<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 April 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 April 4, 1999, 27,397,050 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 Ended March 29, 1998 and April 4, 1999 3
Consolidated Balance Sheets:
As of December 31, 1998 and April 4, 1999 4
Consolidated Statements of Cash Flows:
Thirteen Weeks Ended March 29, 1998 and April 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 2. Changes in Securities and Use of Proceeds 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 16
</TABLE>
<PAGE>
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
-----------------------------------------------
March 29, April 4,
1998 1999
------------------ -------------------
<S> <C> <C>
NET SALES $152,876 $153,097
------------------ -------------------
COSTS AND EXPENSES:
Cost of sales 118,137 114,082
Selling, general and administrative 13,400 14,684
Research and development 5,750 6,102
------------------ -------------------
Total costs and expenses 137,287 134,868
------------------ -------------------
Operating income 15,589 18,229
------------------ -------------------
NONOPERATING INCOME (EXPENSES):
Interest expense, net (2,219) (2,487)
Royalty income 250 175
Other, net (59) (117)
------------------ -------------------
Nonoperating expenses, net (2,028) (2,429)
------------------ -------------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 13,561 15,800
PROVISION FOR INCOME TAXES (3,931) (4,642)
------------------ -------------------
INCOME BEFORE MINORITY INTEREST 9,630 11,158
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES (3,158) (3,094)
------------------ -------------------
Net income $6,472 $8,064
------------------ -------------------
------------------ -------------------
Basic and diluted net income per
common share $ 0.27 $ 0.30
------------------ -------------------
------------------ -------------------
Weighted average basic and diluted shares outstanding 24,225,000 27,225,000
------------------ -------------------
------------------ -------------------
</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, April 4,
1998 1999
---------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,891 $ 6,808
Accounts receivable, less allowances 73,661 97,150
Inventories 89,195 81,660
Other current assets 9,984 11,835
---------------- --------------
Total current assets 181,731 197,453
---------------- --------------
---------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET 262,527 258,014
---------------- --------------
OTHER ASSETS:
Intangible assets, net 3,769 2,783
Deferred income taxes 2,328 1,763
Other 9,416 8,091
---------------- --------------
Total other assets 15,513 12,637
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$459,771 $468,104
---------------- --------------
---------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts $ 41,767 $ 39,998
Long-term debt due within one year 2,398 2,035
Accounts payable 38,271 38,154
Accrued salaries and wages 7,683 9,009
Accrued warranty 8,601 8,743
Other accrued liabilities 12,884 21,751
---------------- --------------
Total current liabilities 111,604 119,690
---------------- --------------
---------------- --------------
LONG-TERM DEBT 106,862 109,288
---------------- --------------
OTHER LIABILITIES:
Long-term pension liability 33,044 31,673
Postretirement benefits other than pensions 13,608 13,608
Deferred income taxes 4,746 4,500
Other 5,419 3,270
---------------- --------------
Total other liabilities 56,817 53,051
---------------- --------------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES 35,584 37,284
---------------- --------------
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 1999; outstanding 24,225,000 in 1998 and 281 281
27,397,050 in 1999
Additional paid-in capital 120,092 120,092
Retained earnings 31,416 37,562
Accumulated other comprehensive income 1,813 (4,529)
Unamortized restricted stock compensation (1,998) (1,915)
Common stock in treasury (at cost),
675,000 shares in 1998 and 1999 (2,700) (2,700)
---------------- --------------
Total stockholders' equity 148,904 148,791
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$459,771 $468,104
---------------- --------------
---------------- --------------
</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>
Thirteen Weeks Ended
---------------------------------------
March 29, April 4,
1998 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $6,472 $8,064
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 6,924 9,595
Minority interest in income of
consolidated companies 3,158 3,094
(Increase) decrease in working capital -
Accounts receivable, net (24,774) (26,136)
Inventories 2,422 3,177
Accounts payable 7,607 3,136
Accrued liabilities 9,981 10,825
Other 837 (1,660)
---------------- ----------------
Net cash provided by operating activities 12,627 10,095
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property, plant and equipment (17,410) (15,415)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on notes
payable and bank overdrafts 3,711 1,123
Net borrowings of long-term debt 5,184 5,561
Cash dividends (1,938) (1,918)
Distributions to minority interest partners (2,701) (1,394)
---------------- ----------------
Net cash provided by
financing activities 4,256 3,372
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES (230) (135)
---------------- ----------------
CASH AND CASH EQUIVALENTS:
Net decrease during the period (757) (2,083)
Beginning balance 7,363 8,891
---------------- ----------------
Ending balance $ 6,606 $ 6,808
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---------------- ----------------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $1,612 $1,497
Income taxes paid $ 423 $ 148
</TABLE>
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 April 4, 1999, and results of operations and
cash flows for the thirteen weeks ended March 29, 1998 and April 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) COMPREHENSIVE INCOME -
Total comprehensive income, consisting of net income adjusted for
foreign currency translation, is as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended
March 29, April 4,
1998 1999
---- ----
<S> <C> <C>
Net income $6,472 $8,064
Translation adjustment (63) (6,124)
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Comprehensive income $6,409 $1,940
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</TABLE>
3) 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.
