SUN HYDRAULICS INC, S-1, 1996-10-15

SUN HYDRAULICS INC
S-1, 1996-10-15

Previous: SALOMON BROTHERS MORT SEC VII INC TRUST CERT SERIES 1996-4, 8-K, 1996-10-15

Next: PACIFIC INNOVATIONS TRUST, N-8A, 1996-10-15

<PAGE> 1

<TABLE>
<S> <C>
As Filed with the Securities and Exchange Commission on October 15, 1996 Registration No. 333-______
</TABLE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM S-1

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

SUN HYDRAULICS INCORPORATED
(Exact name of Registrant as specified in its charter)

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

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)

-----------------------
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>
-----------------------

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. [ ]

--------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES REGISTERED (1) OFFERING AGGREGATE REGISTRATION
TO BE REGISTERED PRICE PER SHARE(2) OFFERING PRICE(2) FEE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per share 2,300,000 $11.50 $26,450,000 $8,015.15
===================================================================================================================
</TABLE>

(1) Includes 300,000 shares which the Underwriters have an option to
purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee.

<PAGE> 2

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

<PAGE> 3

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 OCTOBER 15, 1996

2,000,000 SHARES

SUN HYDRAULICS INCORPORATED

(INSERT LOGO)

COMMON STOCK
--------------------------

All of the 2,000,000 shares of common stock, par value $.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."
--------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
--------------------------

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>
=============================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE . . . . . . . . . . . $ $ $
- -------------------------------------------------------------------------------------------------------------
TOTAL(3) . . . . . . . . . . . $ $ $
=============================================================================================================
</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 _____________________, 1996

<PAGE> 4

INSERT PICTURES AND TEXT

Photo 1 - Utility Vehicle/cartridges in cylinder The high reliability and
small size of Sun's screw-in cartridge valves make them ideally suited for
critical positioning, lifting and locking functions in utility equipment.

Photo 2 - Fire and Rescue/standard and custom manifolds Standard screw-in
cartridge valves in standard and custom manifolds provide flexibility to place
hydraulic control functions at various points in fire and rescue equipment.

Photo 3 - Tire Press/sandwiches Screw-in cartridge valves in standard
industrial sandwiches control critical positioning and locking functions in
industrial presses.

Photo 4 - Concrete Corer/custom block Custom manifolds allow standard screw-in
cartridge valves to be combined in one package to provide a customized
hydraulic control system in a defined space.

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> 5

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 $580
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.

-3-
<PAGE> 6

(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 33% 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.

-4-
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
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 new Florida manufacturing
plant, to pay the S Corporation Distribution
and for general corporate purposes. See
"Use of Proceeds."

Proposed Nasdaq National Market Symbol . . . . . . . . . . . . . . "SNHY"
</TABLE>
- -------------------------
(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
(in thousands except per share data)

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales . . . . . . . . . . . $26,250 $28,331 $32,431 $42,853 $55,388 $28,182 $27,637
Cost of sales . . . . . . . . . 16,928 17,946 21,971 27,512 34,581 17,348 18,616
------- ------- ------- ------- ------- ------- -------
Gross profit . . . . . . . . . 9,322 10,385 10,460 15,341 20,807 10,834 9,021
Selling, engineering and
administrative expenses . . . 7,319 7,826 7,346 8,605 10,578 5,035 5,594
------- ------- ------- ------- ------- ------- -------
Operating income . . . . . . . 2,003 2,559 3,114 6,736 10,229 5,799 3,427
Interest expense . . . . . . . 1,118 997 931 859 814 432 423
Miscellaneous (income) expense (320) (252) 249 66 (79) (11) (10)
------- ------- ------- ------- ------- ------- -------
Income before income taxes . . 1,205 1,814 1,934 5,811 9,494 5,378 3,014
Income tax provision
(benefit) (1) . . . . . . . . 46 (201) (148) 408 633 297 491
------- ------- ------- ------- ------- ------- -------
Net income . . . . . . . . . . $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 5,081 $ 2,523
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT
OF INCOME DATA: (2)
Income before income taxes . . $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 5,378 $ 3,014
Income tax provision . . . . . 481 580 604 2,738 3,611 1,920 1,200
------- ------- ------- ------- ------- ------- -------
Net income . . . . . . . . . . $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 3,458 $ 1,814
======= ======= ======= ======= ======= ======= =======
Net income per common share (3) $ 1.09 $ 0.34
Weighted average shares
outstanding (3) . . . . . . . 5,402 5,384
OTHER FINANCIAL DATA:
EBITDA(4) . . . . . . . . . . . $ 3,956 $ 4,530 $ 5,226 $ 8,933 $12,785 $ 6,870 $ 5,150
Depreciation . . . . . . . . . 1,953 1,971 2,112 2,197 2,556 1,071 1,723
Capital expenditures . . . . . 1,683 1,987 3,005 5,130 7,657 3,146 7,568

</TABLE>

-5-

<PAGE> 8

<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA (5) AS ADJUSTED (6)
------ ------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:

Working capital. . . . . . . . . . . . . . . . . . $ 3,051 $ 3,051 $ 4,202
Total assets . . . . . . . . . . . . . . . . . . . 38,358 38,358 39,509
Total debt . . . . . . . . . . . . . . . . . . . . 9,474 9,474 2,858
Shareholders' equity . . . . . . . . . . . . . . . 23,415 13,082 33,912
</TABLE>

