<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996
REGISTRATION NO. 333-14183
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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SUN HYDRAULICS INCORPORATED
(Exact name of Registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
DELAWARE 3492 65-0696969
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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1500 WEST UNIVERSITY PARKWAY
SARASOTA, FLORIDA 34243
(941) 362-1200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
CLYDE G. NIXON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUN HYDRAULICS INCORPORATED
1500 WEST UNIVERSITY PARKWAY
SARASOTA, FLORIDA 34243
(941) 362-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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With Copies to:
<TABLE>
<S> <C>
GREGORY C. YADLEY, ESQUIRE WADE H. STRIBLING, ESQUIRE
SHUMAKER, LOOP & KENDRICK, LLP NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
101 E. KENNEDY BLVD., SUITE 2800 400 COLONY SQUARE, SUITE 2200
TAMPA, FLORIDA 33602 1201 PEACHTREE STREET, N.E.
(813) 229-7600 ATLANTA, GA 30361
(404) 817-6000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER , 1996
2,000,000 SHARES
[SUN HYDRAULICS(R) LOGO]
COMMON STOCK
---------------------
All of the 2,000,000 shares of common stock, par value $0.001 per share
(the "Common Stock"), offered hereby are being sold by Sun Hydraulics
Incorporated (the "Company"). Prior to this offering (the "Offering"), there has
been no public market for the Common Stock of the Company. It is currently
anticipated that the initial public offering price will be between $9.50 and
$11.50 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
filed an application for the Common Stock to be quoted and traded on the Nasdaq
National Market under the symbol "SNHY."
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SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................................... $ $ $
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Total(3)........................................ $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of $700,000, all of which are payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
---------------------
The Common Stock is offered by the several Underwriters, subject to prior
sale, when, as, and if issued to and accepted by them and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer or to reject any orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made on or about ,
1996.
A.G. EDWARDS & SONS, INC. ROBERT W. BAIRD & CO.
INCORPORATED
The date of this Prospectus is December , 1996
<PAGE> 3
[Photographs and text on this page overlay outlines of schematic design drawings
of various unidentified cartridge valves and manifolds.]
[Photograph of a container-pallet loader being used to load supplies into a
passenger jet]
[Photograph of two manifolds of the Company with the Company's cartridge valves]
Custom manifolds often result in a smaller package size and allow equipment
manufacturers to reduce assembly time and expense with fewer hoses, fittings and
hard tube routing.
[Photograph of two man-lifts being used outside of a building]
[Photograph of various screw-in hydraulic cartridge valves and manifolds of the
Company]
Load control valves control the motion and locking of hydraulic cylinders and
are used in critical applications. These important system elements can be close
coupled to, or directly integrated in, hydraulic cylinders.
[Photograph of an injection molding machine]
[Photograph of three of the Company's small manifolds with the Company's
cartridge valves]
The ability to withstand high pressure, high cycle operation is critical in many
industrial applications. Sun's screw-in cartridge valves provide the necessary
performance and endurance and can be conveniently interfaced in industrial
machinery.
Custom Hydraulic Manifolds
A manifold is a solid block of metal, usually aluminum, steel, or ductile iron,
that is machined to created threaded cavities and channels into which cartridge
valves can be easily placed and through which hydraulic fluids flow. Using its
in-house computer-aided engineering and design systems and its proprietary CAM
expert system software, Sun Hydraulics has flexible production capability and
can efficiently manufacture manifolds in any quantity desired by a customer,
down to a single piece. The high degree of reliability of Sun's cartridge valves
also allows manifold manufacturers around the world to utilize Sun's cartridge
valves in manifolds of their design.
[Photograph of a large, see-through manifold with four of the Company's
cartridge valves inserted in it. Various channels for hydraulic fluid are
highlighted in various colors.]
Custom directional control manifold mounts directly to a pump outlet,
significantly reducing hosing, fittings, and potential leakage points.
Standard Cartridge Valves and Manifolds
Sun Hydraulics designs and manufactures one of the most comprehensive lines of
standard screw-in cartridge valves and manifolds in its industry.
[Photograph of a large variety of the Company's screw-in hydraulic cartridge
valves and manifolds]
In addition to core products that include pressure controls, flow controls and
load controls (shown laying on their side in the photograph), Sun Hydraulics
manufactures a wide variety of complementary products to enable customers to
solve complex applications problems. All of Sun's screw-in cartridge valves are
designed to operate at high pressures, making them ideally suited for both
mobile and industrial applications.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus. Investors should consider carefully the risk factors related to
the purchase of Common Stock of the Company. See "Risk Factors." Except as
otherwise indicated herein, (i) the term the "Company" refers to Sun Hydraulics
Incorporated and its subsidiaries (see "The Reorganization"); and (ii) the
information in this Prospectus (a) assumes the Underwriters' over-allotment
option is not exercised, (b) assumes an initial public offering price for the
Common Stock of $10.50 per share, and (c) gives effect to the consummation of
the Reorganization prior to the completion of the Offering.
THE COMPANY
The Company is a leading designer and manufacturer of high-performance,
screw-in hydraulic cartridge valves and manifolds which control force, speed and
motion as integral components in fluid power systems. The innovative floating
construction of the Company's screw-in cartridge valves provides demonstrable
performance and reliability advantages compared to other available screw-in
cartridge valves. Screw-in cartridge valves are an increasingly accepted
alternative to conventional forms of hydraulic valving, offering significant
design flexibility, as well as substantial size, weight and efficiency benefits
afforded to designers of fluid power systems. Since the introduction of screw-in
hydraulic cartridge valves in the late 1950s, manufacturers of these and similar
products have captured approximately $550 million of the worldwide market for
all non-aerospace hydraulic valves and manifolds, which management believes to
be in excess of $3 billion. The Company has generated a profit each year since
1972 and has achieved an internal compound annual growth rate in net sales of
17% over the last ten years. The Company believes that its success is primarily
a result of its innovative product design, consistent high quality and superior
product performance.
Fluid power involves the transfer and control of power through fluid under
pressure. Fluid power systems are integral to a wide variety of manufacturing,
material handling, agricultural and construction equipment. Due to its
mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power systems typically are comprised of
valves and manifolds that control the flow of fluids, a pump that generates
pressure, and actuators such as cylinders and motors that translate pressure
into mechanical energy.
The Company designs and manufactures one of the most comprehensive lines of
screw-in hydraulic cartridge valves in the world. These valves control
direction, pressure, flow and loads, are available in up to five size ranges,
and are suitable for flows from 5 to 400 gallons per minute and continuous
operating pressures up to 5,000 pounds per square inch. The floating
construction pioneered by the Company provides demonstrable performance and
reliability advantages compared to competitors' product offerings due to its
self-alignment characteristic that accommodates potential manufacturing
deviations common in the thread-making operations of screw-in cartridge valves
and manifolds. This floating construction significantly differentiates the
Company from most of its competitors, who design and manufacture rigid screw-in
cartridge valves that fit an industry common cavity. The Company believes that
competitors' products typically do not offer the inherent reliability of the
Company's products and do not provide equivalent operating performance because
of the design constraints imposed by the industry common cavity.
The Company also designs and manufactures the most comprehensive line of
standard manifolds in the world. A manifold is a solid block of metal, usually
aluminum, steel or ductile iron, which is machined to create threaded cavities
and channels into which screw-in cartridge valves are installed and through
which the hydraulic fluids flow. Fluid power engineers can package standard or
customized manifolds with screw-in cartridge valves to create
application-specific, multiple-function hydraulic control systems that are safe,
reliable and provide greater control. In 1995, screw-in cartridge valves
accounted for approximately 75% of the Company's net sales while standard and
custom manifolds accounted for approximately 25% of net sales.
3
<PAGE> 5
The Company sells its products primarily through a global network of
independent fluid power distributors to a diverse universe of end users, for use
in various "mobile" applications, such as construction, agricultural and utility
equipment (approximately 65% of net sales), and a broad array of "industrial"
applications, such as machine tools and material handling equipment
(approximately 35% of net sales). Sales to the Company's largest distributor
represented approximately 6% of net sales in 1995, and the Company believes that
aggregate sales by its distributors to the largest end user represented less
than 3% of net sales in 1995.
The Company believes that screw-in cartridge valves will continue to
achieve significant growth at the expense of conventional hydraulic valves as
design engineers recognize the inherent advantages of screw-in cartridge valves.
The Company believes that additional growth potential for screw-in cartridge
valve applications exists as a result of a trend toward miniaturization as end
users require smaller, lighter-weight and more efficient components. Custom
manifolds that utilize screw-in cartridge valves allow customers to design an
optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense. The United States and Western Europe are the
largest developed markets for screw-in cartridge valves, and the Company
believes future growth prospects are particularly attractive in the Pacific Rim,
Eastern Europe and India, where the adoption of screw-in cartridge valves is in
an early stage. In 1995, approximately 34% of the Company's net sales were
outside the United States.
Management believes that the Company's success during its 26-year history
is due in large part to its emphasis on innovative product designs and
vertically integrated, state of the art manufacturing processes. Management
attributes the Company's ability continuously to 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> 6
THE OFFERING
Common Stock offered by the
Company............................. 2,000,000 shares
Common Stock outstanding after the
Offering............................ 6,000,000 shares(1)
Use of Proceeds..................... To repay debt principally related to
equipment financing and mortgage
financing of the Company's existing and
new Florida manufacturing plants, to
pay the S Corporation Distribution and
for general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market
Symbol.............................. "SNHY"
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(1) Does not include an aggregate of 1,000,000 shares of Common Stock reserved
for issuance under the Company's 1996 Stock Option Plan. As of September
30, 1996, there were options to purchase 319,960 shares of Common Stock
outstanding under the Company's 1996 Stock Option Plan and the Company has
committed to issue immediately after the consummation of the Offering
options to purchase an additional 289,348 shares of Common Stock. See
"Management -- Stock Option Plan."
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales............................. $26,250 $28,331 $32,431 $42,853 $55,388 $42,718 $41,233
Cost of sales......................... 16,928 17,946 21,971 27,512 34,581 26,361 27,903
------- ------- ------- ------- ------- ------- -------
Gross profit.......................... 9,322 10,385 10,460 15,341 20,807 16,357 13,330
Selling, engineering and
administrative expenses............. 7,319 7,826 7,346 8,605 10,578 7,652 9,288(1)
------- ------- ------- ------- ------- ------- -------
Operating income...................... 2,003 2,559 3,114 6,736 10,229 8,705 4,042
Interest expense...................... 1,118 997 931 859 814 612 678
Miscellaneous (income) expense........ (320) (252) 249 66 (79) (81) 107
------- ------- ------- ------- ------- ------- -------
Income before income taxes............ 1,205 1,814 1,934 5,811 9,494 8,174 3,257
Income tax provision (benefit)(2)..... 46 (201) (148) 408 633 478 727
------- ------- ------- ------- ------- ------- -------
Net income............................ $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF INCOME DATA:(3)
Income before income taxes............ $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257
Income tax provision.................. 481 580 604 2,738 3,611 3,069 1,255
------- ------- ------- ------- ------- ------- -------
Net income............................ $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002
======= ======= ======= ======= ======= ======= =======
Net income per common share(4)........ $ 1.13 $ 0.38
Weighted average shares
outstanding(4)...................... 5,203 5,292
OTHER FINANCIAL DATA:
EBITDA(5)............................. $ 3,956 $ 4,530 $ 5,226 $ 8,933 $12,785 $10,508 $ 6,330
Depreciation.......................... 1,953 1,971 2,112 2,197 2,556 1,803 2,288
Capital expenditures.................. 1,683 1,987 3,005 5,130 7,657 5,316 12,423
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
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PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................. $ 3,064 $ (6,841) $ 3,669
Total assets.................................................... 43,681 43,681 43,681
Total debt...................................................... 14,538 14,538 5,613
Shareholders' equity............................................ 23,845(6) 11,995 30,825
</TABLE>
5
<PAGE> 7
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(1) Includes a non-recurring, non-cash compensation expense of approximately
$1.4 million related to the termination of phantom stock compensation
agreements and the issuance of options to Directors. See Note 16 of the
Notes to Financial Statements. Excluding such expense, EBITDA and pro forma
net income for the nine months ended September 30, 1996 would have been
approximately $7.7 million and $2.9 million, respectively.
(2) The Company has previously operated as an S Corporation. Therefore, the
historical income tax provision represents primarily foreign taxes.
(3) The pro forma statement of income data is based on historical net income as
adjusted to reflect a provision for income taxes calculated using the
statutory rates in effect during the applicable periods, as if the Company
had been a C Corporation since inception. See Notes 2 and 11 of the Notes
to Financial Statements.
(4) The pro forma net income per share data is based on the historical weighted
average number of shares outstanding and as adjusted to reflect the assumed
issuance of 1,052,000 shares (as of the beginning of each respective
period) to fund the S Corporation Distribution as of September 30, 1996.
See "S Corporation Distribution."
(5) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA represents supplemental information
only and should not be construed as a substitute for income from
operations, net earnings (loss) or cash flows from operating activities
determined in accordance with Generally Accepted Accounting Principles
("GAAP"). The Company has included EBITDA because it believes it is
commonly used by certain investors and analysts to analyze and compare
companies on the basis of operating performance, leverage and liquidity and
to determine a company's ability to service debt. Because EBITDA is not
calculated in the same manner by all entities, EBITDA as calculated by the
Company may not necessarily be comparable to that of the Company's
competitors or of other entities.
(6) Shareholders' equity reflects the Reorganization. See "The Reorganization"
and Note 2 of the Notes to Financial Statements.
(7) The pro forma column reflects (a) the declaration of the S Corporation
Distribution of approximately $9.9 million and (b) the recognition of an
estimated provision of approximately $1.9 million for deferred income taxes
which would have been required had the Company terminated its S Corporation
status at September 30, 1996. See Notes 1 and 11 of the Notes to Financial
Statements.
(8) Gives effect to the adjustments in Note (7) above, the sale of shares of
Common Stock offered hereby and the application of the net proceeds
therefrom as set forth under "Use of Proceeds."
References herein to the Notes to Financial Statements, unless otherwise
indicated, refer to the Notes to the Combined Financial Statements of Sun
Hydraulics Incorporated, contained elsewhere herein.
This Prospectus contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Those statements appear in a number of places in this Prospectus and include
statements regarding the intent, belief or current expectations of the Company,
its Directors or its Officers with respect to, among other things: (i) the use
of the proceeds of the Offering; (ii) the Company's financing plans; (iii)
trends affecting the Company's financial condition or results of operations;
(iv) the Company's growth strategy and operating strategy; and (v) the
declaration and payment of dividends. Prospective investors are cautioned that
any such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ materially
from those projected in the forward-looking statements as a result of various
factors. The accompanying information contained in this Prospectus, including
without limitation the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," identifies important factors that could cause such
differences.
6
<PAGE> 8
RISK FACTORS
In evaluating the Offering, prospective investors should consider carefully
all of the information contained in this Prospectus and, in particular, the
following risk factors relating to the Company and to the Common Stock.
POTENTIAL MARKETPLACE ADOPTION OF INDUSTRY STANDARD. Approximately 75% of
the Company's total sales are derived from the sale of its screw-in cartridge
valves that fit into a unique cavity. To date, no other manufacturer has
designed products of any significance that fit this cavity; most competitive
manufacturers produce screw-in cartridge valves that fit into an industry common
cavity. Accordingly, the Company's screw-in cartridge valves are not
interchangeable with those of other manufacturers. Additionally, the
International Standards Organization ("ISO") recently has adopted an industry
standard for screw-in hydraulic cartridge valve cavities that is based on metric
threads and only specifies dimensional data and flow paths. The Company has not
adopted either the industry common cavity or the ISO standard cavity for its
products because it believes both fail to address critical functional
requirements, which could result in performance and safety problems of
significant magnitude for end users. While there are not yet any noticeable
market pressures to supply screw-in cartridge valves that fit the ISO standard
cavity, and no major competitor has converted its products to fit this standard
cavity, any move toward the adoption of the ISO standard cavity for cartridge
valves in the screw-in cartridge valve and manifold industry could have a
material adverse effect on the Company's business, financial condition and
results of operation. See "Business -- Competition."
RISKS RELATING TO GROWTH STRATEGY. In pursuing its growth strategy, the
Company intends to expand its presence in its existing markets and enter new
geographic markets. In addition, the Company may pursue acquisitions and joint
ventures to complement its business. Many of the expenses arising from the
Company's expansion efforts may have a negative effect on operating results
until such time, if at all, as these expenses are offset by increased revenues.
There can be no assurance that the Company will be able to implement its growth
strategy or that its strategy ultimately will be successful. See
"Business -- Strategy."
The Company's expansion strategy also may require substantial capital
investment for the construction of new facilities and their effective operation.
The Company may finance the acquisition of additional assets using cash from
operations, bank or institutional borrowings, or through the issuance of debt or
equity securities. There can be no assurance that the Company will be able to
obtain financing from bank or institutional sources or through the equity or
debt markets or that, if available, such financing will be on terms acceptable
to the Company.
The Company currently is involved in an expansion of its facilities in
Florida and Germany. The Company also currently is engaged in the implementation
of new accounting and manufacturing computer software systems. These matters
require significant attention from senior management and may divert their
attention from other aspects of the business. There can be no assurance that the
facilities expansion can be completed on time within budget and that the new
computer software systems can be timely and efficiently integrated into the
Company's operations. Failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operation.
FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly results are
subject to significant fluctuation based upon the time of receipt of orders from
distributors and requested shipments of products. While the Company's
distributors stock inventory, shipments are largely dependent upon delivery
requirements of end users. In addition to fluctuations due to economic
cyclicality, the Company generally has experienced reduced activity during the
fourth quarter of the year, largely as a result of fewer working days due to
holiday shutdowns. As a result, the Company's fourth quarter net sales, income
from operations and net income typically have been the lowest of any quarter
during the year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Seasonality."
DEPENDENCE ON KEY EMPLOYEES AND SKILLED PERSONNEL. The Company's success
depends, to a significant extent, upon a number of key individuals. The loss of
the services of one or more of these individuals, including the Company's
Chairman, Robert E. Koski, or its President and Chief Executive Officer, Clyde
G. Nixon, could have a material adverse effect on the business of the Company.
The
7
<PAGE> 9
Company's future operating results depend to a significant degree upon the
continued contribution of its key technical personnel and skilled labor force.
Competition for management and engineering personnel is intense, and the Company
competes for qualified personnel with numerous other employers, some of whom
have greater financial and other resources than the Company. The Company
conducts a substantial part of its operations at its factory in Sarasota,
Florida. The Company's continued success depends on its ability to attract and
retain a skilled labor force at this location. While the Company has been
successful in attracting and retaining skilled employees in the past, there can
be no assurance that the Company will continue to be successful in attracting
and retaining the personnel it requires to develop, manufacture and market its
products and expand its operations. See "Business -- Employees."
COMPETITION. The hydraulic valve industry is highly fragmented and
intensely competitive, with the Company facing competition from a large number
of competitors, some of which are full-line producers and others that are niche
suppliers like the Company. Full-line producers have the ability to provide
total hydraulic systems to customers, including components functionally similar
to those manufactured by the Company. The Company believes that it competes
based upon quality, reliability, price, value, speed of delivery and
technological characteristics. Many of the Company's screw-in cartridge valve
competitors are owned by corporations which are significantly larger than the
Company and have greater financial resources than the Company. There can be no
assurance that the Company will continue to be able to compete effectively with
these companies.
The manifold business is also highly fragmented and intensely competitive.
All of the major screw-in cartridge valve manufacturers either manufacture
manifolds or have sources that they use on a regular basis. In addition, there
are a number of independent manifold suppliers that produce manifolds
incorporating various manufacturers' screw-in cartridge valves, including those
made by the Company. Finally, there are many small, independent machine shops
that produce manifolds at very competitive prices. Competition in the manifold
business is based upon quality, price, relationships based on proximity to the
customer, and speed of delivery. Many of the Company's competitors have very low
overhead structures and there can be no assurance that the Company will continue
to be able to compete effectively with these companies.
In addition, the Company competes in the sale of hydraulic valves and
manifolds with certain of its customers. Generally, these customers purchase
special purpose valves from the Company to meet a specific need in a system
which cannot be filled by any valve made by such customer. To the extent that
the Company introduces new valves in the future that increase the competition
between the Company and such customer, such competition could adversely affect
the Company's relationships with these customers.
CYCLICALITY. The capital goods industry in general, and the hydraulic
valve and manifold industry in particular, is subject to economic cycles.
Cyclical downturns could have a material adverse effect on the Company's
business, financial condition and results of operation.
MANUFACTURING CAPACITY EXPANSION. The Company's Sarasota, Florida,
manufacturing facility is currently operating near full capacity. In March 1996,
the Company began construction of a new plant in Sarasota, Florida, which will
be used for the manufacture of manifolds. It is intended that, after the new
facility is completed, the existing Sarasota plant will be utilized solely for
the manufacture of the Company's screw-in cartridge valves. Construction of the
new plant is expected to be completed early in 1997. In March 1996, the Company
began construction of a new plant in Erkelenz, Germany, which is scheduled to be
completed by the end of 1996. There can be no assurance that the Company will be
able to complete its plant expansions on a timely basis or that production will
commence on schedule. Any delay in opening the new facilities, unanticipated
disruptions to manufacturing at the current facility or unanticipated startup
costs at either new facility could adversely affect the Company's business,
financial condition and results of operation. See "Business -- Properties."
INTERNATIONAL SALES. In 1995, approximately 34% of the Company's net sales
were outside of the United States. The Company is expanding the scope of its
operations outside the United States, both through direct investment and
distribution and expects that international sales will continue to account for a
significant portion of net sales in future periods. International sales are
subject to various risks, including unexpected changes in regulatory
requirements and tariffs, longer payment cycles, difficulties in receivable
collections,
8
<PAGE> 10
potentially adverse tax consequences, trade or currency restrictions and,
particularly in emerging economies, potential political and economic instability
and regional conflicts. Furthermore, the Company's international operations
generate sales in a number of foreign currencies, particularly British pounds
and German marks. Therefore, the Company's financial condition and results of
operation are affected by fluctuations in exchange rates between the United
States dollar and these currencies. Any or all of these factors could have a
material adverse effect on the Company's business, financial condition and
results of operation.
INDEPENDENT DISTRIBUTORS. The Company uses independent distributors and
does not maintain an internal sales force. While the Company knows of no current
intention of any of its principal distributors to terminate existing
relationships, there is no assurance of the continuation of such relationships.
In the event any current relationships are terminated, there can be no assurance
that the Company will be able to secure adequate substitutions, and such
inability could have a material adverse effect on the Company's business,
financial condition and results of operation. See "Business -- Sales and
Marketing."
ENVIRONMENTAL COMPLIANCE. The Company's operations involve the handling
and use of substances that are subject to federal, state and local environmental
laws and regulations that impose limitations on the discharge of pollutants into
the soil, air and water and establish standards for their storage and disposal.
Management believes that the Company's current operations are in substantial
compliance with applicable environmental laws and regulations, the violation of
which could have a material adverse effect on the Company. There can be no
assurance, however, that currently unknown matters, new laws and regulations, or
stricter interpretations of existing laws or regulations will not materially
affect the Company's business or operations in the future.
RISK OF PRODUCT LIABILITY. The application of many of the Company's
products entails an inherent risk of product liability. There can be no
assurance that the Company will not face any material product liability claims
in the future or that the product liability insurance maintained by the Company
at such time will be adequate to cover such claims.
OPERATION AS A PUBLIC COMPANY. Since its inception, the Company has
maintained a very long-term view of its business operations. Product
developments, process developments and capital investments have been executed to
achieve long-term benefits. The Company also believes that one of its
competitive strengths is its horizontal management structure which fosters broad
employee involvement in all aspects of its operations. Following the Offering,
the potential for the Company to focus on short-term financial results could
have an adverse effect on the Company's internal culture and significantly alter
the Company's long-term view and, as a result, its long-term business
performance and operating results.
TECHNOLOGICAL CHANGE. The fluid power industry and its component parts are
subject to technological change, evolving industry standards, changing customer
requirements and improvements in and expansion of product offerings. If
technologies or standards used in the Company's products become obsolete, the
Company's business, financial condition and results of operation will be
adversely affected. Although the Company believes that it has the technological
capabilities to remain competitive, there can be no assurance that developments
by others will not render the Company's products or technologies obsolete or
noncompetitive. See "Business -- Strategy."
RAW MATERIALS. The primary raw materials used by the Company in the
manufacture of its products are aluminum, ductile iron and steel. There can be
no assurance that prices for such materials will remain stable. If the Company
is unable to pass through any price increases to its customers, the operating
results of the Company will be adversely affected.
PAYMENT OF SUBSTANTIAL PORTION OF OFFERING PROCEEDS TO CURRENT
STOCKHOLDERS. In connection with the Reorganization, the Company will terminate
its status as an S Corporation and will pay a distribution to its stockholders
of record as of October 5, 1996, in an aggregate amount equal to the Company's
undistributed S Corporation earnings through such date. As of September 30,
1996, the amount of such undistributed earnings totalled approximately $9.9
million. The actual amount of the distribution will include the taxable income
of the Company for the period from October 1, 1996, through the date of the
consummation of the Reorganization, less any foreign or other taxes payable by
the Company. The distribution will be paid by the
9
<PAGE> 11
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 up to 2,000,000 shares of preferred
stock and to fix the rights and preferences of such preferred stock. The
issuance of such shares may have a dilutive effect on stockholders' equity.
These and other provisions of the Certificate of Incorporation and the Company's
Bylaws may deter or delay changes in control of the Company, including
transactions in which stockholders might otherwise receive a premium for the
shares over then current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in
their best interests. See "Description of Capital Stock."
CONTROL BY CURRENT STOCKHOLDERS AND MANAGEMENT. Following the sale of the
shares of Common Stock offered hereby, Robert E. Koski and members of his family
will own or control approximately 43.5% of the outstanding shares of Common
Stock (41.4% if the Underwriters' over-allotment option is exercised in full).
Accordingly, the members of the Koski family likely will have the ability to
control the election of the Company's Directors and the outcome of certain
corporate actions requiring stockholder approval and to control the business of
the Company. Such control could preclude any acquisition of the Company and
could adversely affect the price of the Common Stock. Additionally, all
Directors and Executive Officers of the Company as a group will beneficially own
or control approximately 31.0% of the outstanding shares of Common Stock (29.6%
if the Underwriters' over-allotment option is exercised in full). See "Principal
Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock after the Offering, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock. There will be
6,000,000 shares of Common Stock outstanding immediately following the
consummation of the Offering (6,300,000 shares if the Underwriters'
over-allotment option is exercised in full). The 2,000,000 shares of Common
Stock offered hereby (plus an additional 300,000 shares if the Underwriters'
over-allotment option is exercised in full) will be fully tradeable without
restriction or registration under the Securities Act by persons other than
"affiliates" (as defined in the Securities Act) of the Company. The shares of
Common Stock other than those offered hereby will be "restricted securities"
under the Securities Act and may only be sold pursuant to an effective
registration statement under the Securities Act or an applicable exemption from
the registration requirements of the Securities Act, including Rule 144
thereunder. Upon completion of the Offering, the Company intends to file an S-8
registration statement to register up to 1,000,000 shares of Common Stock
reserved for issuance pursuant to the Company's 1996 Stock Option Plan. See
"Management -- Stock Option Plan." The Company, all Directors and Executive
Officers and all holders of more than 5% of the Common Stock prior to the
Offering have agreed with the Underwriters not to offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of their shares of Common
Stock of the Company or any securities convertible into or exercisable or
exchangeable for such Common Stock or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of such
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of A.G. Edwards & Sons, Inc. See "Shares Eligible for
Future Sale."
NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after the Offering. The initial public offering price negotiated
between the
10
<PAGE> 12
Company and the Underwriters may not be indicative of prices that will prevail
in the trading market after the Offering, and there can be no assurance that the
market price of the Common Stock after the Offering will not fall below the
initial public offering price. See "Underwriting". There has historically been
significant volatility in the market price of securities of manufacturing and
capital goods companies. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of companies. Many factors that
have influenced trading, such as actual or anticipated operating results, growth
rates, changes in estimates by analysts, market conditions in the industry,
announcements by competitors, regulatory actions and general economic
conditions, will vary from period to period. As a result of the foregoing, the
Company's operating results and prospects from time to time may be below the
expectations of public market analysts and investors. Any such event would
likely result in a material adverse effect on the price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION. Investors purchasing shares of Common
Stock in the Offering will incur immediate, substantial dilution. See
"Dilution."
11
<PAGE> 13
S CORPORATION DISTRIBUTION
Prior to the consummation of the Reorganization, the Company was treated
for federal and certain state income tax purposes as an S Corporation under the
Internal Revenue Code of 1986, as amended (the "Code"), and comparable state tax
laws. As a result, the Company's earnings were taxed for federal and certain
state income tax purposes directly to its stockholders. Upon the consummation of
the Reorganization, the Company's status as an S Corporation will be terminated.
On October 5, 1996, the Board of Directors declared a dividend (the "S
Corporation Distribution") in an amount equal to all of its undistributed
earnings through the date of termination of its S Corporation status. The
Company will pay 90% of the estimated amount of the S Corporation Distribution
within 10 business days after the closing of the Offering. The balance of the S
Corporation Distribution will be paid by April 5, 1997, following the completion
of the audit of the Company's financial statements for fiscal year 1996. The S
Corporation Distributions will be paid to stockholders of record of the Company
as of October 5, 1996. As of September 30, 1996, the amount of the S Corporation
Distribution would have totalled approximately $9.9 million. The actual amount
of the S Corporation Distribution will include the taxable income of the Company
for the period from October 1, 1996, through the date of the consummation of the
Reorganization, less any foreign or other taxes payable by the Company. The
Reorganization will be effective immediately prior to the closing of the
Offering. The S Corporation Distribution will be paid by the Company with a
portion of the net proceeds of the Offering. See
"Use of Proceeds." The purchasers of Common Stock in the Offering will not
receive any portion of the S Corporation Distribution.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby, assuming an initial public offering price of $10.50
per share (after deducting the underwriting discount and estimated offering
expenses), are estimated to be approximately $18.8 million. The Company intends
to use the net proceeds of the Offering as follows:
(i) approximately $8.9 million to repay the outstanding balance of the
Company's $3.0 million capital equipment loan, the outstanding indebtedness
under the $2.4 million mortgage loan on the Company's existing
manufacturing facility in Florida and approximately $3.5 million of the
indebtedness under a 10-year mortgage loan for $6.2 million related to the
new manufacturing facility in Florida. These loans had a weighted average
interest rate of 8.25% at September 30, 1996, and maturity dates of May 1,
2003, for the capital equipment loan, April 1, 2006, for the mortgage loan
on the existing facility and July 1, 2006, for the new facility mortgage
loan;
(ii) approximately $9.9 million will be used to pay the S Corporation
Distribution; and
(iii) any remainder will be used for general corporate purposes.
Pending the application of the net proceeds as described above, such
proceeds will be placed in interest-bearing bank accounts or invested in
short-term United States government securities, certificates of deposit of major
banks, money market mutual funds or investment-grade commercial paper.
DIVIDEND POLICY
The Company currently intends to pay quarterly cash dividends of $.035 per
share, beginning with the quarter ending March 31, 1997, assuming that there are
funds legally available therefor. However, the declaration and payment of
dividends will be subject to the sole discretion of the Board of Directors of
the Company and will depend upon the Company's profitability, financial
condition, capital needs, future prospects and other factors deemed relevant by
the Board of Directors. Further, the revolving line of credit agreement the
Company expects to enter into prior to the consummation of the Offering may
include covenants which restrict the payment of dividends.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the short-term borrowings and capitalization
of the Company at September 30, 1996, and as adjusted to give effect to the sale
by the Company of the Common Stock offered hereby and the application of the net
proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total short-term debt...................................... $ 1,750 $ 1,750 $ 1,145
======= ======= =======
Total long-term debt....................................... $12,788 $ 12,788 $ 4,468
------- ------- -------
Stockholders' equity (3):
Common Stock, $.001 par value, 20,000,000 shares
authorized, 4,000,000 shares issued and outstanding
and 6,000,000 shares issued and outstanding as
adjusted; preferred stock, $.001 par value, 2,000,000
shares authorized, no shares issued and outstanding as
adjusted.............................................. 4 4 6
Capital in excess of par value........................... 4,800 4,800 23,628
Retained earnings........................................ 19,427 7,577 7,577
Equity adjustment for foreign currency translation....... (386) (386) (386)
------- ------- -------
Total stockholders' equity....................... 23,845 11,995 30,825
------- ------- -------
Total capitalization............................. $36,633 $ 24,783 $ 35,293
======= ======= =======
</TABLE>
- ---------------
(1) Pro Forma for the Reorganization as if the following had occurred as of
September 30, 1996: (i) the S Corporation Distribution of approximately
$9.9 million and (ii) the provision for deferred income taxes of
approximately $1.9 million. See "S Corporation Distribution" and Notes 1
and 11 of the Notes to Financial Statements.
(2) Gives effect to the adjustments described in Note (1) above, the receipt of
the estimated net proceeds from the Offering and the application of such
proceeds as set forth under "Use of Proceeds."
(3) Actual stockholders' equity as of September 30, 1996, gives effect to the
Reorganization. See "The Reorganization."
13
<PAGE> 15
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the assumed initial public offering price. The net tangible book value of
the Company at September 30, 1996, was approximately $23.8 million, or $5.96 per
share. Net tangible book value per share is equal to net tangible assets
(tangible assets of the Company less total liabilities) divided by the number of
shares of Common Stock outstanding. Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering and the pro forma net tangible book value
per share of Common Stock immediately after completion of the Offering. After
giving effect to the payment of the S Corporation Distribution, the provision
for deferred income taxes to be recorded upon the Company's termination of its S
Corporation status, and the sale of the 2,000,000 shares of Common Stock offered
hereby (after deducting the underwriting discount and estimated offering
expenses), the pro forma net tangible book value of the Company as of September
30, 1996, would have been approximately $30.8 million, or $5.14 per share. This
represents an immediate increase in net tangible book value of $2.15 per share
to existing stockholders and an immediate dilution in net tangible book value of
$5.36 per share to purchasers of Common Stock in the Offering, as illustrated in
the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $10.50
Net tangible book value per share at September 30, 1996........... $5.96
Decrease attributable to S Corporation Distribution(1)............ 2.48
Decrease attributable to provision for deferred income taxes(2)... .49
-----
Subtotal....................................................... 2.99
Increase per share attributable to new investors.................. 2.15
-----
Pro forma net tangible book value per share after the Offering...... 5.14
------
Net tangible book value dilution per share to new investors......... $ 5.36
======
</TABLE>
- ---------------
(1) As of September 30, 1996, the amount of the S Corporation Distribution would
have totalled approximately $9.9 million. The actual amount of the S
Corporation Distribution will include the taxable income of the Company for
the period from October 1, 1996, through the date of the consummation of
the Reorganization, less any foreign or other taxes payable by the Company.