Under this method, there was no dilutive effect for either period
presented.
4) 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 consists of
the design, manufacture and sale of hydraulic systems and other related
components.
<PAGE>
The following table presents the significant items by segment for the
results of operations for each of the thirteen week periods ending
March 29, 1998 and April 4, 1999 and balance sheet data as of December
31, 1998 and April 4, 1999, respectively:
<TABLE>
<CAPTION>
NORTH ALL
1998 AMERICA EUROPE OTHER ELIMINATIONS TOTAL
-------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Trade sales $ 97,518 $ 55,063 $ 295 $ - $152,876
Intersegment sales 9,322 10,783 165 (20,270) (1) -
Net income (loss) 6,467 1,652 (497) (1,150) (2) 6,472
Total assets 227,920 220,172 198,116 (186,437) (3) 459,771
1999
Trade sales $ 98,102 $ 53,704 $ 1,291 $ - $153,097
Intersegment sales 10,589 8,858 46 (19,493) (1) -
Net income (loss) 7,799 1,065 244 (1,044) (2) 8,064
Total assets 252,048 208,963 192,975 (185,882) (3) 468,104
</TABLE>
Reconciliations:
(1) Elimination of intersegment sales.
(2) Net income eliminations:
<TABLE>
<CAPTION>
1998 1999
----- -----
<S> <C> <C>
Minority interest in German Operating Company $ (937) $(1,044)
Other (213) -
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Total net income eliminations $(1,150) $(1,044)
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</TABLE>
(3) Total assets eliminations:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Investment in subsidiaries $(144,391) $(144,662)
Intersegment receivables (40,244) (43,255)
Intersegment profit in inventory and other (1,802) 2,035
---------- ----------
Total assets eliminations $(186,437) $(185,882)
---------- ----------
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</TABLE>
A summary of the Company's net sales by product line is presented below:
<TABLE>
<CAPTION>
NET SALES
1998 1999
---- ----
<S> <C> <C>
Hydrostatic transmissions $120,813 $125,450
Open circuit gear pumps and motors and piston pumps 21,211 17,938
Electrohydraulics and others 10,852 9,709
-------- --------
Total $152,876 $153,097
---------- ----------
---------- ----------
</TABLE>
<PAGE>
A summary of the Company's net sales and long-lived assets by geographic area is
presented below:
<TABLE>
<CAPTION>
Long-Lived
Net Sales (1) Assets (2)
------------- ----------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 89,325 $ 91,026 $141,021 $147,999
Germany 14,569 13,927 46,930 46,166
United Kingdom 9,692 7,791 21,279 24,202
Slovakia 388 189 39,856 33,868
Other countries 38,902 40,164 17,210 16,653
-------- -------- --------- ---------
Total $152,876 $153,097 $266,296 $268,888
-------- -------- --------- ---------
-------- -------- --------- ---------
</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
NET SALES - Net sales for first quarter 1999 of $153.1 million increased by $0.2
million, or 0.1% from first quarter 1998 net sales of $152.9 million. Net sales
decreased by 0.2% excluding the impact of currency fluctuation. First quarter
1999 sales for the specialty market were up 23%, road building was up 17% and
construction increased 9% over first quarter 1998. Turf-care sales were level
with first quarter 1998 while agricultural market sales were down 16% from first
quarter 1998. North American net sales for first quarter 1999 of $98.1 million
increased by $0.6 million, or 0.6% from first quarter 1998 net sales of $97.5
million. European net sales for first quarter 1999 of $53.7 million decreased by
$1.4 million, or 2.5% from first quarter 1998 net sales of $55.1 million.
European net sales decreased by 3.3% excluding the impact of currency
fluctuation. Sales in Europe were adversely impacted by the agriculture market.
The Company's Swindon, England, operations experienced a sales decline of $3.6
million from 1998 levels of $15.5 million due to the agriculture market decline.
