23, 1998, and is incorporated herein by reference.
10.1(m) The Sauer-Sundstrand Employees' Retirement Plan is attached as Exhibit
10.1(s) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(n) The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for
Certain Key Executives is attached as Exhibit 10.1(t) to Amendment No.
1 to the Company's Form S-1 Registration Statement filed on April 23,
1998, and is incorporated herein by reference.
10.1(o) The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for
Certain Key Executives Previously Employed by the Sundstrand
Corporation is attached as Exhibit 10.1(u) to Amendment No. 1 to the
Company's Form S-1 Registration Statement filed on April 23, 1998, and
is incorporated herein by reference.
10.1(p) The Sauer-Sundstrand Employees' Savings & Retirement Plan is attached
as Exhibit 10.1(v) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(q) The Retirement Benefits Agreement for Klaus Murmann is attached as
Exhibit 10.1(w) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(r) The Retirement Benefits Agreement for Tonio Barlage is attached as
Exhibit 10.1(x) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(s) The European Employees' Pension Plan is attached as Exhibit 10.1(y) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(t) The Sauer Inc. 1998 Long-Term Incentive Plan is attached as Exhibit
10.1(p) to Amendment No.1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(u) The Sauer Inc. Non-employee Director Stock Option and Restricted Stock
Plan is attached as Exhibit 10.1(q) to Amendment No. 1 to the Company's
Form S-1 Registration Statement filed on April 23, 1998, and is
incorporated herein by reference.
<PAGE>
10.1(v) The 1999 Sauer Inc. Bonus Plan is attached hereto.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended July 4,
1999.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Sauer Inc.
By /s/ Kenneth D. McCuskey
-------------------------------
Kenneth D. McCuskey, Secretary/Treasurer and
Chief Accounting Officer
Sauer Inc.
August 18, 1999
<PAGE>
SAUER INC.
BONUS PLAN
January 1, 1999 Restatement
<PAGE>
1999
SAUER INC.
BONUS PLAN
ARTICLE I
DEFINITIONS
For the purposes of this Plan, the following words and phrases shall have the
meaning indicated, unless a different meaning is clearly required by the
context:
1. The "Plan" means this 1999 Sauer Inc. Bonus Plan with all amendments and
supplements hereafter made.
2. The "Company" means Sauer Inc., a Delaware stock corporation, its
successors, and the surviving companies or corporations resulting from any
merger or consolidation of Sauer Inc. with any other corporation or
partnership.
3. A "Subsidiary" means any corporation or partnership, the equity of which is
directly or indirectly majority owned by the Company.
4. The "Compensation Committee" means the Compensation Committee of the Board
of Directors of the Company as the same shall from time to time exist.
5. A "Participant" shall mean any executive who is eligible to participate in
the Plan as provided in Article II.
6. The "Plan Year" means the fiscal year of the Company which as of January 1,
1999 coincides with the calendar year.
7. A "Bonus Compensation Award" shall mean the cash payment which may be
awarded to a Participant pursuant to the Plan with respect to any Plan
Year.
8. A "Beneficiary" shall mean the person or persons designated by a
Participant in accordance with the Plan to receive payment of the
Participant's Bonus Compensation Award in the event of the death of the
Participant prior to payment of the Participant's Bonus Compensation Award.
9. The "Target Incentive Opportunity" means the percentage of annual base
salary at the beginning of the Plan Year which will be paid if the target
RoNA is achieved.
10. The "Maximum Potential Incentive Opportunity" means the maximum percentage
of annual base salary at the beginning of the Plan Year which will be paid
under this Plan.
2
<PAGE>
ARTICLE II
ELIGIBILITY
The Chief Executive Officer shall recommend executive(s) of the Company or of
any Subsidiary who shall become Participants in the Plan for Compensation
Committee approval. Once approved by the Compensation Committee, such selected
executives shall be notified of their selection in writing by the Chief
Executive Officer.