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

(1) The Company has previously operated as an S Corporation. Therefore,
the historical income tax provision represents primarily foreign
taxes.
(2) 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.
(3) 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 1,175 shares to fund the S
Corporation Distribution as of June 30, 1996. See "S Corporation
Distribution."
(4) "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.
(5) Shareholders' equity is Pro Forma for the Reorganization as if the
following had occurred as of June 30, 1996: (i) the S Corporation
Distribution of approximately $11.1 million, and (ii) the issuance of
stock options in connection with (a) the termination of the phantom
stock compensation agreements, resulting in a compensation expense of
approximately $1.3 million, and (b) the cancellation of existing
accrued liabilities of approximately $0.7 million under such phantom
stock compensation agreements, which together resulted in an increase
in capital in excess of par value of approximately $2.0 million. See
"S Corporation Distribution," "Capitalization," "The Reorganization"
and Notes 2 and 16 of the Notes to Financial Statements.
(6) Gives effect to the adjustments in Note (5) 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."

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.

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.

-6-
<PAGE> 9

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
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 and manifold 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-

-7-

<PAGE> 10

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 start-up 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 33% 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 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

-8-
<PAGE> 11

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 June 30, 1996, the amount of such undistributed earnings totalled
approximately $11.1 million. The actual amount of the distribution also will
include the taxable income of the Company for the period from July 1, 1996,
through the date of the 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."

-9-
<PAGE> 12

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 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 31.1% of the outstanding shares of Common Stock
(29.7% 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." All holders of Common Stock and all
Directors and Executive Officers 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 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."

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 immediately prior to the closing date of the Reorganization. As
of June 30, 1996, the amount of the S Corporation Distribution would have
totalled

-10-
<PAGE> 13

approximately $11.1 million. The actual amount of the S Corporation
Distribution will include the taxable income of the Company for the period from
July 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 $6.6 million to repay the outstanding
balance of the Company's revolving line of credit, a $3.1 million
capital equipment loan, the outstanding indebtedness under the
$2.4 million mortgage loan on the Company's existing manufacturing
facility in Florida and a portion of the indebtedness under a 10-year
mortgage loan for $6.2 million related to the new manufacturing
facility in Florida. As of June 30, 1996, such borrowings totalled
approximately $6.6 million (only $0.8 million had been borrowed as of
such date under the $6.2 million mortgage loan, as the new facility
was still under construction), had a weighted average interest rate of
8.25%, and maturity dates of March 1, 1997, for the revolving line of
credit, May 1, 2003, for the capital equipment loan and July 1, 2006,
for the mortgage loans;

(ii) approximately $11.1 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 restrict the payment of dividends.

CAPITALIZATION

The following table sets forth the short-term borrowings and
capitalization of the Company at June 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."

-11-
<PAGE> 14

<TABLE>
<CAPTION>
June 30, 1996
---------------------------------------------
Pro Forma
Actual Pro Forma (1) As Adjusted (2)
------ -------------- ---------------
(in thousands)
<S> <C> <C> <C>
Total short-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 1,517 $ 1,517 $ 610
======= ======= ========
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 7,957 $ 7,957 $ 2,248
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 . . . . . . . . . . . . . . 3,261 5,261 24,089
Retained earnings . . . . . . . . . . . . . . . . . . . . 20,532 8,199 8,199
Equity adjustment for foreign currency translation . . . . (382) (382) (382)
------- ------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . 23,415 13,082 31,912
------- ------- --------
Total capitalization . . . . . . . . . . . . . . . . . . . $31,372 $21,039 $ 34,160
======= ======= ========
</TABLE>

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

(1) Pro Forma for the Reorganization as if the following had occurred as
of June 30, 1996: (i) the S Corporation Distribution of approximately
$11.1 million, and (ii) the issuance of stock options in connection
with (a) the termination of the phantom stock compensation agreements,
resulting in a compensation expense of approximately $1.3 million, and
(b) the cancellation of existing accrued liabilities of approximately
$0.7 million under such phantom stock compensation agreements, which
together resulted in an increase in capital in excess of par value of
approximately $2.0 million. See "S Corporation Distribution,"
"Capitalization," "The Reorganization" and Notes 2 and 16 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 June 30, 1996, gives effect to the
Reorganization. See "The Reorganization."

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 June 30, 1996, was approximately $23.4 million, or
$5.85 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 compensation expense associated with the termination of the
phantom stock compensation agreements 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 June 30, 1996, would have been approximately $31.9 million, or
$5.32 per share. This represents an immediate increase in net tangible book
value of $2.56 per share to existing stockholders and an immediate dilution in
net tangible book value of $5.18 per share to purchasers of Common Stock in the
Offering, as illustrated in the following table:

-12-
<PAGE> 15

<TABLE>
<S> <C> <C>
Assumed public offering price per share . . . . . . . . . . . . . . . . . . . $ 10.50

Net tangible book value per share at June 30, 1996 . . . . . . . . . $5.85

Decrease attributable to S Corporation Distribution (1) . . . . . . 2.77

Decrease attributable to phantom stock compensation expense (2) . . . 0.32
-----
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . 2.76

Increase per share attributable to new investors . . . . . . . . . . 2.56
-----
Pro forma net tangible book value per share after the Offering . . . . . . . 5.32
-------
Net tangible book value dilution per share to new investors . . . . . . . . . $ 5.18
=======
</TABLE>

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

(1) As of June 30, 1996, the amount of the S Corporation Distribution
would have totalled approximately $11.1 million. The actual
amount of the S Corporation Distribution will include the taxable
income of the Company for the period from July 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 $1.3 million resulting from
the termination of the phantom stock compensation agreements. See
"The Reorganization."

