SUN HYDRAULICS INC, S-1/A, 1996-11-07

SUN HYDRAULICS INC
S-1/A, 1996-11-07
MISCELLANEOUS FABRICATED METAL PRODUCTS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1996

REGISTRATION NO. 333-14183
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUN HYDRAULICS INCORPORATED
(Exact name of Registrant as specified in its charter)

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<TABLE>
<S> <C> <C>
DELAWARE 3492 65-0696969
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>

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1500 WEST UNIVERSITY PARKWAY
SARASOTA, FLORIDA 34243
(941) 362-1200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)

CLYDE G. NIXON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUN HYDRAULICS INCORPORATED
1500 WEST UNIVERSITY PARKWAY
SARASOTA, FLORIDA 34243
(941) 362-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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With Copies to:

<TABLE>
<S> <C>
GREGORY C. YADLEY, ESQUIRE WADE H. STRIBLING, ESQUIRE
SHUMAKER, LOOP & KENDRICK, LLP NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
101 E. KENNEDY BLVD., SUITE 2800 400 COLONY SQUARE, SUITE 2200
TAMPA, FLORIDA 33602 1201 PEACHTREE STREET, N.E.
(813) 229-7600 ATLANTA, GA 30361
(404) 817-6000
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED NOVEMBER 7, 1996

2,000,000 SHARES

(LOGO) SUN HYDRAULICS

COMMON STOCK

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All of the 2,000,000 shares of common stock, par value $0.001 per share
(the "Common Stock"), offered hereby are being sold by Sun Hydraulics
Incorporated (the "Company"). Prior to this offering (the "Offering"), there has
been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $9.50 and
$11.50 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
filed an application for the Common Stock to be quoted and traded on the Nasdaq
National Market under the symbol "SNHY."

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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................................... $ $ $
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Total(3)........................................ $ $ $
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- ------------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $700,000, all of which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."

---------------------

The Common Stock is offered by the several Underwriters, subject to prior
sale, when, as, and if issued to and accepted by them and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer or to reject any orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about ,
1996.

A.G. EDWARDS & SONS, INC. ROBERT W. BAIRD & CO.
INCORPORATED

The date of this Prospectus is December , 1996

<PAGE> 3

[Photographs and text on this page overlay outlines of schematic design drawings
of various unidentified cartridge valves and manifolds.]

[Photograph of a container-pallet loader being used to load supplies into a
passenger jet]

[Photograph of two manifolds of the Company with the Company's cartridge valves]

Custom manifolds often result in a smaller package size and allow equipment
manufacturers to reduce assembly time and expense with fewer hoses, fittings and
hard tube routing.

[Photograph of two man-lifts being used outside of a building]

[Photograph of various screw-in hydraulic cartridge valves and manifolds of the
Company]

Load control valves control the motion and locking of hydraulic cylinders and
are used in critical applications. These important system elements can be close
coupled to, or directly integrated in, hydraulic cylinders.

[Photograph of an injection molding machine]

[Photograph of three of the Company's small manifolds with the Company's
cartridge valves]

The ability to withstand high pressure, high cycle operation is critical in many
industrial applications. Sun's screw-in cartridge valves provide the necessary
performance and endurance and can be conveniently interfaced in industrial
machinery.

Custom Hydraulic Manifolds

A manifold is a solid block of metal, usually aluminum, steel, or ductile iron,
that is machined to created threaded cavities and channels into which cartridge
valves can be easily placed and through which hydraulic fluids flow. Using its
in-house computer-aided engineering and design systems and its proprietary CAM
expert system software, Sun Hydraulics has flexible production capability and
can efficiently manufacture manifolds in any quantity desired by a customer,
down to a single piece. The high degree of reliability of Sun's cartridge valves
also allows manifold manufacturers around the world to utilize Sun's cartridge
valves in manifolds of their design.

[Photograph of a large, see-through manifold with four of the Company's
cartridge valves inserted in it. Various channels for hydraulic fluid are
highlighted in various colors.]

Custom directional control manifold mounts directly to a pump outlet,
significantly reducing hosing, fittings, and potential leakage points.

STANDARD CARTRIDGE VALVES AND MANIFOLDS

Sun Hydraulics designs and manufactures one of the most comprehensive lines of
standard screw-in cartridge valves and manifolds in its industry.

[Photograph of a large variety of the Company's screw-in hydraulic cartridge
valves and manifolds]

In addition to core products that include pressure controls, flow controls and
load controls (shown laying on their side in the photograph), Sun Hydraulics
manufactures a wide variety of complementary products to enable customers to
solve complex applications problems. All of Sun's screw-in cartridge valves are
designed to operate at high pressures, making them ideally suited for both
mobile and industrial applications.

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Investors should consider carefully the risk factors related to
the purchase of Common Stock of the Company. See "Risk Factors." Except as
otherwise indicated herein, (i) the term the "Company" refers to Sun Hydraulics
Incorporated and its subsidiaries (see "The Reorganization"); and (ii) the
information in this Prospectus (a) assumes the Underwriters' over-allotment
option is not exercised, (b) assumes an initial public offering price for the
Common Stock of $10.50 per share, and (c) gives effect to the consummation of
the Reorganization prior to the completion of the Offering.

THE COMPANY

The Company is a leading designer and manufacturer of high-performance,
screw-in hydraulic cartridge valves and manifolds which control force, speed and
motion as integral components in fluid power systems. The innovative floating
construction of the Company's screw-in cartridge valves provides demonstrable
performance and reliability advantages compared to other available screw-in
cartridge valves. Screw-in cartridge valves are an increasingly accepted
alternative to conventional forms of hydraulic valving, offering significant
design flexibility, as well as substantial size, weight and efficiency benefits
afforded to designers of fluid power systems. Since the introduction of screw-in
hydraulic cartridge valves in the late 1950s, manufacturers of these and similar
products have captured approximately $550 million of the worldwide market for
all non-aerospace hydraulic valves and manifolds, which management believes to
be in excess of $3 billion. The Company has generated a profit each year since
1972 and has achieved an internal compound annual growth rate in net sales of
17% over the last ten years. The Company believes that its success is primarily
a result of its innovative product design, consistent high quality and superior
product performance.

Fluid power involves the transfer and control of power through fluid under
pressure. Fluid power systems are integral to a wide variety of manufacturing,
material handling, agricultural and construction equipment. Due to its
mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power systems typically are comprised of
valves and manifolds that control the flow of fluids, a pump that generates
pressure, and actuators such as cylinders and motors that translate pressure
into mechanical energy.

The Company designs and manufactures one of the most comprehensive lines of
screw-in hydraulic cartridge valves in the world. These valves control
direction, pressure, flow and loads, are available in up to five size ranges,
and are suitable for flows from 5 to 400 gallons per minute and continuous
operating pressures up to 5,000 pounds per square inch. The floating
construction pioneered by the Company provides demonstrable performance and
reliability advantages compared to competitors' product offerings due to its
self-alignment characteristic that accommodates potential manufacturing
deviations common in the thread-making operations of screw-in cartridge valves
and manifolds. This floating construction significantly differentiates the
Company from most of its competitors, who design and manufacture rigid screw-in
cartridge valves that fit an industry common cavity. The Company believes that
competitors' products typically do not offer the inherent reliability of the
Company's products and do not provide equivalent operating performance because
of the design constraints imposed by the industry common cavity.

The Company also designs and manufactures the most comprehensive line of
standard manifolds in the world. A manifold is a solid block of metal, usually
aluminum, steel or ductile iron, which is machined to create threaded cavities
and channels into which screw-in cartridge valves are installed and through
which the hydraulic fluids flow. Fluid power engineers can package standard or
customized manifolds with screw-in cartridge valves to create
application-specific, multiple-function hydraulic control systems that are safe,
reliable and provide greater control. In 1995, screw-in cartridge valves
accounted for approximately 75% of the Company's net sales while standard and
custom manifolds accounted for approximately 25% of net sales.

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<PAGE> 5

The Company sells its products primarily through a global network of
independent fluid power distributors to a diverse universe of end users, for use
in various "mobile" applications, such as construction, agricultural and utility
equipment (approximately 65% of net sales), and a broad array of "industrial"
applications, such as machine tools and material handling equipment
(approximately 35% of net sales). Sales to the Company's largest distributor
represented approximately 6% of net sales in 1995, and the Company believes that
aggregate sales by its distributors to the largest end user represented less
than 3% of net sales in 1995.

The Company believes that screw-in cartridge valves will continue to
achieve significant growth at the expense of conventional hydraulic valves as
design engineers recognize the inherent advantages of screw-in cartridge valves.
The Company believes that additional growth potential for screw-in cartridge
valve applications exists as a result of a trend toward miniaturization as end
users require smaller, lighter-weight and more efficient components. Custom
manifolds that utilize screw-in cartridge valves allow customers to design an
optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense. The United States and Western Europe are the
largest developed markets for screw-in cartridge valves, and the Company
believes future growth prospects are particularly attractive in the Pacific Rim,
Eastern Europe and India, where the adoption of screw-in cartridge valves is in
an early stage. In 1995, approximately 34% of the Company's net sales were
outside the United States.

Management believes that the Company's success during its 26-year history
is due in large part to its emphasis on innovative product designs and
vertically integrated, state of the art manufacturing processes. Management
attributes the Company's ability to continuously implement process improvements
to its horizontal management structure that encourages employee contribution at
all levels. The Company does not have a formal organizational chart and employee
responsibilities do not devolve from titles or narrow job descriptions. This
management philosophy is utilized throughout the Company's operations.

The Company's objective is to enhance its position as one of the world's
leading designers and manufacturers of screw-in hydraulic cartridge valves by
(i) broadening the market for screw-in cartridge valve applications, (ii)
continuing the geographic expansion of its markets, and (iii) selectively
expanding its product lines. Key elements of the Company's strategy include the
following:

- Deliver Value Through High-Quality, High-Performance Products

- Offer a Wide Variety of "Off-the-Shelf" Products

- Capitalize on Custom Manifold Opportunities

- Expand Global Presence

- Maintain a Horizontal Organization with Entrepreneurial Spirit

- Leverage Manufacturing Capability and Know-how as Competitive Advantages

- Sell Through Distributors, Market to End Users

The Company's predecessor, Sun Hydraulics Corporation, was founded in 1970
by Robert E. Koski for the specific purpose of developing and promoting screw-in
cartridge valve technology. Mr. Koski remains active in the business as Chairman
of the Board of Directors. Sun Hydraulics Incorporated was incorporated in
Delaware in September 1996 for the purpose of acquiring all of the outstanding
capital stock of Sun Hydraulics Corporation, a Florida corporation, and Sun
Hydraulik Holdings Limited, a private limited company organized under the laws
of England and Wales. See "The Reorganization." The address of the Company's
executive offices is 1500 West University Parkway, Sarasota, Florida 34243, and
its telephone number is 941/362-1200.

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<PAGE> 6

THE OFFERING

Common Stock offered by the
Company............................. 2,000,000 shares

Common Stock outstanding after the
Offering............................ 6,000,000 shares(1)

Use of Proceeds..................... To repay debt principally related to
equipment financing and mortgage
financing of the Company's existing and
new Florida manufacturing plants, to
pay the S Corporation Distribution and
for general corporate purposes. See
"Use of Proceeds."

Proposed Nasdaq National Market
Symbol.............................. "SNHY"
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(1) Does not include an aggregate of 1,000,000 shares of Common Stock reserved
for issuance under the Company's 1996 Stock Option Plan. As of September
30, 1996, there were options to purchase 319,960 shares of Common Stock
outstanding under the Company's 1996 Stock Option Plan and the Company has
committed to issue immediately after the consummation of the Offering
options to purchase an additional 289,348 shares of Common Stock. See
"Management -- Stock Option Plan."

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
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1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $26,250 $28,331 $32,431 $42,853 $55,388 $42,718 $41,233
Cost of sales......................... 16,928 17,946 21,971 27,512 34,581 26,361 27,903
------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 9,322 10,385 10,460 15,341 20,807 16,357 13,330
Selling, engineering and
administrative expenses............. 7,319 7,826 7,346 8,605 10,578 7,652 9,288(1)
------- ------- ------- ------- ------- ------- -------
Operating income...................... 2,003 2,559 3,114 6,736 10,229 8,705 4,042
Interest expense...................... 1,118 997 931 859 814 612 678
Miscellaneous (income) expense........ (320) (252) 249 66 (79) (81) 107
------- ------- ------- ------- ------- ------- -------
Income before income taxes............ 1,205 1,814 1,934 5,811 9,494 8,174 3,257
Income tax provision (benefit)(2)..... 46 (201) (148) 408 633 478 727
------- ------- ------- ------- ------- ------- -------
Net income............................ $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF INCOME DATA:(3)
Income before income taxes............ $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257
Income tax provision.................. 481 580 604 2,738 3,611 3,069 1,255
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Net income............................ $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002
======= ======= ======= ======= ======= ======= =======
Net income per common share(4)........ $ 1.13 $ 0.38
Weighted average shares
outstanding(4)...................... 5,203 5,292
OTHER FINANCIAL DATA:
EBITDA(5)............................. $ 3,956 $ 4,530 $ 5,226 $ 8,933 $12,785 $10,508 $ 6,330
Depreciation.......................... 1,953 1,971 2,112 2,197 2,556 1,803 2,288
Capital expenditures.................. 1,683 1,987 3,005 5,130 7,657 5,316 12,423
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
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PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................. $ 3,064 $ (6,841) $ 3,669
Total assets.................................................... 43,681 43,681 43,681
Total debt...................................................... 14,538 14,538 5,613
Shareholders' equity............................................ 23,845(6) 11,995 30,825
</TABLE>

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<PAGE> 7

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(1) Includes a non-recurring, non-cash compensation expense of approximately
$1.4 million related to the termination of phantom stock compensation
agreements and the issuance of options to Directors. See Note 16 of the
Notes to Financial Statements. Excluding such expense, EBITDA and pro forma
net income for the nine months ended September 30, 1996 would have been
approximately $7.7 million and $2.9 million, respectively.

(2) The Company has previously operated as an S Corporation. Therefore, the
historical income tax provision represents primarily foreign taxes.

(3) The pro forma statement of income data is based on historical net income as
adjusted to reflect a provision for income taxes calculated using the
statutory rates in effect during the applicable periods, as if the Company
had been a C Corporation since inception. See Notes 2 and 11 of the Notes
to Financial Statements.

(4) The pro forma net income per share data is based on the historical weighted
average number of shares outstanding and as adjusted to reflect the assumed
issuance of 1,052,000 shares (as of the beginning of each respective
period) to fund the S Corporation Distribution as of September 30, 1996.
See "S Corporation Distribution."

(5) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA represents supplemental information
only and is not to be construed as an alternative to operating income or to
cash flows from operating activities as defined by U.S. Generally Accepted
Accounting Principles.

(6) Shareholders' equity reflects the Reorganization. See "The Reorganization"
and Note 2 of the Notes to Financial Statements.

(7) The pro forma column reflects (a) the declaration of the S Corporation
Distribution of approximately $9.9 million and (b) the recognition of an
estimated provision of approximately $1.9 million for deferred income taxes
which would have been required had the Company terminated its S Corporation
status at September 30, 1996. See Notes 1 and 11 of the Notes to Financial
Statements.

(8) Gives effect to the adjustments in Note (7) above, the sale of shares of
Common Stock offered hereby and the application of the net proceeds
therefrom as set forth under "Use of Proceeds."

References herein to the Notes to Financial Statements, unless otherwise
indicated, refer to the Notes to the Combined Financial Statements of Sun
Hydraulics Incorporated, contained elsewhere herein.

This Prospectus contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Those statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company,
its Directors or its Officers with respect to, among other things: (i) the use
of the proceeds of the Offering; (ii) the Company's financing plans; (iii)
trends affecting the Company's financial condition or results of operations;
(iv) the Company's growth strategy and operating strategy; and (v) the
declaration and payment of dividends. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. The accompanying information contained in this Prospectus, including
without limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences.

6
<PAGE> 8

RISK FACTORS

In evaluating the Offering, prospective investors should consider carefully
all of the information contained in this Prospectus and, in particular, the
following risk factors relating to the Company and to the Common Stock.

POTENTIAL MARKETPLACE ADOPTION OF INDUSTRY STANDARD. A significant portion
of the Company's revenues are derived from the sale of its screw-in cartridge
valves that fit into a unique cavity. To date, no other manufacturer has
designed products of any significance that fit this cavity; most competitive
manufacturers produce screw-in cartridge valves that fit into an industry common
cavity. Accordingly, the Company's screw-in cartridge valves are not
interchangeable with those of other manufacturers. Additionally, the
International Standards Organization ("ISO") recently has adopted an industry
standard for screw-in hydraulic cartridge valve cavities that is based on metric
threads and only specifies dimensional data and flow paths. The Company has not
adopted either the industry common cavity or the ISO standard cavity for its
products because it believes both fail to address critical functional
requirements, which could result in performance and safety problems of
significant magnitude for end users. While there are not yet any noticeable
market pressures to supply screw-in cartridge valves that fit the ISO standard
cavity, and no major competitor has converted its products to fit this standard
cavity, any move toward the adoption of the ISO standard cavity for cartridge
valves in the screw-in cartridge valve and manifold industry could have a
material adverse effect on the Company's business, financial condition and
results of operation. See "Business -- Competition."

RISKS RELATING TO GROWTH STRATEGY. In pursuing its growth strategy, the
Company intends to expand its presence in its existing markets and enter new
geographic markets. In addition, the Company may pursue acquisitions and joint
ventures to complement its business. Many of the expenses arising from the
Company's expansion efforts may have a negative effect on operating results
until such time, if at all, as these expenses are offset by increased revenues.
There can be no assurance that the Company will be able to implement its growth
strategy or that its strategy ultimately will be successful. See
"Business -- Strategy."

The Company's expansion strategy also may require substantial capital
investment for the construction of new facilities and their effective operation.
The Company may finance the acquisition of additional assets using cash from
operations, bank or institutional borrowings, or through the issuance of debt or
equity securities. There can be no assurance that the Company will be able to
obtain financing from bank or institutional sources or through the equity or
debt markets or that, if available, such financing will be on terms acceptable
to the Company.

The Company currently is involved in an expansion of its facilities in
Florida and Germany. The Company also currently is engaged in the implementation
of new accounting and manufacturing computer software systems. These matters
require significant attention from senior management and may divert their
attention from other aspects of the business. There can be no assurance that the
facilities expansion can be completed on time within budget and that the new
computer software systems can be timely and efficiently integrated into the
Company's operations. Failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operation.

FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly results are
subject to significant fluctuation based upon the time of receipt of orders from
distributors and requested shipments of products. While the Company's
distributors stock inventory, shipments are largely dependent upon delivery
requirements of end users. In addition to fluctuations due to economic
cyclicality, the Company generally has experienced reduced activity during the
fourth quarter of the year, largely as a result of fewer working days due to
holiday shutdowns. As a result, the Company's fourth quarter net sales, income
from operations and net income typically have been the lowest of any quarter
during the year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Seasonality."

DEPENDENCE ON KEY EMPLOYEES AND SKILLED PERSONNEL. The Company's success
depends, to a significant extent, upon a number of key individuals. The loss of
the services of one or more of these individuals, including the Company's
Chairman, Robert E. Koski, or its President and Chief Executive

7
<PAGE> 9

Officer, Clyde G. Nixon, could have a material adverse effect on the business of
the Company. The Company's future operating results depend to a significant
degree upon the continued contribution of its key technical personnel and
skilled labor force. Competition for management and engineering personnel is
intense, and the Company competes for qualified personnel with numerous other
employers, some of whom have greater financial and other resources than the
Company. The Company conducts a substantial part of its operations at its
factory in Sarasota, Florida. The Company's continued success depends on its
ability to attract and retain a skilled labor force at this location. While the
Company has been successful in attracting and retaining skilled employees in the
past, there can be no assurance that the Company will continue to be successful
in attracting and retaining the personnel it requires to develop, manufacture
and market its products and expand its operations. See "Business -- Employees."

COMPETITION. The hydraulic valve industry is highly fragmented and
intensely competitive, with the Company facing competition from a large number
of competitors, some of which are full-line producers and others that are niche
suppliers like the Company. Full-line producers have the ability to provide
total hydraulic systems to customers, including components functionally similar
to those manufactured by the Company. The Company believes that it competes
based upon quality, reliability, price, value, speed of delivery and
technological characteristics. Many of the Company's screw-in cartridge valve
competitors are owned by corporations which are significantly larger than the
Company and have greater financial resources than the Company. There can be no
assurance that the Company will continue to be able to compete effectively with
these companies.

The manifold business is also highly fragmented and intensely competitive.
All of the major screw-in cartridge valve manufacturers either manufacture
manifolds or have sources that they use on a regular basis. In addition, there
are a number of independent manifold suppliers that produce manifolds
incorporating various manufacturers' screw-in cartridge valves, including those
made by the Company. Finally, there are many small, independent machine shops
that produce manifolds at very competitive prices. Competition in the manifold
business is based upon quality, price, relationships based on proximity to the
customer, and speed of delivery. Many of the Company's competitors have very low
overhead structures and there can be no assurance that the Company will continue
to be able to compete effectively with these companies.

In addition, the Company competes in the sale of hydraulic valves and
manifolds with certain of its customers. Generally, these customers purchase
special purpose valves from the Company to meet a specific need in a system
which cannot be filled by any valve made by such customer. To the extent that
the Company introduces new valves in the future that increase the competition
between the Company and such customer, such competition could adversely affect
the Company's relationships with these customers.

CYCLICALITY. The capital goods industry in general, and the hydraulic
valve and manifold industry in particular, is subject to economic cycles.
Cyclical downturns could have a material adverse effect on the Company's
business, financial condition and results of operation.