ARTICLE III
BONUS COMPENSATION AWARDS
1. The Bonus Compensation Award granted to a Participant will be measured in
relation to the Return on Net Assets (RoNA) as derived from the
consolidated financial statements of Sauer Inc. for the twelve month period
with respect to which the bonus relates. RoNA is defined as Earnings
before taxes and Interest Expense per the audited consolidated financial
statements for the fiscal year divided by the average net assets for the
four quarters in the fiscal year (i.e. net assets at the beginning of the
year and at the end of each of the next four quarters divided by five).
Interest Expense is defined as consolidated interest expense on interest
bearing indebtedness plus minority interest expense, net of minority income
on minority interests including the silent interest(s) in Sauer-Sundstrand
GmbH & Co. Net assets are defined as the sum of total equity including
minority interests such as the minority interests in Sauer-Sundstrand GmbH
& Co. and in Sauer-ZTS, a.s., and all interest bearing indebtedness shown
in the consolidated balance sheet. If RoNA is negative, no Bonus
Compensation Award will be granted.
2. Based upon many factors, including product line maturity, market position,
age and type of ownership of assets, historical and planned performance,
and returns for alternative investment opportunities, a target RoNA of 20%
for each twelve month period with respect to which a Bonus Compensation
Award may be granted has been established.
3. Achievement of the target RoNA of 20% will result in a Bonus Compensation
Award for the twelve month period to which it relates equal to the Target
Incentive Opportunity.
Achievement of a RoNA of 25% or more will result in a Bonus Compensation
Award for the twelve month period to which it relates equal to the Maximum
Potential Incentive Opportunity.
4. The total Bonus Compensation Award granted to a Participant shall be paid
in cash to the Participant on or before May 1 of the Plan Year following
the Plan Year with respect to which such total Bonus Compensation Award is
granted.
3
<PAGE>
5. Forfeiture. Notwithstanding anything to the contrary contained in the
Plan, subject to the approval of the Compensation Committee, the right of a
Participant to receive a Bonus Compensation Award which has been granted
but which has not been paid will be forfeited in the event the
Participant's employment with the Company or any Subsidiary is terminated
under circumstances other than death, permanent and total disability,
normal retirement or other retirement under conditions of eligibility for a
retirement benefit. Furthermore, if the Compensation Committee, in its
sole discretion, determines that a participant has engaged in activities
constituting gross misconduct, the right of such Participant to be granted
a Bonus Compensation Award will be forfeited.
ARTICLE IV
ADMINISTRATION
The Compensation Committee of the Board of Directors shall be responsible for
the general administration of the Plan and for carrying out the provisions
hereof and shall have all such powers, authorities and responsibilities
expressly retained by it herein and as may be necessary to carry out the
provisions of the Plan, including the power to determine all questions relating
to eligibility for and the amount of an Incentive Compensation Award, all
questions pertaining to its claims for benefits and procedures for claim review,
and the power to resolve any and all other questions arising under the Plan,
including any questions of construction. The Compensation Committee may
designate such person or persons as it shall determine to carry out any such
powers, authorities or responsibilities.
The actions taken and the decisions made by the Compensation Committee hereunder
shall be final and binding upon all interested parties. The Compensation
Committee may, as to all questions of accounting, rely conclusively upon any
determination made by the independent public accountants for the Company.
ARTICLE V
AMENDMENT AND TERMINATION
The Compensation Committee reserves the right to amend or terminate the Plan at
any time by written action of the Compensation Committee; provided, however,
that no such action shall adversely affect any Participant or Beneficiary with
respect to the amount of a Bonus Compensation Award theretofore granted.