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>
AVERAGE
PRICE
SHARES PURCHASED TOTAL CASH CONSIDERATION PER SHARE
----------------------- ---------------------------- ---------
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing stockholders . . . 4,000,000 66.6% $ 5,265,000 (1) 20.0% $ 1.32

New investors . . . . . . . . 2,000,000 33.4% 21,000,000 80.0 $ 10.50
--------- ----- ----------- -----
Total . . . . . . . . . . . . 6,000,000 100.0% $26,265,000 100.0%
========= ===== =========== =====
</TABLE>

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

(1) Represents aggregate par value and capital in excess of par value as
of June 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
options, options to purchase 307,442 shares of Common Stock will be exercisable
within 60 days. See "Management - Stock Option Plan" and "Shares Eligible for
Future Sale."

SELECTED FINANCIAL DATA

Set forth below is selected financial data for each of the five years
ended December 31, 1995, and for the six month periods ended June 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 have
been derived from financial statements that are not included herein. The
selected financial data as of and for the six months ended June 30, 1995 and
1996 has been derived from the Company's unaudited interim combined financial
statements contained

-13-
<PAGE> 16

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 six months ended June 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>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 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 $ 28,182 $ 27,637
Cost of sales . . . . . . . . . . . . 16,928 17,946 21,971 27,512 34,581 17,348 18,616
------- ------- ------- -------- ---------- -------- ----------
Gross profit . . . . . . . . . . . . 9,322 10,385 10,460 15,341 20,807 10,834 9,021
Selling, engineering and
administrative expenses . . . . . . 7,319 7,826 7,346 8,605 10,578 5,035 5,594
------- ------- ------- -------- ---------- -------- ----------
Operating income . . . . . . . . . . 2,003 2,559 3,114 6,736 10,229 5,799 3,427
Interest expense . . . . . . . . . . 1,118 997 931 859 814 432 423
Miscellaneous (income) expense. . . . (320) (252) 249 66 (79) (11) (10)
-------- ------- ------- -------- ---------- -------- ----------
Income before income taxes . . . . . 1,205 1,814 1,934 5,811 9,494 5,378 3,014
Income tax provision (benefit) (1). . 46 (201) (148) 408 633 297 491
------- ------- ------- -------- ---------- -------- ----------
Net income . . . . . . . . . . . . . $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 5,081 $ 2,523
======= ======= ======= ======== ========== ======== ==========
PRO FORMA STATEMENT
OF INCOME DATA: (2)
Income before income taxes . . . . . $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 5,378 $ 3,014
Income tax provision . . . . . . . . 481 580 604 2,738 3,611 1,920 1,200
------- ------- ------- -------- ---------- -------- ----------
Net income . . . . . . . . . . . . . $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 3,458 $ 1,814
======= ======= ======= ======== ========== ======== ==========
Net income per common share (3) . . . $ 1.09 $ 0.34
Weighted average shares
outstanding (3) . . . . . . . . . . 5,402 5,384
OTHER FINANCIAL DATA:
EBITDA(4) . . . . . . . . . . . . . . $ 3,956 $ 4,530 $ 5,226 $ 8,933 $ 12,785 $ 6,870 $ 5,150
Depreciation . . . . . . . . . . . . 1,953 1,971 2,112 2,197 2,556 1,071 1,723
Capital expenditures . . . . . . . . 1,683 1,987 3,005 5,130 7,657 3,146 7,568
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 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 $ 883 $ 215
Working capital . . . . . . . . . . . 4,209 3,396 4,557 5,085 4,326 6,011 3,051
Total assets . . . . . . . . . . . . 22,290 20,411 22,674 27,868 33,864 30,619 38,358
Total debt . . . . . . . . . . . . . 8,982 7,637 9,015 8,025 6,186 7,219 9,474
Shareholders' equity . . . . . . . . 10,690 10,805 12,051 15,624 21,529 19,167 23,415

</TABLE>
- --------------------------------------

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

-14-

<PAGE> 17

(2) 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 10 of the Notes to Financial Statements.
(3) The pro forma net income per share data is based on the historical
weighted average number of shares outstanding and as adjusted to
include the estimated number of shares (1,175 shares) required to
be sold by the Company to make the S Corporation Distribution as of
June 30, 1996. See "S Corporation Distribution."
(4) "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.

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 33% 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 six months ended June 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 six months ended June 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 33% 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.

-15-
<PAGE> 18

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.

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.