MANUFACTURING CAPACITY EXPANSION. The Company's Sarasota, Florida,
manufacturing facility is currently operating near full capacity. In March 1996,
the Company began construction of a new plant in Sarasota, Florida, which will
be used for the manufacture of manifolds. It is intended that, after the new
facility is completed, the existing Sarasota plant will be utilized solely for
the manufacture of the Company's screw-in cartridge valves. Construction of the
new plant is expected to be completed early in 1997. In March 1996, the Company
began construction of a new plant in Erkelenz, Germany, which is scheduled to be
completed by the end of 1996. There can be no assurance that the Company will be
able to complete its plant expansions on a timely basis or that production will
commence on schedule. Any delay in opening the new facilities, unanticipated
disruptions to manufacturing at the current facility or unanticipated startup
costs at either new facility could adversely affect the Company's business,
financial condition and results of operation. See "Business -- Properties."

INTERNATIONAL SALES. In 1995, approximately 34% of the Company's net sales
were outside of the United States. The Company is expanding the scope of its
operations outside the United States, both through direct investment and
distribution and expects that international sales will continue to account for a
significant portion of net sales in future periods. International sales are
subject to various risks, including unexpected

8
<PAGE> 10

changes in regulatory requirements and tariffs, longer payment cycles,
difficulties in receivable collections, potentially adverse tax consequences,
trade or currency restrictions and, particularly in emerging economies,
potential political and economic instability and regional conflicts.
Furthermore, the Company's international operations generate sales in a number
of foreign currencies, particularly British pounds and German marks. Therefore,
the Company's financial condition and results of operation are affected by
fluctuations in exchange rates between the United States dollar and these
currencies. Any or all of these factors could have a material adverse effect on
the Company's business, financial condition and results of operation.

INDEPENDENT DISTRIBUTORS. The Company uses independent distributors and
does not maintain an internal sales force. While the Company knows of no current
intention of any of its principal distributors to terminate existing
relationships, there is no assurance of the continuation of such relationships.
In the event any current relationships are terminated, there can be no assurance
that the Company will be able to secure adequate substitutions, and such
inability could have a material adverse effect on the Company's business,
financial condition and results of operation. See "Business -- Sales and
Marketing."

ENVIRONMENTAL COMPLIANCE. The Company's operations involve the handling
and use of substances that are subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants into
the soil, air and water and establish standards for their storage and disposal.
Management believes that the Company's current operations are in substantial
compliance with applicable environmental laws and regulations, the violation of
which could have a material adverse effect on the Company. There can be no
assurance, however, that currently unknown matters, new laws and regulations, or
stricter interpretations of existing laws or regulations will not materially
affect the Company's business or operations in the future.

RISK OF PRODUCT LIABILITY. The application of many of the Company's
products entails an inherent risk of product liability. There can be no
assurance that the Company will not face any material product liability claims
in the future or that the product liability insurance maintained by the Company
at such time will be adequate to cover such claims.

OPERATION AS A PUBLIC COMPANY. Since its inception, the Company has
maintained a very long-term view of its business operations. Product
developments, process developments and capital investments have been executed to
achieve long-term benefits. The Company also believes that one of its
competitive strengths is its horizontal management structure which fosters broad
employee involvement in all aspects of its operations. Following the Offering,
the potential for the Company to focus on short-term financial results could
have an adverse effect on the Company's internal culture and significantly alter
the Company's long-term view and, as a result, its long-term business
performance and operating results.

TECHNOLOGICAL CHANGE. The fluid power industry and its component parts are
subject to technological change, evolving industry standards, changing customer
requirements and improvements in and expansion of product offerings. If
technologies or standards used in the Company's products become obsolete, the
Company's business, financial condition and results of operation will be
adversely affected. Although the Company believes that it has the technological
capabilities to remain competitive, there can be no assurance that developments
by others will not render the Company's products or technologies obsolete or
noncompetitive. See "Business -- Strategy."

RAW MATERIALS. The primary raw materials used by the Company in the
manufacture of its products are aluminum, ductile iron and steel. There can be
no assurance that prices for such materials will remain stable. If the Company
is unable to pass through any price increases to its customers, the operating
results of the Company will be adversely affected.

PAYMENT OF SUBSTANTIAL PORTION OF OFFERING PROCEEDS TO CURRENT
STOCKHOLDERS. In connection with the Reorganization and immediately before the
closing of the Offering, the Company will terminate its status as an S
Corporation and will declare a distribution to its stockholders in an aggregate
amount equal to the Company's undistributed S Corporation earnings through such
date. As of September 30, 1996, the amount of such undistributed earnings
totalled approximately $9.9 million. The actual amount of the distribution will
include the taxable income of the Company for the period from October 1, 1996,
through the date of the

9
<PAGE> 11

consummation of the Reorganization, less any foreign or other taxes payable by
the Company. The distribution will be paid by the Company from the net proceeds
of the Offering. See "Use of Proceeds" and "S Corporation Distribution." The
purchasers of Common Stock in the Offering will not receive any portion of the S
Corporation Distribution.

PAYMENT OF DIVIDENDS. Although the Company currently intends to pay
quarterly cash dividends beginning with the quarter ending March 31, 1997, there
can be no assurance that there will be funds available therefor. The declaration
and payment of dividends will be subject to the sole discretion of the Board of
Directors of the Company and will depend upon the Company's profitability,
financial condition, capital needs, future prospects and other factors deemed
relevant by the Board of Directors, and may be restricted by the terms of the
Company's credit agreements.

CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Certificate of
Incorporation provides for a classified Board of Directors. In addition, the
Certificate of Incorporation gives the Board of Directors the authority, without
further action by the stockholders, to issue and fix the rights and preferences
of a new class, or classes, of preferred stock. These and other provisions of
the Certificate of Incorporation and the Company's Bylaws may deter or delay
changes in control of the Company, including transactions in which stockholders
might otherwise receive a premium for the shares over then current market
prices. In addition, these provisions may limit the ability of stockholders to
approve transactions that they may deem to be in their best interests. See
"Description of Capital Stock."

CONTROL BY CURRENT STOCKHOLDERS AND MANAGEMENT. Following the sale of the
shares of Common Stock offered hereby, Robert E. Koski and members of his family
will own or control approximately 43.5% of the outstanding shares of Common
Stock (41.4% if the Underwriters' over-allotment option is exercised in full).
Accordingly, the members of the Koski family likely will have the ability to
control the election of the Company's Directors and the outcome of certain
corporate actions requiring stockholder approval and to control the business of
the Company. Such control could preclude any acquisition of the Company and
could adversely affect the price of the Common Stock. Additionally, all
Directors and Executive Officers of the Company as a group will beneficially own
or control approximately 31.0% of the outstanding shares of Common Stock (29.6%
if the Underwriters' over-allotment option is exercised in full). See "Principal
Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock after the Offering, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. There will be
6,000,000 shares of Common Stock outstanding immediately following the
consummation of the Offering (6,300,000 shares if the Underwriters'
over-allotment option is exercised in full). The 2,000,000 shares of Common
Stock offered hereby (plus an additional 300,000 shares if the Underwriters'
over-allotment option is exercised in full) will be fully tradeable without
restriction or registration under the Securities Act by persons other than
"affiliates" (as defined in the Securities Act) of the Company. The shares of
Common Stock other than those offered hereby will be "restricted securities"
under the Securities Act and may only be sold pursuant to an effective
registration statement under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act, including Rule 144
thereunder. Upon completion of the Offering, the Company intends to file an S-8
registration statement to register up to 1,000,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1996 Stock Option Plan. See
"Management -- Stock Option Plan." The Company, all Directors and Executive
Officers and all holders of more than 5% of the Common Stock prior to the
Offering have agreed with the Underwriters not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of their shares of Common
Stock of the Company or any securities convertible into or exercisable or
exchangeable for such Common Stock or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of such
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of A.G. Edwards & Sons, Inc. See "Shares Eligible for
Future Sale."

NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price negotiated
between the

10
<PAGE> 12

Company and the Underwriters may not be indicative of prices that will prevail
in the trading market after the Offering, and there can be no assurance that the
market price of the Common Stock after the Offering will not fall below the
initial public offering price. See "Underwriting". There has historically been
significant volatility in the market price of securities of manufacturing and
capital goods companies. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. Many factors that
have influenced trading, such as actual or anticipated operating results, growth
rates, changes in estimates by analysts, market conditions in the industry,
announcements by competitors, regulatory actions and general economic
conditions, will vary from period to period. As a result of the foregoing, the
Company's operating results and prospects from time to time may be below the
expectations of public market analysts and investors. Any such event would
likely result in a material adverse effect on the price of the Common Stock.

IMMEDIATE AND SUBSTANTIAL DILUTION. Investors purchasing shares of Common
Stock in the Offering will incur immediate, substantial dilution. See
"Dilution."

11
<PAGE> 13

S CORPORATION DISTRIBUTION

Prior to the consummation of the Reorganization, the Company was treated
for federal and certain state income tax purposes as an S Corporation under the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable state tax
laws. As a result, the Company's earnings were taxed for federal and certain
state income tax purposes directly to its stockholders. Upon the consummation of
the Reorganization, the Company's status as an S Corporation will be terminated.
The Company intends to declare a distribution (the "S Corporation Distribution")
of all of its undistributed earnings through the date of termination of its S
Corporation status to stockholders of record of the Company as of October 5,
1996. As of September 30, 1996, the amount of the S Corporation Distribution
would have totalled approximately $9.9 million. The actual amount of the S
Corporation Distribution will include the taxable income of the Company for the
period from October 1, 1996, through the date of the consummation of the
Reorganization, less any foreign or other taxes payable by the Company. The S
Corporation Distribution will be paid by the Company with a portion of the net
proceeds of the Offering. See "Use of Proceeds." The purchasers of Common Stock
in the Offering will not receive any portion of the S Corporation Distribution.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $10.50
per share (after deducting the underwriting discount and estimated offering
expenses), are estimated to be approximately $18.8 million. The Company intends
to use the net proceeds of the Offering as follows:

(i) approximately $8.9 million to repay the outstanding balance of the
Company's $3.0 million capital equipment loan, the outstanding indebtedness
under the $2.4 million mortgage loan on the Company's existing
manufacturing facility in Florida and approximately $3.5 million of the
indebtedness under a 10-year mortgage loan for $6.2 million related to the
new manufacturing facility in Florida. These loans had a weighted average
interest rate of 8.25% at September 30, 1996, and maturity dates of May 1,
2003, for the capital equipment loan, April 1, 2006, for the mortgage loan
on the existing facility and July 1, 2006, for the new facility mortgage
loan;

(ii) approximately $9.9 million will be used to pay the S Corporation
Distribution; and

(iii) any remainder will be used for general corporate purposes.

Pending the application of the net proceeds as described above, such
proceeds will be placed in interest-bearing bank accounts or invested in
short-term United States government securities, certificates of deposit of major
banks, money market mutual funds or investment-grade commercial paper.

DIVIDEND POLICY

The Company currently intends to pay quarterly cash dividends of $.035 per
share, beginning with the quarter ending March 31, 1997, assuming that there are
funds legally available therefor. However, the declaration and payment of
dividends will be subject to the sole discretion of the Board of Directors of
the Company and will depend upon the Company's profitability, financial
condition, capital needs, future prospects and other factors deemed relevant by
the Board of Directors. Further, the revolving line of credit agreement the
Company expects to enter into prior to the consummation of the Offering may
include covenants which restrict the payment of dividends.

12
<PAGE> 14

CAPITALIZATION

The following table sets forth the short-term borrowings and capitalization
of the Company at September 30, 1996, and as adjusted to give effect to the sale
by the Company of the Common Stock offered hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds."

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total short-term debt...................................... $ 1,750 $ 1,750 $ 1,145
======= ======= =======
Total long-term debt....................................... $12,788 $ 12,788 $ 4,468
------- ------- -------
Stockholders' equity (3):
Common Stock, $.001 par value, 20,000,000 shares
authorized, 4,000,000 shares issued and outstanding
and 6,000,000 shares issued and outstanding as
adjusted; preferred stock, $.001 par value, 2,000,000
shares authorized, no shares issued and outstanding as
adjusted.............................................. 4 4 6
Capital in excess of par value........................... 4,800 4,800 23,628
Retained earnings........................................ 19,427 7,577 7,577
Equity adjustment for foreign currency translation....... (386) (386) (386)
------- ------- -------
Total stockholders' equity....................... 23,845 11,995 30,825
------- ------- -------
Total capitalization............................. $36,633 $ 24,783 $ 35,293
======= ======= =======
</TABLE>

- ---------------

(1) Pro Forma for the Reorganization as if the following had occurred as of
September 30, 1996: (i) the S Corporation Distribution of approximately
$9.9 million and (ii) the provision for deferred income taxes of
approximately $1.9 million. See "S Corporation Distribution" and Notes 1
and 11 of the Notes to Financial Statements.

(2) Gives effect to the adjustments described in Note (1) above, the receipt of
the estimated net proceeds from the Offering and the application of such
proceeds as set forth under "Use of Proceeds."

(3) Actual stockholders' equity as of September 30, 1996, gives effect to the
Reorganization. See "The Reorganization."

13
<PAGE> 15

DILUTION

Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the assumed initial public offering price. The net tangible book value of
the Company at September 30, 1996, was approximately $23.8 million, or $5.96 per
share. Net tangible book value per share is equal to net tangible assets
(tangible assets of the Company less total liabilities) divided by the number of
shares of Common Stock outstanding. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering and the pro forma net tangible book value
per share of Common Stock immediately after completion of the Offering. After
giving effect to the payment of the S Corporation Distribution, the provision
for deferred income taxes to be recorded upon the Company's termination of its S
Corporation status, and the sale of the 2,000,000 shares of Common Stock offered
hereby (after deducting the underwriting discount and estimated offering
expenses), the pro forma net tangible book value of the Company as of September
30, 1996, would have been approximately $30.8 million, or $5.14 per share. This
represents an immediate increase in net tangible book value of $2.15 per share
to existing stockholders and an immediate dilution in net tangible book value of
$5.36 per share to purchasers of Common Stock in the Offering, as illustrated in
the following table:

<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $10.50
Net tangible book value per share at September 30, 1996........... $5.96
Decrease attributable to S Corporation Distribution(1)............ 2.48
Decrease attributable to provision for deferred income taxes(2)... .49
-----
Subtotal....................................................... 2.99
Increase per share attributable to new investors.................. 2.15
-----
Pro forma net tangible book value per share after the Offering...... 5.14
------
Net tangible book value dilution per share to new investors......... $ 5.36
======
</TABLE>

- ---------------

(1) As of September 30, 1996, the amount of the S Corporation Distribution would
have totalled approximately $9.9 million. The actual amount of the S
Corporation Distribution will include the taxable income of the Company for
the period from October 1, 1996, through the date of the consummation of
the Reorganization, less any foreign or other taxes payable by the Company.

(2) Represents an expense of approximately $1.9 million resulting from
recognition of deferred income taxes to be recorded by the Company upon
termination of its S Corporation status.

The following table sets forth certain information with respect to the
number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid, by existing
stockholders:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 4,000,000 66.7% $ 4,804,000(1) 18.6% $ 1.20
New investors......................... 2,000,000 33.3% 21,000,000 81.4% 10.50
--------- ----- ----------- -----
Total................................. 6,000,000 100.0% $25,804,000 100.0%
========= ===== =========== =====
</TABLE>

- ---------------

(1) Represents aggregate par value and capital in excess of par value as of
September 30, 1996.

The foregoing tables assume no exercise of outstanding options. As of
September 30, 1996, there were options outstanding to purchase 319,960 shares of
Common Stock at a weighted average price of $3.90 per share, all of which are
presently exercisable. Additionally, the Company has committed to issue
immediately after the consummation of the Offering options to purchase 289,348
shares at the initial public offering price of the Common Stock. Of such
additional options, options to purchase 39,168 shares of Common Stock will be
exercisable within 60 days. See "Management -- Stock Option Plan" and "Shares
Eligible for Future Sale."

14
<PAGE> 16

SELECTED FINANCIAL DATA

Set forth below is selected financial data for each of the five years ended
December 31, 1995, and for the nine month periods ended September 30, 1995 and
1996. The selected financial data for each of the three years ended December 31,
1995, has been derived from the Company's combined financial statements which
have been audited by Price Waterhouse LLP, independent certified public
accountants, that are included elsewhere herein and should be read in
conjunction with such financial statements and the Notes thereto. The selected
unaudited financial data for the years ended December 31, 1991 and 1992 has been
derived from financial statements that are not included herein. The selected
financial data as of and for the nine months ended September 30, 1995 and 1996
has been derived from the Company's unaudited interim combined financial
statements contained elsewhere herein. In the opinion of management, the
unaudited combined financial statements have been prepared on the same basis as
the audited combined financial statements and include all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the financial position and results of operations for these periods. Results
of operations for the nine months ended September 30, 1996, are not necessarily
indicative of results to be expected for the year ending December 31, 1996. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," "Risk
Factors" and the Combined Financial Statements and the Notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................................... $26,250 $28,331 $32,431 $42,853 $55,388 $42,718 $41,233
Cost of sales..................................... 16,928 17,946 21,971 27,512 34,581 26,361 27,903
------- ------- ------- ------- ------- ------- -------
Gross profit...................................... 9,322 10,385 10,460 15,341 20,807 16,357 13,330
Selling, engineering and administrative
expenses........................................ 7,319 7,826 7,346 8,605 10,578 7,652 9,288(1)
------- ------- ------- ------- ------- ------- -------
Operating income.................................. 2,003 2,559 3,114 6,736 10,229 8,705 4,042
Interest expense.................................. 1,118 997 931 859 814 612 678
Miscellaneous (income) expense.................... (320) (252) 249 66 (79) (81) 107
------- ------- ------- ------- ------- ------- -------
Income before income taxes........................ 1,205 1,814 1,934 5,811 9,494 8,174 3,257
Income tax provision (benefit)(2)................. 46 (201) (148) 408 633 478 727
------- ------- ------- ------- ------- ------- -------
Net income........................................ $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF INCOME DATA:(3)
Income before income taxes........................ $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257
Income tax provision.............................. 481 580 604 2,738 3,611 3,069 1,255
------- ------- ------- ------- ------- ------- -------
Net income........................................ $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002
======= ======= ======= ======= ======= ======= =======
Net income per common share(4).................... $ 1.13 $ 0.38
Weighted average shares outstanding(4)............ 5,203 5,292
OTHER FINANCIAL DATA:
EBITDA(5)......................................... $ 3,956 $ 4,530 $ 5,226 $ 8,933 $12,785 $10,508 $ 6,330
Depreciation...................................... 1,953 1,971 2,112 2,197 2,556 1,803 2,288
Capital expenditures.............................. 1,683 1,987 3,005 5,130 7,657 5,316 12,423
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1,711 $ 1,128 $ 1,883 $ 2,371 $ 2,434 $ 1,493 $ 1,187
Working capital................................... 4,474 3,396 4,557 5,085 4,326 5,591 3,064
Total assets...................................... 22,445 20,411 22,674 27,868 33,864 32,304 43,681
Total debt........................................ 8,541 7,637 8,184 8,025 6,186 6,095 14,538
Shareholders' equity.............................. 10,690 10,805 12,051 15,624 21,529 20,932 23,845
</TABLE>

15
<PAGE> 17

- ---------------

(2) The Company has previously operated as an S Corporation. Therefore, the
historical income tax provision represents primarily foreign taxes.

16
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto and
Selected Financial Data included elsewhere in this Prospectus. Historical
operating results are not necessarily indicative of trends in operating results
for any future period.

OVERVIEW

The Company is a leading designer and manufacturer of high-performance,
screw-in hydraulic cartridge valves and manifolds which control force, speed and
motion as integral components in fluid power systems. The Company's innovative
product design, consistent high quality and superior product performance have
allowed it to generate a profit in every year since 1972 and achieve an internal
compound annual growth rate in net sales of 17% over the last ten years. In
recent years, the Company's sales have been comprised of approximately 75%
screw-in cartridge valves and approximately 25% manifolds, and the Company
expects that relationship to remain relatively constant. The Company sells its
products globally through independent distributors and in 1995 generated
approximately 34% of its net sales outside the United States.

The Company experienced significant growth in net sales and improvements in
profitability in 1994 and 1995. Management believes that the Company's growth
was due primarily to the increasing awareness of the quality, reliability and
design flexibility of the Company's products and its increased presence in
international markets, as well as the growth of the hydraulics market in
general. In the nine months ended September 30, 1996, the Company experienced a
decline in net sales and gross margin due to declines in industry shipments and
temporary inefficiencies caused by the Company's existing plant in Sarasota,
Florida, operating near full capacity. The Company believes that the new
facility under construction in Sarasota, Florida, will address the current
capacity constraints.

The capital goods industry in general, and the hydraulic valve and manifold
industry in particular, is subject to economic cycles. Following three years of
rapid growth, the hydraulic valve and manifold industry peaked in mid-1995. The
National Fluid Power Association ("NFPA") estimated a decline in domestic
industry shipments in excess of 2% in the first half of 1996. The Company's net
sales during the nine months ended September 30, 1996, although adversely
affected by capacity constraints, were in line with industry trends.
Historically, the Company has managed to mitigate negative consequences of
cyclical downturns with new product introductions and geographic and end user
market diversity. In 1995, approximately 34% of the Company's net sales were
outside the United States and the Company's single largest end user customer
represented less than 3% of net sales.

The Company maintains facilities in the United States, the United Kingdom
and Germany. The United States plant manufactures screw-in cartridge valves and
manifolds, and supplies the United Kingdom plant with finished products and some
cartridge valve components for final assembly and test. The United Kingdom
operation also manufactures manifolds and supplies a portion to the United
States plant. Both the United States and United Kingdom operations supply
technical support and finished product to the German distribution facility. The
United States dollar is the functional currency for all intercompany sales, and
international sales are made in a number of foreign currencies, particularly
British pounds and German marks. Currency fluctuations have not been material to
date, but could become more important as the Company's international sales grow
in the future.