(2) Represents an expense of approximately $1.9 million resulting from
recognition of deferred income taxes to be recorded by the Company upon
termination of its S Corporation status.
The following table sets forth certain information with respect to the
number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid, by existing
stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 4,000,000 66.7% $ 4,804,000(1) 18.6% $ 1.20
New investors......................... 2,000,000 33.3% 21,000,000 81.4% 10.50
--------- ----- ----------- -----
Total................................. 6,000,000 100.0% $25,804,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Represents aggregate par value and capital in excess of par value as of
September 30, 1996.
The foregoing tables assume no exercise of outstanding options. As of
September 30, 1996, there were options outstanding to purchase 319,960 shares of
Common Stock at a weighted average price of $3.90 per share, all of which are
presently exercisable. Additionally, the Company has committed to issue
immediately after the consummation of the Offering options to purchase 289,348
shares at the initial public offering price of the Common Stock. Of such
additional options, options to purchase 39,168 shares of Common Stock will be
exercisable within 60 days. See "Management -- Stock Option Plan" and "Shares
Eligible for Future Sale."
14
<PAGE> 16
SELECTED FINANCIAL DATA
Set forth below is selected financial data for each of the five years ended
December 31, 1995, and for the nine month periods ended September 30, 1995 and
1996. The selected financial data for each of the three years ended December 31,
1995, has been derived from the Company's combined financial statements which
have been audited by Price Waterhouse LLP, independent certified public
accountants, that are included elsewhere herein and should be read in
conjunction with such financial statements and the Notes thereto. The selected
unaudited financial data for the years ended December 31, 1991 and 1992 has been
derived from financial statements that are not included herein. The selected
financial data as of and for the nine months ended September 30, 1995 and 1996
has been derived from the Company's unaudited interim combined financial
statements contained elsewhere herein. In the opinion of management, the
unaudited combined financial statements have been prepared on the same basis as
the audited combined financial statements and include all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the financial position and results of operations for these periods. Results
of operations for the nine months ended September 30, 1996, are not necessarily
indicative of results to be expected for the year ending December 31, 1996. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," "Risk
Factors" and the Combined Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................................... $26,250 $28,331 $32,431 $42,853 $55,388 $42,718 $41,233
Cost of sales..................................... 16,928 17,946 21,971 27,512 34,581 26,361 27,903
------- ------- ------- ------- ------- ------- -------
Gross profit...................................... 9,322 10,385 10,460 15,341 20,807 16,357 13,330
Selling, engineering and administrative
expenses........................................ 7,319 7,826 7,346 8,605 10,578 7,652 9,288(1)
------- ------- ------- ------- ------- ------- -------
Operating income.................................. 2,003 2,559 3,114 6,736 10,229 8,705 4,042
Interest expense.................................. 1,118 997 931 859 814 612 678
Miscellaneous (income) expense.................... (320) (252) 249 66 (79) (81) 107
------- ------- ------- ------- ------- ------- -------
Income before income taxes........................ 1,205 1,814 1,934 5,811 9,494 8,174 3,257
Income tax provision (benefit)(2)................. 46 (201) (148) 408 633 478 727
------- ------- ------- ------- ------- ------- -------
Net income........................................ $ 1,159 $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
======= ======= ======= ======= ======= ======= =======
PRO FORMA STATEMENT OF INCOME DATA:(3)
Income before income taxes........................ $ 1,205 $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257
Income tax provision.............................. 481 580 604 2,738 3,611 3,069 1,255
------- ------- ------- ------- ------- ------- -------
Net income........................................ $ 724 $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002
======= ======= ======= ======= ======= ======= =======
Net income per common share(4).................... $ 1.13 $ 0.38
Weighted average shares outstanding(4)............ 5,203 5,292
OTHER FINANCIAL DATA:
EBITDA(5)......................................... $ 3,956 $ 4,530 $ 5,226 $ 8,933 $12,785 $10,508 $ 6,330
Depreciation...................................... 1,953 1,971 2,112 2,197 2,556 1,803 2,288
Capital expenditures.............................. 1,683 1,987 3,005 5,130 7,657 5,316 12,423
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1,711 $ 1,128 $ 1,883 $ 2,371 $ 2,434 $ 1,493 $ 1,187
Working capital................................... 4,474 3,396 4,557 5,085 4,326 5,591 3,064
Total assets...................................... 22,445 20,411 22,674 27,868 33,864 32,304 43,681
Total debt........................................ 8,541 7,637 8,184 8,025 6,186 6,095 14,538
Shareholders' equity.............................. 10,690 10,805 12,051 15,624 21,529 20,932 23,845
</TABLE>
15
<PAGE> 17
- ---------------
(1) Includes a non-recurring, non-cash compensation expense of approximately
$1.4 million related to the termination of phantom stock compensation
agreements and the issuance of options to Directors. See Note 16 of the
Notes to Financial Statements. Excluding such expense, EBITDA and pro forma
net income for the nine months ended September 30, 1996 would have been
approximately $7.7 million and $2.9 million, respectively.
(2) The Company has previously operated as an S Corporation. Therefore, the
historical income tax provision represents primarily foreign taxes.
(3) The pro forma statement of income data is based on historical net income as
adjusted to reflect a provision for income taxes calculated using the
statutory rates in effect during the applicable periods, as if the Company
had been a C Corporation since inception. See Notes 2 and 11 of the Notes
to Financial Statements.
(4) The pro forma net income per share data is based on the historical weighted
average number of shares outstanding and as adjusted to reflect the assumed
issuance of 1,052,000 shares (as of the beginning of each respective
period) to fund the S Corporation Distribution as of September 30, 1996.
See "S Corporation Distribution."
(5) "EBITDA" represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA represents supplemental information
only and should not be construed as a substitute for income from
operations, net earnings (loss) or cash flows from operating activities
determined in accordance with GAAP. The Company has included EBITDA because
it believes it is commonly used by certain investors and analysts to
analyze and compare companies on the basis of operating performance,
leverage and liquidity and to determine a company's ability to service
debt. Because EBITDA is not calculated in the same manner by all entities,
EBITDA as calculated by the Company may not necessarily be comparable to
that of the Company's competitors or of other entities.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto and
Selected Financial Data included elsewhere in this Prospectus. Historical
operating results are not necessarily indicative of trends in operating results
for any future period.
OVERVIEW
The Company is a leading designer and manufacturer of high-performance,
screw-in hydraulic cartridge valves and manifolds which control force, speed and
motion as integral components in fluid power systems. The Company's innovative
product design, consistent high quality and superior product performance have
allowed it to generate a profit in every year since 1972 and achieve an internal
compound annual growth rate in net sales of 17% over the last ten years,
although net sales were down approximately 3.5% for the first nine months of
fiscal year 1996 compared to the first nine months of fiscal year 1995. In
recent years, the Company's sales have been comprised of approximately 75%
screw-in cartridge valves and approximately 25% manifolds, and the Company
expects that relationship to remain relatively constant. The Company sells its
products globally through independent distributors and in 1995 generated
approximately 34% of its net sales outside the United States.
The Company experienced significant growth in net sales and improvements in
profitability in 1994 and 1995. Management believes that the Company's growth
was due primarily to the increasing awareness of the quality, reliability and
design flexibility of the Company's products and its increased presence in
international markets, as well as the growth of the hydraulics market in
general. In the nine months ended September 30, 1996, the Company experienced a
decline in net sales and gross margin due to declines in industry shipments and
temporary inefficiencies caused by the Company's existing plant in Sarasota,
Florida, operating near full capacity. The Company believes that the new
facility under construction in Sarasota, Florida, will address the current
capacity constraints.
The capital goods industry in general, and the hydraulic valve and manifold
industry in particular, is subject to economic cycles. Following three years of
rapid growth, the hydraulic valve and manifold industry peaked in mid-1995. The
National Fluid Power Association ("NFPA") estimated a decline in domestic
industry shipments in excess of 2% in the first half of 1996. The Company's net
sales during the nine months ended September 30, 1996, although adversely
affected by capacity constraints, were in line with industry trends.
Historically, the Company has managed to mitigate negative consequences of
cyclical downturns with new product introductions and geographic and end user
market diversity. The Company is unable to predict the length and/or severity of
the current downturn. The demand for the Company's products is dependent upon
demand for the capital goods in which the Company's products are incorporated.
In 1995, approximately 34% of the Company's net sales were outside the United
States and the Company's single largest end user customer represented less than
3% of net sales.
The Company maintains facilities in the United States, the United Kingdom
and Germany. The United States plant manufactures screw-in cartridge valves and
manifolds, and supplies the United Kingdom plant with finished products and some
cartridge valve components for final assembly and test. The United Kingdom
operation also manufactures manifolds and supplies a portion to the United
States plant. Both the United States and United Kingdom operations supply
technical support and finished product to the German distribution facility. The
United States dollar is the functional currency for all intercompany sales, and
international sales are made in a number of foreign currencies, particularly
British pounds and German marks. Currency fluctuations have not been material to
date, but could become more important as the Company's international sales grow
in the future.
The Company has been an S Corporation for federal and state income tax
purposes. As a result, the Company has not been subject to federal and state
income taxes, but has been subject to foreign taxes. The Company will terminate
its S Corporation status in connection with the consummation of the
Reorganization
17
<PAGE> 19
and will be fully subject to federal and state income taxes in the future. Upon
termination of S Corporation status, the Company will be required to recognize
approximately $1.9 million of deferred income taxes.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's statements of income as a percentage of net sales. Results for any
one or more periods are not necessarily indicative of annual results or
continuing trends.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 67.7 64.2 62.4 61.7 67.7
----- ----- ----- ----- -----
Gross profit....................................... 32.3 35.8 37.6 38.3 32.3
Selling, engineering and administrative expenses... 22.7 20.1 19.1 17.9 22.5
----- ----- ----- ----- -----
Operating income................................... 9.6 15.7 18.5 20.4 9.8
Interest expense................................... 2.9 2.0 1.5 1.4 1.6
Miscellaneous (income) expense..................... 0.7 0.1 (0.1) (0.1) 0.3
----- ----- ----- ----- -----
Income before income taxes......................... 6.0% 13.6% 17.1% 19.1% 7.9%
===== ===== ===== ===== =====
</TABLE>
Comparison of Nine Months Ended September 30, 1996 and 1995
Net sales decreased 3.5%, or $1.5 million, to $41.2 million in the nine
month period ended September 30, 1996, compared to $42.7 million in the nine
month period ended September 30, 1995. Domestic net sales decreased 3.6%, or
$1.0 million to $27.3 million in the nine month period ended September 30, 1996,
primarily due to distributor inventory adjustments as well as to a general
decline in hydraulic industry shipments. International net sales decreased 3.2%,
or $0.5 million, to $13.9 million in the nine month period ended September 30,
1996. United Kingdom net sales increased 10.3% while net sales decreased in
Germany and Canada 14.9% and 25.3%, respectively.
Gross profit decreased 18.5%, or $3.0 million, to $13.3 million in the nine
month period ended September 30, 1996, compared to $16.4 million in the nine
month period ended September 30, 1995. Gross profit as a percentage of net sales
decreased to 32.3% for the nine month period ended September 30, 1996, from
38.3% for the nine month period ended September 30, 1995. The decrease in gross
profit was primarily due to increased costs in the United States plant as new
machinery for future growth was installed in severely restricted space, creating
excess down time and start-up costs. In addition, material cost increases also
were experienced due to an increase in outsourcing necessitated by the United
States plant operating near full capacity.
Selling, engineering and administrative expenses increased 21.4% or $1.6
million, to $9.3 million in the nine month period ended September 30, 1996,
compared to $7.7 million in the nine month period ended September 30, 1995.
These expenses as a percentage of net sales increased to 22.5% for the nine
month period ended September 30, 1996, from 17.9% for the nine month period
ended September 30, 1995. The increase in selling, engineering and
administrative expenses was primarily due to a non-recurring, non-cash
compensation expense of $1.4 million related to the issuance of stock options
and the cancellation of phantom stock compensation agreements and increases in
software development costs and professional fees. Excluding the $1.4 million
compensation expense, selling, engineering and administrative expenses as a
percentage of sales would have been 19.2% for the nine month period ended
September 30, 1996, compared to 17.9% for the nine month period ended September
30, 1995.
18
<PAGE> 20
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
19
<PAGE> 21
periods presented. The operating results for any quarter are not necessarily
indicative of the results for any future period or for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1994 1995 1995 1995 1995 1996 1996 1996
------------ --------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $ 11,022 $13,632 $ 14,288 $14,798 $ 12,670 $13,806 $ 13,831 $13,596
Cost of sales................ 7,366 8,185 8,901 9,275 8,220 9,491 9,125 9,287
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 3,656 5,447 5,387 5,523 4,450 4,315 4,706 4,309
Selling, engineering and
administrative expenses.... 2,070 2,486 2,549 2,617 2,926 2,665 2,929 3,694
------- ------- ------- ------- ------- ------- ------- -------
Operating income............. 1,586 2,961 2,838 2,906 1,524 1,650 1,777 615
Interest expense............. 202 212 220 180 202 205 218 255
Miscellaneous (income)
expense.................... (151) (16) 5 (70) 2 53 (63) 117
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes... 1,535 2,765 2,613 2,796 1,320 1,392 1,622 243
Pro forma tax provision...... 723 987 933 1,149 542 554 646 55
------- ------- ------- ------- ------- ------- ------- -------
Pro forma net income......... $ 812 $ 1,778 $ 1,680 $ 1,647 $ 778 $ 838 $ 976 $ 188
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's primary source of capital has been cash
generated from operations, although short-term fluctuations in working capital
requirements have been met through borrowings under revolving lines of credit as
needed. The Company's principal uses of cash have been to pay operating
expenses, make capital expenditures, make distributions to stockholders,
repurchase shares of the Company's Common Stock and service debt.
At September 30, 1996, the Company had working capital of approximately
$3.1 million. Cash generated from operations was $5.9 million and $9.6 million
in the nine month periods ended September 30, 1996 and 1995, respectively. The
decrease in the Company's cash generated from operations reflects primarily a
decrease in net income. Cash generated from operations was $12.7 million in
1995, compared to $7.3 million and $3.5 million in 1994 and 1993, respectively.
Capital expenditures in the nine months ended September 30, 1996, were
$12.4 million, compared to $5.3 million in the comparable 1995 period. For the
full year 1996, the Company intends to invest approximately $16.0 million in
capital expenditures, of which $11.0 million will be used to complete the new
manufacturing plants in the United States and Germany, and approximately $5.0
million will be invested in machinery and equipment. Capital expenditures were
$7.7 million, $5.1 million and $3.0 million in 1995, 1994 and 1993,
respectively. Included in 1995 capital expenditures was $0.9 million used for
land and land improvements for the new United States and German facilities.
The Company currently has a $1.7 million line of credit, secured by all
inventory and accounts, which bears interest at the lender's prime rate and has
a maturity date of March 1, 1997. The Company currently is negotiating a new
unsecured revolving credit facility which will provide a maximum availability of
$10.0 million, payable on demand, with a floating interest rate. There can be no
assurance that the Company will be able to finalize this new facility; however,
management believes that the Company would be able to obtain other financing on
commercially reasonable terms if the Company is unable to obtain the credit
facility described above.
In 1996, the Company obtained a mortgage loan of approximately $2.4
million, denominated in German marks, for the new facility in Erkelenz, Germany.
The loan has a term of 12 years and bears interest at 6.47%. In May 1996, the
Company converted its existing $0.8 million line of credit for capital equipment
to a term loan, borrowing an additional $2.3 million for a total loan amount of
approximately $3.1 million. The interest rate on the term loan is 8.25% and it
matures on May 1, 2003. The loan is secured by the equipment purchased with the
loan proceeds. Concurrently, the Company obtained a ten-year mortgage loan for
$6.2 million at an interest rate of 8.25% for the new facility in Florida. This
loan matures on July 1, 2006. The existing Florida facility has a $2.4 million
mortgage loan with an interest rate of 8.25%. This loan matures on April 1,
2006. In
20
<PAGE> 22
England, the Company has a $1.2 million line of credit, denominated in British
pounds, which bears interest at a floating rate (8.0% at September 30, 1996)
equal to 2.25% over the bank's base rate. None of these arrangements contain
pre-payment penalties. In addition, the Company has $2.7 million in notes
payable to former stockholders, which bear interest at a weighted rate of 15%,
and which have terms ranging from three to five years. These notes were issued
by the Company in connection with the repurchase of shares of Common Stock from
the former stockholders, and do not allow for prepayment by the Company.
The Company intends to use approximately $8.9 million of the net proceeds
from the Offering to repay the outstanding balance of the Company's $3.0 million
capital equipment loan, the $2.4 million mortgage loan related to the existing
facility in Florida and $3.5 million of the indebtedness under the mortgage loan
for $6.2 million related to the new facility in Florida.
The Company believes that cash generated from operations, borrowing
availability under the bank facility currently under negotiation and the net
proceeds of the Offering will be sufficient to satisfy the Company's operating
expenses and capital expenditures for the foreseeable future.
SEASONALITY
The Company generally has experienced reduced activity during the fourth
quarter of the year, largely as a result of fewer working days due to holiday
shutdowns. As a result, the Company's fourth quarter net sales, income from
operations and net income typically have been the lowest of any quarter during
the year.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy and relative stability in the Company's cost of sales. While inflation
has not had, and the Company does not expect that it will have, a material
impact upon operating results, there is no assurance that the Company's business
will not be affected by inflation in the future.