AS A PERCENTAGE OF NET SALES

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 61.6 67.4
----- ----- ----- ----- -----
Gross profit . . . . . . . . . . 32.3 35.8 37.6 38.4 32.6

Selling, engineering and
administrative expenses . . . 22.7 20.1 19.1 17.9 20.2
----- ----- ----- ----- -----
Operating income . . . . . . . . 9.6 15.7 18.5 20.6 12.4

Interest expense . . . . . . . . 2.9 2.0 1.5 1.5 1.5

Miscellaneous (income)
expense . . . . . . . . . . . 0.8 0.2 (0.1) 0.0 0.0
----- ----- ------ ----- -----
Income before income taxes . . . 6.0% 13.6% 17.1% 19.1% 10.9%
===== ===== ====== ===== =====
</TABLE>

Comparison of Six Months Ended June 30, 1996 and 1995

Net sales decreased 2.0%, or $0.5 million, to $27.6 million in the six
month period ended June 30, 1996, compared to $28.2 million in the six month
period ended June 30, 1995. Domestic net sales decreased 4.4%, or $0.9 million
to $18.7 million in the six month period ended June 30, 1996, primarily due to
capacity constraints at the United States plant, as well as to a general
decline in hydraulic industry shipments. International net sales increased
3.6%, or $0.3 million, to $8.9 million in the six month period ended June 30,
1996, as growth was achieved across all major geographic areas except Germany,
where net sales decreased 13.5% compared to the 1995 period.

Gross profit decreased 16.7%, or $1.8 million, to $9.0 million in the
six month period ended June 30, 1996, compared to $10.8 million in the six
month period ended June 30, 1995. Gross profit as a percentage of net sales
decreased to 32.6% for the six month period ended June 30, 1996, from 38.4%
for the six month period ended June 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 physical space, creating
excess down time and start-up costs. In addition, material cost increases also
were experienced due to a temporary increase in outsourcing necessitated by the
United States plant operating near full capacity.

Selling, engineering and administrative expenses increased 11.1%, or
$0.6 million, to $5.6 million in the six month period ended June 30, 1996,
compared to $5.0 million in the six month period ended June 30, 1995. These
expenses as a percentage of net sales

-16-
<PAGE> 19

increased to 20.2% for the six month period ended June 30, 1996 from 17.9% for
the six month period ended June 30, 1995. The increase in selling, engineering
and administrative expenses was primarily due to increases in software
development costs and professional fees.

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 $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.

-17-
<PAGE> 20

<TABLE>
<CAPTION>
Quarter Ended
-------------
September 30, December 31, March 31, June 30, September 30, December 31, March 31, June 30,
1994 1994 1995 1995 1995 1995 1996 1996
------------- ------------ --------- -------- ------------- ----------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . $ 11,752 $ 10,949 $13,708 $ 14,474 $ 15,935 $ 11,271 $ 13,806 $ 13,831
Cost of sales . . . . . 7,289 7,293 8,261 9,087 10,413 6,820 9,491 9,125
-------- -------- ------- -------- -------- -------- -------- --------
Gross profit . . . . . 4,463 3,656 5,447 5,387 5,522 4,451 4,315 4,706
Selling, engineering
and administrative
expenses . . . . . . 2,242 2,070 2,486 2,549 2,616 2,927 2,665 2,929
-------- -------- ------- -------- -------- -------- -------- --------
Operating income . . . 2,221 1,586 2,961 2,838 2,906 1,524 1,650 1,777
Interest expense . . . 197 202 212 220 180 202 205 218
Miscellaneous (income)
expense . . . . . . . 248 (151) (16) 5 (71) 3 53 (63)
-------- -------- ------- -------- -------- -------- -------- --------
Income before income
taxes . . . . . . . . 1,776 1,535 2,765 2,613 2,797 1,319 1,392 1,622
Pro forma tax provision 836 723 987 933 1,156 541 554 646
-------- -------- ------- -------- -------- -------- -------- --------

Pro forma net income. . $ 940 $ 812 $ 1,778 $ 1,680 $ 1,641 $ 778 $ 838 $ 976
======== ======== ======= ======== ======== ======== ======== ========
</TABLE>

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 June 30, 1996, the Company had working capital of approximately
$3.0 million. Cash generated from operations was $3.4 million and $4.9 million
in the six month periods ended June 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 six months ended June 30, 1996, were $7.6
million, compared to $3.1 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 $0.8 million used for
land and land improvements for the new United States and German facilities.

The Company currently has a $1.7 million unsecured line of credit,
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%. Also in
1996, the Company negotiated an additional advance on a loan, which is secured
by capital equipment, increasing the amount of the loan from $0.8 million to
$3.1 million and decreasing the interest rate from 10.25% to 8.25%. The
maturity date of the equipment loan

-18-

<PAGE> 21

is May 1, 2003. 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.
The existing Florida facility has a $2.4 million mortgage loan with an interest
rate of 8.25% payable over the same term as the mortgage loan for the new
facility. In England, the Company has a $1.2 million line of credit,
denominated in British pounds, which bears interest at a floating rate equal to
2.25% over the bank's base rate (8.0% at June 30, 1996). None of these
arrangements contain pre-payment penalties. In addition, the Company has $2.8
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 $6.6 million of the net
proceeds from the Offering to repay the outstanding balance of the Company's
revolving line of credit, the $3.1 million capital equipment loan, the $2.4
million mortgage loan related to the existing facility in Florida and a portion
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.

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.

BUSINESS

OVERVIEW

-19-

<PAGE> 22

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 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 also 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.

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.

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 the early stage. In 1995,
approximately 33% of the Company's net sales were outside the United States.

-20-

<PAGE> 23

do not devolve from titles or narrow job descriptions. This management
philosophy is utilized throughout the Company's operations.

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 $580 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

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
flows 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.

-21-

<PAGE> 24

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 33% 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 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.

-22-

<PAGE> 25

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 5000 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.

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

-23-

<PAGE> 26

a fluid power system and can be actuated electrically, manually or
with hydraulic pressure. The Company's patented 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.