The Company has been an S Corporation for federal and state income tax
purposes. As a result, the Company has not been subject to federal and state
income taxes, but has been subject to foreign taxes. The Company will terminate
its S Corporation status in connection with the consummation of the
Reorganization and will be fully subject to federal and state income taxes in
the future. Upon termination of S Corporation status, the Company will be
required to recognize approximately $1.9 million of deferred income taxes.

17
<PAGE> 19

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items in
the Company's statements of income as a percentage of net sales. Results for any
one or more periods are not necessarily indicative of annual results or
continuing trends.

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 67.7 64.2 62.4 61.7 67.7
----- ----- ----- ----- -----
Gross profit....................................... 32.3 35.8 37.6 38.3 32.3
Selling, engineering and administrative expenses... 22.7 20.1 19.1 17.9 22.5
----- ----- ----- ----- -----
Operating income................................... 9.6 15.7 18.5 20.4 9.8
Interest expense................................... 2.9 2.0 1.5 1.4 1.6
Miscellaneous (income) expense..................... 0.7 0.1 (0.1) (0.1) 0.3
----- ----- ----- ----- -----
Income before income taxes......................... 6.0% 13.6% 17.1% 19.1% 7.9%
===== ===== ===== ===== =====
</TABLE>

Comparison of Nine Months Ended September 30, 1996 and 1995

Net sales decreased 3.5%, or $1.5 million, to $41.2 million in the nine
month period ended September 30, 1996, compared to $42.7 million in the nine
month period ended September 30, 1995. Domestic net sales decreased 3.6%, or
$1.0 million to $27.3 million in the nine month period ended September 30, 1996,
primarily due to distributor inventory adjustments as well as to a general
decline in hydraulic industry shipments. International net sales decreased 3.2%,
or $0.5 million, to $13.9 million in the nine month period ended September 30,
1996. United Kingdom net sales increased 10.3% while net sales decreased in
Germany and Canada 14.9% and 25.3%, respectively.

Gross profit decreased 18.5%, or $3.0 million, to $13.3 million in the nine
month period ended September 30, 1996, compared to $16.4 million in the nine
month period ended September 30, 1995. Gross profit as a percentage of net sales
decreased to 32.3% for the nine month period ended September 30, 1996, from
38.3% for the nine month period ended September 30, 1995. The decrease in gross
profit was primarily due to increased costs in the United States plant as new
machinery for future growth was installed in severely restricted space, creating
excess down time and start-up costs. In addition, material cost increases also
were experienced due to an increase in outsourcing necessitated by the United
States plant operating near full capacity.

Selling, engineering and administrative expenses increased 21.4% or $1.6
million, to $9.3 million in the nine month period ended September 30, 1996,
compared to $7.7 million in the nine month period ended September 30, 1995.
These expenses as a percentage of net sales increased to 22.5% for the nine
month period ended September 30, 1996, from 17.9% for the nine month period
ended September 30, 1995. The increase in selling, engineering and
administrative expenses was primarily due to a non-recurring, non-cash
compensation expense of $1.4 million related to the issuance of stock options
and the cancellation of phantom stock compensation agreements and increases in
software development costs and professional fees. Excluding the $1.4 million
compensation expense, selling, engineering and administrative expenses as a
percentage of sales would have been 19.2% for the nine month period ended
September 30, 1996, compared to 17.9% for the nine month period ended September
30, 1995.

Comparison of Years Ended December 31, 1995 and 1994

Net sales increased 29.3%, or $12.5 million, to $55.4 million in 1995,
compared to $42.9 million in 1994. Domestic net sales increased 27.7%, or $7.9
million, to a total of $36.6 million in 1995, compared to $28.7 million in 1994.
International net sales increased 32.5%, or $4.6 million, to $18.8 million in
1995, compared to

18
<PAGE> 20

$14.2 million in 1994. The international net sales increase was due primarily to
increased volume across all major geographic areas led by the Pacific Rim and
Canada.

Gross profit increased 35.6%, or $5.5 million, to $20.8 million in 1995,
compared to $15.3 million in 1994. Gross profit as a percentage of net sales
increased to 37.6% in 1995 from 35.8% in 1994. The improvement in gross margin
was generally due to allocating fixed costs over a greater sales base.

Selling, engineering and administrative expenses increased 22.9%, or $2.0
million, to $10.6 million in 1995, compared to $8.6 million in 1994. The
increase in selling, engineering and administrative expenses was primarily due
to increased customer support staffing, research and development expenses and
professional fees. These expenses as a percentage of net sales decreased to
19.1% in 1995 from 20.1% in 1994. The decrease in these expenses as a percentage
of net sales resulted from allocating these higher expenses over greater net
sales.

Comparison of Years Ended December 31, 1994 and 1993

Net sales increased 32.1%, or $10.4 million, to $42.8 million in 1994,
compared to $32.4 million in 1993. Domestic net sales increased 27.0%, or $6.1
million, to $28.7 million in 1994, compared to $22.6 million in 1993.
International net sales increased 44.0%, or $4.3 million, to $14.1 million in
1994, compared to $9.8 million in 1993, primarily due to increased volume in
Europe.

Gross profit increased 46.7%, or $4.9 million, to $15.3 million in 1994,
compared to $10.4 million in 1993. Gross profit as a percentage of net sales
increased to 35.8% in 1994 from 32.3% in 1993, primarily due to improvements in
productivity in the United States operation.

Selling, engineering and administrative expenses increased 17.1%, or $1.3
million, to $8.6 million in 1994, compared to $7.3 million in 1993. The increase
in selling, engineering and administrative expenses primarily was due to
increased marketing and research and development expenses. These expenses
decreased as a percentage of net sales to 20.1% in 1994 from 22.7% in 1993,
primarily due to allocating these expenses over greater net sales.

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited quarterly financial
information for each of the Company's last eight quarters. The Company believes
that this information includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such quarterly
information when read in conjunction with the Financial Statements and the Notes
thereto included elsewhere herein. The pro forma income tax provision and pro
forma net income are presented as if the Company were a C Corporation in the
periods presented. The operating results for any quarter are not necessarily
indicative of the results for any future period or for the entire year.

<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1995 1995 1996 1996 1996
------------ --------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 11,022 $13,632 $ 14,288 $14,798 $ 12,670 $13,806 $ 13,831 $13,596
Cost of sales................ 7,366 8,185 8,901 9,275 8,220 9,491 9,125 9,287
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 3,656 5,447 5,387 5,523 4,450 4,315 4,706 4,309
Selling, engineering and
administrative expenses.... 2,070 2,486 2,549 2,617 2,926 2,665 2,929 3,694
------- ------- ------- ------- ------- ------- ------- -------
Operating income............. 1,586 2,961 2,838 2,906 1,524 1,650 1,777 615
Interest expense............. 202 212 220 180 202 205 218 255
Miscellaneous (income)
expense.................... (151) (16) 5 (70) 2 53 (63) 117
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes... 1,535 2,765 2,613 2,796 1,320 1,392 1,622 243
Pro forma tax provision...... 723 987 933 1,149 542 554 646 55
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income......... $ 812 $ 1,778 $ 1,680 $ 1,647 $ 778 $ 838 $ 976 $ 188
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

19
<PAGE> 21

LIQUIDITY AND CAPITAL RESOURCES

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

At September 30, 1996, the Company had working capital of approximately
$3.1 million. Cash generated from operations was $5.9 million and $9.6 million
in the nine month periods ended September 30, 1996 and 1995, respectively. The
decrease in the Company's cash generated from operations reflects primarily a
decrease in net income. Cash generated from operations was $12.7 million in
1995, compared to $7.3 million and $3.5 million in 1994 and 1993, respectively.

Capital expenditures in the nine months ended September 30, 1996, were
$12.4 million, compared to $5.3 million in the comparable 1995 period. For the
full year 1996, the Company intends to invest approximately $16.0 million in
capital expenditures, of which $11.0 million will be used to complete the new
manufacturing plants in the United States and Germany, and approximately $5.0
million will be invested in machinery and equipment. Capital expenditures were
$7.7 million, $5.1 million and $3.0 million in 1995, 1994 and 1993,
respectively. Included in 1995 capital expenditures was $0.9 million used for
land and land improvements for the new United States and German facilities.

The Company currently has a $1.7 million line of credit, secured by all
inventory and accounts, which bears interest at the lender's prime rate and has
a maturity date of March 1, 1997. The Company currently is negotiating a new
unsecured revolving credit facility which will provide a maximum availability of
$10.0 million, payable on demand, with a floating interest rate. There can be no
assurance that the Company will be able to finalize this new facility; however,
management believes that the Company would be able to obtain other financing on
commercially reasonable terms if the Company is unable to obtain the credit
facility described above.

In 1996, the Company obtained a mortgage loan of approximately $2.4
million, denominated in German marks, for the new facility in Erkelenz, Germany.
The loan has a term of 12 years and bears interest at 6.47%. In May 1996, the
Company converted its existing $0.8 million line of credit for capital equipment
to a term loan, borrowing an additional $2.3 million for a total loan amount of
approximately $3.1 million. The interest rate on the term loan is 8.25% and it
matures on May 1, 2003. The loan is secured by the equipment purchased with the
loan proceeds. Concurrently, the Company obtained a ten-year mortgage loan for
$6.2 million at an interest rate of 8.25% for the new facility in Florida. This
loan matures on July 1, 2006. The existing Florida facility has a $2.4 million
mortgage loan with an interest rate of 8.25%. This loan matures on April 1,
2006. In England, the Company has a $1.2 million line of credit, denominated in
British pounds, which bears interest at a floating rate (8.0% at September 30,
1996) equal to 2.25% over the bank's base rate. None of these arrangements
contain pre-payment penalties. In addition, the Company has $2.7 million in
notes payable to former stockholders, which bear interest at a weighted rate of
15%, and which have terms ranging from three to five years. These notes were
issued by the Company in connection with the repurchase of shares of Common
Stock from the former stockholders, and do not allow for prepayment by the
Company.

The Company intends to use approximately $8.9 million of the net proceeds
from the Offering to repay the outstanding balance of the Company's $3.0 million
capital equipment loan, the $2.4 million mortgage loan related to the existing
facility in Florida and $3.5 million of the indebtedness under the mortgage loan
for $6.2 million related to the new facility in Florida.

The Company believes that cash generated from operations, borrowing
availability under the bank facility currently under negotiation and the net
proceeds of the Offering will be sufficient to satisfy the Company's operating
expenses and capital expenditures for the foreseeable future.

20
<PAGE> 22

SEASONALITY

The Company generally has experienced reduced activity during the fourth
quarter of the year, largely as a result of fewer working days due to holiday
shutdowns. As a result, the Company's fourth quarter net sales, income from
operations and net income typically have been the lowest of any quarter during
the year.

INFLATION

The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy and relative stability in the Company's cost of sales. While inflation
has not had, and the Company does not expect that it will have, a material
impact upon operating results, there is no assurance that the Company's business
will not be affected by inflation in the future.

21
<PAGE> 23

BUSINESS

OVERVIEW

Fluid power involves the transfer and control of power through fluids under
pressure. Fluid power systems are integral to a wide variety of manufacturing,
material handling, agricultural and construction equipment. Due to its
mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power systems typically are comprised of
valves and manifolds that control the flow of fluids, a pump that generates
pressure and actuators such as cylinders and motors that translate pressure into
mechanical energy.

The Company designs and manufactures one of the most comprehensive lines of
screw-in hydraulic cartridge valves in the world. These valves control
direction, pressure, flow and loads, are available in up to five size ranges,
and are suitable for flows from 5 to 400 gallons per minute and continuous
operating pressures up to 5,000 pounds per square inch. The floating
construction pioneered by the Company provides demonstrable performance and
reliability advantages compared to competitors' product offerings due to its
self-alignment characteristic that accommodates potential manufacturing
deviations common in the thread-making operations of screw-in cartridge valves
and manifolds. This floating construction significantly differentiates the
Company from most of its competitors, who design and manufacture rigid screw-in
cartridge valves that fit an industry common cavity. The Company believes that
competitors' products typically do not offer the inherent reliability of the
Company's products and cannot provide equivalent operating performance because
of the design constraints imposed by the industry common cavity.

22
<PAGE> 24

more efficient components. Custom manifolds that utilize screw-in cartridge
valves allow customers to design an optimal solution for control of their fluid
power systems that significantly reduces assembly time and expense. The United
States and Western Europe are the largest developed markets for screw-in
cartridge valves, and the Company believes future growth prospects are
particularly attractive in the Pacific Rim, Eastern Europe and India where the
adoption of screw-in cartridge valves is in the early stage. In 1995,
approximately 34% of the Company's net sales were outside the United States.

INDUSTRY BACKGROUND

Fluid power is one of three basic technologies, along with electrical and
mechanical, utilized to achieve power transmission and motion control. Due to
its mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power can perform work on very light loads
with a high degree of accuracy or develop enormous forces to move and position
materials and equipment that weigh many tons. As a result, fluid power systems
are integral to a wide variety of manufacturing, material handling, agricultural
and construction equipment. Fluid power systems typically are comprised of
valves and manifolds that control the flow of fluids, a pump to generate fluid
pressure, and actuators, such as cylinders and rotary motors, to translate
pressure into mechanical energy.

Screw-in hydraulic cartridge valves first appeared in the late 1950s as an
alternative to conventional forms of hydraulic valving. Conventional hydraulic
valves are generally larger in size, typically manufactured from cumbersome iron
castings, relatively inflexible in their ability to interface with machinery and
equipment, and are usually simple devices designed to control a single task.
Screw-in cartridge valves represent a miniaturization of hydraulic valves,
providing the same functional characteristics as conventional valves, but in a
smaller package size. In addition to being lighter-weight and more compact,
screw-in cartridge valves frequently offer significant advantages in interface
flexibility and cost over conventional hydraulic valves.

Screw-in cartridge valves have achieved greater marketplace acceptance in
recent years as hydraulic system design engineers increasingly use them to
develop multiple-function control systems. A number of screw-in cartridge valves
can be grouped together in a manifold, creating a hydraulic control system that
is functionally analogous to an electronic integrated circuit. The Company's
breadth of products offers many custom "packaging" opportunities that allow
design engineers to create custom, application-specific solutions using the
Company's cataloged "off-the-shelf" screw-in cartridge valves and related
components. End users can utilize screw-in valves and custom manifolds to design
an optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense.

The Company estimates the global market for non-aerospace hydraulic valves
to be in excess of $3 billion, and believes that manufacturers of screw-in
hydraulic cartridge valves and manifolds and similar products have captured
approximately $550 million of the total market. The United States and Western
Europe are the largest developed markets for screw-in cartridge valves, and the
Company believes that future growth prospects are particularly attractive in the
Pacific Rim, Eastern Europe and India, where the adoption of screw-in cartridge
technology is in the early stage.

STRATEGY

23
<PAGE> 25

applications, (ii) continuing the geographic expansion of its markets, and (iii)
selectively expanding its product lines. Key elements of the Company's strategy
include the following:

Deliver Value Through High-Quality, High-Performance Products. The
Company's products are designed with operating and performance characteristics
that typically exceed those of functionally similar products. Overall, the
Company's products provide high value because they generally operate at higher
flow rates and pressures than competitive offerings of the same size. The
Company tests 100% of its screw-in cartridge valves in order to ensure the
highest level of performance on a consistent basis.

Offer a Wide Variety of "Off-the-Shelf" Products. The Company currently
offers one of the most comprehensive lines of screw-in cartridge valves in the
world. The Company is committed to producing functionally superior, cataloged
products that contain a high degree of common content to minimize work in
process and maximize manufacturing efficiency. Products are designed for use by
a broad base of industries to minimize the risk of dependence on any single
market segment or customer. The Company, in the future, will seek to expand its
business through development of products that are complementary to its existing
products.

Capitalize on Custom Manifold Opportunities. Because fluid power system
design engineers are increasingly incorporating screw-in cartridge valves into
custom control systems, the Company will concentrate its efforts in the custom
manifold market in two ways: (i) by designing and manufacturing manifolds which
incorporate the Company's screw-in cartridge valves for sale to original
equipment manufacturers ("OEMs"), and (ii) by encouraging competitive manifold
manufacturers to utilize the Company's screw-in cartridge valves in their
manifold designs. The Company's internally developed, proprietary expert system
software allows the Company efficiently to design and manufacture smaller, more
efficient manifolds in low quantities. The Company provides free software to aid
manifold designers in designing the Company's unique cavity into their manifolds
and sells tooling at cost for machining its cavities, allowing independent
manifold manufacturers easily to incorporate the Company's screw-in cartridge
valves into their designs.

Expand Global Presence. The Company intends to continue to increase its
global presence through expansion of its distribution network and its
international manufacturing capabilities. Key areas for expansion where the
Company has minimal presence include Central and South America, China and
Eastern Europe. In addition to operating units in Germany and England, the
Company has strong distributor representation in most developed and developing
markets, including Western Europe, Taiwan, Korea, Singapore, Australia and
Japan. In 1995, the Company generated approximately 34% of its net sales outside
the United States. The Company believes that further expansion of its
international manufacturing facilities could enhance its competitive position in
certain foreign markets. In addition, custom manifolds provide an opportunity
for distributors to offer significant local-added content through the local
production of manifolds that incorporate the Company's screw-in cartridge
valves. This strategy helps minimize potential tariffs and duties that could
inflate the price of the Company's products in foreign markets.

Maintain a Horizontal Organization with Entrepreneurial Spirit. The
Company believes that maintaining its horizontal management structure is
critical to retaining key personnel and an important factor in attracting top
talent from within the hydraulic valve and manifold industry. The Company will
strive to maintain its horizontal management structure that encourages
communication, creativity, an entrepreneurial spirit and individual
responsibility among employees. Employee initiatives have led to continuous
process improvement, resulting in considerable operating efficiencies and
quality control, as well as the maintenance of a safe and comfortable working
environment. The Company believes that a lack of job titles and direct formal
reporting responsibilities eliminates perceived barriers to advancement and
reduces the potential for adversarial relationships to arise within the
organization. A workplace without walls in the Company's offices as well as on
the shop floor encourages informal employee consultation and provides the
opportunity for all personnel to interface across functional areas.

Leverage Manufacturing Capability and Know-how as Competitive
Advantages. The Company believes one of its competitive advantages is its
ability to manufacture products to demanding specifications. The Company's
strong process capability allows it to machine parts to exacting dimensional
tolerances, resulting in the high performance characteristics of its screw-in
cartridge valves. The Company has the ability to control manufacturing processes
to replicate products consistently and can, if it desires, manufacture all
components

24
<PAGE> 26

of its products with the exception of springs and elastomer seals. Additionally,
the Company has in-house heat treatment capability to provide consistent and
reliable control of this critical operation.

Sell Through Distributors, Market to End Users. Due to the variety of
potential customers and the Company's desire to avoid unnecessary bureaucracy,
the sales function has been performed primarily by independent distributors. The
Company currently utilizes 60 distributors, 37 of which are located outside the
United States and a majority of which have strong technical backgrounds or
capabilities which enable them to develop practical, efficient and
cost-effective fluid power systems for their customers. The Company provides a
high level of technical support to its distributors through open access to the
Company's engineering staff, catalogs, technical documents and technical
training programs. In addition, the Company maintains close relationships with
many OEMs and end users of its products in order to understand and predict
future needs for fluid power control devices and to test and refine new product
offerings.

PRODUCTS

The Company's products are integral components in fluid power systems for
both "mobile" applications, such as construction, agricultural and utility
equipment (approximately 65% of net sales) and a broad array of "industrial"
applications, such as machine tools and material handling equipment
(approximately 35% of net sales). In 1995, screw-in cartridge valves accounted
for approximately 75% of the Company's net sales while standard and custom
manifolds accounted for approximately 25% of net sales.

Screw-in Cartridge Valves

The Company designs and manufactures high-performance, screw-in hydraulic
cartridge valves in up to five size ranges, suitable for flows from 5 to 400
gallons per minute and continuous operating pressures up to 5,000 pounds per
square inch. The floating construction pioneered by the Company provides
demonstrable performance and reliability advantages compared to competitors'
product offerings due to its self-alignment characteristic that accommodates
potential manufacturing deviations common in the thread-making operations of
screw-in cartridge valves and manifolds. This floating construction
significantly differentiates the Company from most of its competitors, who
design and manufacture rigid screw-in cartridge valves that fit an industry
common cavity. The floating construction of the Company's screw-in cartridge
valves eliminates the tendency of working parts inside rigid cartridge valves to
bind when screwed into the manifold, which leads to unnecessary stress and often
premature failure.

The Company has developed new market opportunities by scaling its screw-in
cartridge valves to accommodate application requirements with various flow
ranges. Management believes that the series zero valve introduced in 1996 will
allow the Company to gain entry to new market applications which it previously
had not been able to serve, including fork lift trucks and food processing
equipment. The Company believes that scaling involves minimal risk, as designs
and manufacturing processes are already proven. Future upward scaling of the
product line currently is in a conceptual stage.

The Company manufactures screw-in cartridge valves for load control,
pressure control, flow control and logic and directional control, with a broad
range of other unique functional offerings. Many variants of the same basic
functional products can be interchanged with each other to attain an optimum
level of performance in a customer's fluid power system. The Company's screw-in
cartridge valves are described more fully below.

Load Control Valves. The Company considers itself to be the world's
recognized leader in the design and manufacture of load control valves and
believes that it holds a dominant market share position in multiple end use
applications. Load control valves are pressure devices that are used to
control the motion and locking of linear and rotary hydraulic actuators
(cylinders and motors) and often are used as safety devices in many
critical system areas. Typical applications for these products include
cranes, manlifts and aerial platforms. The uncompromising requirement for
smooth and reliable operation in these applications has helped build the
Company's reputation as a high quality, screw-in cartridge valve
manufacturer. Load control valves represent the Company's largest selling
product family.