21
<PAGE> 23
BUSINESS
OVERVIEW
The Company is a leading designer and manufacturer of high-performance,
screw-in hydraulic cartridge valves and manifolds which control force, speed and
motion as integral components in fluid power systems. The innovative floating
construction of the Company's screw-in cartridge valves provides demonstrable
performance and reliability advantages compared to other available screw-in
cartridge valves. Screw-in cartridge valves are an increasingly accepted
alternative to conventional forms of hydraulic valving, offering significant
design flexibility, as well as substantial size, weight and efficiency benefits
afforded to designers of fluid power systems. Since the introduction of screw-in
hydraulic cartridge valves in the late 1950s, manufacturers of these and similar
products have captured approximately $550 million of the worldwide market for
all non-aerospace hydraulic valves and manifolds, which management believes to
be in excess of $3 billion. The Company has generated a profit each year since
1972 and has achieved an internal compound annual growth rate in net sales of
17% over the last ten years. The Company believes that its success is primarily
a result of its innovative product design, consistent high quality and superior
product performance.
Fluid power involves the transfer and control of power through fluids under
pressure. Fluid power systems are integral to a wide variety of manufacturing,
material handling, agricultural and construction equipment. Due to its
mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power systems typically are comprised of
valves and manifolds that control the flow of fluids, a pump that generates
pressure and actuators such as cylinders and motors that translate pressure into
mechanical energy.
The Company designs and manufactures one of the most comprehensive lines of
screw-in hydraulic cartridge valves in the world. These valves control
direction, pressure, flow and loads, are available in up to five size ranges,
and are suitable for flows from 5 to 400 gallons per minute and continuous
operating pressures up to 5,000 pounds per square inch. The floating
construction pioneered by the Company provides demonstrable performance and
reliability advantages compared to competitors' product offerings due to its
self-alignment characteristic that accommodates potential manufacturing
deviations common in the thread-making operations of screw-in cartridge valves
and manifolds. This floating construction significantly differentiates the
Company from most of its competitors, who design and manufacture rigid screw-in
cartridge valves that fit an industry common cavity. The Company believes that
competitors' products typically do not offer the inherent reliability of the
Company's products and cannot provide equivalent operating performance because
of the design constraints imposed by the industry common cavity.
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
22
<PAGE> 24
more efficient components. Custom manifolds that utilize screw-in cartridge
valves allow customers to design an optimal solution for control of their fluid
power systems that significantly reduces assembly time and expense. The United
States and Western Europe are the largest developed markets for screw-in
cartridge valves, and the Company believes future growth prospects are
particularly attractive in the Pacific Rim, Eastern Europe and India where the
adoption of screw-in cartridge valves is in the early stage. In 1995,
approximately 34% of the Company's net sales were outside the United States.
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 was organized as a Delaware corporation in September 1996 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"). See "The Reorganization." SHHL (through subsidiaries in
England and Germany) and SHC conduct all of the business and hold all of the
assets described as the Company's in this Prospectus. Prior to the
Reorganization, which was initiated during 1996 and will be effected immediately
prior to the consummation of the Offering, both SHC and SHHL have been
controlled by the same group of stockholders and operated as a common
enterprise.
INDUSTRY BACKGROUND
Fluid power is one of three basic technologies, along with electrical and
mechanical, utilized to achieve power transmission and motion control. Due to
its mechanical advantage, fluid power is widely employed to move and position
materials, control machines, vehicles and equipment, and improve industrial
efficiency and productivity. Fluid power can perform work on very light loads
with a high degree of accuracy or develop enormous forces to move and position
materials and equipment that weigh many tons. As a result, fluid power systems
are integral to a wide variety of manufacturing, material handling, agricultural
and construction equipment. Fluid power systems typically are comprised of
valves and manifolds that control the flow of fluids, a pump to generate fluid
pressure, and actuators, such as cylinders and rotary motors, to translate
pressure into mechanical energy.
Screw-in hydraulic cartridge valves first appeared in the late 1950s as an
alternative to conventional forms of hydraulic valving. Conventional hydraulic
valves are generally larger in size, typically manufactured from cumbersome iron
castings, relatively inflexible in their ability to interface with machinery and
equipment, and are usually simple devices designed to control a single task.
Screw-in cartridge valves represent a miniaturization of hydraulic valves,
providing the same functional characteristics as conventional valves, but in a
smaller package size. In addition to being lighter-weight and more compact,
screw-in cartridge valves frequently offer significant advantages in interface
flexibility and cost over conventional hydraulic valves.
Screw-in cartridge valves have achieved greater marketplace acceptance in
recent years as hydraulic system design engineers increasingly use them to
develop multiple-function control systems. A number of screw-in cartridge valves
can be grouped together in a manifold, creating a hydraulic control system that
is functionally analogous to an electronic integrated circuit. The Company's
breadth of products offers many custom "packaging" opportunities that allow
design engineers to create custom, application-specific solutions using the
Company's cataloged "off-the-shelf" screw-in cartridge valves and related
components. End users can utilize screw-in valves and custom manifolds to design
an optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense.
The Company estimates the global market for non-aerospace hydraulic valves
to be in excess of $3 billion, and believes that manufacturers of screw-in
hydraulic cartridge valves and manifolds and similar products have captured
approximately $550 million of the total market. The United States and Western
Europe are the largest developed markets for screw-in cartridge valves, and the
Company believes that future
23
<PAGE> 25
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
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. The
Company's products are designed with operating and performance characteristics
that typically exceed those of functionally similar products. Overall, the
Company's products provide high value because they generally operate at higher
flow rates and pressures than competitive offerings of the same size. The
Company tests 100% of its screw-in cartridge valves in order to ensure the
highest level of performance on a consistent basis.
Offer a Wide Variety of "Off-the-Shelf" Products. The Company currently
offers one of the most comprehensive lines of screw-in cartridge valves in the
world. The Company is committed to producing functionally superior, cataloged
products that contain a high degree of common content to minimize work in
process and maximize manufacturing efficiency. Products are designed for use by
a broad base of industries to minimize the risk of dependence on any single
market segment or customer. The Company, in the future, will seek to expand its
business through development of products that are complementary to its existing
products.
Capitalize on Custom Manifold Opportunities. Because fluid power system
design engineers are increasingly incorporating screw-in cartridge valves into
custom control systems, the Company will concentrate its efforts in the custom
manifold market in two ways: (i) by designing and manufacturing manifolds which
incorporate the Company's screw-in cartridge valves for sale to original
equipment manufacturers ("OEMs"), and (ii) by encouraging competitive manifold
manufacturers to utilize the Company's screw-in cartridge valves in their
manifold designs. The Company's internally developed, proprietary expert system
software allows the Company efficiently to design and manufacture smaller, more
efficient manifolds in low quantities. The Company provides free software to aid
manifold designers in designing the Company's unique cavity into their manifolds
and sells tooling at cost for machining its cavities, allowing independent
manifold manufacturers easily to incorporate the Company's screw-in cartridge
valves into their designs.
Expand Global Presence. The Company intends to continue to increase its
global presence through expansion of its distribution network and its
international manufacturing capabilities. Key areas for expansion where the
Company has minimal presence include Central and South America, China and
Eastern Europe. In addition to operating units in Germany and England, the
Company has strong distributor representation in most developed and developing
markets, including Western Europe, Taiwan, Korea, Singapore, Australia and
Japan. In 1995, the Company generated approximately 34% of its net sales outside
the United States. The Company believes that further expansion of its
international manufacturing facilities could enhance its competitive position in
certain foreign markets. In addition, custom manifolds provide an opportunity
for distributors to offer significant local-added content through the local
production of manifolds that incorporate the Company's screw-in cartridge
valves. This strategy helps minimize potential tariffs and duties that could
inflate the price of the Company's products in foreign markets.
Maintain a Horizontal Organization with Entrepreneurial Spirit. The
Company believes that maintaining its horizontal management structure is
critical to retaining key personnel and an important factor in attracting top
talent from within the hydraulic valve and manifold industry. The Company will
strive to maintain its horizontal management structure that encourages
communication, creativity, an entrepreneurial spirit and individual
responsibility among employees. Employee initiatives have led to continuous
process improvement, resulting in considerable operating efficiencies and
quality control, as well as the maintenance of a safe and comfortable working
environment. The Company believes that a lack of job titles and direct formal
reporting responsibilities eliminates perceived barriers to advancement and
reduces the potential for adversarial relationships to arise within the
organization. A workplace without walls in the Company's offices as well
24
<PAGE> 26
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.
PRODUCTS
The Company's products are integral components in fluid power systems for
both "mobile" applications, such as construction, agricultural and utility
equipment (approximately 65% of net sales) and a broad array of "industrial"
applications, such as machine tools and material handling equipment
(approximately 35% of net sales). In 1995, screw-in cartridge valves accounted
for approximately 75% of the Company's net sales while standard and custom
manifolds accounted for approximately 25% of net sales.
Screw-in Cartridge Valves
The Company designs and manufactures high-performance, screw-in hydraulic
cartridge valves in up to five size ranges, suitable for flows from 5 to 400
gallons per minute and continuous operating pressures up to 5,000 pounds per
square inch. The floating construction pioneered by the Company provides
demonstrable performance and reliability advantages compared to competitors'
product offerings due to its self-alignment characteristic that accommodates
potential manufacturing deviations common in the thread-making operations of
screw-in cartridge valves and manifolds. This floating construction
significantly differentiates the Company from most of its competitors, who
design and manufacture rigid screw-in cartridge valves that fit an industry
common cavity. The floating construction of the Company's screw-in cartridge
valves eliminates the tendency of working parts inside rigid cartridge valves to
bind when screwed into the manifold, which leads to unnecessary stress and often
premature failure.
The Company has developed new market opportunities by scaling its screw-in
cartridge valves to accommodate application requirements with various flow
ranges. Management believes that the series zero valve introduced in 1996 will
allow the Company to gain entry to new market applications which it previously
had not been able to serve, including fork lift trucks and food processing
equipment. The Company believes that scaling involves minimal risk, as designs
and manufacturing processes are already proven. Future upward scaling of the
product line currently is in a conceptual stage.
The Company manufactures screw-in cartridge valves for load control,
pressure control, flow control and logic and directional control, with a broad
range of other unique functional offerings. Many variants of the same basic
functional products can be interchanged with each other to attain an optimum
level of performance in a customer's fluid power system. The Company's screw-in
cartridge valves are described more fully below.
Load Control Valves. The Company considers itself to be the world's
recognized leader in the design and manufacture of load control valves and
believes that it holds a dominant market share position
25
<PAGE> 27
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 a fluid power system and can be actuated electrically, manually
or with hydraulic pressure. The Company's logic control valves, some of
which are patented, can be used in combination with one another to provide
complex directional control functions. The Company also manufactures
high-pressure spool-type solenoid valves and other pilot devices that can
be used to actuate other Company screw-in cartridge valves.
Other Products. The Company designs and manufactures a broad array of
screw-in cartridge valves that can be used in combination with other
Company products to offer useful and unique functionality. For example, the
Company's Air-Bleed and Start-Up cartridge valves help protect a fluid
power system from potential damage by releasing air trapped in the system
when a machine is shut down for maintenance. Often, these functional
products are not manufactured by any other competitors, providing the
Company with additional sales opportunities. While these products are not
generally demanded in high volumes, their usefulness across industries
helps strengthen the Company's brand name and market penetration.
Manifolds
A manifold is a solid block of metal, usually aluminum or ductile iron,
which is machined to create threaded cavities and channels into which screw-in
cartridge valves can be installed and through which the hydraulic fluid flows.
The manifolds manufactured by the Company are described more fully below.
Standard Manifolds. The variety of standard, cataloged manifolds
offered by the Company is unmatched by any screw-in cartridge valve
competitor. These products allow customers easily to 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.
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<PAGE> 28
- 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 interface
simply and easily 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 components in new
functional products. The Company's focus on engineering has served as the
foundation of its ability to offer the expansive range of screw-in cartridge
valves that it brings to market.
Before designing functionally new screw-in cartridge valves, the Company's
engineers and sales and marketing personnel first establish performance and
operating requirements for the products. An iterative design process is
undertaken to meet the expected performance requirements in a screw-in cartridge
valve that fits the Company's cavity. Prototypes are typically hand built and
subject to extensive testing until the desired performance levels are achieved.
Before a new product is released for sale, the Company's engineers will work
closely with beta site customers to test the product under actual field
conditions.
During product development, engineers work closely with manufacturing
personnel to define the processes required to manufacture the product reliably
and consistently. The close link between engineering and manufacturing helps to
ensure a smooth transition from design to market. Design changes to facilitate
manufacturing processes are not considered if performance levels would be
compromised. The Company practices a continuous improvement process, and at
various times the Company may incorporate design changes in a product to improve
its performance or life expectancy. All of the Company's engineers provide
application support to customers and distributors.
MANUFACTURING
The Company is a process intensive manufacturing operation that extensively
utilizes state of the art computer numerically controlled ("CNC") machinery to
manufacture its products with consistent replication and minimal lead times.
Where commercial machinery is not available for specific manufacturing or
assembly operations, the Company often designs and builds its own machinery to
perform these tasks. The Company makes extensive use of automated handling and
assembly technology (robotics) where possible to perform repetitive tasks, thus
promoting manufacturing efficiencies and workplace safety. The Company has its
own electric heat treatment furnace to provide consistent and reliable control
of this important operation.
The Company's manufacturing operations include turning, grinding, honing
and lapping operations for its screw-in cartridge valves and milling and
drilling operations for its manifolds. Most machinery employed by the Company is
computer numerically controlled, with more than 75 CNC machines in operation in
the Company's manufacturing plants. The Company employs more than 60 robots,
including 45 intelligent (programmable) models, to supplement traditional pick
and place units. In addition, eight vision systems are in use with three used
for decision making tasks. In its manifold manufacturing operations in Florida
and England, the Company utilizes internally developed, proprietary personal
computer based software to program machines off-line and to minimize setup
times. This expert system also enables the Company to utilize compound angle
holes in its manifold designs, a technique that allows manifolds to be made
smaller in size with fewer potential leak points.
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<PAGE> 29
At its Sarasota, Florida plant, the Company has extensive testing
facilities that allow its design engineers to test fully 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 and relies on its
distributors to purchase and maintain sufficient inventory to meet their
customers' demands. 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. These and other raw materials are commercially available
from multiple sources. Scheduling is aided by a software system that provides
employees with the requisite information to make intelligent scheduling
decisions.
The Company's ability to machine components to exacting tolerances, such as
millionths of an inch circularity, makes it more difficult for competitors to
offer products of equal performance. The Company controls most critical
finishing processes in-house but does rely on a small network of outside
manufacturers to machine cartridge components to varying degrees of
completeness. High volume machining operations are performed exclusively at
outside vendors. The Company is very selective in establishing its vendor base
and develops long-term relationships with vendors. The Company is capable of
machining all parts of its cartridge valves and manifolds in house, except
elastomer seals and springs. Both of the existing facilities in the United
States and England have been certified to ISO 9002 since 1993.
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. The Company believes
that it is in material compliance with all of such laws. Compliance with such
laws and regulations has not had, and is not expected to have, any material
effect on the Company's earnings or competitive position. The Company has not
been required to make any material capital expenditures, nor does it expect to
have to make any material capital expenditures, in connection with its
compliance with such laws and regulations.
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 does not grant extended payment terms to distributors. The
Company has an exchange policy which permits distributors to return standard
screw-in cartridge valves and standard manifolds for full credit, provided that
the products are in new condition, packaged in factory boxes and date coded
within two years. All inventory exchanges must be approved by the Company, and a
distributor's quarterly total list price value of inventory exchanges generally
is not permitted to exceed 2% of the distributor's prior year's annual
shipments, up to a maximum of $50,000.
The Company currently utilizes 60 distributors, 37 of which are located
outside the United States and a majority of which have strong technical
backgrounds or capabilities which enable them to develop practical, efficient
and cost-effective fluid power systems for their customers. Sales to the
Company's largest distributor represented approximately 6% of net sales in 1995
and approximately 34% of the Company's net sales were outside of the United
States in 1995.
In addition to distributors, the Company sells directly to other companies
within the hydraulic industry under a pricing program that does not undermine
the primary distributors' efforts. Companies that participate in this program
must utilize the Company's products in a value-added application, integrating
the Company's screw-in cartridge valves into other fluid power products of their
manufacture. This strategy strengthens the
28
<PAGE> 30
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 Company's products are
designed to withstand these operating imperatives, and industrial applications
currently account for approximately 35% of the Company's net sales. Many
conventional valve designs still are used in industrial applications and
represent substitution opportunities for the Company's products. Industrial
customers include Cincinnati Inc., Motch and Giddings & Lewis (machine tools);
Cincinnati Milacron, Autojector and Mitsubishi (injection molding equipment);
NRM McNeil (tire presses); Morgan Engineering (steel process plant equipment);
and Beloit (paper process plant equipment).
The Company's distributors are not authorized to approve the use of its
products in any of the following applications: (i) any product that comes under
the Federal Highway Safety Act, such as steering or braking systems for
passenger-carrying vehicles or on-highway trucks, (ii) aircraft or space
vehicles, (iii) ordnance equipment, (iv) life support equipment, and (v) any
product that, when sold, would be subject to the rules and regulations of the
United States Nuclear Regulatory Commission. These "application limitations"
have alleviated the need for the Company to maintain the internal bureaucracy
necessary to conduct business in these market segments.