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

-24-

<PAGE> 27

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 treat 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
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

-25-

<PAGE> 28

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 33% 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."

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

-26-

<PAGE> 29

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 and manifold 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."

EMPLOYEES

As of September 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

-27-

<PAGE> 30

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.

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>

-28-

<PAGE> 31

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, 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.

-29-
<PAGE> 32

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 employees of the Company are reimbursed for
expenses in connection with attendance at Board and Committee meetings.
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 with
in 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.

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.

-30-
<PAGE> 33

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."

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").

-31-
<PAGE> 34

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM
NAME AND ------------------- COMPENSATION AWARDS - OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS (#)(1) COMPENSATION (2)
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert E. Koski, Chairman 1995 $ 106,000 - $28,033 (3)
of the Board of Directors 1994 106,000 - 18,837
1993 106,000 - 13,056

Clyde G. Nixon, President and 1995 165,000 110,739 21,807
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) Represents payment by the Company of certain professional fees on
behalf of Mr. Koski.
(4) Represents payment by the Company of certain club dues on behalf of
Mr. Nixon.

-32-

<PAGE> 35

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
=================================================================================================================
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
- ------------------------------------------------------------------------------------ ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
OPTION TERM (1)
- -----------------------------------------------------------------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE OR
OPTIONS IN FISCAL BASE PRICE EXPIRATION
NAME GRANTED (#) 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.

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

<TABLE>
<CAPTION>
=====================================================================================================================
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
SHARES ACQUIRED ON EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) VALUE REALIZED ($) 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.

-33-
<PAGE> 36

STOCK OPTION PLAN

The Company adopted the Sun Hydraulics Incorporated 1996 Stock Option
Plan (the "Plan") in October 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
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, 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

-34-

<PAGE> 37

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 5 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 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

-35-

<PAGE> 38

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.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
----------------- --------------------
NAME AND ADDRESS (1) Number Percent (2) Number Percent (2)
-------------------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Christine L. Koski (3) 1,419,416 35.5 1,419,416 22.5
5619 Preston Oaks Road
Dallas, Texas 75240
Robert C. Koski (3) 1,360,855 34.0 1,360,855 21.6
315 Sycamore Street
Decatur, Georgia 30030
Thomas L. Koski (3) 1,360,855 34.0 1,360,855 21.6
Six New Street
East Norwalk, Connecticut 06855
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) 250,201 6.2 250,201 3.9
Clyde G. Nixon (7) 211,638 5.2 211,638 3.3
Curtis J. Timm (8) 97,284 2.4 97,284 1.5
Peter G. Robson (9) 77,410 1.9 77,410 1.2
James G. March (10) 53,572 1.3 53,572 *
Jeffrey Cooper (9) 53,213 1.3 53,213 *
Arthur B. Bodley (11) 13,860 * 13,860 *
Taco van Tijn (12) 8,920 * 8,920 *
David N. Wormley (13) 3,940 * 3,940 *
Russell G. Copeman 0 0
Richard J. Dobbyn 0 0
All Directors and Executive Officers as a 1,959,838 45.5 1,959,838 29.7
Group (12 persons)

</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.

-36-

<PAGE> 39

(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 57,830 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 104,289 shares which will be subject to options
exercisable by Mr. Nixon within 60 days which the Company has
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 which Mr. Timm has the right to acquire under
currently exercisable options.
(9) Represents shares which will be subject to options exercisable within
60 days which the Company has 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 3,920 shares which Mr. Bodley has the right to acquire under
currently exercisable options.
(12) Includes 3,920 shares subject to currently exercisable options.
(13) 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 per share. 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,
Nonstatutory 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.

-37-

<PAGE> 40

SHC began operation in 1970 in Sarasota, Florida. SHHL began
operations in England 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, $.001 par value per share, and (ii) 2,000,000 shares of
preferred stock, $.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.

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,

-38-
<PAGE> 41

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
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.

-39-

<PAGE> 42

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.

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.

-40-

<PAGE> 43

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 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. All holders of Common Stock and all Directors and Executive Officers 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.

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:

-41-

<PAGE> 44

<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 and all Directors and Executive Officers of the Company
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.

-42-

<PAGE> 45

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.

-43-
<PAGE> 46

INDEX TO FINANCIAL STATEMENTS

COMBINED FINANCIAL STATEMENTS OF SUN HYDRAULICS INCORPORATED

<TABLE>
<S> <C>
Report of Independent Certified Public Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Combined Balance Sheets - December 31, 1994, 1995 and Unaudited June 30, 1996 . . . . . . . . . . . . . . . . . . . . F-3
Combined Statements of Income - Years Ended December 31, 1993, 1994 and 1995
and Unaudited Six Months Ended June 30, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Combined Statements of Changes in Shareholders' Equity - Years Ended December 31, 1993, 1994 and 1995
and Unaudited Six Months Ended June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Combined Statements of Cash Flows - Years Ended December 31, 1993, 1994 and 1995
and Unaudited Six Months Ended June 30, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>

F-1

<PAGE> 47
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.