25
<PAGE> 27

Pressure Control Valves. The Company manufactures screw-in cartridge
valves for limiting or regulating fluid pressure. Types of pressure
controls include relief valves, reducing valves, reducing/relieving valves
and sequence valves, each available in many variants and configurations.
Most hydraulic systems incorporate at least one pressure relief valve for
over-pressure protection.

Flow Control Valves. The Company manufactures a variety of two-,
three- and four-port valves to control the rate of flow of fluids in fluid
power systems. These valves typically are used to control speed and are an
integral component in most fluid power systems. Variety and high flow
capacity relative to physical size help differentiate the Company in this
product area.

Logic and Directional Control Valves. The Company manufactures a
variety of screw-in cartridge valves that can be used as directional
control devices. These valves are used to start, direct and stop the flow
of fluid in a fluid power system and can be actuated electrically, manually
or with hydraulic pressure. The Company's logic control valves, some of
which are patented, can be used in combination with one another to provide
complex directional control functions. The Company also manufactures
high-pressure spool-type solenoid valves and other pilot devices that can
be used to actuate other Company screw-in cartridge valves.

Other Products. The Company designs and manufactures a broad array of
screw-in cartridge valves that can be used in combination with other
Company products to offer useful and unique functionality. For example, the
Company's Air-Bleed and Start-Up cartridge valves help protect a fluid
power system from potential damage by releasing air trapped in the system
when a machine is shut down for maintenance. Often, these functional
products are not manufactured by any other competitors, providing the
Company with additional sales opportunities. While these products are not
generally demanded in high volumes, their usefulness across industries
helps strengthen the Company's brand name and market penetration.

Manifolds

A manifold is a solid block of metal, usually aluminum or ductile iron,
which is machined to create threaded cavities and channels into which screw-in
cartridge valves can be installed and through which the hydraulic fluid flows.
The manifolds manufactured by the Company are described more fully below.

Standard Manifolds. The variety of standard, cataloged manifolds
offered by the Company is unmatched by any screw-in cartridge valve
competitor. These products allow customers to easily interface the
Company's screw-in cartridge valves into their systems in many different
ways. Once designed, standard manifolds require minimal, if any,
maintenance engineering over the life of the product. The following are the
types of standard manifolds manufactured by the Company:

- Line Mounted Manifolds can be placed anywhere in a hydraulic system
and are easily connected to various standard couplings. These specific
products are suitable for both mobile and industrial applications.

- Subplates and Sandwich Manifolds are offered in five different sizes
and industry standard interface patterns and generally are used in
industrial applications. The Company believes that the breadth of
different functional screw-in cartridge valves it manufactures allows
it to offer more functionally unique standard sandwich manifolds than
any other cartridge valve or conventional valve manufacturer.

- Motor Mount Manifolds fit a variety of the most common commercially
available hydraulic motor interface patterns. These products allow
users of hydraulic motors to buy standard control elements to simply
and easily interface with their motors.

Custom Manifolds. Custom manifolds are designed for a
customer-specific application and typically combine many different screw-in
cartridge valves in a single package. The Company's internally developed,
proprietary expert system software allows the Company efficiently to design
and manufacture smaller, more efficient manifolds in low quantities.

26
<PAGE> 28

ENGINEERING

The Company believes that it is critical for engineers to play an important
role in all aspects of the Company's business, including design, manufacturing,
sales and marketing and technical support. The Company currently employs 11
screw-in cartridge valve design engineers, 13 engineering personnel who serve in
other capacities, including designing standard and custom manifolds, and five
additional engineers who provide technical support. When designing products,
engineers work within a disciplined set of design parameters that often results
in repeated incorporation of existing screw-in cartridge valve components in new
functional products. The Company's focus on engineering has served as the
foundation of its ability to offer the expansive range of screw-in cartridge
valves that it brings to market.

Before designing functionally new screw-in cartridge valves, the Company's
engineers and sales and marketing personnel first establish performance and
operating requirements for the products. An iterative design process is
undertaken to meet the expected performance requirements in a screw-in cartridge
valve that fits the Company's cavity. Prototypes are typically hand built and
subject to extensive testing until the desired performance levels are achieved.
Before a new product is released for sale, the Company's engineers will work
closely with beta site customers to test the product under actual field
conditions.

During product development, engineers work closely with manufacturing
personnel to define the processes required to manufacture the product reliably
and consistently. The close link between engineering and manufacturing helps to
ensure a smooth transition from design to market. Design changes to facilitate
manufacturing processes are not considered if performance levels would be
compromised. The Company practices a continuous improvement process, and at
various times the Company may incorporate design changes in a product to improve
its performance or life expectancy. All of the Company's engineers provide
application support to customers and distributors.

MANUFACTURING

The Company is a process intensive manufacturing operation that extensively
utilizes state of the art computer numerically controlled ("CNC") machinery to
manufacture its products with consistent replication and minimal lead times.
Where commercial machinery is not available for specific manufacturing or
assembly operations, the Company often designs and builds its own machinery to
perform these tasks. The Company makes extensive use of automated handling and
assembly technology (robotics) where possible to perform repetitive tasks, thus
promoting manufacturing efficiencies and workplace safety. The Company has its
own electric heat treatment furnace to provide consistent and reliable control
of this important operation.

The Company's manufacturing operations include turning, grinding, honing
and lapping operations for its screw-in cartridge valves and milling and
drilling operations for its manifolds. Most machinery employed by the Company is
computer numerically controlled, with more than 75 CNC machines in operation in
the Company's manufacturing plants. The Company employs more than 60 robots,
including 45 intelligent (programmable) models, to supplement traditional pick
and place units. In addition, eight vision systems are in use with three used
for decision making tasks. In its manifold manufacturing operations in Florida
and England, the Company utilizes internally developed, proprietary personal
computer based software to program machines off-line and to minimize setup
times. This expert system also enables the Company to utilize compound angle
holes in its manifold designs, a technique that allows manifolds to be made
smaller in size with fewer potential leak points.

At its Sarasota, Florida plant, the Company has extensive testing
facilities that allow its design engineers to fully test all products at their
maximum rated pressure and flow rates. A metallurgist and complete metallurgical
laboratory support the Company's design engineers and in-house heat treatment
facility. Extensive test equipment also is utilized by the resident engineers at
the Company's plants in England and Germany.

The Company employs a build-to-order philosophy, with most finished goods
inventory held at distributor locations. On the front end, most raw materials
are delivered on a just-in-time basis, with a one-day supply of

27
<PAGE> 29

aluminum and a five-day supply of steel held in plant. Scheduling is aided by a
software system that provides employees with the requisite information to make
intelligent scheduling decisions.

The Company's ability to machine components to exacting tolerances, such as
millionths of an inch circularity, makes it more difficult for competitors to
offer products of equal performance. The Company controls most critical
finishing processes in-house but does rely on a small network of outside
manufacturers to machine cartridge components to varying degrees of
completeness. High volume machining operations are performed exclusively at
outside vendors. The Company is very selective in establishing its vendor base
and develops long-term relationships with vendors. The Company is capable of
machining all parts of its cartridge valves and manifolds in house, except
elastomer seals and springs. Both of the existing facilities in the United
States and England have been certified to ISO 9002 since 1993.

SALES AND MARKETING

The Company's products are sold globally primarily through independent
fluid power distributors. Distributors are supported with product education
programs conducted by the Company at its facilities. Technical support is
provided by each of the Company's three operations (Florida, England and
Germany), with two additional regional support offices in the United States.
Included in the Company's sales and marketing staff are hydraulic engineers that
have significant experience in the fluid power industry. Discount pricing
structures encourage distributors to buy in moderate to high volumes to ensure
there is a local inventory of products in the marketplace. Domestic distributors
are rewarded with additional pricing discounts if payments are received within
10 days of invoicing, helping to establish lower accounts receivable cycle
times. The Company currently utilizes 60 distributors, 37 of which are located
outside the United States and a majority of which have strong technical
backgrounds or capabilities which enable them to develop practical, efficient
and cost-effective fluid power systems for their customers. Sales to the
Company's largest distributor represented approximately 6% of net sales in 1995
and approximately 34% of the Company's net sales were outside of the United
States in 1995.

In addition to distributors, the Company sells directly to other companies
within the hydraulic industry under a pricing program that does not undermine
the primary distributors' efforts. Companies that participate in this program
must utilize the Company's products in a value-added application, integrating
the Company's screw-in cartridge valves into other fluid power products of their
manufacture. This strategy strengthens the Company because it encourages other
manufacturers to buy from the Company instead of competing with it. The
"goodwill" relationships that result from this strategy also help to keep the
Company abreast of technological advances within the fluid power industry,
aiding in new product development. In 1995, direct sales to other fluid power
component manufacturers accounted for approximately 5% of net sales.

While the Company generally does not sell directly to end users, it markets
directly to end users with catalogs that typically include suggested list prices
along with suggested customer discounts. This program is intended to provide
design engineers with all the necessary information that is required to specify
and obtain the Company's products. Since the average price for a single screw-in
cartridge valve is about $20 and the typical order from an end user is for a
relatively small quantity, the Company recognizes that its products are often
"bought" and not "sold." Publishing and distributing technically comprehensive
catalogs makes the Company's products easy to purchase. The Company believes
that publishing prices helps to maintain the Company's pricing strategy.

CUSTOMERS

The Company mails its catalogs to more than 15,000 potential end users in
the United States and Canada. Overseas marketing and catalog distribution is
executed primarily through distributors. The Company believes that its single
largest end use customer represented less than 3% of net sales in 1995,
minimizing risks of dependence on major customers. The loss of any one customer
would not have a material adverse effect on the Company's business. End users
are classified by whether their primary applications for the Company's products
are "mobile" or "industrial."

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<PAGE> 30

Mobile applications involve equipment that generally is not fixed in place,
such as construction, agricultural and utility equipment. Mobile customers were
the original users of screw-in cartridge valves due to the premium that these
industries place on considerations of space, weight and cost. Mobile customers
currently account for approximately 65% of the Company's net sales. Mobile
customers include JLG Industries, Genie, Altec and Simon Telelect (manlifts and
aerial platforms); Komatsu Galion, Gomaco, Kawasaki, JCB, Clark Melroe and John
Deere (construction equipment); Emergency One (fire rescue equipment); FMC
(material handling equipment); Atlas Copco and Fletcher Mining Equipment (mining
equipment); and Varco (oil field equipment).

Industrial applications involve equipment that generally is fixed in place
in factories or processing plants. Examples include presses, injection molding
equipment and machine tools. The requirements of the industrial marketplace are
more demanding than most mobile applications since industrial equipment
typically operates at significantly higher cycles. The Company's products are
designed to withstand these operating imperatives, and industrial applications
currently account for approximately 35% of the Company's net sales. Many
conventional valve designs still are used in industrial applications and
represent substitution opportunities for the Company's products. Industrial
customers include Cincinnati Inc., Motch and Giddings & Lewis (machine tools);
Cincinnati Milacron, Autojector and Mitsubishi (injection molding equipment);
NRM McNeil (tire presses); Morgan Engineering (steel process plant equipment);
and Beloit (paper process plant equipment).

The Company's distributors are not authorized to approve the use of its
products in any of the following applications: (i) any product that comes under
the Federal Highway Safety Act, such as steering or braking systems for
passenger-carrying vehicles or on-highway trucks, (ii) aircraft or space
vehicles, (iii) ordnance equipment, (iv) life support equipment, and (v) any
product that, when sold, would be subject to the rules and regulations of the
United States Nuclear Regulatory Commission. These "application limitations"
have alleviated the need for the Company to maintain the internal bureaucracy
necessary to conduct business in these market segments.

COMPETITION

The hydraulic valve industry is highly fragmented and intensely
competitive. The Company has a large number of competitors, some of which are
full-line producers and others that are niche suppliers like the Company. Most
competitors market globally. Full-line producers have the ability to provide
total hydraulic systems to customers, including components functionally similar
to those manufactured by the Company. There has been some consolidation activity
in recent years, with large, full-line producers filling out their product lines
with the acquisition of smaller, privately held screw-in cartridge valve
producers. The Company believes that it competes based upon quality,
reliability, price, value, speed of delivery and technological characteristics.
The Company estimates that the following competitors represent more than 50% of
the world-wide sales of non-aerospace, screw-in hydraulic cartridge valves: Oil
Control SpA, Hydraforce, Inc., Vickers Incorporated, Danfoss Fluid Power, Dana
Corp., Compact Controls, Inc., Sterling Hydraulics, Inc. and Parker-Hannifin
Corp.

Most of the Company's screw-in cartridge valve competitors produce screw-in
cartridge valves that fit an industry common cavity that allows their products
to be interchangeable. The industry common cavity is not supported by any
national or global standards organizations. The International Standards
Organization (ISO) recently developed a standard screw-in cartridge cavity that
is different from the industry common cavity. The Company does not manufacture a
product that fits either the industry common or the ISO standard cavity.
Currently, no major competitor produces products that conform to the ISO
standard. See "Risk Factors -- Potential Marketplace Acceptance of Industry
Standards."

29
<PAGE> 31

the manifold business is based upon quality, price, relationships based on
proximity to the customer, and speed of delivery.

EMPLOYEES

As of October 1, 1996, the Company had approximately 410 full-time
employees in the United States, approximately 70 in England and 10 in Germany.
Over 80% of its employees are in manufacturing functions, over 10% are in
engineering and marketing functions, and the remainder are in other support
functions. None of the employees in any operating unit are represented by a
union and the Company believes that relations with its employees are good.

Employees are paid either hourly or with an annual salary at rates that are
competitive with other companies in the industry and geographic area. The
combination of competitive salary, above average health and retirement plans,
and a safe and pleasant working environment discourages employee turnover and
encourages efficient, high-quality production.

The Company recognizes the need for continuing employee education to allow
the workforce to remain effective in today's rapidly changing technological
environment. Significant time is dedicated to education programs that assist
employees in understanding technology and the change it brings to their jobs.
The Company also offers tuition reimbursement programs that encourage employees
to continue the education process outside the workplace.

PROPERTIES

The Company owns two manufacturing facilities (Sarasota, Florida, and
Coventry, England) with two additional facilities under construction (Sarasota,
Florida and Erkelenz, Germany). The existing Sarasota plant has approximately
66,000 square feet, with additional acreage at the site that can accommodate
future expansion. The Coventry plant is comprised of 25,000 square feet, with
additional acreage at the site that can accommodate future expansion.

The new plant in Sarasota, located approximately two miles from the
existing facility, will offer an additional 60,000 square feet of capacity and
will be used initially for manifold manufacturing. Approximately 85 personnel
from the existing plant will move to the new plant once it is completed. The new
facility in Germany will offer approximately 42,000 square feet of capacity for
future product manufacturing needs. Initially, the German facility will utilize
a small percentage of available space to assemble cartridge valves and
manifolds; the Company intends to sublease all or a portion of the unused space.

PATENTS AND TRADEMARKS

The Company believes that the growth of its business will be dependent upon
the quality and functional performance of its products and its relationship with
the marketplace, rather than the extent of its patents and trademarks. The
Company's principal trademark is registered globally in the following countries:
Australia, Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain, Sweden,
Switzerland, the United Kingdom and the United States. While the Company
believes that its patents have significant value, the loss of any single patent
would not have a material adverse effect on the Company.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings other than
routine litigation incidental to its business.

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<PAGE> 32

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information regarding the Directors,
Executive Officers and certain key employees of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Robert E. Koski........................ 67 Chairman of the Board of Directors
Clyde G. Nixon......................... 61 President, Chief Executive Officer,
Director
Robert J. Devereaux.................... 65 Vice President
Jeffrey Cooper......................... 55 Engineering Manager
Russell G. Copeman..................... 57 Manufacturing Manager
Richard J. Dobbyn...................... 53 Chief Financial Officer
Peter G. Robson........................ 53 General Manager, Sun Hydraulics Limited
Arthur B. Bodley....................... 78 Director
James G. March......................... 68 Director
Curtis J. Timm......................... 68 Director
Taco van Tijn.......................... 72 Director
David N. Wormley....................... 57 Director
</TABLE>

MR. KOSKI is a co-founder of the Company and has served as its Chairman of
the Board since it began operations in 1970. He was also its President and Chief
Executive Officer from that time until November 1988. He is a graduate of
Dartmouth College and past Chairman of the Board of the National Fluid Power
Association. Mr. Koski has over 35 years experience in the fluid power industry,
and has served as Chairman of the Fluid Power Systems and Technology Division of
the American Society of Mechanical Engineers, and as a member of the Board of
Directors of the National Association of Manufacturers.

MR. NIXON joined the Company in January 1988, and was named its President
and Chief Executive Officer in November 1988. From September 1985, to January
1988, he served as Vice President of Cross & Trecker Corporation and was
President of Warner & Swasey Company, its wholly-owned subsidiary. From 1964 to
1985, he served in various management capacities with Brown & Sharpe
Manufacturing Corporation, most recently as Vice President of its fluid power
division and President of Double A Products Company, its wholly-owned
subsidiary. Mr. Nixon is a graduate of Cornell University and the Harvard
Business School, and he currently serves as First Vice Chairman of the Board of
the National Fluid Power Association. Mr. Nixon has over 29 years experience in
the fluid power industry.

MR. DEVEREAUX joined the Company as head of manufacturing operations and
processes in June 1979. He was named Vice President in January 1991. From 1957
to 1979, he served in various management capacities with Continental Group and
its subsidiaries Continental Can Corporation and Bondware/Crest. Mr. Devereaux
is an engineering graduate of Rensselaer Polytechnical Institute. Mr. Devereaux
has over 17 years experience in the fluid power industry.

MR. COOPER joined the Company in December 1990, as an engineer and has been
Engineering Manager since September 1991. From August 1987, to December 1990, he
was Engineering Manager, Mobile Valves, of Vickers, Incorporated, a wholly-owned
subsidiary of Trinova Corporation, and from September 1979 to August 1986, he
served as Vice President of Engineering for Double A Products Company. Mr.
Cooper is an engineering graduate of Willesden College of Technology, London,
England. Mr. Cooper has over 28 years experience in the fluid power industry.

MR. COPEMAN joined the Company in July 1996, as Manufacturing Manager, in
charge of manufacturing operations and processes. From January 1996, to July
1996, Mr. Copeman was the principal of Copeman Consulting, and performed
consulting services for the Company from March 1996 to July 1996. From January
1994, to October 1995, Mr. Copeman was a partner with Coopers & Lybrand,
Australia; from July 1989, to December 1993, he was a Director of Coopers &
Lybrand's International Manufacturing Practice. From January 1985, to July 1989,
he served in various management positions with Vickers,

31
<PAGE> 33

Incorporated, most recently as Vice President. From August 1967, to January
1985, he served in various management positions with Double A Products Company,
most recently as Vice President. Mr. Copeman is a Certified Manufacturing
Engineer and a graduate of Georgia Institute of Technology and the Krannert
Business School of Purdue University. Mr. Copeman has over 22 years experience
in the fluid power industry.

MR. DOBBYN joined the Company in October 1995, and was named Chief
Financial Officer in July 1996. From June 1995 to October 1995, Mr. Dobbyn
served as the Controller of Protek Electronics. From July 1994 to June 1995, he
served as the Fiscal Director of a non-profit child care agency. From September
1984 to July 1994, Mr. Dobbyn was Senior Vice President-Finance and
Administration for Loral Data Systems, formerly Fairchild Weston Systems, a
Schlumberger company. Mr. Dobbyn is a Certified Public Accountant and a graduate
of Boston College.

MR. ROBSON has served as a Director of Sun Hydraulics Limited, Coventry,
England, since May 1993, and has been employed by the Company as the General
Manager of its United Kingdom operations since 1982. Mr. Robson is a Chartered
Engineer and a graduate of Coventry University. Mr. Robson has over 30 years
experience in the fluid power industry.

MR. BODLEY has served as President and Chief Executive Officer of Atlas
Fluid Components Company, Inc., a fluid power distributorship in Akron, Ohio,
since January 1966. Mr. Bodley has over 30 years experience in the fluid power
industry. He has served as a Director of the Company since January 1973.

DR. MARCH is a Professor Emeritus at Stanford University, Palo Alto,
California. He was a senior member of the faculty at Stanford University and the
Stanford Business School from September 1970, to August 1995, and is the author
of numerous books and articles on organizational behavior and decision making.
From September 1964, to August 1970, Dr. March was a Professor of Psychology and
Sociology at the University of California, Irvine, where he was Dean of the
School of Social Sciences from 1964 to 1969. Dr. March served as a Director of
the Company from 1989 to 1992, and rejoined the Company's Board of Directors in
November 1995. He also is a member of the Board of Directors of Wally Industries
and Chair of the Citicorp Behavioral Sciences Research Council. Dr. March is a
graduate of the University of Wisconsin and received his Ph.D. from Yale
University.

MR. TIMM is a private investor and was a founding partner of the law firm
of Icard, Merrill, Cullis, Timm, Furen & Ginsburg, Sarasota, Florida, where he
practiced law from 1958 to 1989. He is a graduate of the University of Minnesota
and its law school and has served as a Director of the Company since April 1970.

MR. VAN TIJN is an attorney (solicitor), practicing law in London, England,
since May 1971. He has been a Director of the Company since February 1989, and
the principal statutory officer of Sun Hydraulik Holdings Limited since January
1991.

DR. WORMLEY is the Dean of the Engineering School at Pennsylvania State
University, where he has taught since 1982. He previously was a member of the
engineering faculty at the Massachusetts Institute of Technology. Dr. Wormley is
Vice-Chair of the National Science Foundation Engineering Directorate Advisory
Committee. Dr. Wormley has served as a Director of the Company since December
1992. He is a professional engineer and earned his Ph.D. from the Massachusetts
Institute of Technology.

The Board of Directors currently consists of seven members. The Company's
Certificate of Incorporation classifies the Board of Directors into three
classes, with each class holding office for a three-year period. The terms of
Messrs. Bodley, Koski and March expire in 1997; the terms of Messrs. Nixon and
Timm expire in 1998; and the terms of Messrs. van Tijn and Wormley expire in
1999.