Net sales to East Asia for first quarter 1999 increased by $1.0 million from
first quarter 1998.
COST OF SALES - Cost of sales for first quarter 1999 of $114.1 million was 74.5%
of net sales, compared to 77.2% of net sales for first quarter 1998. Cost of
sales for 1999 was favorably impacted by the Company's efforts to control
manufacturing costs. In addition, 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 first quarter 1999 of $14.7 million increased by
$1.3 million, or 9.7% from first quarter 1998 expenses of $13.4 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.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for first
quarter 1999 of $6.1 million increased by $0.3 million, or 5.2% from first
quarter 1998 expenses of $5.8 million. The increase reflects the higher number
of engineers which have been added since early 1998 to aid the Company in
developing new products in support of the Company's growth plans.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for first quarter 1999 of
$2.4 million increased by $0.4 million from first quarter 1998 net expenses of
$2.0 million. Net interest expense for first quarter 1999 of $2.5 million
increased by $0.3 million from first quarter 1998 net expense of $2.2 million,
reflecting higher bank borrowings for increased capital expenditures and working
capital to support on-going development of new products and planned growth in
sales. Other income, net, for first quarter 1999 decreased by $0.1 million from
first quarter 1998 relating primarily to a decrease in royalty income from the
Company's Japanese licensee due to the effects of the Asian crisis.
PROVISION FOR INCOME TAXES - Provision for income taxes for first quarter 1999
of $4.6 million increased by $0.7 million from first quarter 1998 provision for
income taxes of $3.9 million. The increase comes from the increase in net income
before income taxes of $2.3 million offset slightly by a decrease in the
effective tax rate for first quarter 1999 of 36.5% from the first quarter 1998
rate of 37.8%.
<PAGE>
NET INCOME - Net income for first quarter 1999 of $8.1 million increased by $1.6
million, or 24.6% from first quarter 1998 net income of $6.5 million. Net income
was positively impacted by lower cost of sales as the Company continues to
control its manufacturing costs in light of the agriculture market slow-down.
North American first quarter 1999 net income of $7.8 million increased by $1.3
million, or 20%, from first quarter 1998 net income of $6.5 million. North
American net income was favorably impacted by the increase in the road-building,
construction and specialty markets as mentioned above. European first quarter
1999 net income of $1.1 million decreased by $0.6 million, or 35.3%, from first
quarter 1998 net income of $1.7 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 as 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 first quarter 1999 of $10.1
million decreased by $2.5 million from first quarter 1998 of $12.6 million. The
increase in net income of $1.6 million was offset by the increase in accounts
receivable and decrease in accounts payable.
Net borrowing increases under short and long term credit facilities for first
quarter 1999 were $6.7 million compared to first quarter 1998 of $8.9 million.
Less net borrowings were necessary in first quarter 1999 due primarily to the
reduction in distributions to minority interest partners of $1.3 million in
first quarter 1999 compared to first quarter 1998.
The cash provided by operating activities and borrowings have funded first
quarter 1999 capital expenditures of $15.4 million, dividends of $1.9 million
and distributions to minority interest partners of $1.4 million.
Capital expenditures for the first quarter 1999 of $15.4 million decreased by
$2.0 million from first quarter 1998 capital expenditures of $17.4 million.
In light of the agriculture market conditions mentioned above, the Company is
continuing to evaluate its capital expenditure requirements for the next few
years. 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. For example, the recently completed Lawrence plant will produce
medium power hydrostatic transmissions. This additional plant space will free
up capacity at the Company's Ames facility which will be used to expand the
production of high power hydrostatic transmissions for new programs. However,
in light of the agriculture market conditions referred to earlier, the
Company is slowing its plans to transition production to the new Lawrence
facility. 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.
<PAGE>
The Company's overall Year 2000 project approach and status is as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF APPROACH STAGE OF COMPLETION TIMETABLE FOR COMPLETION
- ----------------------- ------------------- ------------------------
<S> <C> <C>
Inventory and assessment for Y2K impact of
all systems 90% July 31, 1999
Compliance of operational and financial systems 90% July 31, 1999
Compliance of computer-dependent machine
tools and equipment 50% September 30, 1999
Compliance of personal computers 50% September 30, 1999
Compliance of building-related systems 50% 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 will be continued.
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 significant manufacturing locations have been scheduled
and are expected to be completed for inclusion in the second quarter 1999 Form
10-Q discussion. 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. 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 are
on-going during the first half 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 what
the extent of the impact on operations would be.