/s/ Price Waterhouse LLP

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

F-2

<PAGE> 48
Sun Hydraulics Incorporated

COMBINED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1996 1996
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,371 $ 2,434 $ 215
Accounts receivable, net of allowance for
doubtful accounts of $64, $40 and $59 3,095 3,574 4,267
Inventories 3,799 4,478 4,656
Income taxes receivable, net 91 - -
Other current assets 438 222 122
------- ------- -------
Total current assets 9,794 10,708 9,260

Property, plant and equipment, net 18,051 23,129 28,974
Other assets 23 27 124
------- ------- -------
$27,868 $33,864 $38,358
======= ======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,846 $ 2,992 $ 2,489
Accrued expenses 908 1,188 1,141
Long-term debt due within one year 551 495 907
Notes payable to related parties due
within one year 516 574 610
Accrued distributions to shareholders 888 643 -
Income taxes payable, net - 490 1,062
------- ------- -------
Total current liabilities 4,709 6,382 6,209

Long-term debt due after one year 3,821 2,553 5,709
Notes payable to related parties due after one year 3,137 2,564 2,248
Deferred income taxes, net 194 84 -
Other liabilities 383 752 777
------- ------- -------
Total liabilities 12,244 12,335 14,943

Commitments & contingencies (Notes 5, 7 and 15)
Shareholders' equity:
Capital stock 2,181 2,181 2,181 $ 4
Capital in excess of par value 848 997 1,084 5,261
Retained earnings 12,969 18,676 20,532 8,199
Equity adjustment for foreign currency translation (374) (325) (382) (382)
------- ------- ------- -------
Total shareholders' equity 15,624 21,529 23,415 $13,082
------- ------- ------- =======
$27,868 $33,864 $38,358
======= ======= =======
</TABLE>

F-3

The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
<PAGE> 49
Sun Hydraulics Incorporated

COMBINED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>

Net sales $ 32,431 $ 42,853 $ 55,388 $ 28,182 $ 27,637
Cost of sales 21,971 27,512 34,581 17,348 18,616
-------- -------- --------- -------- ----------

Gross profit 10,460 15,341 20,807 10,834 9,021

Selling, engineering and
administrative expense 7,346 8,605 10,578 5,035 5,594
-------- -------- --------- -------- ----------

Operating income 3,114 6,736 10,229 5,799 3,427

Interest expense 931 859 814 432 423
Miscellaneous (income)
expense 249 66 (79) (11) (10)
-------- -------- --------- -------- ----------

Income before income taxes 1,934 5,811 9,494 5,378 3,014
Income tax provision (benefit) (148) 408 633 297 491
-------- -------- --------- -------- ----------

Net income $ 2,082 $ 5,403 $ 8,861 $ 5,081 $ 2,523
======== ======== ========= ======== ==========

Pro forma income
data (unaudited):

Income before income
taxes, as reported $ 1,934 $ 5,811 $ 9,494 $ 5,378 $ 3,014
Pro forma income tax
provision 604 2,738 3,611 1,920 1,200
-------- -------- --------- -------- ----------

Pro forma net income $ 1,330 $ 3,073 $ 5,883 $ 3,458 $ 1,814
======== ======== ========= ======== ==========

Pro forma net income
per share $ 1.09 $ 0.34
========= ==========

Average shares outstanding 5,401,844 5,383,587
========= ==========
</TABLE>

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

F-4
<PAGE> 50
Sun Hydraulics Incorporated

COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
CAPITAL IN FOR FOREIGN
CAPITAL EXCESS OF RETAINED CURRENCY
STOCK PAR VALUE EARNINGS TRANSLATION TOTAL
<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 79 79
Exercise of stock options 8 8
Adjustment for foreign
currency translation (57) (57)
Net income 2,523 2,523
Distributions to shareholders (667) (667)
------ ------ ------- ------ -------

Balance, June 30, 1996 (unaudited) $2,181 $1,084 $20,532 $ (382) $23,415
====== ====== ======= ====== =======
</TABLE>

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

F-5
<PAGE> 51
Sun Hydraulics Incorporated

COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1993 1994 1995 1995 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,082 $ 5,403 $ 8,861 $ 5,081 $ 2,523
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 2,112 2,197 2,556 1,071 1,723
Other 79
(Benefit from)/provision for deferred
income taxes (28) 57 (110) 76 (84)
Realized tax benefit on debt exchange 271
(Increase) decrease in:
Accounts receivable (245) (937) (479) (1,846) (693)
Inventories (303) (765) (679) (734) (178)
Income tax receivable, net (119) 101 91 91 -
Other current assets 143 (161) 216 331 100
Other assets 4 (11) (4) (6) (97)
Increase (decrease) in:
Accounts payable 67 1,014 1,146 (195) (503)
Accrued expenses (39) (5) 280 667 (47)
Income taxes payable, net 490 128 572
Other liabilities (138) 100 369 226 25
------- ------- ------- ------- -------

Net cash provided by
operating activities 3,536 7,264 12,737 4,890 3,420
------- ------- ------- ------- -------

Cash flows from investing activities:
Capital expenditures (3,005) (5,130) (7,657) (3,146) (7,568)
Proceeds from dispositions of equipment 281 - 23
------- ------- ------- ------- -------

Net cash used in investing activities (2,724) (5,130) (7,634) (3,146) (7,568)
------- ------- ------- ------- -------

Cash flows from financing activities:
Proceeds from long-term debt 2,727 1,850 3,337 2,987 6,403
Repayment of long-term debt (1,773) (1,563) (4,661) (3,793) (3,115)
Proceeds from notes payable to related parties 355 1,940
Repayment of notes payable to related parties (381) (2,386) (515)
Proceeds from exercise of employee stock options 34 105 149 7 8
Distributions to shareholders (791) (1,900) (3,399) (2,576) (1,310)
------- ------- ------- ------- -------