Directors who are not officers of the Company are paid $2,500 for
attendance at each meeting of the Board of Directors, as well as each meeting of
each Board committee on which they serve when the committee meeting is not held
within one day of a meeting of the Board of Directors. Directors are also
reimbursed for their expenses incurred in connection with their attendance at
such meetings. Officers are elected annually by and serve at the discretion of
the Board of Directors. Mr. Koski and Dr. March are step-brothers.

32
<PAGE> 34

The Company has established a Compensation Committee, comprised of Dr.
March, Mr. Timm and Dr. Wormley. The functions of the Compensation Committee are
to review and approve annual salaries and bonuses for all Officers, review,
approve and recommend to the Board of Directors the terms and conditions of all
employee benefit plans or changes thereto, administer the Company's stock option
plans and carry out the responsibilities required by the rules of the Securities
and Exchange Commission (the "Commission").

The Company expects that the Board of Directors will establish an Audit
Committee and an Executive Committee. The members of each committee are expected
to be determined at the first meeting of the Board of Directors following the
closing of the Offering.

The functions of the Audit Committee will be to recommend annually to the
Board of Directors the appointment of the independent public accountants of the
Company, discuss and review the scope of and the fees for the prospective annual
audit, to review the results thereof with the independent public accountants,
review and approve non-audit services of the independent public accountants,
review compliance with existing major accounting and financial policies of the
Company, review the adequacy of the financial organization of the Company,
review management's procedures and policies relative to the adequacy of the
Company's internal accounting control, review compliance with federal and state
laws relating to accounting practices and review and approve (with the
concurrence of a majority of the disinterested Directors of the Company)
transactions, if any, with affiliated parties.

The Executive Committee, to the fullest extent allowed by Delaware law and
subject to the powers and authority delegated to the Audit Committee and the
Compensation Committee, will have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Company during intervals between meetings of the Board of Directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

The Board of Directors of the Company determined the compensation,
including salary and bonus, of the Executive Officers of the Company for the
fiscal year ended December 31, 1995, and for the current fiscal year through the
date hereof. Following the Offering, it is expected that the Compensation
Committee of the Board of Directors will determine the compensation of the
Company's Executive Officers. See "Management -- Directors, Executive Officers
and Key Employees."

33
<PAGE> 35

EXECUTIVE COMPENSATION

The following table is a summary of the compensation paid or accrued by the
Company for the last three fiscal years, for services in all capacities to the
Company's Chief Executive Officer and its other three Executive Officers who
earned more than $100,000 from the Company in 1995 (the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
NAME AND --------------- AWARDS -- OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS (#)(1) COMPENSATION(2)
- -------------------------------------------- ---- -------- ------------------- ---------------
<S> <C> <C> <C> <C>
Robert E. Koski,............................ 1995 $106,000 -- $28,033(3)
Chairman of the Board of Directors 1994 106,000 -- 18,837
1993 106,000 -- 13,056
Clyde G. Nixon,............................. 1995 165,000 110,739 21,807
President and Chief Executive Officer 1994 150,000 -- 30,827(4)
1993 142,500 -- 13,229
Robert J. Devereaux......................... 1995 123,500 -- 19,771
Vice President 1994 118,500 -- 19,171
1993 113,000 55,369 13,959
Jeffrey Cooper.............................. 1995 110,500 -- 10,280
Engineering Manager 1994 105,000 -- 9,840
1993 98,000 55,369 5,364
</TABLE>

- ---------------

(1) Represents phantom stock compensation award.
(2) Certain perquisites were provided to certain of the Named Executive
Officers, but in no event did the value of the perquisites provided in any
year exceed 10% of the amount of the executive's salary for that year,
except with respect to Mr. Koski (see note 3) and Mr. Nixon (see note 4).
All other amounts shown in this column reflect contributions made by the
Company on behalf of the employee to the Company's 401(k) plan.

(3) Includes payment by the Company of certain professional fees on behalf of
Mr. Koski.

(4) Includes payment by the Company of certain club dues on behalf of Mr. Nixon.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
----------------------- REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES EXERCISE OR FOR OPTION TERM (1)
GRANTED IN FISCAL BASE PRICE EXPIRATION -------------------
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
(A) (B) (C) (D) (E) (F) (G)
- ----------------------------------- ---------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Koski.................... 0 -- -- -- -- --
Clyde G. Nixon..................... 110,739 80% $3.36 7/1/05 $234,486 $591,798
Robert J. Devereaux................ 0 -- -- -- -- --
Jeffrey Cooper..................... 0 -- -- -- -- --
</TABLE>

- ---------------

(1) The 5% and 10% assumed annual rates of stock price appreciation are provided
in compliance with Regulation S-K under the Securities Exchange Act of
1934. The Company does not necessarily believe that these appreciation
calculations are indicative of actual future stock option values or that
the price of Common Stock will appreciate at such rates.

34
<PAGE> 36

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FISCAL AT FISCAL
ACQUIRED ON VALUE YEAR-END (#) YEAR-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
(A) (B) (C) (D) (E)
- ----------------------------------------- ----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Robert E. Koski.......................... 0 -- 0/0 0/0
Clyde G. Nixon........................... 21,006 $ 239,840 7,021/134,084 $ 71,160/109,441
Robert J. Devereaux...................... 10,508 129,410 27,998/33,221 110,300/76,500
Jeffrey Cooper........................... 0 -- 22,148/33,221 51,000/76,500
</TABLE>

- ---------------

(1) In the absence of a trading market for the Common Stock, value is based upon
the difference between book value per share at December 31, 1995 and the
exercise price.

STOCK OPTION PLAN

The Company adopted the Sun Hydraulics Incorporated 1996 Stock Option Plan
(the "Plan") in September 1996. The Company may issue up to 1,000,000 shares of
Common Stock to participants in the Plan. The Plan has a term of ten years.

The Plan authorizes the Company's Compensation Committee to grant options
("Options") to purchase shares of the Company's Common Stock to Directors,
Officers and employees of the Company. The purposes of the Plan are to enable
the Company to attract and retain qualified persons to serve as Directors,
Officers and employees and to align the interests of such persons with the
interests of stockholders by giving them a personal interest in the value of the
Company's Common Stock.

Options granted to eligible employees under the Plan may be Options that
are intended to qualify as "Incentive Stock Options" within the meaning of
Section 422 of the Code or Options that are not intended to so qualify
("Nonstatutory Options"). Options granted to members of the Board of Directors
who are not also employees of the Company will be Nonstatutory Options.

If the Option is designated as an Incentive Stock Option, the purchase
price of the Common Stock that is the subject of such Option may be not less
than the fair market value of the Common Stock on the date the Option is
granted. Additionally, no Incentive Stock Option may be granted to any employee,
who, at the time of such grant, owns more than 10% of the stock of the Company
or of any subsidiary, unless at the time such Option is granted the exercise
price is at least 110% of the fair market value of the Common Stock and the term
of the Option is for five years or less. If the Option is a Nonstatutory Option,
the purchase price may be equal to or less than the fair market value of the
Common Stock on the date the Option is granted, as the Compensation Committee
shall determine. No person may receive in any year Options to purchase more than
150,000 shares of Common Stock. The exercise price is payable at the time of
exercise (i) in cash, (ii) by the delivery of shares of Common Stock having a
fair market value equal to the exercise price, (iii) with a promissory note for
part of the option price, or (iv) in such other manner as the Compensation
Committee may approve. Any grant may provide for payment of the exercise price
from the proceeds of sale through a broker on the date of exercise of some or
all of the shares of Common Stock to which the exercise relates.

No Options may be exercised more than 10 years from the date of grant. Each
employee's or Director's stock option agreement may specify the period of
continuous service with the Company that is necessary before the Option will
become exercisable. Except in the case of an employee who is permanently and
totally disabled, if the Option is an Incentive Stock Option, it will be
exercisable only if the recipient is an employee of either the Company or a
subsidiary corporation at all times during the period beginning on the date of
the grant of the Option and ending on a date which is no later than three months
before the date of such exercise,

35
<PAGE> 37

all as specified in the employee's or Director's stock option agreement.
Successive grants may be made to the same recipient regardless of whether
Options previously granted to him or her remain unexercised.

No Option granted under the Plan is transferable by a participant except by
will or the laws of descent and distribution. Options may not be exercised
during a participant's lifetime except by the participant or, in the event of
the participant's incapacity, by the participant's guardian or legal
representative acting in a fiduciary capacity on behalf of the participant under
state law and court supervision.

The Plan may be amended from time to time by the Board of Directors in such
respects as it deems advisable. Further approval by the stockholders of the
Company will be required for any amendment that would (i) increase the aggregate
number of shares of Common Stock that may be issued under the Plan, (ii)
materially change the classes of persons eligible to participate in the Plan, or
(iii) otherwise cause Rule 16b-3 under the Exchange Act to cease to be
applicable to the Plan. No amendment may change the Plan so as to cause any
Option intended to be an Incentive Stock Option to fail to meet the Internal
Revenue Code requirements for an Incentive Stock Option. No amendment may change
any rights an Option holder may have under any outstanding Option without the
written consent of the holder of the Option. The Board may at any time terminate
or discontinue the Plan.

The Company has granted to the four independent Directors who joined the
Board of Directors prior to 1994 Nonstatutory Options under the Plan to purchase
14,700 shares of Common Stock. Such options have an exercise price of $3.00 per
share, a term of 10 years and are immediately exercisable. The Company intends
to grant Incentive Stock Options to purchase 100,000 shares of Common Stock
under the Plan to two Executive Officers of the Company following the Offering,
with an exercise price equal to the initial public offering price of the Common
Stock. The Options will vest over varying periods of time and have a term of 10
years. In connection with the termination of certain phantom stock compensation
agreements in September 1996, the Company granted Nonstatutory Options to
purchase 305,260 shares of Common Stock under the Plan to eight employees,
including four Executive Officers of the Company. Such Options have exercise
prices ranging from $3.00 to $5.05, with a weighted average price of $3.95. Such
options are all immediately exercisable and have a term of 10 years. The Company
also has committed to grant Incentive Stock Options to purchase 189,348 shares
of Common Stock under the Plan to such employees following the Offering at an
exercise price equal to the initial public offering price of the Common Stock.
Such Options will vest over varying periods of time, up to five years, and will
have a term of 10 years. See "The Reorganization."

CERTAIN TRANSACTIONS

The information set forth herein briefly describes transactions over the
past three years between the Company and its Directors, Officers and 5%
stockholders. Management of the Company believes that such transactions have
been on terms no less favorable to the Company than those that could have been
obtained from unaffiliated parties. These transactions have been approved by a
majority of the Company's disinterested Directors. Future transactions, if any,
with affiliated parties will be approved by a majority of the Company's
disinterested Directors and the Audit Committee (after the Offering) and will be
on terms no less favorable to the Company than those that could be obtained from
unaffiliated parties.

ORGANIZATION OF SUNOPTECH, LTD.

In October 1995, the Company contributed certain intangible assets to
SunOpTech, Ltd. ("SunOpTech"), a limited partnership formed to further the
development of manufacturing software. In January 1996, the Company distributed
to its stockholders the 65% limited partnership interest in SunOpTech which it
received in exchange for the contributed intangible assets. Robert E. Koski owns
51% of the common stock of the general partner of SunOpTech, and Messrs. Koski
and Clyde G. Nixon are members of the board of directors of the general partner.
The Company currently has no ownership interest in SunOpTech.

The Company entered into a contract with SunOpTech for a 35-month term
beginning November 1995, for the development of computer software and computer
support to the Company. The Company will pay approximately $955,000 over the
contract term, provide office space and equipment and reimburse

36
<PAGE> 38

SunOpTech for reasonable expenses related to the software development. During
1995, the Company paid fees of $90,000 and expenses of $25,000 under the
agreement, and provided certain administrative support to SunOpTech at no
charge. The software is still in the development stage but is being utilized in
the Company's plants in Sarasota and Germany. Under its agreement with
SunOpTech, the Company has a perpetual, nonexclusive license to use the
software, as well as any future enhancements, without charge other than the
development and support fees to be provided during the 35-month term of the
agreement.

ATLAS FLUID COMPONENTS COMPANY, INC.

Arthur B. Bodley, a Director of the Company, is the President, Chief
Executive Officer and controlling stockholder of Atlas Fluid Components Company,
Inc. ("Atlas"), a fluid power distributorship in Akron, Ohio, that purchases and
sells the Company's products pursuant to one of the Company's standard
distributor agreements. Atlas purchased approximately $1.3 million, $1.2 million
and $1.1 million of products from the Company in fiscal 1995, 1994 and 1993,
respectively.

INDEMNIFICATION AGREEMENTS

For a description of limitations on liability of the Company's Directors
and certain indemnification arrangements with respect to the Company's Directors
and Officers, see "Description of Capital Stock -- Directors' Liability."
Further, the Company has entered into indemnity agreements with all of its
Directors and Officers for the indemnification and advancing of expenses to such
persons to the full extent permitted by law. The Company intends to execute such
indemnity agreements with its future Officers and Directors. The Company
maintains insurance for the benefit of its Officers and Directors insuring such
persons against certain liabilities arising in connection with their service as
Officers and Directors of the Company and its subsidiaries, including certain
liabilities under the securities laws.

PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of the consummation of
the Reorganization and as adjusted to reflect the sale of the Common Stock
offered hereby by (i) each person or entity known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each Director and Named Executive Officer of the Company, and (iii) all
Directors and Executive Officers of the Company as a group. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent such
power may be shared with a spouse. The table assumes that the persons listed do
not purchase any shares of Common Stock in the Offering and that the
Underwriters' over-allotment option is exercised in full.

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<PAGE> 39

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
---------------------- ----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
- ----------------------------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Robert E. Koski(4)................................... 1,189,800 29.8 1,189,800 18.9
Robert S. and Ann R. Ferrell(5)...................... 420,437 10.5 420,437 6.7
563 Brigton Drive
Berea, Ohio 44017
Robert J. Devereaux(6)............................... 250,200 6.2 250,200 3.9
Clyde G. Nixon(7).................................... 211,637 5.2 211,637 3.3
Curtis J. Timm(8).................................... 97,284 2.4 97,284 1.5
Peter G. Robson(9)................................... 76,308 1.9 76,308 1.2
James G. March(10)................................... 53,572 1.3 53,572 *
Jeffrey Cooper(9).................................... 49,109 1.2 49,109 *
Arthur B. Bodley(8).................................. 13,860 * 13,860 *
Taco van Tijn(8)..................................... 8,920 * 8,920 *
David N. Wormley(11)................................. 3,940 * 3,940 *
Russell G. Copeman................................... 0 -- 0 --
Richard J. Dobbyn.................................... 0 -- 0 --
All Directors and Executive Officers as a
Group (12 persons)................................. 1,954,630 45.4 1,954,630 29.6
</TABLE>

- ---------------

* Less than 1%.
(1) Unless otherwise indicated, the address of each of the persons listed who
own more than 5% of the Company's Common Stock is 1500 West University
Parkway, Sarasota, Florida 34243.
(2) Based on 4,000,000 shares of Common Stock outstanding prior to the Offering
and 6,300,000 shares of Common Stock outstanding immediately after the
Offering. Pursuant to the rules of the Commission, certain shares of Common
Stock which a person has the right to acquire within 60 days of the date
hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Includes 404,904 shares owned by the Christine L. Koski Irrevocable Trust,
404,904 shares owned by the Robert C. Koski Irrevocable Trust, 404,904
shares owned by the Thomas L. Koski Irrevocable Trust and 146,143 shares
owned by the Koski Family Trust. Christine L. Koski, Robert C. Koski and
Thomas L. Koski are the trustees of each of these trusts and share voting
and dispositive power. Christine L. Koski, Robert C. Koski and Thomas L.
Koski are all adult children of Robert E. Koski.
(4) Includes 602,426 shares owned by Mr. Koski's spouse. Does not include any
of the shares beneficially owned by Christine L. Koski, Robert C. Koski and
Thomas L. Koski.
(5) Includes 240,125 shares owned by the Robert S. Ferrell Trust, of which
Robert S. Ferrell is the sole trustee, and 180,312 shares owned by the Ann
R. Ferrell Trust, of which Ann R. Ferrell is the sole trustee. Robert S.
Ferrell is the spouse of Ann R. Ferrell.

(6) Includes 139,871 shares owned by the Robert J. Devereaux Trust, of which
Robert J. Devereaux is the sole trustee, and 52,500 shares owned by the
Christine C. Devereaux Trust, of which Christine C. Devereaux is the sole
trustee. Robert J. Devereaux is the spouse of Christine C. Devereaux. Also
includes 57,829 shares which will be subject to options exercisable by Mr.
Devereaux within 60 days which the Company has granted or committed to
grant immediately following the Offering in connection with the amendment
of certain phantom stock compensation agreements. See "The Reorganization."

(7) Includes 107,349 shares which are owned jointly by Mr. Nixon and his
spouse. Also includes 104,288 shares which will be subject to options
exercisable by Mr. Nixon within 60 days which the Company has

38
<PAGE> 40

granted or committed to grant immediately following the Offering in
connection with the amendment of certain phantom stock compensation
agreements. See "The Reorganization."

(8) Includes 3,920 shares subject to currently exercisable options.

(9) Represents shares which will be subject to options exercisable within 60
days which the Company has granted or committed to grant immediately
following the Offering in connection with the amendment of certain phantom
stock compensation agreements. See "The Reorganization."

(10) Shares are owned jointly by Dr. March and his spouse.

(11) Includes 2,940 shares subject to currently exercisable options.

THE REORGANIZATION

The Company is a newly organized Delaware corporation formed for the
purpose of acquiring all of the outstanding shares of capital stock of Sun
Hydraulics Corporation, a Florida corporation ("SHC"), and Sun Hydraulik
Holdings Limited, a private limited company organized under the Laws of England
and Wales ("SHHL"), upon the consummation of the Offering in exchange for
4,000,000 shares of Common Stock (the "Reorganization"). SHC and SHHL (through
subsidiaries in England and Germany) conduct all of the business and hold all of
the assets described as the Company's in this Prospectus. Prior to the issuance
of shares of Common Stock to the stockholders of SHC and SHHL and the purchasers
of Common Stock in the Offering, only one share of Common Stock has been issued
by the Company, which share was issued to Clyde G. Nixon at a price of $10. The
Reorganization will be effective immediately prior to the consummation of the
Offering.

In anticipation of the Reorganization, the Company issued to eight
employees of SHC and SHHL, including four Executive Officers of the Company,
Options to purchase 305,260 shares of Common Stock in connection with the
termination of certain individual phantom stock compensation agreements of SHC
(the "Agreements"). The exercise prices for such Options range from $3.00 to
$5.05, with a weighted average of $3.95. Such Options are all immediately
exercisable and have a term of 10 years. The Company also has committed to issue
to such employees Incentive Stock Options to purchase 189,348 shares of Common
Stock following the Offering at the initial public offering price of the Common
Stock, and such Options will vest over varying periods of up to five years.

SHC began operation in 1970 in Sarasota, Florida. SHHL's operations in
Europe began in 1982. Both companies were controlled by the same group of
stockholders and were operated as a common enterprise. Unless otherwise
specified herein, references to the "Company" mean Sun Hydraulics Incorporated
after giving effect to the acquisition of SHC and SHHL in the Reorganization.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of (i) 20,000,000
shares of Common Stock, $0.001 par value per share, and (ii) 2,000,000 shares of
preferred stock, $0.001 par value per share (the "Preferred Stock").

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to the prior rights of the
holders of Preferred Stock, if any, holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors from funds
legally available therefor, and to share ratably in the assets of the Company
legally available for distribution to the stockholders in the event of
liquidation or dissolution. The Common Stock has no preemptive rights or
redemption privileges. The Common Stock does not have cumulative voting rights,
which means the holder or holders of more than half of the shares voting for the
election of Directors can elect all the Directors then being elected. All the
outstanding shares of Common Stock are, and the shares to be sold in the
Offering when issued and paid for will be, fully paid and not liable for further
call or assessment. After giving effect to the Reorganization, the Company will
have 24 holders of record of Common Stock.

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<PAGE> 41

PREFERRED STOCK

The Company is authorized to issue 2,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time in one or more series, and the
Board of Directors is authorized to fix the dividend rights, dividend rates,
conversion or exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), redemption price or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any series of Preferred Stock and the number of shares constituting such series
and the designation thereof. The Company has no present plans to issue any
shares of Preferred Stock.

Depending upon the rights of such Preferred Stock, the issuance of
Preferred Stock could have an adverse effect on holders of Common Stock by
delaying or preventing a change in control of the Company, making removal of the
present management of the Company more difficult or resulting in restrictions
upon the payment of dividends and other distributions to the holders of Common
Stock.