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 its 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 has begun 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.
<PAGE>
ASIAN CRISIS IMPACT - Several countries in Asia continue to experience 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 have been affected by the economic crisis, however, the Company is
beginning to see some improvement. Total sales into Asia for first quarter 1999
increased $1.8 million over first quarter 1998 sales. With total assets of $13.0
million located in China and total Asian sales for 1998 of $12.2 million, the
Company has experienced some adverse effect on the results of its operations,
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 does not believe that the
Asian crisis will have as significant an impact in 1999 as in 1998. 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 expects its 1999 sales to be up slightly over 1998 sales.
The agricultural markets continue to be weak. In addition, European economies as
a whole, are weaker that what was projected a few months ago. These economic
impacts are offset by the continued strong North American economy, as well as
new program production startups. Net income for 1999 is expected to be level
with 1998.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) The following information relates to the registration statement
filed by the Company under the Securities Act of 1933 on Form S-1
(the "Registration Statement").
The Registration Statement was declared effective on May 11, 1998,
and the Commission File No. is 333-48299. The offering commenced
on May 12, 1998. The offering has terminated with all registered
securities being sold. The managing underwriters were Credit
Suisse First Boston Corporation, global lead manager, Smith Barney
Inc., and Deutsche Morgan Grenfell Inc.
All securities registered were shares of the Company's Common Stock,
par value $.01 per share. The following information relates to
securities sold by the Company and the selling stockholders:
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE OFFERING
AMOUNT OFFERING PRICE OF
REGISTERED PRICE AMOUNT SOLD AMOUNT SOLD
<S> <C> <C> <C> <C>
Company 3,000,000 shares $54,000,000 3,000,000 shares $54,000,000
Selling Stockholders 6,000,000 shares $108,000,000 6,000,000 shares $108,000,000
</TABLE>
From the May 11, 1998 effective date of the Registration Statement
through February 17, 1999, the following expenses have been incurred
for the Company's account in connection with the issuance and
distribution of the common stock registered:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Underwriting Discounts and Commissions $2,700,000
Other Expenses (including accounting, legal, and printing) $3,200,000
----------
Total $5,900,000
</TABLE>
None of the above expenses were paid directly or indirectly to
directors or officers of the Company, or to persons owning 10% or more
of the Company's common stock, or to affiliates of the Company.
The net offering proceeds to the issuer after deducting the total
expenses described in the preceding paragraph were $48,100,000. From
the May 11, 1998 effective date of the Registration Statement through
February 17, 1999, the net offering proceeds to the Company have been
used as follows:
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
Repayment of long-term indebtedness $15,000,000
Purchase of real estate, plant, and building for the Company's
main facility in Germany $15,680,000(1)
Other capital expenditures $17,420,000
-----------
Total $48,100,000
</TABLE>
(1) The real estate and improvements were purchased from, and the proceeds
were paid to, Sauer Hydraulik, which is wholly-owned by Klaus Murmann
and his family. Klaus Murmann is Chairman of the Board of Directors and
Chief Executive Officer and a 10% stockholder of the Company.
All payments other than the payment to Sauer Hydraulik were made to
others.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the security holders for vote during the
quarter ended April 4, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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(m) The Sauer Inc. Bonus Plan is attached as Exhibit 10.1(o) 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 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(o) 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(p) 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(q) 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(r) 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(s) 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(t) 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(u) 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(v) 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(w) The Sauer Inc. Non-employee Director Stock Option and Restricted Stock
Plan is attached as Exhibit 10.1(q) to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(x) The Purchase Agreement for the Neumunster, Germany Facility is attached
as Exhibit 10.1(d) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended April 4,
1999.
</TABLE>
<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.
May 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-04-1999
<CASH> 6,808
<SECURITIES> 0
<RECEIVABLES> 97,150
<ALLOWANCES> 3,166
<INVENTORY> 81,660
<CURRENT-ASSETS> 197,453
<PP&E> 475,799
<DEPRECIATION> (217,785)
<TOTAL-ASSETS> 468,104
<CURRENT-LIABILITIES> 119,690
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> 148,510
<TOTAL-LIABILITY-AND-EQUITY> 468,104
<SALES> 153,097
<TOTAL-REVENUES> 153,097
<CGS> 114,082
<TOTAL-COSTS> 114,082
<OTHER-EXPENSES> (58)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,487
<INCOME-PRETAX> 15,800
<INCOME-TAX> 4,642
<INCOME-CONTINUING> 11,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,064
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