COMPETITION
The hydraulic valve industry is highly fragmented and intensely
competitive. The Company has a large number of competitors, some of which are
full-line producers and others that are niche suppliers like the Company. Most
competitors market globally. Full-line producers have the ability to provide
total hydraulic
29
<PAGE> 31
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."
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.
EMPLOYEES
As of October 1, 1996, the Company had approximately 410 full-time
employees in the United States, approximately 70 in England and 10 in Germany.
Over 80% of its employees are in manufacturing functions, over 10% are in
engineering and marketing functions, and the remainder are in other support
functions. None of the employees in any operating unit are represented by a
union and the Company believes that relations with its employees are good.
Employees are paid either hourly or with an annual salary at rates that are
competitive with other companies in the industry and geographic area. The
combination of competitive salary, above average health and retirement plans,
and a safe and pleasant working environment discourages employee turnover and
encourages efficient, high-quality production.
The Company recognizes the need for continuing employee education to allow
the workforce to remain effective in today's rapidly changing technological
environment. Significant time is dedicated to education programs that assist
employees in understanding technology and the change it brings to their jobs.
The Company also offers tuition reimbursement programs that encourage employees
to continue the education process outside the workplace.
PROPERTIES
The Company owns two manufacturing facilities (Sarasota, Florida, and
Coventry, England) with two additional facilities under construction (Sarasota,
Florida and Erkelenz, Germany). The existing Sarasota plant has approximately
66,000 square feet, with additional acreage at the site that can accommodate
future expansion. The Coventry plant is comprised of 25,000 square feet, with
additional acreage at the site that can accommodate future expansion.
The new plant in Sarasota, located approximately two miles from the
existing facility, will offer an additional 60,000 square feet of capacity and
will be used initially for manifold manufacturing. Approximately 85 personnel
from the existing plant will move to the new plant once it is completed. The new
facility in Germany will offer approximately 42,000 square feet of capacity for
future product manufacturing needs.
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<PAGE> 32
Initially, the German facility will utilize a small percentage of available
space to assemble cartridge valves and manifolds; the Company intends to
sublease all or a portion of the unused space.
PATENTS AND TRADEMARKS
The Company believes that the growth of its business will be dependent upon
the quality and functional performance of its products and its relationship with
the marketplace, rather than the extent of its patents and trademarks. The
Company's principal trademark is registered globally in the following countries:
Australia, Canada, France, Germany, Italy, Japan, Korea, Mexico, Spain, Sweden,
Switzerland, the United Kingdom and the United States. While the Company
believes that its patents have significant value, the loss of any single patent
would not have a material adverse effect on the Company.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings other than
routine litigation incidental to its business.
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<PAGE> 33
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information regarding the Directors,
Executive Officers and certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Robert E. Koski........................ 67 Chairman of the Board of Directors
Clyde G. Nixon......................... 61 President, Chief Executive Officer,
Director
Robert J. Devereaux.................... 65 Vice President
Jeffrey Cooper......................... 55 Engineering Manager
Russell G. Copeman..................... 57 Manufacturing Manager
Richard J. Dobbyn...................... 53 Chief Financial Officer
Peter G. Robson........................ 53 General Manager, Sun Hydraulics Limited
Arthur B. Bodley....................... 78 Director
James G. March......................... 68 Director
Curtis J. Timm......................... 68 Director
Taco van Tijn.......................... 72 Director
David N. Wormley....................... 57 Director
</TABLE>
MR. KOSKI is a co-founder of the Company and has served as its Chairman of
the Board since it began operations in 1970. He was also its President and Chief
Executive Officer from that time until November 1988. He is a graduate of
Dartmouth College and past Chairman of the Board of the National Fluid Power
Association. Mr. Koski has over 35 years experience in the fluid power industry,
and has served as Chairman of the Fluid Power Systems and Technology Division of
the American Society of Mechanical Engineers, and as a member of the Board of
Directors of the National Association of Manufacturers.
MR. NIXON joined the Company in January 1988, and was named its President
and Chief Executive Officer in November 1988. From September 1985, to January
1988, he served as Vice President of Cross & Trecker Corporation and was
President of Warner & Swasey Company, its wholly-owned subsidiary. From 1964 to
1985, he served in various management capacities with Brown & Sharpe
Manufacturing Corporation, most recently as Vice President of its fluid power
division and President of Double A Products Company, its wholly-owned
subsidiary. Mr. Nixon is a graduate of Cornell University and the Harvard
Business School, and he currently serves as First Vice Chairman of the Board of
the National Fluid Power Association. Mr. Nixon has over 29 years experience in
the fluid power industry.
MR. DEVEREAUX joined the Company as head of manufacturing operations and
processes in June 1979. He was named Vice President in January 1991. From 1957
to 1979, he served in various management capacities with Continental Group and
its subsidiaries Continental Can Corporation and Bondware/Crest. Mr. Devereaux
is an engineering graduate of Rensselaer Polytechnical Institute. Mr. Devereaux
has over 17 years experience in the fluid power industry.
MR. COOPER joined the Company in December 1990, as an engineer and has been
Engineering Manager since September 1991. From August 1987, to December 1990, he
was Engineering Manager, Mobile Valves, of Vickers, Incorporated, a wholly-owned
subsidiary of Trinova Corporation, and from September 1979 to August 1986, he
served as Vice President of Engineering for Double A Products Company. Mr.
Cooper is an engineering graduate of Willesden College of Technology, London,
England. Mr. Cooper has over 28 years experience in the fluid power industry.
MR. COPEMAN joined the Company in July 1996, as Manufacturing Manager, in
charge of manufacturing operations and processes. From January 1996, to July
1996, Mr. Copeman was the principal of Copeman Consulting, and performed
consulting services for the Company from March 1996 to July 1996. From January
1994, to October 1995, Mr. Copeman was a partner with Coopers & Lybrand,
Australia; from July 1989, to December 1993, he was a Director of Coopers &
Lybrand's International Manufacturing Practice. From January 1985, to July 1989,
he served in various management positions with Vickers,
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<PAGE> 34
Incorporated, most recently as Vice President. From August 1967, to January
1985, he served in various management positions with Double A Products Company,
most recently as Vice President. Mr. Copeman is a Certified Manufacturing
Engineer and a graduate of Georgia Institute of Technology and the Krannert
Business School of Purdue University. Mr. Copeman has over 22 years experience
in the fluid power industry.
MR. DOBBYN joined the Company in October 1995, and was named Chief
Financial Officer in July 1996. From June 1995 to October 1995, Mr. Dobbyn
served as the Controller of Protek Electronics. From July 1994 to June 1995, he
served as the Fiscal Director of a non-profit child care agency. From September
1984 to July 1994, Mr. Dobbyn was Senior Vice President-Finance and
Administration for Loral Data Systems, formerly Fairchild Weston Systems, a
Schlumberger company. Mr. Dobbyn is a Certified Public Accountant and a graduate
of Boston College.
MR. ROBSON has served as a Director of Sun Hydraulics Limited, Coventry,
England, since May 1993, and has been employed by the Company as the General
Manager of its United Kingdom operations since 1982. Mr. Robson is a Chartered
Engineer and a graduate of Coventry University. Mr. Robson has over 30 years
experience in the fluid power industry.
MR. BODLEY has served as President and Chief Executive Officer of Atlas
Fluid Components Company, Inc., a fluid power distributorship in Akron, Ohio,
since January 1966. Mr. Bodley has over 30 years experience in the fluid power
industry. He has served as a Director of the Company since January 1973.
DR. MARCH is a Professor Emeritus at Stanford University, Palo Alto,
California. He was a senior member of the faculty at Stanford University and the
Stanford Business School from September 1970, to August 1995, and is the author
of numerous books and articles on organizational behavior and decision making.
From September 1964, to August 1970, Dr. March was a Professor of Psychology and
Sociology at the University of California, Irvine, where he was Dean of the
School of Social Sciences from 1964 to 1969. Dr. March served as a Director of
the Company from 1989 to 1992, and rejoined the Company's Board of Directors in
November 1995. He also is a member of the Board of Directors of Wally Industries
and Chair of the Citicorp Behavioral Sciences Research Council. Dr. March is a
graduate of the University of Wisconsin and received his Ph.D. from Yale
University.
MR. TIMM is a private investor and was a founding partner of the law firm
of Icard, Merrill, Cullis, Timm, Furen & Ginsburg, Sarasota, Florida, where he
practiced law from 1958 to 1989. He is a graduate of the University of Minnesota
and its law school and has served as a Director of the Company since April 1970.
MR. VAN TIJN is an attorney (solicitor), practicing law in London, England,
since May 1971. He has been a Director of the Company since February 1989, and
the principal statutory officer of Sun Hydraulik Holdings Limited since January
1991.
DR. WORMLEY is the Dean of the Engineering School at Pennsylvania State
University, where he has taught since 1992. 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 an 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. Officers are elected annually by and serve at the discretion of the Board
of Directors. Mr. Koski and Dr. March are step-brothers.
Directors who are not officers of the Company are paid $2,500 for
attendance at each meeting of the Board of Directors, as well as each meeting of
each Board committee on which they serve when the committee meeting is not held
within one day of a meeting of the Board of Directors. Directors are also
reimbursed for their expenses incurred in connection with their attendance at
such meetings. In January 1995, the Company paid Mr. Timm the final $12,500 of a
total $25,000 consulting fee for preparation of a report analyzing certain
structural, legal and tax issues relating to the Company's business activities.
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<PAGE> 35
The Company has established a Compensation Committee, comprised of Dr.
March, Mr. Timm and Dr. Wormley. The functions of the Compensation Committee are
to review and approve annual salaries and bonuses for all Officers, review,
approve and recommend to the Board of Directors the terms and conditions of all
employee benefit plans or changes thereto, administer the Company's stock option
plans and carry out the responsibilities required by the rules of the Securities
and Exchange Commission (the "Commission").
The Company expects that the Board of Directors will establish an Audit
Committee and an Executive Committee. The members of each committee are expected
to be determined at the first meeting of the Board of Directors following the
closing of the Offering.
The functions of the Audit Committee will be to recommend annually to the
Board of Directors the appointment of the independent public accountants of the
Company, discuss and review the scope of and the fees for the prospective annual
audit, to review the results thereof with the independent public accountants,
review and approve non-audit services of the independent public accountants,
review compliance with existing major accounting and financial policies of the
Company, review the adequacy of the financial organization of the Company,
review management's procedures and policies relative to the adequacy of the
Company's internal accounting control, review compliance with federal and state
laws relating to accounting practices and review and approve (with the
concurrence of a majority of the disinterested Directors of the Company)
transactions, if any, with affiliated parties.
The Executive Committee, to the fullest extent allowed by Delaware law and
subject to the powers and authority delegated to the Audit Committee and the
Compensation Committee, will have and may exercise all the powers and authority
of the Board of Directors in the management of the business and affairs of the
Company during intervals between meetings of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Board of Directors of the Company determined the compensation,
including salary and bonus, of the Executive Officers of the Company for the
fiscal year ended December 31, 1995, and for the current fiscal year through the
date hereof. Following the Offering, it is expected that the Compensation
Committee of the Board of Directors will determine the compensation of the
Company's Executive Officers. See "Management -- Directors, Executive Officers
and Key Employees."
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<PAGE> 36
EXECUTIVE COMPENSATION
The following table is a summary of the compensation paid or accrued by the
Company for the last three fiscal years, for services in all capacities to the
Company's Chief Executive Officer and its other three Executive Officers who
earned more than $100,000 from the Company in 1995 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
NAME AND --------------- AWARDS -- OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS (#)(1) COMPENSATION(2)
- -------------------------------------------- ---- -------- ------------------- ---------------
<S> <C> <C> <C> <C>
Robert E. Koski,............................ 1995 $106,000 -- $28,033(3)
Chairman of the Board of Directors 1994 106,000 -- 18,837
1993 106,000 -- 13,056
Clyde G. Nixon,............................. 1995 165,000 110,739 21,807
President and Chief Executive Officer 1994 150,000 -- 30,827(4)
1993 142,500 -- 13,229
Robert J. Devereaux......................... 1995 123,500 -- 19,771
Vice President 1994 118,500 -- 19,171
1993 113,000 55,369 13,959
Jeffrey Cooper.............................. 1995 110,500 -- 10,280
Engineering Manager 1994 105,000 -- 9,840
1993 98,000 55,369 5,364
</TABLE>
- ---------------
(1) Represents phantom stock compensation award.
(2) Certain perquisites were provided to certain of the Named Executive
Officers, but in no event did the value of the perquisites provided in any
year exceed 10% of the amount of the executive's salary for that year,
except with respect to Mr. Koski (see note 3) and Mr. Nixon (see note 4).
All other amounts shown in this column reflect contributions made by the
Company on behalf of the employee to the Company's 401(k) plan.
(3) Includes payment by the Company of certain professional fees on behalf of
Mr. Koski.
(4) Includes payment by the Company of certain club dues on behalf of Mr. Nixon.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
----------------------- REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDERLYING GRANTED TO APPRECIATION
OPTIONS EMPLOYEES EXERCISE OR FOR OPTION TERM (1)
GRANTED IN FISCAL BASE PRICE EXPIRATION -------------------
NAME (#) YEAR ($/SH) DATE 5% ($) 10% ($)
(A) (B) (C) (D) (E) (F) (G)
- ----------------------------------- ---------- ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Koski.................... 0 -- -- -- -- --
Clyde G. Nixon..................... 110,739 80% $3.36 7/1/05 $234,486 $591,798
Robert J. Devereaux................ 0 -- -- -- -- --
Jeffrey Cooper..................... 0 -- -- -- -- --
</TABLE>
- ---------------
(1) The 5% and 10% assumed annual rates of stock price appreciation are provided
in compliance with Regulation S-K under the Securities Exchange Act of
1934. The Company does not necessarily believe that these appreciation
calculations are indicative of actual future stock option values or that
the price of Common Stock will appreciate at such rates.
35
<PAGE> 37
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FISCAL AT FISCAL
ACQUIRED ON VALUE YEAR-END (#) YEAR-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
(A) (B) (C) (D) (E)
- ----------------------------------------- ----------- ----------- ------------- ----------------
<S> <C> <C> <C> <C>
Robert E. Koski.......................... 0 -- 0/0 0/0
Clyde G. Nixon........................... 21,006 $ 239,840 7,021/134,084 $ 71,160/109,441
Robert J. Devereaux...................... 10,508 129,410 27,998/33,221 110,300/76,500
Jeffrey Cooper........................... 0 -- 22,148/33,221 51,000/76,500
</TABLE>
- ---------------
(1) In the absence of a trading market for the Common Stock, value is based upon
the difference between book value per share at December 31, 1995 and the
exercise price.
STOCK OPTION PLAN
The Company adopted the Sun Hydraulics Incorporated 1996 Stock Option Plan
(the "Plan") in September 1996. The Company may issue up to 1,000,000 shares of
Common Stock to participants in the Plan. The Plan has a term of ten years.
The Plan authorizes the Company's Compensation Committee to grant options
("Options") to purchase shares of the Company's Common Stock to Directors,
Officers and employees of the Company. The purposes of the Plan are to enable
the Company to attract and retain qualified persons to serve as Directors,
Officers and employees and to align the interests of such persons with the
interests of stockholders by giving them a personal interest in the value of the
Company's Common Stock.
Options granted to eligible employees under the Plan may be Options that
are intended to qualify as "Incentive Stock Options" within the meaning of
Section 422 of the Code or Options that are not intended to so qualify
("Nonstatutory Options"). Options granted to members of the Board of Directors
who are not also employees of the Company will be Nonstatutory Options.
If the Option is designated as an Incentive Stock Option, the purchase
price of the Common Stock that is the subject of such Option may be not less
than the fair market value of the Common Stock on the date the Option is
granted. Additionally, no Incentive Stock Option may be granted to any employee,
who, at the time of such grant, owns more than 10% of the stock of the Company
or of any subsidiary, unless at the time such Option is granted the exercise
price is at least 110% of the fair market value of the Common Stock and the term
of the Option is for five years or less. If the Option is a Nonstatutory Option,
the purchase price may be equal to or less than the fair market value of the
Common Stock on the date the Option is granted, as the Compensation Committee
shall determine. No person may receive in any year Options to purchase more than
150,000 shares of Common Stock. The exercise price is payable at the time of
exercise (i) in cash, (ii) by the delivery of shares of Common Stock having a
fair market value equal to the exercise price, (iii) with a promissory note for
part of the option price, or (iv) in such other manner as the Compensation
Committee may approve. Any grant may provide for payment of the exercise price
from the proceeds of sale through a broker on the date of exercise of some or
all of the shares of Common Stock to which the exercise relates.
No Options may be exercised more than 10 years from the date of grant. Each
employee's or Director's stock option agreement may specify the period of
continuous service with the Company that is necessary before the Option will
become exercisable. Except in the case of an employee who is permanently and
totally disabled, if the Option is an Incentive Stock Option, it will be
exercisable only if the recipient is an employee of either the Company or a
subsidiary corporation at all times during the period beginning on the date of
the grant of the Option and ending on a date which is no later than three months
before the date of such exercise,
36
<PAGE> 38
all as specified in the employee's or Director's stock option agreement.
Successive grants may be made to the same recipient regardless of whether
Options previously granted to him or her remain unexercised.
No Option granted under the Plan is transferable by a participant except by
will or the laws of descent and distribution. Options may not be exercised
during a participant's lifetime except by the participant or, in the event of
the participant's incapacity, by the participant's guardian or legal
representative acting in a fiduciary capacity on behalf of the participant under
state law and court supervision.