DIRECTORS' LIABILITY

As authorized by the Delaware General Corporation Law ("DGCL"), the
Certificate of Incorporation of the Company (the "Certificate") limits the
liability of Directors to the Company for monetary damages. The effect of this
provision in the Certificate is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages from Directors for breaches of their fiduciary
duties as Directors (including breaches resulting from negligent behavior),
except in certain circumstances involving wrongful acts, such as the breach of a
Director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. Further, the Certificate contains
provisions to indemnify the Company's Directors and Officers to the full extent
permitted by the DGCL. These provisions do not limit or eliminate the rights of
the Company or any stockholder to seek non-monetary relief such as an injunction
or rescission in the event of a breach of a Director's fiduciary duty. These
provisions will not alter the liability of Directors under federal securities
laws. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as Directors.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to the provisions of Section 203 of the DGCL, which
provides, with certain exceptions, that a Delaware corporation may not engage in
a "business combination" with a person or an affiliate or associate of a person
who is an "Interested Stockholder" for a period of three years from the date
that such person became an Interested Stockholder unless: (a) the transaction
resulting in a person's becoming an Interested Stockholder, or the business
combination, is approved by the board of directors of the corporation before the
person becomes an Interested Stockholder, (b) the Interested Stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction that makes such person an Interested Stockholder (excluding
shares owned by persons who are both officers and directors of the corporation
and shares held by certain employee stock ownership plans) or (c) on or after
the date the person became an Interested Stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least 66 2/3% of the corporation's outstanding voting stock at an annual or
special meeting, excluding shares owned by the Interested Stockholder.
Generally, a "business combination" includes a merger, asset or stock sale or
other transaction resulting in a financial benefit to the Interested
Stockholder. An "Interested Stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's outstanding voting stock. This provision may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CERTIFICATE AND BYLAWS

Certain provisions of the Certificate and the Bylaws of the Company (the
"Bylaws") could have an anti-takeover effect. These provisions are intended to
enhance the likelihood of continuity and stability in the

40
<PAGE> 42

composition of the Board of Directors of the Company and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions, described below, which may involve an actual or threatened change
of control of the Company. The provisions are designed to reduce the
vulnerability of the Company to an unsolicited proposal for a takeover of the
Company that does not contemplate the acquisition of all of its outstanding
shares or an unsolicited proposal for the restructuring or sale of all or part
of the Company. The provisions are also intended to discourage certain tactics
that may be used in proxy fights. The Board of Directors believes that, as a
general rule, such takeover proposals would not be in the best interests of the
Company and its stockholders.

Certificate of Incorporation

Classified Board of Directors. The Certificate provides for the Board of
Directors to be divided into three classes of Directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. The Board of Directors believes that a classified
Board of Directors will help to assure the continuity and stability of the Board
of Directors and the business strategies and policies of the Company as
determined by the Board of Directors.

The classified board provision could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its stockholders. In addition, the classified board provision could delay
stockholders who do not agree with the policies of the Board of Directors from
removing a majority of the Board for two years, unless they can show cause and
obtain the requisite vote.

Special Meetings of Stockholders. The Certificate provides that special
meetings of stockholders of the Company may be called only by the Chairman, the
President or by a majority of the members of the Board of Directors. The
Certificate also prohibits the taking of stockholder action by written consent
without a meeting if there are more than 30 stockholders of record. This
provision will make it more difficult for stockholders to take action opposed by
the Board of Directors.

Amendment of Certain Provisions of the Certificate. The Certificate
generally requires the affirmative vote of the holders of at least 80% of the
outstanding voting stock in order to amend its provisions, including any
provisions concerning (i) the classified board, (ii) the amendment of the
Bylaws, (iii) any proposed compromise or arrangement between the Company and its
creditors, (iv) the authority of stockholders to act by written consent, (v) the
liability of Directors, (vi) the calling of special meetings of the
stockholders, and (vii) the supermajority voting requirements described in this
paragraph. These voting requirements will make it more difficult for
stockholders to make changes in the Certificate which would be designed to
facilitate the exercise of control over the Company. In addition, the
requirement for approval by at least an 80% stockholder vote will enable the
holders of a minority of the voting securities of the Company to prevent the
holders of a majority or more of such securities from amending such provisions
of the Certificate.

Number of Directors; Removal. The Certificate provides that the Board of
Directors will consist of that number of Directors as shall be fixed from time
to time by resolution adopted by a majority of the Directors then in office.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, the Certificate provides that Directors of the Company may be
removed only for cause and only by the affirmative vote of holders of a majority
of the outstanding shares of voting stock. This provision will preclude a
stockholder from removing incumbent Directors without cause and simultaneously
gaining control of the Board of Directors by filling the vacancies created by
such removal with its own nominees.

Bylaws

Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as Director as well as for other
stockholder proposals to be considered at stockholders' meetings.

41
<PAGE> 43

Notice of stockholder proposals and Director nominations must be timely
given in writing to the Secretary of the Company prior to the meeting at which
the matters are to be acted upon or at which the Directors are to be elected. To
be timely, notice must be received at the principal executive offices of the
Company not less than 60 nor more than 90 days prior to the meeting of
stockholders; provided, however, that in the event that less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made to
the stockholders, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting was mailed or public disclosure
of the date of the meeting was made, whichever first occurs.

A stockholder's notice to the Secretary with respect to a stockholder
proposal shall set forth as to each matter the stockholder proposes to bring
before the meeting (i) a brief description of the business desired to be brought
before the meeting, (ii) the reasons for conducting such business at the
meeting, (iii) the name and address of the stockholder proposing such business,
(iv) the class or series and number of shares of stock of the Company which are
owned beneficially or of record by such stockholder, (v) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (vi) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting. A stockholder's notice to the Secretary with respect to a Director
nomination shall set forth (i) certain information about the nominee, (ii) the
consent of the nominee to serve as a Director if elected, (iii) the name and
address of the nominating stockholder, (iv) the class or series and number of
shares of stock of the Company which are beneficially owned by such stockholder,
(v) a description of all arrangements or understandings between such stockholder
and each proposed nominee and any other person pursuant to which the nominations
are to be made, (vi) a representation that such stockholder intends to appear in
person or by proxy at the meeting to nominate the persons named and (vii)
certain other information.

The purpose of requiring advance notice is to afford the Board of Directors
an opportunity to consider the qualifications of the proposed nominees or the
merits of other stockholder proposals and, to the extent deemed necessary or
desirable by the Board of Directors, to inform stockholders about those matters.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is SunTrust
Bank, Atlanta, Atlanta, Georgia.

SHARES ELIGIBLE FOR FUTURE SALE

In connection with the Reorganization, the Company will issue an aggregate
of 4,000,000 shares of Common Stock to the stockholders of the companies being
acquired by the Company. There will be 6,000,000 shares of Common Stock
outstanding immediately following consummation of the Offering (6,300,000 shares
if the Underwriters' over-allotment option is exercised in full). The 2,000,000
shares of Common Stock offered hereby (plus an additional 300,000 shares if the
Underwriters' over-allotment option is exercised in full) will be fully
tradeable without restriction or registration under the Securities Act by
persons other than "affiliates" (as defined in the Securities Act) of the
Company. The shares of Common Stock other than those offered hereby will be
"restricted securities" under the Securities Act and may only be sold pursuant
to an effective registration statement under the Securities Act or an applicable
exemption from the registration requirements of the Securities Act. Pursuant to
the exemption provided by Rule 144 under the Securities Act (as presently in
effect), such shares of Common Stock may be sold after November 1998, in
accordance with the volume limitations and manner of sale provisions set forth
in Rule 144. In general, under Rule 144 as currently in effect, a person who has
beneficially owned "restricted securities" for at least two years, including a
person who may be deemed an affiliate of the Company, is entitled to sell within
any three month period a number of shares of Common Stock that does not exceed
the greater of 1% of the then outstanding shares of Common Stock of the Company
and the average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. Sales under Rule 144
are further subject

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<PAGE> 44

to certain restrictions relating to manner of sale, notice and the availability
of current public information about the Company. A person who is not an
affiliate of the Company at any time during the 90 days preceding a sale and who
has beneficially owned shares of Common Stock for at least three years, is
entitled to sell such shares without regard to the volume limitations, manner of
sale provisions, notice or other requirements of Rule 144. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 prior to effecting a transfer of such shares.

Upon completion of the Offering, the Company intends to file a registration
statement on Form S-8 to register up to 1,000,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1996 Stock Option Plan. See
"Management -- Stock Option Plan." There are no stockholders who have the right
to require the Company to register any shares of Common Stock held by them. The
Company, all Directors and Executive Officers and all holders of more than 5% of
the Common Stock prior to the Offering have agreed with the Underwriters not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of their shares of Common Stock of the Company or any securities convertible
into or exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of such Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of A.G. Edwards & Sons, Inc.

No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares for future sale will have
on the market price of shares of Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock (including shares issuable upon the
exercise of stock options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.

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<PAGE> 45

UNDERWRITING

The Underwriters named below have severally agreed with the Company,
subject to the terms and conditions of the Underwriting Agreement, to purchase
the respective numbers of shares of Common Stock set forth opposite their names
below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
A.G. Edwards & Sons, Inc..................................................
Robert W. Baird & Co. Incorporated........................................

---------
Total........................................................... 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock, if any are purchased.

The Company has been advised by A.G. Edwards & Sons, Inc. and Robert W.
Baird & Co. Incorporated, the representatives of the Underwriters (the
"Representatives"), that the Underwriters propose to offer the Common Stock to
the public at the offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share and that the Underwriters and such dealers may reallow a discount of
not in excess of $ per share to other dealers. The public offering price
and the concession and discount to dealers may be changed by the Representatives
after the Offering.

The Company has granted the Underwriters an option, expiring at the close
of business on the 30th day subsequent to the date of the Underwriting
Agreement, to purchase up to 300,000 additional shares of Common Stock at the
public offering price, less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriters may exercise such option solely to
cover over-allotments, if any, in the sale of the shares. To the extent the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of the option shares as the number of shares set forth opposite each
Underwriter's name in the preceding table bears to 2,000,000, and the Company
will be obligated to sell such shares to the Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

The Company, all Directors and Executive Officers of the Company and all
holders of more than 5% of the Common Stock prior to the Offering have agreed
that they will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of A.G. Edwards & Sons, Inc.

The Representatives have advised the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.

Prior to the Offering, there has been no public market for the Common
Stock. The public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the public offering price was the history of and the
future prospects for the Company and the industry in which it operates, the past
and present operating results of the Company and the trends of such results, an
assessment of the Company's management, the general condition for the securities
markets at the time of the Offering and the prices for similar securities of
comparable companies.

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<PAGE> 46

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Shumaker, Loop & Kendrick, LLP, Tampa, Florida. Counsel for the
Underwriters is Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.

EXPERTS

The financial statements as of December 31, 1995 and 1994 and for each of
the three years in the period ended December 31, 1995, included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent certified public accountants, given on the authority of such
firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

This Prospectus constitutes a part of a Registration Statement on Form S-1
filed by the Company with the Commission under the Securities Act through the
Electronic Data Gathering and Retrieval ("EDGAR") system with respect to the
Common Stock offered hereby. This Prospectus omits certain of the information
contained in the Registration Statement, and reference is hereby made to the
Registration Statement and related exhibits and schedules for further
information with respect to the Company and the Common Stock offered hereby. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and in each such instance reference is made to the copy of
such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules forming a part thereof can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be
available for inspection and copying at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Registration statements, reports, proxy and
information statements filed through the EDGAR system are publicly available
through the Commission's Internet web site at "http://www.sec.gov".

As a result of the Offering, the Company will be subject to the
informational requirements of the Exchange Act and, in accordance therewith,
will file reports and other information with the Commission on a periodic basis.
The Company intends to furnish to its stockholders annual reports, containing
audited financial statements and a report thereon expressed by independent
certified public accountants, and quarterly reports for the first three fiscal
quarters of each fiscal year, containing certain unaudited interim financial
information.

45
<PAGE> 47

INDEX TO FINANCIAL STATEMENTS

COMBINED FINANCIAL STATEMENTS OF SUN HYDRAULICS INCORPORATED

<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Combined Balance Sheets -- December 31, 1994, 1995 and Unaudited September 30, 1996... F-3
Combined Statements of Income -- Years Ended December 31, 1993, 1994 and 1995 and
Unaudited Nine Months Ended September 30, 1995 and 1996............................. F-4
Combined Statements of Changes in Shareholders' Equity -- Years Ended December 31,
1993, 1994 and 1995 and Unaudited Nine Months Ended September 30, 1996.............. F-5
Combined Statements of Cash Flows -- Years Ended December 31, 1993, 1994 and 1995 and
Unaudited Nine Months Ended September 30, 1995 and 1996............................. F-6
Notes to Combined Financial Statements................................................ F-7
SEPARATE FINANCIAL STATEMENT OF SUN HYDRAULICS INCORPORATED
Report of Independent Certified Public Accountants.................................... F-20
Balance Sheet -- September 30, 1996................................................... F-21
Notes to Balance Sheet................................................................ F-22
</TABLE>

F-1
<PAGE> 48

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
of Sun Hydraulics Corporation, Suninco, Inc.,
and Sun Hydraulik Holdings Limited,
(collectively "Sun Hydraulics Incorporated")

In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of changes in shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Sun
Hydraulics Incorporated (the "Company") at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

Price Waterhouse LLP
Tampa, Florida
September 30, 1996, except as to Note 16,
which is dated October 5, 1996

F-2
<PAGE> 49

SUN HYDRAULICS INCORPORATED

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------- ------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 2,371 $ 2,434 $ 1,187 $ 1,187
Accounts receivable, net of allowance for
doubtful accounts of $64, $40 and $62......... 3,095 3,574 4,266 4,266
Inventories...................................... 3,799 4,478 4,377 4,377
Income taxes receivable, net..................... 91 -- -- --
Other current assets............................. 438 222 151 151
------- ------- ------- -------
Total current assets..................... 9,794 10,708 9,981 9,981
Property, plant and equipment, net................. 18,051 23,129 33,264 33,264
Deferred tax asset................................. -- -- 269 269
Other assets....................................... 23 27 167 167
------- ------- ------- -------
$27,868 $33,864 $43,681 $43,681
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,846 $ 2,992 $ 2,165 $ 2,165
Accrued expenses................................. 908 1,188 1,930 1,930
Long-term debt due within one year............... 551 495 1,118 1,118
Notes payable to related parties due within one
year.......................................... 516 574 632 632
Accrued distributions to shareholders............ 888 643 -- 9,905
Income taxes payable, net........................ -- 490 1,072 1,072
------- ------- ------- -------
Total current liabilities................ 4,709 6,382 6,917 16,822
Long-term debt due after one year.................. 3,821 2,553 10,707 10,707
Notes payable to related parties due after one
year............................................. 3,137 2,564 2,081 2,081
Deferred income taxes.............................. 194 84 -- 1,945
Other liabilities.................................. 383 752 131 131
------- ------- ------- -------
Total liabilities........................ 12,244 12,335 19,836 31,686
------- ------- ------- -------
Commitments & contingencies (Notes 5, 7 and 15)
Shareholders' equity:
Capital stock.................................... 2,181 2,181 2,179 4
Capital in excess of par value................... 848 997 2,625 4,800
Retained earnings................................ 12,969 18,676 19,427 7,577
Equity adjustment for foreign currency
translation................................... (374) (325) (386) (386)
------- ------- ------- -------
Total shareholders' equity............... 15,624 21,529 23,845 11,995
------- ------- ------- -------
$27,868 $33,864 $43,681 $43,681
======= ======= ======= =======
</TABLE>

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

F-3
<PAGE> 50

SUN HYDRAULICS INCORPORATED

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $32,431 $42,853 $55,388 $42,718 $41,233
Cost of sales................................. 21,971 27,512 34,581 26,361 27,903
------- ------- ------- ------- -------
Gross profit.................................. 10,460 15,341 20,807 16,357 13,330
Selling, engineering and administrative
expense..................................... 7,346 8,605 10,578 7,652 9,288
------- ------- ------- ------- -------
Operating income.............................. 3,114 6,736 10,229 8,705 4,042
Interest expense.............................. 931 859 814 612 678
Miscellaneous (income) expense................ 249 66 (79) (81) 107
------- ------- ------- ------- -------
Income before income taxes.................... 1,934 5,811 9,494 8,174 3,257
Income tax provision (benefit)................ (148) 408 633 478 727
------- ------- ------- ------- -------
Net income.................................... $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
======= ======= ======= ======= =======
Pro forma income data (unaudited):
Income before income taxes, as reported..... $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257
Pro forma income tax provision.............. 604 2,738 3,611 3,069 1,255
------- ------- ------- ------- -------
Pro forma net income........................ $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002
======= ======= ======= ======= =======
Pro forma net income per share.............. $ 1.13 $ 0.38
Average shares outstanding.................. 5,203 5,292
</TABLE>

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

F-4
<PAGE> 51

SUN HYDRAULICS INCORPORATED

COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FOR
CAPITAL IN FOREIGN
CAPITAL EXCESS OF RETAINED CURRENCY
STOCK PAR VALUE EARNINGS TRANSLATION TOTAL
------- ---------- -------- ---------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992....................... $ 2,181 $ 438 $ 8,801 $ (453) $10,967
Exercise of stock options........................ 34 34
Adjustment for foreign currency translation...... (229) (229)
Net income....................................... 2,082 2,082
Distributions to shareholders.................... (803) (803)
------ ------- ----- ------- -------
Balance, December 31, 1993....................... 2,181 472 10,080 (682) 12,051
Exercise of stock options........................ 105 105
Adjustment for foreign currency translation...... 308 308
Net income....................................... 5,403 5,403
Distributions to shareholders.................... (2,514) (2,514)
Realized tax benefit on debt exchange
(see Note 9)................................... 271 271
------ ------- ----- ------- -------
Balance, December 31, 1994....................... 2,181 848 12,969 (374) 15,624
Exercise of stock options........................ 149 149
Adjustment for foreign currency translation...... 49 49
Net income....................................... 8,861 8,861
Distributions to shareholders.................... (3,154) (3,154)
------ ------- ----- ------- -------
Balance, December 31, 1995....................... 2,181 997 18,676 (325) 21,529
Unaudited:
Issuance of common stock......................... 92 92
Issuance of stock options........................ 2,110 2,110
Exercise of stock options........................ 69 69
Repurchase of shares............................. (41) (41)
Exchange of shares in merger (Note 1)............ (2) (602) 604
Adjustment for foreign currency translation...... (61) (61)
Net income....................................... 2,530 2,530
Distributions to shareholders.................... (2,383) (2,383)
------ ------- ----- ------- -------
Balance, September 30, 1996 (unaudited).......... $ 2,179 $2,625 $ 19,427 $ (386) $23,845
====== ======= ===== ======= =======
</TABLE>

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

F-5
<PAGE> 52

SUN HYDRAULICS INCORPORATED

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- --------------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)

(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 2,112 2,197 2,556 1,803 2,288
Issuance of stock options..................... 2,110
Other......................................... -- -- -- -- 92
(Benefit from)/provision for deferred income
taxes...................................... (28) 57 (110) 195 (353)
Realized tax benefit on debt exchange......... -- 271 --
(Increase) decrease in:
Accounts receivable........................ (245) (937) (479) (1,891) (692)
Inventories................................ (303) (765) (679) (367) 101
Income tax receivable, net................. (119) 101 91 91 --
Other current assets....................... 143 (161) 216 438 71
Other assets............................... 4 (11) (4) (72) (140)
Increase (decrease) in:
Accounts payable........................... 67 1,014 1,146 344 (827)
Accrued expenses........................... (39) (5) 280 958 742
Income taxes payable, net.................. -- -- 490 (84) 582
Other liabilities.......................... (138) 100 369 533 (621)
------- ------- ------- ------- --------
Net cash provided by operating
activities............................. 3,536 7,264 12,737 9,644 5,883
------- ------- ------- ------- --------
Cash flows from investing activities:
Capital expenditures............................ (3,005) (5,130) (7,657) (5,316) (12,423)
Proceeds from dispositions of equipment......... 281 -- 23 -- --
------- ------- ------- ------- --------
Net cash used in investing activities.... (2,724) (5,130) (7,634) (5,316) (12,423)
------- ------- ------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt.................... 2,727 1,850 3,337 2,987 13,519
Repayment of long-term debt..................... (1,773) (1,563) (4,661) (4,537) (4,743)
Proceeds from notes payable to related
parties....................................... 355 1,940 -- -- --
Repayment of notes payable to related parties... (381) (2,386) (515) (380) (424)
Proceeds from exercise of employee stock
options....................................... 34 105 149 7 69
Repurchase of shares............................ -- -- -- -- (41)
Distributions to shareholders................... (791) (1,900) (3,399) (3,398) (3,026)
------- ------- ------- ------- --------
Net cash provided by (used in) financing
activities............................. 171 (1,954) (5,089) (5,321) 5,354
------- ------- ------- ------- --------
Foreign currency translation adjustment........... (229) 308 49 115 (61)
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 754 488 63 (878) (1,247)
Cash and cash equivalents, beginning of year...... 1,129 1,883 2,371 2,371 2,434
------- ------- ------- ------- --------
Cash and cash equivalents, end of year............ $ 1,883 $ 2,371 $ 2,434 $ 1,493 $ 1,187
======= ======= ======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest (net of amounts capitalized)............. $ 923 $ 875 $ 815 $ 663 $ 706
======= ======= ======= ======= ========
Income taxes...................................... $ 169 $ (223) $ 109 $ 8 $ 506
======= ======= ======= ======= ========
</TABLE>

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

F-6
<PAGE> 53

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)

1. ORGANIZATION

Sun Hydraulics Incorporated (the "Company"), a Delaware corporation, was
formed on September 27, 1996 with a nominal capital contribution solely in
anticipation of a business combination (the "Reorganization"). The Company plans
to issue approximately 4 million shares of stock (par value $0.001 per share) in
exchange for all of the issued and outstanding stock of Sun Hydraulics
Corporation ("Sun Hydraulics") and all of the issued and outstanding stock of
Sun Hydraulik Holdings Limited ("Sun Holdings"). Sun Hydraulics completed a
merger with Suninco, Inc. ("Suninco") on June 28, 1996 by exchanging shares of
its common stock for all of the outstanding stock of Suninco. The financial
statements presented represent the combined financial position and results of
operations of Sun Hydraulics, Sun Holdings and Suninco. The combined financial
statements represent the financial position and business activities of the
Company subsequent to the Reorganization going forward.

The Reorganization will be accounted for in a manner similar to a pooling
of interests as the entities were under common control. In conjunction with the
Reorganization, the Company's Board of Directors approved an initial public
offering of the Company's common stock. The Company intends to file a
Registration Statement on Form S-1 with the Securities and Exchange Commission.
The Reorganization will be effective immediately prior to the consummation of
the initial public offering by the Company. The effects of the Reorganization,
the S Corporation distribution (see Note 2) and a charge to recognize deferred
income taxes (see Note 11) are reflected in the unaudited pro forma balance
sheet as of September 30, 1996.