Net cash provided by (used in)
financing activities 171 (1,954) (5,089) (3,375) 1,986
------- ------- ------- ------- -------

Foreign currency translation adjustment (229) 308 49 143 (57)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 754 488 63 (1,488) (2,219)
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 $ 883 $ 215
======= ======= ======= ======= =======

Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:

Interest (net of amount capitalized) $ 923 $ 875 $ 815 $ 510 $ 429
======= ======= ======= ======= =======
Income taxes $ 169 $ (223) $ 15 $ (1) $ 50
======= ======= ======= ======= =======
</TABLE>

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

F-6
<PAGE> 52

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 in anticipation of a business combination (the
"Reorganization"). The Company plans to issue approximately 4 million
shares of stock (par value $0.001) 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 associated with the amendment of certain individual phantom stock
compensation plans (see Note 16) are reflected in the unaudited pro forma
balance sheet as of June 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.

F-7

<PAGE> 53
Sun Hydraulics Incorporated

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

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.

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

F-8

<PAGE> 54

Sun Hydraulics Incorporated

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

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.

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.

F-9

<PAGE> 55

Sun Hydraulics Incorporated

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

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 amendment of certain individual phantom stock
compensation plans (see Note 16) are reflected in the unaudited pro forma
balance sheet as of June 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
Notes 1 and 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.

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.

F-10

<PAGE> 56

Sun Hydraulics Incorporated

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

Interim Financial Information

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, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $ 81 $ 127 $ 223
Work in process 2,612 3,236 3,446
Finished goods 1,106 1,115 987
---------- ---------- ----------
$ 3,799 $ 4,478 $ 4,656
========== ========== ==========
</TABLE>

F-11

<PAGE> 57

Sun Hydraulics Incorporated

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

5. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment $17,905 $20,666 $22,663

Furniture and fixtures 3,145 4,221 4,745
Buildings 4,819 4,861 6,189
Leasehold improvements 248 285 -
------- ------- -------
26,117 30,033 33,597

Less-accumulated depreciation (9,462) (11,684) (12,645)
------- ------- -------
16,655 18,349 20,952
Construction in progress 920 3,414 1,476
Land 476 1,366 6,546
------- ------- -------

$18,051 $23,129 $28,974
======= ======= =======
</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
$2,286 for the new distribution facility in Erkelenz. Construction
contracts for structural components, building erection and roof construction
in the total amount of $1,306 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.

F-12
<PAGE> 58

Sun Hydraulics Incorporated

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

6. ACCRUED EXPENSES

The components of accrued expenses are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Accrued compensation $ 746 $ 863 $ 808
Accrued interest 134 111 107
Other accrued expenses 28 214 226
-------- ---------- ----------

$ 908 $ 1,188 $ 1,141
======== ========== ==========
</TABLE>

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

F-13

<PAGE> 59

Sun Hydraulics Incorporated

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

7. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
Line of credits agreements, interest
payable at lender determined rates
(8.50%, 9.50% at December 31, 1995
and 1994 and 8.25% at June 30, 1996 $1,345 $ 38 $ 202

Equipment line of credit agreement,
secured by equipment, interest only
payable monthly at 10.25% in 1995
and 1994 and 8.25% in 1996,
converting to five year note on final
draw down - 443 3,036

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 -

8.25% mortgage note payable secured
by real property due in monthly principal
and interest installments of $30 with the
balance due in a balloon payment on
December 1, 2006 - - 2,448

Variable rate mortgage note (9.5% and
13% at December 31, 1995 and 1994)
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 585 277 134
</TABLE>

F-14

<PAGE> 60

Sun Hydraulics Incorporated

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

<TABLE>
<S> <C> <C> <C>
Construction line of credit at 8.25% to
be converted to a mortgage note
payable at 8.25% with a 15 year
amortization and a 10 year balloon
payment upon issuance of the
certificate of occupancy - - 796

Capital lease obligations at varying
interest rates from 8.45% to 12.45%
through 1999 83 65 -
------ ------- ------
4,372 3,048 6,616
Less amounts due within one year (551) (495) (907)
------ ------- ------
$3,821 $ 2,553 $5,709
====== ======= ======
</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 an unsecured revolving credit agreement 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. During
1996, the Company drew down the balance of this line and renegotiated the
interest rate to a fixed rate of 8.25%. Additionally, the agreement was
converted to a general line of credit with the limit increased to $3,036.
The Company drew an additional $2,593 to provide a portion of the financing
for construction of the new production facility (see Note 5).

Additional financing was obtained subsequent to year end with an increase in
the existing mortgage of approximately $761 and a 10-year mortgage note of
$6,187 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 15-year amortization schedule.

F-15

<PAGE> 61

Sun Hydraulics Incorporated

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

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 342,815 342,815
Shares outstanding 333,315 333,315

Suninco, Inc.