The Plan may be amended from time to time by the Board of Directors in such
respects as it deems advisable. Further approval by the stockholders of the
Company will be required for any amendment that would (i) increase the aggregate
number of shares of Common Stock that may be issued under the Plan, (ii)
materially change the classes of persons eligible to participate in the Plan, or
(iii) otherwise cause Rule 16b-3 under the Exchange Act to cease to be
applicable to the Plan. No amendment may change the Plan so as to cause any
Option intended to be an Incentive Stock Option to fail to meet the Internal
Revenue Code requirements for an Incentive Stock Option. No amendment may change
any rights an Option holder may have under any outstanding Option without the
written consent of the holder of the Option. The Board may at any time terminate
or discontinue the Plan.
The Company has granted to the four independent Directors who joined the
Board of Directors prior to 1994 Nonstatutory Options under the Plan to purchase
14,700 shares of Common Stock. Such options have an exercise price of $3.00 per
share, a term of 10 years and are immediately exercisable. The Company intends
to grant Incentive Stock Options to purchase 100,000 shares of Common Stock
under the Plan to two Executive Officers of the Company following the Offering,
with an exercise price equal to the initial public offering price of the Common
Stock. The Options will vest over varying periods of time and have a term of 10
years. In connection with the termination of certain phantom stock compensation
agreements in September 1996, the Company granted Nonstatutory Options to
purchase 305,260 shares of Common Stock under the Plan to eight employees,
including four Executive Officers of the Company. Such Options have exercise
prices ranging from $3.00 to $5.05, with a weighted average price of $3.95. Such
options are all immediately exercisable and have a term of 10 years. The Company
also has committed to grant Incentive Stock Options to purchase 189,348 shares
of Common Stock under the Plan to such employees following the Offering at an
exercise price equal to the initial public offering price of the Common Stock.
Such Options will vest over varying periods of time, up to five years, and will
have a term of 10 years. See "The Reorganization."
CERTAIN TRANSACTIONS
The information set forth herein briefly describes transactions over the
past three years between the Company and its Directors, Officers and 5%
stockholders. Management of the Company believes that such transactions have
been on terms no less favorable to the Company than those that could have been
obtained from unaffiliated parties. These transactions have been approved by a
majority of the Company's disinterested Directors. Future transactions, if any,
with affiliated parties will be approved by a majority of the Company's
disinterested Directors and the Audit Committee (after the Offering) and will be
on terms no less favorable to the Company than those that could be obtained from
unaffiliated parties.
ORGANIZATION OF SUNOPTECH, LTD.
In October 1995, the Company contributed certain intangible assets to
SunOpTech, Ltd. ("SunOpTech"), a limited partnership formed to further the
development of manufacturing software. In January 1996, the Company distributed
to its stockholders the 65% limited partnership interest in SunOpTech which it
received in exchange for the contributed intangible assets. Robert E. Koski owns
51% of the common stock of the general partner of SunOpTech, and Messrs. Koski
and Clyde G. Nixon are members of the board of directors of the general partner.
The Company currently has no ownership interest in SunOpTech.
The Company entered into a contract with SunOpTech for a 35-month term
beginning November 1995, for the development of computer software and computer
support to the Company. The Company will pay approximately $955,000 over the
contract term, provide office space and equipment and reimburse
37
<PAGE> 39
SunOpTech for reasonable expenses related to the software development. During
1995, the Company paid fees of $90,000 and expenses of $25,000 under the
agreement, and provided certain administrative support to SunOpTech at no
charge. The software is still in the development stage but is being utilized in
the Company's plants in Sarasota and Germany. Under its agreement with
SunOpTech, the Company has a perpetual, nonexclusive license to use the
software, as well as any future enhancements, without charge other than the
development and support fees to be provided during the 35-month term of the
agreement.
ATLAS FLUID COMPONENTS COMPANY, INC.
Arthur B. Bodley, a Director of the Company, is the President, Chief
Executive Officer and controlling stockholder of Atlas Fluid Components Company,
Inc. ("Atlas"), a fluid power distributorship in Akron, Ohio, that purchases and
sells the Company's products pursuant to one of the Company's standard
distributor agreements. Atlas purchased approximately $1.3 million, $1.2 million
and $1.1 million of products from the Company in fiscal 1995, 1994 and 1993,
respectively.
INDEMNIFICATION AGREEMENTS
For a description of limitations on liability of the Company's Directors
and certain indemnification arrangements with respect to the Company's Directors
and Officers, see "Description of Capital Stock -- Directors' Liability."
Further, the Company has entered into indemnity agreements with all of its
Directors and Officers for the indemnification and advancing of expenses to such
persons to the full extent permitted by law. The Company intends to execute such
indemnity agreements with its future Officers and Directors. The Company
maintains insurance for the benefit of its Officers and Directors insuring such
persons against certain liabilities arising in connection with their service as
Officers and Directors of the Company and its subsidiaries, including certain
liabilities under the securities laws.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of the consummation of
the Reorganization and as adjusted to reflect the sale of the Common Stock
offered hereby by (i) each person or entity known by the Company to be the
beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii)
each Director and Named Executive Officer of the Company, and (iii) all
Directors and Executive Officers of the Company as a group. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of Common Stock owned by them, except to the extent such
power may be shared with a spouse. The table assumes that the persons listed do
not purchase any shares of Common Stock in the Offering and that the
Underwriters' over-allotment option is exercised in full.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
---------------------- ----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
- ----------------------------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
38
<PAGE> 40
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
---------------------- ----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
- ----------------------------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Robert E. Koski(4)................................... 1,189,800 29.8 1,189,800 18.9
Robert S. and Ann R. Ferrell(5)...................... 420,437 10.5 420,437 6.7
5924 Cranbrook Way, #101
Naples, Florida 34112
Robert J. Devereaux(6)............................... 250,200 6.2 250,200 3.9
Clyde G. Nixon(7).................................... 211,637 5.2 211,637 3.3
Curtis J. Timm(8).................................... 97,284 2.4 97,284 1.5
Peter G. Robson(9)................................... 76,308 1.9 76,308 1.2
James G. March(10)................................... 53,572 1.3 53,572 *
Jeffrey Cooper(9).................................... 49,109 1.2 49,109 *
Arthur B. Bodley(8).................................. 13,860 * 13,860 *
Taco van Tijn(8)..................................... 8,920 * 8,920 *
David N. Wormley(11)................................. 3,940 * 3,940 *
Russell G. Copeman................................... 0 -- 0 --
Richard J. Dobbyn.................................... 0 -- 0 --
All Directors and Executive Officers as a
Group (12 persons)................................. 1,954,630 45.4 1,954,630 29.6
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each of the persons listed who
own more than 5% of the Company's Common Stock is 1500 West University
Parkway, Sarasota, Florida 34243.
(2) Based on 4,000,000 shares of Common Stock outstanding prior to the Offering
and 6,300,000 shares of Common Stock outstanding immediately after the
Offering. Pursuant to the rules of the Commission, certain shares of Common
Stock which a person has the right to acquire within 60 days of the date
hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Includes 404,904 shares owned by the Christine L. Koski Irrevocable Trust,
404,904 shares owned by the Robert C. Koski Irrevocable Trust, 404,904
shares owned by the Thomas L. Koski Irrevocable Trust and 146,143 shares
owned by the Koski Family Trust. Christine L. Koski, Robert C. Koski and
Thomas L. Koski are the trustees of each of these trusts and share voting
and dispositive power. Christine L. Koski, Robert C. Koski and Thomas L.
Koski are all adult children of Robert E. Koski.
(4) Includes 605,426 shares owned by Mr. Koski's spouse. Does not include any
of the shares beneficially owned by Christine L. Koski, Robert C. Koski and
Thomas L. Koski.
(5) Includes 240,125 shares owned by the Robert S. Ferrell Trust, of which
Robert S. Ferrell is the sole trustee, and 180,312 shares owned by the Ann
R. Ferrell Trust, of which Ann R. Ferrell is the sole trustee. Robert S.
Ferrell is the spouse of Ann R. Ferrell.
(6) Includes 139,871 shares owned by the Robert J. Devereaux Trust, of which
Robert J. Devereaux is the sole trustee, and 52,500 shares owned by the
Christine C. Devereaux Trust, of which Christine C. Devereaux is the sole
trustee. Robert J. Devereaux is the spouse of Christine C. Devereaux. Also
includes 57,829 shares which will be subject to options exercisable by Mr.
Devereaux within 60 days which the Company has granted or committed to
grant immediately following the Offering in connection with the amendment
of certain phantom stock compensation agreements. See "The Reorganization."
(7) Includes 107,349 shares which are owned jointly by Mr. Nixon and his
spouse. Also includes 104,288 shares which will be subject to options
exercisable by Mr. Nixon within 60 days which the Company has
39
<PAGE> 41
granted or committed to grant immediately following the Offering in
connection with the amendment of certain phantom stock compensation
agreements. See "The Reorganization."
(8) Includes 3,920 shares subject to currently exercisable options.
(9) Represents shares which will be subject to options exercisable within 60
days which the Company has granted or committed to grant immediately
following the Offering in connection with the amendment of certain phantom
stock compensation agreements. See "The Reorganization."
(10) Shares are owned jointly by Dr. March and his spouse.
(11) Includes 2,940 shares subject to currently exercisable options.
THE REORGANIZATION
The Company is a newly organized Delaware corporation formed for the
purpose of acquiring all of the outstanding shares of capital stock of Sun
Hydraulics Corporation, a Florida corporation ("SHC"), and Sun Hydraulik
Holdings Limited, a private limited company organized under the Laws of England
and Wales ("SHHL") (the "Reorganization"). SHC began operation in 1970 in
Sarasota, Florida; SHHL's operations in Europe began in 1982. SHHL (through
subsidiaries in England and Germany) and SHC 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. Pursuant to the Reorganization, all of the outstanding
shares of the common stock of SHC and SHHL will be exchanged for newly issued
shares of the Company's Common Stock, and SHC and SHHL thereafter will be
wholly-owned subsidiaries of the Company.
Prior to the Reorganization, SHC and SHHL have been controlled by the same
group of stockholders and were operated as a common enterprise. After the
Reorganization, such stockholders will own approximately 4,000,000 shares of the
Company's Common Stock in the relative proportions that their stock bore to
their percentage ownership of the two companies. No registration rights have
been granted to the SHC and SHHL stockholders, and the shares of the Company's
Common Stock issued to them in the Reorganization will be "restricted
securities" under the Securities Act of 1933. See "Shares Eligible for Future
Sale." The Reorganization is contingent upon the closing of the Offering and
will be effective immediately prior thereto.
The stockholders of SHC and SHHL will own approximately 2/3 of the
Company's outstanding shares after the Offering (assuming that the Underwriters'
over-allotment option is not exercised). In structuring the Reorganization, the
Company concluded that the issuance of 4,000,000 shares represented fair value
for the acquired assets and operations of SHC and SHHL. Although the combined
stockholders' equity of SHC and SHHL as of September 30, 1996, was approximately
$24 million, the Company determined the value of the SHC and SHHL shares to be
in the $38 million to $46 million range, based upon the per share price range
for the Offering. The Company based its determination primarily on its appraisal
of the earning capacity of the combined entities as a going concern in light of
negotiations with the Underwriters, rather than on underlying asset values.
In connection with the Reorganization, the Company will issue to eight
employees of SHC and SHHL, including four Executive Officers of the Company,
Options to purchase 305,260 shares of Common Stock in exchange for options they
hold to purchase shares of SHC common stock. Such options to purchase SHC shares
were issued by SHC in connection with the termination of certain individual
phantom stock compensation agreements of SHC. 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 Incentive Stock Options will
vest over varying periods of up to five years.
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.
40
<PAGE> 42
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 20,000,000
shares of Common Stock, $0.001 par value per share, and (ii) 2,000,000 shares of
preferred stock, $0.001 par value per share (the "Preferred Stock").
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to the prior rights of the
holders of Preferred Stock, if any, holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors from funds
legally available therefor, and to share ratably in the assets of the Company
legally available for distribution to the stockholders in the event of
liquidation or dissolution. The Common Stock has no preemptive rights or
redemption privileges. The Common Stock does not have cumulative voting rights,
which means the holder or holders of more than half of the shares voting for the
election of Directors can elect all the Directors then being elected. All the
outstanding shares of Common Stock are, and the shares to be sold in the
Offering when issued and paid for will be, fully paid and not liable for further
call or assessment. After giving effect to the Reorganization, the Company will
have 24 holders of record of Common Stock.
PREFERRED STOCK
The Company is authorized to issue 2,000,000 shares of Preferred Stock. The
Preferred Stock may be issued from time to time in one or more series, and the
Board of Directors is authorized to fix the dividend rights, dividend rates,
conversion or exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), redemption price or prices, the liquidation
preferences and any other rights, preferences, privileges and restrictions of
any series of Preferred Stock and the number of shares constituting such series
and the designation thereof. The Company has no present plans to issue any
shares of Preferred Stock.
Depending upon the rights of such Preferred Stock, the issuance of
Preferred Stock could have an adverse effect on holders of Common Stock by
delaying or preventing a change in control of the Company, making removal of the
present management of the Company more difficult or resulting in restrictions
upon the payment of dividends and other distributions to the holders of Common
Stock.
DIRECTORS' LIABILITY
As authorized by the Delaware General Corporation Law ("DGCL"), the
Certificate of Incorporation of the Company (the "Certificate") limits the
liability of Directors to the Company for monetary damages. The effect of this
provision in the Certificate is to eliminate the rights of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages from Directors for breaches of their fiduciary
duties as Directors (including breaches resulting from negligent behavior),
except in certain circumstances involving wrongful acts, such as the breach of a
Director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. Further, the Certificate contains
provisions to indemnify the Company's Directors and Officers to the full extent
permitted by the DGCL. These provisions do not limit or eliminate the rights of
the Company or any stockholder to seek non-monetary relief such as an injunction
or rescission in the event of a breach of a Director's fiduciary duty. These
provisions will not alter the liability of Directors under federal securities
laws. The Company believes that these provisions will assist the Company in
attracting and retaining qualified individuals to serve as Directors.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the DGCL, which
provides, with certain exceptions, that a Delaware corporation may not engage in
a "business combination" with a person or an affiliate or associate of a person
who is an "Interested Stockholder" for a period of three years from the date
that such person became an Interested Stockholder unless: (a) the transaction
resulting in a person's
41
<PAGE> 43
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.
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
42
<PAGE> 44
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is SunTrust
Bank, Atlanta, Atlanta, Georgia.
43
<PAGE> 45
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. The
Company, all Directors and Executive Officers and all holders of more than 5% of
the Common Stock prior to the Offering have agreed with the Underwriters not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of their shares of Common Stock of the Company or any securities convertible
into or exercisable or exchangeable for such Common Stock or in any other manner
transfer all or a portion of the economic consequences associated with the
ownership of such Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of A.G. Edwards & Sons, Inc.
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares for future sale will have
on the market price of shares of Common Stock prevailing from time to time.
Sales of substantial amounts of Common Stock (including shares issuable upon the
exercise of stock options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock.
44
<PAGE> 46
UNDERWRITING
The Underwriters named below have severally agreed with the Company,
subject to the terms and conditions of the Underwriting Agreement, to purchase
the respective numbers of shares of Common Stock set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
A.G. Edwards & Sons, Inc..................................................
Robert W. Baird & Co. Incorporated........................................
---------
Total........................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock, if any are purchased.
The Company has been advised by A.G. Edwards & Sons, Inc. and Robert W.
Baird & Co. Incorporated, the representatives of the Underwriters (the
"Representatives"), that the Underwriters propose to offer the Common Stock to
the public at the offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share and that the Underwriters and such dealers may reallow a discount of
not in excess of $ per share to other dealers. The public offering price
and the concession and discount to dealers may be changed by the Representatives
after the Offering.
The Company has granted the Underwriters an option, expiring at the close
of business on the 30th day subsequent to the date of the Underwriting
Agreement, to purchase up to 300,000 additional shares of Common Stock at the
public offering price, less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriters may exercise such option solely to
cover over-allotments, if any, in the sale of the shares. To the extent the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage of the option shares as the number of shares set forth opposite each
Underwriter's name in the preceding table bears to 2,000,000, and the Company
will be obligated to sell such shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company, all Directors and Executive Officers of the Company and all
holders of more than 5% of the Common Stock prior to the Offering have agreed
that they will not, directly or indirectly, offer, sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for, or any rights to purchase or acquire, Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of A.G. Edwards & Sons, Inc.
The Representatives have advised the Company that they do not intend to
confirm sales to any account over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. The public offering price for the Common Stock was determined by
negotiation among the Company and the Representatives. Among the factors
considered in determining the public offering price was the history of and the
future prospects for the Company and the industry in which it operates, the past
and present operating results of the Company and the trends of such results, an
assessment of the Company's management, the general condition for the securities
markets at the time of the Offering and the prices for similar securities of
comparable companies.
45
<PAGE> 47
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.