The Company designs, manufactures and sells screw-in cartridge valves and
manifolds used in hydraulic systems, and has facilities in the United States,
the United Kingdom and Germany. Sun Hydraulics, located in Sarasota, Florida,
designs, manufactures and sells through independent distributors in the United
States. Sun Holdings was formed to provide a holding company vehicle for the
European market operations. Its subsidiaries are Sun Hydraulics Limited (a
British corporation, "Sun Ltd.") and Sun Hydraulik GmbH (a German corporation,
"GmbH"). Sun Ltd. was originally formed in 1985, and operates a manufacturing
and distribution facility located in Coventry, England. GmbH was incorporated on
January 1, 1991 as a wholly-owned subsidiary of Sun Holdings to market the
Company's products in German-speaking European markets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies followed in the
preparation of the Company's combined financial statements is set forth below:

Principles of Combination

The combined financial statements include the accounts and operations of
Sun Hydraulics and Sun Holdings. All significant intercompany accounts and
transactions are eliminated in combination.

Cash and Cash Equivalents

The Company considers all short-term highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.

Inventories

Inventories are valued at the lower of cost or market, cost being
determined on a first-in, first-out basis.

F-7
<PAGE> 54

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Other Current Assets

Other current assets consist primarily of prepaid insurance and advances to
suppliers.

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Expenditures for repairs
and improvements that significantly add to the productive capacity or extend the
useful life of an asset are capitalized. Repairs and maintenance are expensed as
incurred. Depreciation is computed using the straight line method over the
following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment.............................................. 4-12
Furniture and fixtures............................................... 4-10
Leasehold improvements............................................... 5-12
Land improvements.................................................... 10-15
Buildings............................................................ 40
</TABLE>

During 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Management periodically evaluates
long-lived assets for potential impairment, and will reserve for impairment
whenever events or changes in circumstances indicate the carrying amount of the
assets may not be fully recoverable. As of December 31, 1995, management does
not believe that an impairment reserve is required.

Other Liabilities

Other liabilities consists of accrued compensation earned under the
Company's phantom stock option plans (the "Plans"). Compensation cost is
measured as the amount by which the market value, as defined in the Plans, of
the stock on the measurement date exceeds the market value on the date the
phantom stock options are granted. The market value is defined in the Plans as
the higher of: the last arms length sale price of said stock between unrelated
parties if there has been a sale in the preceding six months period or the book
value of said stock. Compensation cost is accrued over the service period and is
adjusted in periods subsequent to the measurement date for changes in the market
value of the stock (see Note 13).

Revenue Recognition

Sales are recognized when products are shipped. Sales incentives are
granted to customers based upon the volume of purchases. These sales incentives
are recorded at the time of sales as a reduction of gross sales.

Research and Development Expense

Included in selling, engineering and administrative expense are amounts
incurred for research and development of the Company's manufacturing processes
and related software which approximated $1,061, $1,276 and $1,337 for the years
ended December 31, 1993, 1994 and 1995, respectively.

Advertising Costs

The Company expenses the costs for advertising and promotional literature
during the year incurred. Included in selling, engineering and administrative
expense are amounts incurred for advertising and promotional literature which
approximated $562, $791 and $792 for the years ended December 31, 1993, 1994 and
1995, respectively.

F-8
<PAGE> 55

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Foreign Currency Translation and Transactions

The Company follows the translation policy provided by Statement of
Financial Accounting Standards No. 52, Foreign Currency Translation. The Pound
Sterling is the functional currency of Sun Ltd. The Deutsche Mark is the
functional currency of GmbH. The U.S. Dollar is the functional currency for all
other companies and the reporting currency for the combined group. The assets
and liabilities of Sun Ltd. and GmbH are translated at the exchange rate in
effect at the balance sheet date, while income and expense items are translated
at the average annual rate of exchange for the period. The resulting unrealized
translation gains and losses are included in the component of shareholders'
equity designated "Equity Adjustment for Foreign Currency Translation". Realized
gains and losses from foreign currency transactions are included in
miscellaneous income.

Income Taxes

The Company follows the income tax policy provided by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This
Statement provides for a liability approach under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable. These differences result from items reported
differently for financial reporting and income tax purposes, primarily
depreciation and phantom stock compensation.

Sun Hydraulics elected to be taxed under the S Corporation provisions of
the Internal Revenue Code. Historically, the shareholders of Sun Hydraulics
included their pro rata share of income or loss in their individual returns. A
portion of the distributions to shareholders was related to their individual
income tax liabilities, resulting from S Corporation taxable earnings (see Note
10). Effective with the consummation of the Reorganization (see Note 1), Sun
Hydraulics' S Corporation status will be converted to C Corporation status and
Sun Hydraulics' subsequent earnings will be subject to corporate taxes.
Accordingly, for informational purposes, the financial statements include an
unaudited pro forma income tax provision which would have been recorded as if
Sun Hydraulics had been an C Corporation, based on the tax laws in effect during
those periods.

Stock-Based Compensation

The Company will adopt Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation during 1996. Upon adoption, the Company
intends to retain the intrinsic value method of accounting for stock-based
compensation and disclose pro forma net income.

Pro Forma Balance Sheet Information (unaudited)

The effects of the Reorganization, the S Corporation distribution and a
charge associated with the provision for deferred income taxes the Company will
recognize upon its termination of S Corporation status (see Note 11) are
reflected in the unaudited pro forma balance sheet as of September 30, 1996.

Pro Forma Net Income Per Share (unaudited)

The computation of primary pro forma earnings per share is based on the
weighted average number of outstanding common shares during the period plus
common stock equivalents, if dilutive, consisting of certain shares subject to
stock options, after giving effect to the proposed Reorganization (see Note 1)
and issuance of stock options (see Note 16). The assumed exercise of dilutive
stock options less the number of treasury shares assumed to be purchased from
the proceeds were calculated using the book value of the Company prior to 1994
and the appraised fair market value of the Company from 1995 forward.
Additionally, the weighted average number of outstanding common shares includes
the effects of the incremental number of shares required to fund the
distribution to S Corporation shareholders.

F-9
<PAGE> 56

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Management Estimates and Assumptions

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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Interim Financial Information

The interim financial data includes the accounts and operations of Sun
Hydraulics Incorporated, Sun Hydraulics and Sun Holdings. The interim financial
data is unaudited; however, in the opinion of the Company, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim period and are
prepared on the same basis as the audited annual financial statements.

3. FAIR VALUE OF INVESTMENTS

In 1995, the Company adopted Statement of Financial Accounting Standards
107, Disclosures about the Fair Value of Financial Instruments, which requires
disclosure of information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of the
following disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments:

The carrying amounts of cash and cash equivalents, accounts
receivable, other current assets, accounts payable, accrued expenses and
other liabilities approximate fair value because of the short maturity of
those instruments.

The carrying amount of long-term debt approximates fair value, as the
interest rates on the debt approximate rates currently available to the
Company for debt with similar terms and remaining maturities.

The fair value of the notes payable to related parties is estimated
based on the current rates offered to the Company for similar debt. The
estimated fair value of the Company's related party debt is $3,572 at
December 31, 1995.

4. INVENTORIES

The components of inventory are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $ 81 $ 127 $ 151
Work in process.......................................... 2,612 3,236 3,102
Finished goods........................................... 1,106 1,115 1,124
------ ------ ------
$3,799 $4,478 $ 4,377
====== ====== ======
</TABLE>

F-10
<PAGE> 57

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. PROPERTY, PLANT AND EQUIPMENT

The components of property, plant and equipment are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1994 1995 1996
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................... $17,905 $ 20,666 $ 24,186
Furniture and fixtures................................ 3,145 4,221 4,237
Buildings............................................. 4,819 4,861 4,938
Leasehold improvements................................ 248 285 337
------- -------- --------
26,117 30,033 33,698
Less-accumulated depreciation......................... (9,462) (11,684) (13,075)
------- -------- --------
16,655 18,349 20,623
Construction in progress.............................. 920 3,414 11,288
Land.................................................. 476 1,366 1,353
------- -------- --------
$18,051 $ 23,129 $ 33,264
======= ======== ========
</TABLE>

During 1995, the Company purchased land for $461 and began construction of
a new production facility in Sarasota, Florida. Management believes the
aggregate cost of the new production facility will approximate $9,300. As of
December 31, 1995, the Company had capital expenditure purchase commitments
outstanding of approximately $1,500 related to the construction of the new
facility.

Also during 1995, the Company purchased land in Erkelenz, Germany for
approximately $429 for construction of a new distribution facility. Management
believes the aggregate cost of the facility will approximate $2,600.

In April 1996, the Company signed a financing commitment in the amount of
$2,400 for the new distribution facility in Erkelenz. Construction contracts for
structural components, building erection and roof construction in the total
amount of $2,716 have been entered into by the Company.

During 1996, the Company renegotiated existing bank financing to increase
availability of funds by approximately $9,500 at 8.25% for the construction of
the new production facility in Sarasota.

6. ACCRUED EXPENSES

The components of accrued expenses are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Compensation.............................................. $746 $ 863 $ 991
Taxes..................................................... -- -- 265
Insurance................................................. -- -- 218
Interest.................................................. 134 111 102
Other accrued expenses.................................... 28 214 354
---- ------ ------
$908 $1,188 $ 1,930
==== ====== ======
</TABLE>

Accrued compensation consists primarily of salaries and wages, commissions,
employee 401(k) withholdings and employer 401(k) matching contributions.

F-11
<PAGE> 58

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

7. LONG-TERM DEBT

The components of long-term debt are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Lines of credit agreements, interest payable at lender
determined rates (9.50% and 8.50% at December 31, 1994
and 1995 and 8.25% at September 30, 1996).............. $1,345 $ 38 $ 300
Secured equipment loan, interest only payable monthly at
10.25% in 1994 and 1995 and 8.25% in 1996, converting
to a five year note on final draw down................. -- 443 2,955
9% mortgage note payable secured by real property due in
monthly principal and interest installments of $20 with
the balance due in a balloon payment on January 9,
1997................................................... 1,797 1,714 2,395
Variable rate mortgage note (9.5% and 13% at December 31,
1994 and 1995) secured by real property, principal and
interest payable in monthly installments of $8 through
2007................................................... 562 511 --
Notes payable secured by equipment, payable in monthly
principal and interest installments with interest rates
varying from 4.90% to 5.60% with maturity dates from
March 1996 to June 1998................................ 585 277 78
Construction lines of credit at 8.25% and 6.47% to be
converted to mortgage notes payable at 8.25% and 6.47%
between 12 and 15 years................................ -- -- 6,097
Capital lease obligations at varying interest rates from
8.45% to 12.45% through 1999........................... 83 65 --
------ ------ -------
4,372 3,048 11,825
Less amounts due within one year......................... (551) (495) (1,118)
------ ------ -------
$3,821 $2,553 $10,707
====== ====== =======
</TABLE>

The remaining principal payments are due as follows: 1997 - $299;
1998 - $268; 1999 - $284; 2000 - $111; 2001 and thereafter - $1,591.

The Company has a revolving credit agreement, secured by all inventory and
accounts, that provides for a two-year commitment by the lender for a maximum
borrowing of $1,700 with interest payable at prime. The agreement requires Sun
Hydraulics to maintain certain financial ratios and places certain limitations
on fixed asset expenditures. The Company was not in compliance with the
limitation on fixed asset expenditures; however, a waiver of this limitation as
of September 30, 1995 for the remainder of fiscal 1995 was obtained from the
bank.

In January 1995, the Company obtained a loan for capital equipment
expenditures with a limit of $775 at a fixed interest rate of 10.25%, with
interest only for the first year, converting to a five year amortization with
monthly principal and interest payments of $13. As of December 31, 1995, the
Company had drawn $443 on this equipment line of credit. In May 1996, the loan
was converted to a seven-year term loan and additional funds were advanced,
resulting in a total outstanding balance of approximately $3,063 with monthly
principal and interest payments of approximately $50.

F-12
<PAGE> 59

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Subsequent to year end, the 9% mortgage note was increased by approximately
$794 and the interest rate reduced to 8.25%. Also, a 10-year mortgage note of
$6,187 was obtained at a fixed interest rate of 8.25%. Terms on the new mortgage
note are interest-only on the balance drawn down until construction is completed
and then conversion to a 10-year note with a 15-year amortization schedule.

8. CAPITAL STOCK

At December 31, 1994 and 1995, prior to the effects of the Reorganization
(see Note 1), the combined par value of common stock consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
Sun Hydraulics Corporation........................................... $ 3 $ 3
Suninco, Inc......................................................... 3 3
Sun Hydraulik Holdings Limited....................................... 2,175 2,175
------ ------
$2,181 $2,181
====== ======
</TABLE>

Other information by entity, prior to the effects of the Reorganization, is
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Sun Hydraulics Corporation
Par value per share......................................... $ 0.01 $ 0.01
Shares authorized........................................... 1,000,000 1,000,000
Shares issued and outstanding............................... 333,315 342,815
Suninco, Inc.
Par value per share......................................... $ 0.01 $ 0.01
Shares authorized........................................... 1,000,000 1,000,000
Shares issued and outstanding............................... 293,235 302,735
Sun Hydraulik Holdings Limited
Par value per share......................................... $ 6.81 $ 6.81
Shares authorized........................................... 421,052 421,052
Shares issued and outstanding............................... 319,315 319,315
</TABLE>

F-13
<PAGE> 60

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

9. RELATED PARTIES

Notes Payable to Related Parties

Notes payable to related parties include the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
15% unsecured notes payable repurchase and retirement of
stock, quarterly principal and interest installments
ranging from $43 to $142 through 2001.................. $3,338 $2,849 $ 2,445
10% unsecured notes payable for phantom compensation
quarterly principal and interest payments of $14
payable through 2002................................... 315 289 268
------ ------ ------
3,653 3,138 2,713
Less amounts due within one year....................... (516) (574) (632)
------ ------ ------
$3,137 $2,564 $ 2,081
====== ====== ======
</TABLE>

Other Related Party Transactions

During 1995, Sun Hydraulics Real Estate, Ltd. ("Sun Real Estate"), a
limited partnership was formed to hold the real property and building for a
manufacturing facility located in Sarasota, Florida. During 1995, land was
purchased and construction on the facility was underway at year end. Upon
completion, management anticipated that the land and building would be leased to
Sun Hydraulics. Sun Hydraulics owned a 1% general partnership interest and a 99%
limited partnership interest in Sun Real Estate at December 31, 1995. The
financial position and results of operations of Sun Real Estate are included in
the combined accounts of Sun Hydraulics at December 31, 1995. Subsequent to year
end, Sun Real Estate was dissolved, and the net assets were distributed to Sun
Hydraulics.

On October 31, 1995, Sun Hydraulics contributed certain intangible assets
to SunOpTech Limited ("SunOpTech"), a limited partnership formed to further the
development of manufacturing software used in the Company's production
processes. In exchange for the contributed intangible assets, Sun Hydraulics
received a 1% general partnership interest and a 65% limited partnership
interest in SunOpTech. This investment is accounted for under the equity method,
and is included in other assets at a net balance of $6 at December 31, 1995. The
founders of SunOpTech, Inc., which owns the remaining 1% managing general
partnership interest in SunOpTech, also own a 33% limited partnership interest
in SunOpTech. Subsequent to year end, Sun Hydraulics distributed its limited
partnership interests to its individual shareholders. Effective July 1, 1996,
the Company withdrew as general partner from SunOpTech.

During 1995, Sun Hydraulics entered into a 35 month agreement with
SunOpTech for the development of computer software and computer support to Sun
Hydraulics. In exchange, Sun Hydraulics will pay approximately $955 over the
three year period, provide office space and equipment and reimburse SunOpTech
for reasonable expenses related to the software development. During 1995, $90
was paid to SunOpTech under the agreement. Future payments are scheduled as
follows: 1996 -- $510; 1997 -- $325 and 1998 -- $30. For the year ended December
31, 1995, Sun Hydraulics paid expenses of SunOpTech of $25. Additionally, Sun
Hydraulics provided certain administrative support to SunOpTech at no charge.
All of these expenses are included in selling, engineering and administrative
expenses.

Effective July 1, 1994, Sun Hydraulics and Suninco agreed to an exchange of
debt instruments. The realized tax benefit on the transaction of $271 was
treated for financial statement purposes as a capital contribution, resulting in
an increase to capital in excess of par value.

F-14
<PAGE> 61

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

A Director of the Company is the President, Chief Executive Officer and
controlling stockholder of a fluid power distributorship that purchases and
sells the Company's products pursuant to one of the Company's standard
distributor agreements. This distributorship purchased approximately $1,060,
$1,250 and $1,310 of products from the Company in fiscal 1993, 1994 and 1995,
respectively.

10. DISTRIBUTIONS TO SHAREHOLDERS

The Company declared distributions of $803, $2,514 and $3,154 to
shareholders in 1993, 1994 and 1995, respectively, a portion of which was to
fund shareholders' individual income tax liabilities related to the S
Corporation taxable earnings.

In 1996, the Company has paid $2,383 in distributions. Approximately half
of the distributions in 1996 have been to fund shareholders' individual income
tax liabilities related to the S Corporation taxable earnings.

The Company plans to distribute all of Sun Hydraulics' previously
undistributed retained earnings as of the consummation of the Reorganization
(see Note 1).

11. INCOME TAXES

Pretax income from continuing operations for the years ended December 31,
is taxed under the following jurisdictions:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
United States................................................ $1,636 $4,914 $7,489
Foreign...................................................... 298 897 2,005
------ ------ ------
Total.............................................. $1,934 $5,811 $9,494
====== ====== ======
</TABLE>

The income tax provision (benefit) consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
Current tax expense (benefit):
United States............................................... $(146) $197 $ (3)
State and local............................................. -- -- --
Foreign..................................................... 26 154 746
------ ----- ------
Total current....................................... (120) 351 743
------ ----- ------
Deferred tax expense (benefit):
United States............................................... (32) (82) (88)
State and local............................................. (15) (37) (16)
Foreign..................................................... 19 176 (6)
------ ----- ------

Total deferred...................................... (28) 57 (110)
------ ----- ------
Total income tax provision (benefit)................ $(148) $408 $ 633
====== ====== ======
</TABLE>

F-15
<PAGE> 62

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
----- ------- -------
<S> <C> <C> <C>
U.S. federal taxes at statutory rate...................... $ 658 $ 1,976 $ 3,228
Increase (decrease):
Foreign income taxed at higher (lower) rates............ (59) 12 28
Book/tax basis differences on disposed equipment........ (61) 131 --
Taxable gain eliminated from book income................ -- 127 --
S Corporation income.................................... (665) (1,839) (2,684)
Nondeductible items..................................... 8 45 46
State and local taxes, net.............................. (15) (37) (16)
Other................................................... (14) (7) 31
----- ------- -------
Income tax provision (benefit)............................ $(148) $ 408 $ 633
===== ======= =======
</TABLE>

Deferred tax assets and liabilities at December 31 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
<S> <C> <C>
Deferred taxes, non-current:
Assets
Phantom stock compensation........................................ $142 $218
Florida NOL carryforward.......................................... 14 15
---- ----
Deferred tax asset, non-current................................... $156 $233
==== ====
Liabilities
Depreciation differences.......................................... $346 $317
Other............................................................. 4 --
---- ----
Deferred tax liability, non-current............................... $350 $317
==== ====
Net deferred tax liability, non-current................................ $194 $ 84
==== ====
</TABLE>

At December 31, 1995, the Company has a Florida income tax net operating
loss carryforward of approximately $413 available to offset future taxable
income. These carryforwards expire through 2010 as follows: 2008 -- $176;
2009 -- $132; and 2010 -- $105. Utilization of these carryforwards may be
limited in the event of certain ownership changes.

Upon termination of its S Corporation status (see Note 1), the Company will
be required to recognize deferred income taxes for cumulative temporary
differences between income for financial and tax reporting purposes. Had the
termination occurred at September 30, 1996, the deferred income tax liability,
calculated in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, would have approximated $1,945.

12. STOCK OPTION PLANS

Sun Hydraulics and Suninco have granted options under qualified incentive
stock option plans to certain employees which are exercisable at a price equal
to the fair market value, as defined in the agreement, on the date of the grant.
No shares are available for granting at December 31, 1993, 1994 or 1995. The
following

F-16
<PAGE> 63

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

reflects the combined activity of the plans, prior to the Reorganization (see
Note 1), for the three years ended December 31, 1995:

<TABLE>
<CAPTION>
1993 1994 1995
----------------- ------------------ ------------------
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1,............ 53,000 $ 6.76 44,000 $ 7.37 27,000 $ 8.12
Exercised............................ (9,000) 3.81 (17,000) 6.17 (19,000) 7.83
------ ----- ------- ----- ------- -----
Outstanding at December 31,.......... 44,000 $ 7.37 27,000 $ 8.12 8,000 $ 8.83
====== ===== ======= ===== ======= =====
Exercisable at December 31,.......... 24,000 13,000 2,000
====== ======= =======
</TABLE>

At December 31, 1995, 4,000 options under the plans were outstanding to
purchase shares at $6.50 per share and 4,000 shares were outstanding under the
plans to purchase shares at $11.15.

Options become exercisable to purchase shares of stock subsequent to
December 31, 1995 as follows: 1996 -- 0 shares and 1997 -- 6,000 shares.

During May 1996, the Board of Directors approved the acceleration of the
6,000 options which were to become exercisable in 1997 effective immediately. As
of the end of July 1996, all qualified stock options have been exercised. In
September of 1996, additional stock options were issued (see Note 16).

13. EMPLOYEE BENEFITS

The Company has a defined contribution retirement plan covering
substantially all of its eligible United States employees. Employer
contributions under the retirement plan amounted to approximately $537, $796 and
$901 during 1993, 1994 and 1995, respectively.