Par value per share $ 0.01 $ 0.01
Shares authorized 1,000,000 1,000,000
Shares issued 302,735 302,735
Shares outstanding 293,235 293,235

Sun Hydraulik Holdings Limited

Par value per share $ 6.81 $ 6.81
Shares authorized 421,052 421,052
Shares issued 319,315 319,315
Shares outstanding 319,315 319,315
</TABLE>

F-16

<PAGE> 62

Sun Hydraulics Incorporated

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

9. RELATED PARTIES

Notes Payable to Related Parties

Notes payable to related parties include the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1994 1995 1996
(UNAUDITED)
<S> <C> <C> <C>
15% unsecured notes payable re-
purchase and retirement of stock,
quarterly principal and interest
installments ranging from $43 to
$142 through 2001 $ 3,338 $ 2,849 $ 2,582

10% unsecured notes payable for
phantom compensation quarterly
principal and interest payments of
$14 payable through 2002 315 289 275
---------- ---------- --------
3,653 3,138 2,857
Less amounts due within one year (516) (574) (609)
---------- ---------- --------
$ 3,137 $ 2,564 $ 2,248
========== ========== ========
</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

F-17

<PAGE> 63

Sun Hydraulics Incorporated

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

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.

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, but prior to June 30, the Company declared additional distributions
of $667. Subsequent to June 30, 1996, the Company has paid $1,716 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).

F-18
<PAGE> 64

Sun Hydraulics Incorporated

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

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-19
<PAGE> 65

Sun Hydraulics Incorporated

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

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.

F-20

<PAGE> 66

Sun Hydraulics Incorporated

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

Utilization of these carryforwards may be limited in the event of certain
ownership changes.

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 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 24,000
======= ======= =======
</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 - 3,000 shares.

During May 1996, the Board of Directors approved the acceleration of the
3,000 options which were to become exercisable in 1997 effective
immediately. As of the end of July 1996, all qualified stock options have
been exercised.

13.EMPLOYEE BENEFITS

The Company has a defined contribution requirement 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.

F-21
<PAGE> 67

Sun Hydraulics Incorporated

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

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 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.

Subsequent to year end, the Company teminated these phantom stock agreements
and issued stock options (see Note 16).

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.

F-22
<PAGE> 68

Sun Hydraulics Incorporated

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

Geographic information is as follows:

<TABLE>
<CAPTION>
UNITED UNITED GERMANY ELIMINATION COMBINED
STATES KINGDOM
<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.

F-23

<PAGE> 69

Sun Hydraulics Incorporated

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

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.

16. SUBSEQUENT EVENTS

Effective September 30, 1996, the Board of Directors of the Company
approved a plan to replace the phantom stock agreements (see Note 13) by
issuing approximately 305,000 nonqualified and 189,000 qualified stock
options. Exercise prices of the nonqualified options will range from $3.00
to $5.05, assuming a public offering price of $10.50 per share for the
common stock of the Company (see Note 1). 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
will recognize a charge 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 will recognize a charge of approximately $110 in
connection with the issuance of these options.

F-24

<PAGE> 70

<TABLE>
<S> <C>
======================================================= =============================================================
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 2,000,000 Shares
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 [LOGO]
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 SUN HYDRAULICS
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT INCORPORATED
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 Common Stock
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
PAGE
----
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . ____________________
S CORPORATION DISTRIBUTION . . . . . . . . . . . . . .
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . PROSPECTUS
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . ____________________
CAPITALIZATION . . . . . . . . . . . . . . . . . . . .
DILUTION . . . . . . . . . . . . . . . . . . . . . . .
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . A.G. EDWARDS & SONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS ROBERT W. BAIRD & CO.
OF OPERATIONS . . . . . . . . . . . . . . . . . . . . INCORPORATED
BUSINESS . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . .
CERTAIN TRANSACTIONS . . . . . . . . . . . . . . . . .
PRINCIPAL STOCKHOLDERS . . . . . . . . . . . . . . . .
THE REORGANIZATION . . . . . . . . . . . . . . . . . .
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . .
SHARES ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . ________________, 1996
UNDERWRITING . . . . . . . . . . . . . . . . . . . . .
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . .
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . .
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . .
__________________________________

UNTIL ________________, 1996, (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.
======================================================= =============================================================
</TABLE>

<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.

II-1
<PAGE> 72

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 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:

<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
1.1* Form of Underwriting Agreement.
</TABLE>

II-2

<PAGE> 73

<TABLE>
<CAPTION>
<S> <C>
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
L.800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
</TABLE>

II-3

<PAGE> 74

<TABLE>
<CAPTION>
<S> <C>
4.18 Overdraft and Other Facilities letter agreement, dated June 7, 1996, in an amount not
to exceed L.250,000, 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>
- ---------------------------

* 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.

II-4

<PAGE> 75

(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-5

<PAGE> 76

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
Company has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Sarasota, State
of Florida on October 5, 1996.

SUN HYDRAULICS INCORPORATED

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

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and
appoints Robert E. Koski and Clyde G. Nixon his true and lawful
attorneys-in-fact and agents, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any registration statement
filed pursuant to Rule 462(b) under the Securities Act of 1933, and to file the
same with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on October 5, 1996.

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

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

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

/s/ Arthur B. Bodley
- -------------------------------------
Arthur B. Bodley Director

/s/ James G. March
- -------------------------------------
James G. March Director

/s/ Curtis J. Timm
- -------------------------------------
Curtis J. Timm Director

/s/ Taco van Tijn
- -------------------------------------
Taco van Tijn Director

/s/ David N. Wormley
- -------------------------------------
David N. Wormley Director

</TABLE>

II-6

<PAGE> 77

<TABLE>
<CAPTION>
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
------ ------------------- ----
<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.