46
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
COMBINED FINANCIAL STATEMENTS OF SUN HYDRAULICS INCORPORATED
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.................................... F-2
Combined Balance Sheets -- December 31, 1994, 1995 and Unaudited September 30, 1996... F-3
Combined Statements of Income -- Years Ended December 31, 1993, 1994 and 1995 and
Unaudited Nine Months Ended September 30, 1995 and 1996............................. F-4
Combined Statements of Changes in Shareholders' Equity -- Years Ended December 31,
1993, 1994 and 1995 and Unaudited Nine Months Ended September 30, 1996.............. F-5
Combined Statements of Cash Flows -- Years Ended December 31, 1993, 1994 and 1995 and
Unaudited Nine Months Ended September 30, 1995 and 1996............................. F-6
Notes to Combined Financial Statements................................................ F-7
SEPARATE FINANCIAL STATEMENT OF SUN HYDRAULICS INCORPORATED
Report of Independent Certified Public Accountants.................................... F-21
Balance Sheet -- September 30, 1996................................................... F-22
Notes to Balance Sheet................................................................ F-23
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sun Hydraulics Corporation, Suninco, Inc.,
and Sun Hydraulik Holdings Limited,
(collectively "Sun Hydraulics Incorporated")
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, of changes in shareholders' equity and of cash
flows present fairly, in all material respects, the financial position of Sun
Hydraulics Incorporated (the "Company") at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Tampa, Florida
September 30, 1996, except as to Note 16,
which is dated October 5, 1996
F-2
<PAGE> 50
SUN HYDRAULICS INCORPORATED
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
----------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
------- ------- ------------- -------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 2,371 $ 2,434 $ 1,187 $ 1,187
Accounts receivable, net of allowance for
doubtful accounts of $64, $40 and $62......... 3,095 3,574 4,266 4,266
Inventories...................................... 3,799 4,478 4,377 4,377
Income taxes receivable, net..................... 91 -- -- --
Other current assets............................. 438 222 151 151
------- ------- ------- -------
Total current assets..................... 9,794 10,708 9,981 9,981
Property, plant and equipment, net................. 18,051 23,129 33,264 33,264
Deferred tax asset................................. -- -- 269 269
Other assets....................................... 23 27 167 167
------- ------- ------- -------
$27,868 $33,864 $43,681 $43,681
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 1,846 $ 2,992 $ 2,165 $ 2,165
Accrued expenses................................. 908 1,188 1,930 1,930
Long-term debt due within one year............... 551 495 1,118 1,118
Notes payable to related parties due within one
year.......................................... 516 574 632 632
Accrued distributions to shareholders............ 888 643 -- 9,905
Income taxes payable, net........................ -- 490 1,072 1,072
------- ------- ------- -------
Total current liabilities................ 4,709 6,382 6,917 16,822
Long-term debt due after one year.................. 3,821 2,553 10,707 10,707
Notes payable to related parties due after one
year............................................. 3,137 2,564 2,081 2,081
Deferred income taxes.............................. 194 84 -- 1,945
Other liabilities.................................. 383 752 131 131
------- ------- ------- -------
Total liabilities........................ 12,244 12,335 19,836 31,686
------- ------- ------- -------
Commitments & contingencies (Notes 5, 7 and 15)
Shareholders' equity:
Capital stock.................................... 2,181 2,181 2,179 4
Capital in excess of par value................... 848 997 2,625 4,800
Retained earnings................................ 12,969 18,676 19,427 7,577
Equity adjustment for foreign currency
translation................................... (374) (325) (386) (386)
------- ------- ------- -------
Total shareholders' equity............... 15,624 21,529 23,845 11,995
------- ------- ------- -------
$27,868 $33,864 $43,681 $43,681
======= ======= ======= =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
F-3
<PAGE> 51
SUN HYDRAULICS INCORPORATED
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------- SEPTEMBER 30,
1993 1994 1995 -------------------------
------- ------- ------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales..................................... $32,431 $42,853 $55,388 $42,718 $41,233
Cost of sales................................. 21,971 27,512 34,581 26,361 27,903
------- ------- ------- ------- -------
Gross profit.................................. 10,460 15,341 20,807 16,357 13,330
Selling, engineering and administrative
expense..................................... 7,346 8,605 10,578 7,652 9,288
------- ------- ------- ------- -------
Operating income.............................. 3,114 6,736 10,229 8,705 4,042
Interest expense.............................. 931 859 814 612 678
Miscellaneous (income) expense................ 249 66 (79) (81) 107
------- ------- ------- ------- -------
Income before income taxes.................... 1,934 5,811 9,494 8,174 3,257
Income tax provision (benefit)................ (148) 408 633 478 727
------- ------- ------- ------- -------
Net income.................................... $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
======= ======= ======= ======= =======
Pro forma income data (unaudited):
Income before income taxes, as reported..... $ 1,934 $ 5,811 $ 9,494 $ 8,174 $ 3,257
Pro forma income tax provision.............. 604 2,738 3,611 3,069 1,255
------- ------- ------- ------- -------
Pro forma net income........................ $ 1,330 $ 3,073 $ 5,883 $ 5,105 $ 2,002
======= ======= ======= ======= =======
Pro forma net income per share.............. $ 1.13 $ 0.38
Average shares outstanding.................. 5,203 5,292
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
F-4
<PAGE> 52
SUN HYDRAULICS INCORPORATED
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EQUITY
ADJUSTMENT
FOR
CAPITAL IN FOREIGN
CAPITAL EXCESS OF RETAINED CURRENCY
STOCK PAR VALUE EARNINGS TRANSLATION TOTAL
------- ---------- -------- ---------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992....................... $ 2,181 $ 438 $ 8,801 $ (453) $10,967
Exercise of stock options........................ 34 34
Adjustment for foreign currency translation...... (229) (229)
Net income....................................... 2,082 2,082
Distributions to shareholders.................... (803) (803)
------ ------- ----- -------
Balance, December 31, 1993....................... 2,181 472 10,080 (682) 12,051
Exercise of stock options........................ 105 105
Adjustment for foreign currency translation...... 308 308
Net income....................................... 5,403 5,403
Distributions to shareholders.................... (2,514) (2,514)
Realized tax benefit on debt exchange
(see Note 9)................................... 271 271
------ ------- ----- -------
Balance, December 31, 1994....................... 2,181 848 12,969 (374) 15,624
Exercise of stock options........................ 149 149
Adjustment for foreign currency translation...... 49 49
Net income....................................... 8,861 8,861
Distributions to shareholders.................... (3,154) (3,154)
------ ------- ----- -------
Balance, December 31, 1995....................... 2,181 997 18,676 (325) 21,529
Unaudited:
Issuance of common stock......................... 92 92
Issuance of stock options........................ 2,110 2,110
Exercise of stock options........................ 69 69
Repurchase of shares............................. (41) (41)
Exchange of shares in merger (Note 1)............ (2) (602) 604
Adjustment for foreign currency translation...... (61) (61)
Net income....................................... 2,530 2,530
Distributions to shareholders.................... (2,383) (2,383)
------ ------- ----- -------
Balance, September 30, 1996 (unaudited).......... $ 2,179 $2,625 $ 19,427 $ (386) $23,845
====== ======= ===== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
F-5
<PAGE> 53
SUN HYDRAULICS INCORPORATED
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 --------------------------
------- ------- ------- 1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 2,082 $ 5,403 $ 8,861 $ 7,696 $ 2,530
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................. 2,112 2,197 2,556 1,803 2,288
Issuance of stock options..................... 2,110
Other......................................... -- -- -- -- 92
(Benefit from)/provision for deferred income
taxes...................................... (28) 57 (110) 195 (353)
Realized tax benefit on debt exchange......... -- 271 --
(Increase) decrease in:
Accounts receivable........................ (245) (937) (479) (1,891) (692)
Inventories................................ (303) (765) (679) (367) 101
Income tax receivable, net................. (119) 101 91 91 --
Other current assets....................... 143 (161) 216 438 71
Other assets............................... 4 (11) (4) (72) (140)
Increase (decrease) in:
Accounts payable........................... 67 1,014 1,146 344 (827)
Accrued expenses........................... (39) (5) 280 958 742
Income taxes payable, net.................. -- -- 490 (84) 582
Other liabilities.......................... (138) 100 369 533 (621)
------- ------- ------- ------- --------
Net cash provided by operating
activities............................. 3,536 7,264 12,737 9,644 5,883
------- ------- ------- ------- --------
Cash flows from investing activities:
Capital expenditures............................ (3,005) (5,130) (7,657) (5,316) (12,423)
Proceeds from dispositions of equipment......... 281 -- 23 -- --
------- ------- ------- ------- --------
Net cash used in investing activities.... (2,724) (5,130) (7,634) (5,316) (12,423)
------- ------- ------- ------- --------
Cash flows from financing activities:
Proceeds from long-term debt.................... 2,727 1,850 3,337 2,987 13,519
Repayment of long-term debt..................... (1,773) (1,563) (4,661) (4,537) (4,743)
Proceeds from notes payable to related
parties....................................... 355 1,940 -- -- --
Repayment of notes payable to related parties... (381) (2,386) (515) (380) (424)
Proceeds from exercise of employee stock
options....................................... 34 105 149 7 69
Repurchase of shares............................ -- -- -- -- (41)
Distributions to shareholders................... (791) (1,900) (3,399) (3,398) (3,026)
------- ------- ------- ------- --------
Net cash provided by (used in) financing
activities............................. 171 (1,954) (5,089) (5,321) 5,354
------- ------- ------- ------- --------
Foreign currency translation adjustment........... (229) 308 49 115 (61)
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 754 488 63 (878) (1,247)
Cash and cash equivalents, beginning of year...... 1,129 1,883 2,371 2,371 2,434
------- ------- ------- ------- --------
Cash and cash equivalents, end of year............ $ 1,883 $ 2,371 $ 2,434 $ 1,493 $ 1,187
======= ======= ======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest (net of amounts capitalized)............. $ 923 $ 875 $ 815 $ 663 $ 706
======= ======= ======= ======= ========
Income taxes...................................... $ 169 $ (223) $ 109 $ 8 $ 506
======= ======= ======= ======= ========
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
F-6
<PAGE> 54
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION
Sun Hydraulics Incorporated (the "Company"), a Delaware corporation, was
formed on September 27, 1996 with a nominal capital contribution solely in
anticipation of a business combination (the "Reorganization"). The Company plans
to issue approximately 4 million shares of stock (par value $0.001 per share) in
exchange for all of the issued and outstanding stock of Sun Hydraulics
Corporation ("Sun Hydraulics") and all of the issued and outstanding stock of
Sun Hydraulik Holdings Limited ("Sun Holdings"). Sun Hydraulics completed a
merger with Suninco, Inc. ("Suninco") on June 28, 1996 by exchanging shares of
its common stock for all of the outstanding stock of Suninco. The financial
statements presented represent the combined financial position and results of
operations of Sun Hydraulics, Sun Holdings and Suninco. The combined financial
statements represent the financial position and business activities of the
Company subsequent to the Reorganization going forward.
The Reorganization will be accounted for in a manner similar to a pooling
of interests as the entities were under common control. In conjunction with the
Reorganization, the Company's Board of Directors approved an initial public
offering of the Company's common stock. The Company intends to file a
Registration Statement on Form S-1 with the Securities and Exchange Commission.
The Reorganization will be effective immediately prior to the consummation of
the initial public offering by the Company. The effects of the Reorganization,
the S Corporation distribution (see Note 2) and a charge to recognize deferred
income taxes (see Note 11) are reflected in the unaudited pro forma balance
sheet as of September 30, 1996.
The Company designs, manufactures and sells screw-in cartridge valves and
manifolds used in hydraulic systems, and has facilities in the United States,
the United Kingdom and Germany. Sun Hydraulics, located in Sarasota, Florida,
designs, manufactures and sells through independent distributors in the United
States. Sun Holdings was formed to provide a holding company vehicle for the
European market operations. Its subsidiaries are Sun Hydraulics Limited (a
British corporation, "Sun Ltd.") and Sun Hydraulik GmbH (a German corporation,
"GmbH"). Sun Ltd. was originally formed in 1985, and operates a manufacturing
and distribution facility located in Coventry, England. GmbH was incorporated on
January 1, 1991 as a wholly-owned subsidiary of Sun Holdings to market the
Company's products in German-speaking European markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies followed in the
preparation of the Company's combined financial statements is set forth below:
Principles of Combination
The combined financial statements include the accounts and operations of
Sun Hydraulics and Sun Holdings. All significant intercompany accounts and
transactions are eliminated in combination.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market, cost being
determined on a first-in, first-out basis.
Other Current Assets
Other current assets consist primarily of prepaid insurance and advances to
suppliers.
F-7
<PAGE> 55
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Expenditures for repairs
and improvements that significantly add to the productive capacity or extend the
useful life of an asset are capitalized. Repairs and maintenance are expensed as
incurred. Depreciation is computed using the straight line method over the
following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment.............................................. 4-12
Furniture and fixtures............................................... 4-10
Leasehold improvements............................................... 5-12
Land improvements.................................................... 10-15
Buildings............................................................ 40
</TABLE>
During 1995, the Company adopted Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. Management periodically evaluates
long-lived assets for potential impairment, and will reserve for impairment
whenever events or changes in circumstances indicate the carrying amount of the
assets may not be fully recoverable. As of December 31, 1995, management does
not believe that an impairment reserve is required.
Other Liabilities
Other liabilities consists of accrued compensation earned under the
Company's phantom stock option plans (the "Plans"). Compensation cost is
measured as the amount by which the market value, as defined in the Plans, of
the stock on the measurement date exceeds the market value on the date the
phantom stock options are granted. The market value is defined in the Plans as
the higher of: the last arms length sale price of said stock between unrelated
parties if there has been a sale in the preceding six months period or the book
value of said stock. Compensation cost is accrued over the service period and is
adjusted in periods subsequent to the measurement date for changes in the market
value of the stock (see Note 13).
Revenue Recognition
Sales are recognized when products are shipped. Sales incentives are
granted to customers based upon the volume of purchases. These sales incentives
are recorded at the time of sales as a reduction of gross sales.
Research and Development Expense
Included in selling, engineering and administrative expense are amounts
incurred for research and development of the Company's manufacturing processes
and related software which approximated $1,061, $1,276 and $1,337 for the years
ended December 31, 1993, 1994 and 1995, respectively.
Advertising Costs
The Company expenses the costs for advertising and promotional literature
during the year incurred. Included in selling, engineering and administrative
expense are amounts incurred for advertising and promotional literature which
approximated $562, $791 and $792 for the years ended December 31, 1993, 1994 and
1995, respectively.
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
F-8
<PAGE> 56
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
companies and the reporting currency for the combined group. The assets and
liabilities of Sun Ltd. and GmbH are translated at the exchange rate in effect
at the balance sheet date, while income and expense items are translated at the
average annual rate of exchange for the period. The resulting unrealized
translation gains and losses are included in the component of shareholders'
equity designated "Equity Adjustment for Foreign Currency Translation". Realized
gains and losses from foreign currency transactions are included in
miscellaneous income.
Income Taxes
The Company follows the income tax policy provided by Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. This
Statement provides for a liability approach under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable. These differences result from items reported
differently for financial reporting and income tax purposes, primarily
depreciation and phantom stock compensation.
Sun Hydraulics elected to be taxed under the S Corporation provisions of
the Internal Revenue Code. Historically, the shareholders of Sun Hydraulics
included their pro rata share of income or loss in their individual returns. A
portion of the distributions to shareholders was related to their individual
income tax liabilities, resulting from S Corporation taxable earnings (see Note
10). Effective with the consummation of the Reorganization (see Note 1), Sun
Hydraulics' S Corporation status will be converted to C Corporation status and
Sun Hydraulics' subsequent earnings will be subject to corporate taxes.
Accordingly, for informational purposes, the financial statements include an
unaudited pro forma income tax provision which would have been recorded as if
Sun Hydraulics had been an C Corporation, based on the tax laws in effect during
those periods.
Stock-Based Compensation
The Company will adopt Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation during 1996. Upon adoption, the Company
intends to retain the intrinsic value method of accounting for stock-based
compensation and disclose pro forma net income.
Pro Forma Balance Sheet Information (unaudited)
The effects of the Reorganization, the S Corporation distribution of $9,905
and a charge associated with the provision for deferred income taxes of $1,945
which the Company will recognize upon its termination of S Corporation status
(see Note 11) are reflected in the unaudited pro forma balance sheet as of
September 30, 1996.
Pro Forma Net Income Per Share (unaudited)
The computation of primary pro forma earnings per share is based on the
weighted average number of outstanding common shares during the period plus
common stock equivalents, if dilutive, consisting of certain shares subject to
stock options, after giving effect to the proposed Reorganization (see Note 1)
and issuance of stock options (see Note 16). The assumed exercise of dilutive
stock options less the number of treasury shares assumed to be purchased from
the proceeds were calculated using the book value of the Company prior to 1994
and the appraised fair market value of the Company from 1995 forward.
Additionally, the weighted average number of outstanding common shares includes
the effects of the incremental number of shares required to fund the
distribution to S Corporation shareholders.
F-9
<PAGE> 57
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Interim Financial Information
The interim financial data includes the accounts and operations of Sun
Hydraulics Incorporated, Sun Hydraulics and Sun Holdings. The interim financial
data is unaudited; however, in the opinion of the Company, the interim data
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results of the interim period and are
prepared on the same basis as the audited annual financial statements.
3. FAIR VALUE OF INVESTMENTS
In 1995, the Company adopted Statement of Financial Accounting Standards
107, Disclosures about the Fair Value of Financial Instruments, which requires
disclosure of information about the fair value of certain financial instruments
for which it is practicable to estimate that value. For purposes of the
following disclosure, the fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments:
The carrying amounts of cash and cash equivalents, accounts
receivable, other current assets, accounts payable, accrued expenses and
other liabilities approximate fair value because of the short maturity of
those instruments.
The carrying amount of long-term debt approximates fair value, as the
interest rates on the debt approximate rates currently available to the
Company for debt with similar terms and remaining maturities.
The fair value of the notes payable to related parties is estimated
based on the current rates offered to the Company for similar debt. The
estimated fair value of the Company's related party debt is $3,572 at
December 31, 1995.