The Company has a medical benefit trust to provide for health care coverage
to substantially all eligible United States employees. Employer contributions to
the trust amounted to approximately $991, $1,242 and $1,490 during 1993, 1994
and 1995, respectively. Long-term disability and life insurance benefits are
also provided to employees, the premiums for which are paid directly by Sun
Hydraulics. Payments amounted to approximately $111, $110 and $132 for 1993,
1994 and 1995, respectively.

The Company provides supplemental pension benefits to its employees of
foreign operations in addition to mandatory benefits included in local country
payroll tax statutes. These supplemental pension benefits amounted to
approximately $33, $43 and $56 during 1993, 1994 and 1995, respectively.

The Company has phantom stock agreements with certain employees. Under
these agreements, 92,801 phantom options are deemed vested, as defined in the
agreements, at various dates from October 1, 1987 to July 1, 2005. At December
31, 1995, all phantom options remained outstanding and 60,951 phantom options
were deemed vested at prices ranging from $2.35 to $24.72 per share.
Approximately $379 and $732 is included in other liabilities under these
agreements at December 31, 1994 and 1995, respectively. Compensation expense
related to these phantom options of $175, $105 and $353 is included in selling,
engineering and administrative expense in 1993, 1994 and 1995, respectively.
Effective September 30, 1996 the Board of Directors of the Company approved a
plan to replace the phantom stock agreements (see Note 16).

Effective January 1, 1993, Suninco issued a 10 year note payable of $355 at
10% interest, with principal and interest payments due quarterly beginning on
April 1, 1993, in settlement of 10,000 phantom options which were deemed vested.

F-17
<PAGE> 64

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

14. INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS

The individual companies comprising the Company operate predominantly in a
single industry as manufacturers and distributors of hydraulic components. The
companies are multinational with operations in the United States, the United
Kingdom and Germany. Intercompany transfers between geographic areas are
accounted for based on sales prices that approximate those to third parties. In
computing earnings from operations for the foreign companies, no allocations of
general corporate expenses, interest or income taxes have been made.

Identifiable assets of the foreign companies are those assets related to
the operation of those companies. United States assets consist of all other
operating assets of the companies.

Geographic information is as follows:

<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM GERMANY ELIMINATION COMBINED
------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
1993
Sales to unaffiliated customers......... $25,692 $4,457 $2,282 -- $32,431
Intercompany sales...................... 3,686 767 -- $(4,453) 0
Operating profits....................... 2,739 133 242 -- 3,114
Identifiable assets..................... 15,097 3,851 878 (903) 18,923
Depreciation expense.................... 1,729 356 27 -- 2,112
Capital expenditures.................... 2,592 331 82 -- 3,005
1994
Sales to unaffiliated customers......... $33,284 $6,590 $2,979 -- $42,853
Intercompany sales...................... 5,297 1,119 -- $(6,416) 0
Operating profits....................... 5,753 676 307 -- 6,736
Identifiable assets..................... 22,486 4,828 1,036 (482) 27,868
Depreciation expense.................... 1,746 406 45 -- 2,197
Capital expenditures.................... 4,355 739 36 -- 5,130
1995
Sales to unaffiliated customers......... $43,099 $8,300 $3,989 -- $55,388
Intercompany sales...................... 5,940 1,470 -- $(7,410) 0
Operating profits....................... 8,090 1,446 693 -- 10,229
Identifiable assets..................... 27,212 5,414 1,813 (575) 33,864
Depreciation expense.................... 1,961 531 64 -- 2,556
Capital expenditures.................... 6,230 700 727 -- 7,657
</TABLE>

Total liabilities attributable to foreign operations were $2,123, $2,493
and $2,674 at December 31, 1993, 1994 and 1995, respectively. Net foreign
currency gains (losses) reflected in results of operations were $10, ($19) and
($45) for the year ended 1993, 1994 and 1995, respectively. Operating income is
total sales and other operating income less operating expenses. In computing
geographic operating income, interest expense and net miscellaneous income
(expense) have not been deducted (added).

Included in U.S. sales to unaffiliated customers were export sales,
principally to Canada and Asia, of $3,092, $4,589 and $6,468 during 1993, 1994
and 1995, respectively.

15. COMMITMENTS AND CONTINGENCIES

The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position of the Company.

F-18
<PAGE> 65

SUN HYDRAULICS INCORPORATED

NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

16. SUBSEQUENT EVENTS

Effective September 30, 1996, the Board of Directors of the Company
approved a plan to replace the phantom stock agreements by issuing approximately
305,000 nonqualified stock options on September 30, 1996, and committing to
issue 189,000 qualified incentive stock options upon the closing of the
Reorganization. Exercise prices of the nonqualified options will range from
$3.00 to $5.05. The employees will be immediately vested in their nonqualified
options upon issuance. The qualified options will vest over periods up to five
years. The Company recognized a charge in the nine months ended September 30,
1996 related to termination of the phantom stock agreements of approximately
$1,270.

Also effective September 30, 1996, the Company granted approximately 15,000
nonqualified stock options to four Directors. These options have an exercise
price of $3.00 per share, a term of 10 years and are immediately exercisable.
The Company recognized a charge during the nine months ended September 30, 1996
of approximately $110 in connection with the issuance of these options.

F-19
<PAGE> 66

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders
of Sun Hydraulics Incorporated

In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Sun Hydraulics Incorporated (the
"Company") at September 30, 1996 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

Price Waterhouse LLP
Tampa, Florida
November 1, 1996

F-20
<PAGE> 67

SUN HYDRAULICS INCORPORATED

BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C>
ASSETS
Deferred offering costs................................................. $ 150
----
$ 150
====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Other accrued liabilities............................................. $ 150
----
Total liabilities............................................. $ 150
----
Stockholders' equity:
Preferred stock, par value $0.001 per share, 2,000,000 shares
authorized; no shares issued.......................................
Common stock, par value $0.001 per share, 20,000,000 shares
authorized; 1 share issued and outstanding.........................
Capital in excess of par value........................................
Retained earnings.....................................................
----
Total stockholders' equity....................................
----
$ 150
====
</TABLE>

The accompanying Notes are an integral part of this Balance Sheet

F-21
<PAGE> 68

SUN HYDRAULICS INCORPORATED

NOTES TO BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)

1. ORGANIZATION

The Reorganization will be accounted for in a manner similar to a pooling
of interests as the entities are under common control. In conjunction with the
Reorganization, the Company's Board of Directors approved an initial public
offering of the Company's common stock. The Company has filed a Registration
Statement on Form S-1 with the Securities and Exchange Commission. The
Reorganization will be effective immediately prior to the consummation of the
proposed initial public offering by the Company.

The balance sheet should be read in conjunction with the historical
combined financial statements of Sun Hydraulics Incorporated included elsewhere
in this Registration Statement.

2. DEFERRED OFFERING COSTS

The Company has incurred costs approximating $150 in connection with the
proposed initial public offering of the Company's common stock. The costs have
been reflected as deferred offering costs in the balance sheet as of September
30, 1996. If the offering is successful, the costs will be deducted from the
proceeds received from the offering. If the offering is not successful, the
costs will be charged to expense in the period a decision is made to terminate
the offering. In such an event, the costs would be paid by Sun Hydraulics.

F-22
<PAGE> 69

[Photographs and text on this page overlay outlines of schematic design drawings
of various unidentified cartridge valves and manifolds.]

[Photograph of the exterior of the Company's existing factory in Sarasota,
Florida]

Main manufacturing facility in Sarasota, Florida.

[Photograph of the interior of the Company's offices in Sarasota, Florida]

Open office environment encourages employee communication and involvement.

[Photograph of a portion of the interior of the Company's factory in Sarasota,
Florida]

Extensive use of CNC machines and factory automation ensures products are
consistently replicated.
<PAGE> 70

------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
S Corporation Distribution............ 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 22
Management............................ 31
Certain Transactions.................. 36
Principal Stockholders................ 37
The Reorganization.................... 39
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 42
Underwriting.......................... 44
Legal Matters......................... 45
Experts............................... 45
Additional Information................ 45
Index to Financial Statements......... F-1
</TABLE>

------------------

UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.

------------------------------------------------------
------------------------------------------------------

2,000,000 SHARES
(SUN HYDRAULICS LOGO)

COMMON STOCK

---------------------------

PROSPECTUS
---------------------------
A.G. EDWARDS & SONS, INC.

ROBERT W. BAIRD & CO.
INCORPORATED

DECEMBER , 1996

------------------------------------------------------
------------------------------------------------------
<PAGE> 71

PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The Company estimates that expenses payable by it in connection with the
Offering described in this Registration Statement (other than the underwriting
discount) will be as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ 8,015
NASD filing fee............................................................ 3,145
Nasdaq National Market listing fee......................................... 33,290
Printing expenses.......................................................... 130,000
Accounting fees and expenses............................................... 290,000
Legal fees and expenses.................................................... 200,000
Fees and expenses (including legal fees) for qualifications under state
securities laws.......................................................... 25,000
Registrar and Transfer Agent's fees and expenses........................... 10,000
Miscellaneous.............................................................. *
-------
Total............................................................ *
=======
</TABLE>

- ---------------

* To be included by amendment to the Registration Statement.

All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee are estimated.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its Directors and
Officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The Company's Certificate of Incorporation and By-laws
provide that the Company shall indemnify its Directors, Officers, employees and
agents to the fullest extent permitted by Section 145 of the DGCL, as now
existing or as may hereafter be amended.

Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for breaches
of fiduciary duty. The enabling statute provides, however, that liability for
breaches of the duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or knowing violation of the law, and the
unlawful purchase or redemption of stock or payment of unlawful dividends or the
receipt of improper personal benefits cannot be eliminated or limited in this
manner. The Company's Certificate of Incorporation includes a provision which
eliminates, to the fullest extent permitted by the DGCL, director liability for
monetary damages for breaches of fiduciary duty. In addition, the Board of
Directors of the Company has approved the execution by the Company of
indemnification agreements with the Directors and certain Officers of the
Company, the form of which has been filed as an exhibit to this Registration
Statement.

The Company carries Directors' and Officers' liability insurance.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Between September 1, 1993 and the date of the filing of this Registration
Statement, the Company issued the following securities that were not registered
under the Act:

The Company was formed on September 27, 1996, and prior to the filing of
this Registration Statement issued only one share of Common Stock, to Clyde G.
Nixon, for $10 in cash. Immediately prior to the sale of

II-1
<PAGE> 72

the Common Stock covered by this Registration Statement, the Company intends to
effect a reorganization (the "Reorganization"). In the Reorganization, pursuant
to an Agreement and Plan of Share Exchange, the Company will acquire all of the
366,043 outstanding shares of capital stock of Sun Hydraulics Corporation
("SHC") and all of the 320,315 outstanding shares of Sun Hydraulik Holdings
Limited ("SHHL") and will issue 4,000,000 shares of Common Stock to the
stockholders of SHC and SHHL. Each share of SHC stock will be converted into
9.90373 shares of Common Stock and each share of SHHL stock will be converted
into 1.17013 shares of Common Stock.

Between September 1, 1993 and the date of the filing of this Registration
Statement, SHHL did not issue any securities.

SHC issued 25,212 shares of its common stock upon the exercise of employee
stock options as follows: in 1993, 4,500 shares of SHC's common stock were
purchased for $.01 per share; in 1994, 6,500 shares were purchased for $6.50 per
share and 2,000 shares were purchased for $.01 per share; in 1995, 7,500 shares
were purchased for $6.50 per share, and 1,000 shares were purchased for $.01 per
share; and in 1996, 3,712 shares of SHC's common stock were purchased for an
average of $16.64 per share. The board of directors of SHC deemed the exercise
prices of these stock options to be the fair market value of the shares at the
time of their issuance.

On June 28, 1996, pursuant to an agreement and plan of merger, Suninco,
Inc. was merged with and into SHC. SHC and Suninco, Inc. were controlled by the
same group of stockholders and were operated as a common enterprise. In the
merger, all of the issued and outstanding shares of Suninco, Inc.'s common stock
were cancelled, and the stockholders of Suninco, Inc. received 18,016 newly
issued shares of SHC's common stock.

In January 1996, SHC and Suninco, Inc. each issued 1,000 shares of common
stock, and in September 1996, SHHL issued 1,000 ordinary shares, to Curtis J.
Timm. These companies were obligated to issue such shares to Mr. Timm prior to
October 1993; however, they inadvertently were not issued. The shares had been
granted in consideration for Mr. Timm's agreement at the time the companies were
organized to serve as a member of the Board of Directors.

The Company relied upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended, with respect to the
issuance of the shares of Common Stock described in the above paragraphs and for
the issuance of shares of Common Stock in the Reorganization. The certificates
representing such shares are restricted as to transfer and are marked with
restricted transfer legends. There were no underwriters involved in any of the
foregoing transactions.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) EXHIBITS:

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement.
2.1** -- Reorganization Agreement among Sun Hydraulics Incorporated, Sun Hydraulics
Corporation and Sun Hydraulik Holdings Limited dated , 1996.
</TABLE>

II-2
<PAGE> 73

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
-----------------------------------------------------------------------------------
<C> <C> <S>
3.1* -- Certificate of Incorporation of the Company.
3.2* -- Bylaws of the Company.
4.1* -- Revolving Credit Agreement, dated March 9, 1992, between Sun Hydraulics Corporation
and Northern Trust Bank of Florida/Sarasota, N.A.
4.2* -- Modification Agreement, dated March 25, 1993, amending Revolving Credit Agreement
dated March 9, 1992, between Sun Hydraulics Corporation and Northern Trust Bank of
Florida, N.A.
4.3* -- Second Modification to Revolving Credit Agreement, dated May __, 1995, between Sun
Hydraulics Corporation and Northern Trust Bank of Florida, N.A.
4.4* -- Revolving Line of Credit Renewal Note, dated May __, 1995, in the amount of
$1,700,000.00 given by Sun Hydraulics Corporation to Northern Trust Bank of
Florida, N.A.
4.5* -- Mortgage and Security Agreement, dated January 9, 1992, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
4.6* -- Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun Hydraulics
Corporation, and Northern Trust Bank of Florida, N.A.
4.7* -- Security Agreement, dated March 29, 1996, between Suninco, Inc., Sun Hydraulics
Corporation, and Northern Trust Bank of Florida, N.A.
4.8* -- Modification and Additional Advance Agreement, dated March 29, 1996, between
Suninco, Inc. and Northern Trust Bank of Florida, N.A.
4.9* -- Consolidated Note, dated March 29, 1996, in the amount of $2,475,000.00, given by
Suninco, Inc. to Northern Trust Bank of Florida, N.A.
4.10* -- Loan Agreement, dated May 20, 1996, between Sun Hydraulics Corporation and Northern
Trust Bank of Florida, N.A.
4.11* -- Security Agreement, dated May 20, 1996, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A.
4.12* -- Consolidated Note, dated May 20, 1996, in the amount of $3,063,157.00, given by Sun
Hydraulics Corporation to Northern Trust Bank of Florida, N.A.
4.13* -- Loan Agreement, dated June 14, 1996, between Sun Hydraulics Corporation, Suninco
Inc., and Northern Trust Bank of Florida, N.A.
4.14* -- Mortgage, dated June 14, 1996, between Sun Hydraulics Corporation, Suninco Inc.,
and Northern Trust Bank of Florida, N.A.
4.15* -- Security Agreement, dated June 14, 1996, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A.
4.16* -- Promissory Note, dated June 14, 1996, in the amount of $6,187,000.00, given by Sun
Hydraulics Corporation and Suninco, Inc. to Northern Trust Bank of Florida, N.A.
4.17* -- Revolving Loan Facility letter agreement, dated July 30, 1996, in the amount of
L800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
4.18* -- Overdraft and Other Facilities letter agreement, dated June 7, 1996, in an amount
not to exceed L250,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
4.19* -- Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and Dresdner Bank.
4.20** -- Specimen of the Company's Common Stock Certificate.
5.1** -- Opinion of Shumaker, Loop & Kendrick, LLP as to the Common Stock being registered.
10.1* -- Form of Distributor Agreement (Domestic).
10.2* -- Form of Distributor Agreement (International).
10.3* -- 1996 Sun Hydraulics Incorporated Stock Option Plan.
10.4* -- Form of Indemnification Agreement.
21* -- Subsidiaries of the Company.
23.1** -- Consent of Shumaker, Loop & Kendrick, LLP (included in their opinion filed as
Exhibit 5.1).
23.2* -- Consent of Price Waterhouse LLP, independent certified public accountants.
27.1* -- Financial Data Schedule for six months ended June 30, 1996.
27.2* -- Financial Data Schedule for year ended December 31, 1995.
</TABLE>

II-3
<PAGE> 74

- ---------------

* Previously filed in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183).

** To be filed by amendment.

(B) FINANCIAL STATEMENT SCHEDULES:

All schedules are omitted because the required information is not present
or is not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements or
notes thereto or the schedule is not required or inapplicable under the related
instructions.

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Pre-effective Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sarasota, State of Florida on November 6, 1996.

SUN HYDRAULICS INCORPORATED

By: /s/ CLYDE G. NIXON
------------------------------------
Clyde G. Nixon,
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities indicated on November 6, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
* Chairman of the Board of Directors
- ---------------------------------------------
Robert E. Koski

/s/ CLYDE G. NIXON President, Chief Executive Officer and
- --------------------------------------------- Director
Clyde G. Nixon

/s/ RICHARD J. DOBBYN Chief Financial Officer (Principal Financial
- --------------------------------------------- and Accounting Officer)
Richard J. Dobbyn

* Director
- ---------------------------------------------
Arthur B. Bodley

* Director
- ---------------------------------------------
James G. March

* Director
- ---------------------------------------------
Curtis J. Timm

* Director
- ---------------------------------------------
Taco van Tijn

* Director
- ---------------------------------------------
David N. Wormley
- ---------------------------------------------------------------------------------------
*By: /s/ CLYDE G. NIXON as attorney-in-fact pursuant to the power of
- --------------------------------------------- attorney included in the Registration
Clyde G. Nixon Statement as originally filed on October 15,
1996.
</TABLE>

II-5
<PAGE> 76

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- --------------------------------------------------------------------- -------------
<C> <C> <S> <C>
1.1** -- Form of Underwriting Agreement.......................................
2.1** -- Reorganization Agreement among Sun Hydraulics Incorporated, Sun
Hydraulics Corporation and Sun Hydraulik Holdings Limited dated
, 1996...................................................
3.1* -- Certificate of Incorporation of the Company..........................
3.2* -- Bylaws of the Company................................................
4.1* -- Revolving Credit Agreement, dated March 9, 1992, between Sun
Hydraulics Corporation and Northern Trust Bank of Florida/Sarasota,
N.A..................................................................
4.2* -- Modification Agreement, dated March 25, 1993, amending Revolving
Credit Agreement dated March 9, 1992, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A..................
4.3* -- Second Modification to Revolving Credit Agreement, dated May __,
1995, between Sun Hydraulics Corporation and Northern Trust Bank of
Florida, N.A.........................................................
4.4* -- Revolving Line of Credit Renewal Note, dated May __, 1995, in the
amount of $1,700,000.00 given by Sun Hydraulics Corporation to
Northern Trust Bank of Florida, N.A..................................
4.5* -- Mortgage and Security Agreement, dated January 9, 1992, between
Suninco, Inc., Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A.........................................................
4.6* -- Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A......
4.7* -- Security Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A......
4.8* -- Modification and Additional Advance Agreement, dated March 29, 1996,
between Suninco, Inc. and Northern Trust Bank of Florida, N.A........
4.9* -- Consolidated Note, dated March 29, 1996, in the amount of
$2,475,000.00, given by Suninco, Inc. to Northern Trust Bank of
Florida, N.A.........................................................
4.10* -- Loan Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A..................
4.11* -- Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A..................
4.12* -- Consolidated Note, dated May 20, 1996, in the amount of
$3,063,157.00, given by Sun Hydraulics Corporation to Northern Trust
Bank of Florida, N.A.................................................
4.13* -- Loan Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A..................................................................
4.14* -- Mortgage, dated June 14, 1996, between Sun Hydraulics Corporation,
Suninco Inc., and Northern Trust Bank of Florida, N.A................
4.15* -- Security Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A..................
4.16* -- Promissory Note, dated June 14, 1996, in the amount of $6,187,000.00,
given by Sun Hydraulics Corporation and Suninco, Inc. to Northern
Trust Bank of Florida, N.A. .........................................
4.17* -- Revolving Loan Facility letter agreement, dated July 30, 1996, in the
amount of L800,000, between Sun Hydraulics Ltd. and Lloyds Bank
Plc..................................................................
</TABLE>

II-6
<PAGE> 77

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- --------------------------------------------------------------------- -------------
<C> <C> <S> <C>
4.18* -- Overdraft and Other Facilities letter agreement, dated June 7, 1996,
in an amount not to exceed L250,000, between Sun Hydraulics Ltd. and
Lloyds Bank Plc......................................................
4.19* -- Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and
Dresdner Bank........................................................
4.20** -- Specimen of the Company's Common Stock Certificate...................
5.1** -- Opinion of Shumaker, Loop & Kendrick, LLP as to the Common Stock
being registered.....................................................
10.1* -- Form of Distributor Agreement (Domestic).............................
10.2* -- Form of Distributor Agreement (International)........................
10.3* -- 1996 Sun Hydraulics Incorporated Stock Option Plan...................
10.4* -- Form of Indemnification Agreement....................................
21* -- Subsidiaries of the Company..........................................
23.1** -- Consent of Shumaker, Loop & Kendrick, LLP (included in their opinion
filed as Exhibit 5.1)................................................
23.2* -- Consent of Price Waterhouse LLP, independent certified public
accountants..........................................................
27.1* -- Financial Data Schedule for six months ended June 30, 1996 (For SEC
purposes only).......................................................
27.2* -- Financial Data Schedule for year ended December 31, 1995 (For SEC
purposes only).......................................................
</TABLE>

- ---------------

* Previously filed in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183).

** To be filed by amendment.

II-7