4
<PAGE>
ARTICLE VI
MISCELLANEOUS
1. Nonalienation. No Participant or Beneficiary shall in any manner encumber
or dispose of the right to receive any payment of a Bonus Compensation
Award hereunder. If a Participant or Beneficiary attempts to assign,
transfer, alienate or encumber the right to receive the amount of a Bonus
Compensation Award hereunder or permits the same to be subject to
alienation, garnishment, attachment, execution or levy of any kind, then
the Compensation Committee in its sole discretion may hold or apply such
amount or any part thereof to or for the benefit of such Participant or
Beneficiary, the Participant's or Beneficiary's spouse, children, blood
relatives or other dependents, or any of them in such manner and in such
proportions as the Compensation Committee may consider proper. Any such
application of the amount of an Bonus Compensation Award may be made
without the intervention of a guardian. The receipt by the payee shall
constitute a complete acquittance to the Company with respect thereto and
neither the Company nor any Subsidiary nor the Compensation Committee shall
have any responsibility for the proper application thereof.
2. Plan Noncontractual. Nothing herein contained shall be construed as a
commitment or agreement on the part of any person employed by the Company
or a Subsidiary to continue such person's employment with the Company or
Subsidiary, and nothing herein contained shall be construed as a commitment
or agreement on the part of the Company or any Subsidiary to continue the
employment or the annual rate of compensation of any such person for any
period, and all Participants shall remain subject to discharge to the same
extent as if the Plan had never been put into effect.
3. Interest of Participant and Beneficiary. The obligation of the Company
under the Plan to make payments of a Bonus Compensation Award merely
constitutes the unsecured promise of the Company to make payments from its
general assets as provided therein, and no Participant or Beneficiary shall
have any interest, or a lien or prior claim upon any property of the
Company or any Subsidiary.
4. Claims of other Persons. The provisions of the Plan shall in no event be
construed as giving any person, firm or corporation any legal or equitable
right as against the Company or any Subsidiary, their officers, employees,
or directors, except any such rights as are especially provided for in the
Plan or are hereafter created in accordance with the terms and provisions
of the Plan.
5
<PAGE>
5. Facility of Payment. If any person to whom a Bonus Compensation Award is
payable is unable to care for his affairs because of illness or accident,
any payment due (unless prior claim therefore shall have been made by a
duly qualified guardian or other legal representative) may be paid to the
spouse, parent, child, brother or sister, or any other individual deemed by
the Compensation Committee to be maintaining or responsible for the
maintenance of such person. Any payment made in accordance with the
provisions of this Section 4 shall be a complete discharge of any liability
of the Plan with respect to such payment.
6. Absence of Liability. No member of the Board of Directors of the Company
or of a Subsidiary, or the Chairman and Chief Executive Officer, or any
officers of the Company or a Subsidiary shall be liable for any act or
action hereunder, whether of commission or omission, taken by any other
member, or by any officer, agent, or employee, or except in circumstances
involving his bad faith, for anything done or omitted to be done by him.
7. Severability. The invalidity or unenforceability of any particular
provision of the Plan shall not affect any other provision hereof, and the
Plan shall be construed in all respects as if such invalid or unenforceable
provision were omitted herefrom.
8. Governing Law. The provisions of the Plan shall be governed and construed
in accordance with the laws of the State of Iowa, U.S.A.
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-04-1999
<CASH> 12,697
<SECURITIES> 0
<RECEIVABLES> 92,963
<ALLOWANCES> 3,166
<INVENTORY> 67,294
<CURRENT-ASSETS> 183,529
<PP&E> 485,721
<DEPRECIATION> (221,933)
<TOTAL-ASSETS> 458,884
<CURRENT-LIABILITIES> 120,086
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> 149,179
<TOTAL-LIABILITY-AND-EQUITY> 458,884
<SALES> 301,061
<TOTAL-REVENUES> 301,061
<CGS> 224,537
<TOTAL-COSTS> 265,198
<OTHER-EXPENSES> 141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,768
<INCOME-PRETAX> 30,954
<INCOME-TAX> 9,312
<INCOME-CONTINUING> 21,642
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,860
<EPS-BASIC> .58
<EPS-DILUTED> .58
</TABLE>