4. INVENTORIES
The components of inventory are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $ 81 $ 127 $ 151
Work in process.......................................... 2,612 3,236 3,102
Finished goods........................................... 1,106 1,115 1,124
------ ------ ------
$3,799 $4,478 $ 4,377
====== ====== ======
</TABLE>
F-10
<PAGE> 58
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 1996
------------------ -------------
1994 1995
------- -------- (UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................... $17,905 $ 20,666 $ 24,186
Furniture and fixtures................................ 3,145 4,221 4,237
Buildings............................................. 4,819 4,861 4,938
Leasehold improvements................................ 248 285 337
------- -------- --------
26,117 30,033 33,698
Less-accumulated depreciation......................... (9,462) (11,684) (13,075)
------- -------- --------
16,655 18,349 20,623
Construction in progress.............................. 920 3,414 11,288
Land.................................................. 476 1,366 1,353
------- -------- --------
$18,051 $ 23,129 $ 33,264
======= ======== ========
</TABLE>
During 1995, the Company purchased land for $461 and began construction of
a new production facility in Sarasota, Florida. Management believes the
aggregate cost of the new production facility will approximate $9,300. As of
December 31, 1995, the Company had capital expenditure purchase commitments
outstanding of approximately $1,500 related to the construction of the new
facility.
Also during 1995, the Company purchased land in Erkelenz, Germany for
approximately $429 for construction of a new distribution facility. Management
believes the aggregate cost of the facility will approximate $2,600.
In April 1996, the Company signed a financing commitment in the amount of
$2,400 for the new distribution facility in Erkelenz. Construction contracts for
structural components, building erection and roof construction in the total
amount of $2,716 have been entered into by the Company.
During 1996, the Company renegotiated existing bank financing to increase
availability of funds by approximately $9,500 at 8.25% for the construction of
the new production facility in Sarasota.
6. ACCRUED EXPENSES
The components of accrued expenses are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Compensation.............................................. $746 $ 863 $ 991
Taxes..................................................... -- -- 265
Insurance................................................. -- -- 218
Interest.................................................. 134 111 102
Other accrued expenses.................................... 28 214 354
---- ------ ------
$908 $1,188 $ 1,930
==== ====== ======
</TABLE>
Accrued compensation consists primarily of salaries and wages, commissions,
employee 401(k) withholdings and employer 401(k) matching contributions.
F-11
<PAGE> 59
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
The components of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Lines of credit agreements, interest payable at lender
determined rates (9.50% and 8.50% at December 31, 1994
and 1995 and 8.25% at September 30, 1996).............. $1,345 $ 38 $ 300
Secured equipment loan, interest only payable monthly at
10.25% in 1994 and 1995 and 8.25% in 1996, converting
to a five year note on final draw down................. -- 443 2,955
9% mortgage note payable secured by real property due in
monthly principal and interest installments of $20 with
the balance due in a balloon payment on January 9,
1997................................................... 1,797 1,714 2,395
Variable rate mortgage note (9.5% and 13% at December 31,
1994 and 1995) secured by real property, principal and
interest payable in monthly installments of $8 through
2007................................................... 562 511 --
Notes payable secured by equipment, payable in monthly
principal and interest installments with interest rates
varying from 4.90% to 5.60% with maturity dates from
March 1996 to June 1998................................ 585 277 78
Construction lines of credit at 8.25% and 6.47% to be
converted to mortgage notes payable at 8.25% and 6.47%
between 12 and 15 years................................ -- -- 6,097
Capital lease obligations at varying interest rates from
8.45% to 12.45% through 1999........................... 83 65 --
------ ------ -------
4,372 3,048 11,825
Less amounts due within one year......................... (551) (495) (1,118)
------ ------ -------
$3,821 $2,553 $10,707
====== ====== =======
</TABLE>
The remaining principal payments are due as follows: 1997 - $299;
1998 - $268; 1999 - $284; 2000 - $111; 2001 and thereafter - $1,591.
The Company has a $1,700 revolving credit agreement, secured by all
inventory and accounts, which bears interest at the lender's prime rate and has
a maturity date of March 1, 1997. At September 30, 1996, $1,400 of this amount
was available to the Company. The agreement requires Sun Hydraulics to maintain
certain financial ratios and places certain limitations on fixed asset
expenditures. Although the Company currently is in compliance with the
limitation on fixed asset expenditures, a waiver of this limitation as of
September 30, 1995 for the remainder of fiscal 1995 was required and obtained
from the bank.
In January 1995, the Company obtained a loan for capital equipment
expenditures with a limit of $775 at a fixed interest rate of 10.25%, with
interest only for the first year, converting to a five year amortization with
monthly principal and interest payments of $13. As of December 31, 1995, the
Company had drawn $443 on this equipment line of credit. In May 1996, the loan
was converted to a seven-year term loan and additional funds were advanced,
resulting in a total outstanding balance of approximately $3,063 with monthly
principal and interest payments of approximately $50.
F-12
<PAGE> 60
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to year end, the 9% mortgage note was increased by approximately
$794 and the interest rate reduced to 8.25%. Also, a 10-year mortgage note of
$6,187 was obtained at a fixed interest rate of 8.25%. Terms on the new mortgage
note are interest-only on the balance drawn down until construction is completed
and then conversion to a 10-year note with a 15-year amortization schedule.
Subsequent to September 30, 1996, the Company began negotiating a new
unsecured revolving credit facility which will provide a maximum availability of
$10,000, payable on demand with a floating interest rate. Terms relating to the
potential credit agreement currently are under discussion and have not been
established.
8. CAPITAL STOCK
At December 31, 1994 and 1995, prior to the effects of the Reorganization
(see Note 1), the combined par value of common stock consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
Sun Hydraulics Corporation........................................... $ 3 $ 3
Suninco, Inc......................................................... 3 3
Sun Hydraulik Holdings Limited....................................... 2,175 2,175
------ ------
$2,181 $2,181
====== ======
</TABLE>
Other information by entity, prior to the effects of the Reorganization, is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Sun Hydraulics Corporation
Par value per share......................................... $ 0.01 $ 0.01
Shares authorized........................................... 1,000,000 1,000,000
Shares issued and outstanding............................... 333,315 342,815
Suninco, Inc.
Par value per share......................................... $ 0.01 $ 0.01
Shares authorized........................................... 1,000,000 1,000,000
Shares issued and outstanding............................... 293,235 302,735
Sun Hydraulik Holdings Limited
Par value per share......................................... $ 6.81 $ 6.81
Shares authorized........................................... 421,052 421,052
Shares issued and outstanding............................... 319,315 319,315
</TABLE>
F-13
<PAGE> 61
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTIES
Notes Payable to Related Parties
Notes payable to related parties include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
15% unsecured notes payable repurchase and retirement of
stock, quarterly principal and interest installments
ranging from $43 to $142 through 2001.................. $3,338 $2,849 $ 2,445
10% unsecured notes payable for phantom compensation
quarterly principal and interest payments of $14
payable through 2002................................... 315 289 268
------ ------ ------
3,653 3,138 2,713
Less amounts due within one year....................... (516) (574) (632)
------ ------ ------
$3,137 $2,564 $ 2,081
====== ====== ======
</TABLE>
The 15% notes payable for the repurchase and retirement of stock represent
the repurchase of shares of common stock from four retired employees, one
employee of retirement age who was still employed by the Company at the time the
shares were repurchased, and nine former shareholders.
Other Related Party Transactions
During 1995, Sun Hydraulics Real Estate, Ltd. ("Sun Real Estate"), a
limited partnership was formed to hold the real property and building for a
manufacturing facility located in Sarasota, Florida. During 1995, land was
purchased and construction on the facility was underway at year end. Upon
completion, management anticipated that the land and building would be leased to
Sun Hydraulics. Sun Hydraulics owned a 1% general partnership interest and a 99%
limited partnership interest in Sun Real Estate at December 31, 1995. The
financial position and results of operations of Sun Real Estate are included in
the combined accounts of Sun Hydraulics at December 31, 1995. Subsequent to year
end, Sun Real Estate was dissolved, and the net assets were distributed to Sun
Hydraulics.
On October 31, 1995, Sun Hydraulics contributed certain intangible assets
to SunOpTech Limited ("SunOpTech"), a limited partnership formed to further the
development of manufacturing software used in the Company's production
processes. In exchange for the contributed intangible assets, Sun Hydraulics
received a 1% general partnership interest and a 65% limited partnership
interest in SunOpTech. This investment is accounted for under the equity method,
and is included in other assets at a net balance of $6 at December 31, 1995. The
founders of SunOpTech, Inc., which owns the remaining 1% managing general
partnership interest in SunOpTech, also own a 33% limited partnership interest
in SunOpTech. Subsequent to year end, Sun Hydraulics distributed its limited
partnership interests to its individual shareholders. Effective July 1, 1996,
the Company withdrew as general partner from SunOpTech.
During 1995, Sun Hydraulics entered into a 35 month agreement with
SunOpTech for the development of computer software and computer support to Sun
Hydraulics. In exchange, Sun Hydraulics will pay approximately $955 over the
three year period, provide office space and equipment and reimburse SunOpTech
for reasonable expenses related to the software development. During 1995, $90
was paid to SunOpTech under the agreement. Future payments are scheduled as
follows: 1996 -- $510; 1997 -- $325 and 1998 -- $30. For the year ended December
31, 1995, Sun Hydraulics paid expenses of SunOpTech of $25. Additionally, Sun
Hydraulics provided certain administrative support to SunOpTech at no charge.
All of these expenses are included in selling, engineering and administrative
expenses.
F-14
<PAGE> 62
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, the Company has paid $2,383 in distributions. Approximately half
of the distributions in 1996 have been to fund shareholders' individual income
tax liabilities related to the S Corporation taxable earnings.
The Company plans to distribute all of Sun Hydraulics' previously
undistributed retained earnings as of the consummation of the Reorganization
(see Note 1).
11. INCOME TAXES
Pretax income from continuing operations for the years ended December 31,
is taxed under the following jurisdictions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
United States................................................ $1,636 $4,914 $7,489
Foreign...................................................... 298 897 2,005
------ ------ ------
Total.............................................. $1,934 $5,811 $9,494
====== ====== ======
</TABLE>
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1993 1994 1995
----- ---- -----
<S> <C> <C> <C>
Current tax expense (benefit):
United States............................................... $(146) $197 $ (3)
State and local............................................. -- -- --
Foreign..................................................... 26 154 746
-----
-
------ ------
Total current....................................... (120) 351 743
-----
-
------ ------
Deferred tax expense (benefit):
United States............................................... (32) (82) (88)
State and local............................................. (15) (37) (16)
Foreign..................................................... 19 176 (6)
-----
-
------ ------
Total deferred...................................... (28) 57 (110)
-----
-
------ ------
Total income tax provision (benefit)................ $(148) $408 $ 633
====== ====== ======
</TABLE>
F-15
<PAGE> 63
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
----- ------- -------
<S> <C> <C> <C>
U.S. federal taxes at statutory rate...................... $ 658 $ 1,976 $ 3,228
Increase (decrease):
Foreign income taxed at higher (lower) rates............ (59) 12 28
Book/tax basis differences on disposed equipment........ (61) 131 --
Taxable gain eliminated from book income................ -- 127 --
S Corporation income.................................... (665) (1,839) (2,684)
Nondeductible items..................................... 8 45 46
State and local taxes, net.............................. (15) (37) (16)
Other................................................... (14) (7) 31
----- ------- -------
Income tax provision (benefit)............................ $(148) $ 408 $ 633
===== ======= =======
</TABLE>
Deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- ----
<S> <C> <C>
Deferred taxes, non-current:
Assets
Phantom stock compensation........................................ $142 $218
Florida NOL carryforward.......................................... 14 15
---- ----
Deferred tax asset, non-current................................... $156 $233
==== ====
Liabilities
Depreciation differences.......................................... $346 $317
Other............................................................. 4 --
---- ----
Deferred tax liability, non-current............................... $350 $317
==== ====
Net deferred tax liability, non-current................................ $194 $ 84
==== ====
</TABLE>
At December 31, 1995, the Company has a Florida income tax net operating
loss carryforward of approximately $413 available to offset future taxable
income. These carryforwards expire through 2010 as follows: 2008 -- $176;
2009 -- $132; and 2010 -- $105. Utilization of these carryforwards may be
limited in the event of certain ownership changes.
Upon termination of its S Corporation status (see Note 1), the Company will
be required to recognize deferred income taxes for cumulative temporary
differences between income for financial and tax reporting purposes. Had the
termination occurred at September 30, 1996, the deferred income tax liability,
calculated in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes, would have approximated $1,945.
F-16
<PAGE> 64
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Pro Forma Taxes
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 --
Nondeductible items........................................ 16 72 81
State and local taxes, net................................. 64 427 243
Other...................................................... (14) (7) 31
----- ------- -------
Income tax provision (benefit)............................... $604 $2,738 $3,611
===== ======= =======
</TABLE>
Pro forma deferred tax assets and liabilities at September 30, 1996 are as
follows:
<TABLE>
<S> <C>
Pro forma deferred taxes, non-current:
Assets
Phantom stock compensation............................................. $ 509
Florida NOL carryforward............................................... 126
----
Pro forma deferred tax asset, non-current.............................. $ 635
====
Liabilities
Depreciation differences............................................... $2,580
----
Pro forma deferred tax liability, non-current.......................... $2,580
====
Pro forma net deferred tax liability, non-current........................... $1,945
====
</TABLE>
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 2,000
====== ======= =======
</TABLE>
At December 31, 1995, 4,000 options under the plans were outstanding to
purchase shares at $6.50 per share and 4,000 shares were outstanding under the
plans to purchase shares at $11.15.
Options become exercisable to purchase shares of stock subsequent to
December 31, 1995 as follows: 1996 -- 0 shares and 1997 -- 6,000 shares.
F-17
<PAGE> 65
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
During May 1996, the Board of Directors approved the acceleration of the
6,000 options which were to become exercisable in 1997 effective immediately. As
of the end of July 1996, all qualified stock options have been exercised. In
September of 1996, additional stock options were issued (see Note 16).
13. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan covering
substantially all of its eligible United States employees. Employer
contributions under the retirement plan amounted to approximately $537, $796 and
$901 during 1993, 1994 and 1995, respectively.
The Company has a medical benefit trust to provide for health care coverage
to substantially all eligible United States employees. Employer contributions to
the trust amounted to approximately $991, $1,242 and $1,490 during 1993, 1994
and 1995, respectively. Long-term disability and life insurance benefits are
also provided to employees, the premiums for which are paid directly by Sun
Hydraulics. Payments amounted to approximately $111, $110 and $132 for 1993,
1994 and 1995, respectively.
The Company provides supplemental pension benefits to its employees of
foreign operations in addition to mandatory benefits included in local country
payroll tax statutes. These supplemental pension benefits amounted to
approximately $33, $43 and $56 during 1993, 1994 and 1995, respectively.
The Company has phantom stock agreements with certain employees. Under
these agreements, 92,801 phantom options are deemed vested, as defined in the
agreements, at various dates from October 1, 1987 to July 1, 2005. At December
31, 1995, all phantom options remained outstanding and 60,951 phantom options
were deemed vested at prices ranging from $2.35 to $24.72 per share.
Approximately $379 and $732 is included in other liabilities under these
agreements at December 31, 1994 and 1995, respectively. Compensation expense
related to these phantom options of $175, $105 and $353 is included in selling,
engineering and administrative expense in 1993, 1994 and 1995, respectively.
Effective September 30, 1996 the Board of Directors of the Company approved a
plan to replace the phantom stock agreements (see Note 16).
Effective January 1, 1993, Suninco issued a 10 year note payable of $355 at
10% interest, with principal and interest payments due quarterly beginning on
April 1, 1993, in settlement of 10,000 phantom options which were deemed vested.
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-18
<PAGE> 66
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Geographic information is as follows:
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM GERMANY ELIMINATION COMBINED
------- ------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
1993
Sales to unaffiliated customers......... $25,692 $4,457 $2,282 -- $32,431
Intercompany sales...................... 3,686 767 -- $(4,453) 0
Operating profits....................... 2,739 133 242 -- 3,114
Identifiable assets..................... 15,097 3,851 878 (903) 18,923
Depreciation expense.................... 1,729 356 27 -- 2,112
Capital expenditures.................... 2,592 331 82 -- 3,005
1994
Sales to unaffiliated customers......... $33,284 $6,590 $2,979 -- $42,853
Intercompany sales...................... 5,297 1,119 -- $(6,416) 0
Operating profits....................... 5,753 676 307 -- 6,736
Identifiable assets..................... 22,486 4,828 1,036 (482) 27,868
Depreciation expense.................... 1,746 406 45 -- 2,197
Capital expenditures.................... 4,355 739 36 -- 5,130
1995
Sales to unaffiliated customers......... $43,099 $8,300 $3,989 -- $55,388
Intercompany sales...................... 5,940 1,470 -- $(7,410) 0
Operating profits....................... 8,090 1,446 693 -- 10,229
Identifiable assets..................... 27,212 5,414 1,813 (575) 33,864
Depreciation expense.................... 1,961 531 64 -- 2,556
Capital expenditures.................... 6,230 700 727 -- 7,657
</TABLE>
Total liabilities attributable to foreign operations were $2,123, $2,493
and $2,674 at December 31, 1993, 1994 and 1995, respectively. Net foreign
currency gains (losses) reflected in results of operations were $10, ($19) and
($45) for the year ended 1993, 1994 and 1995, respectively. Operating income is
total sales and other operating income less operating expenses. In computing
geographic operating income, interest expense and net miscellaneous income
(expense) have not been deducted (added).
Included in U.S. sales to unaffiliated customers were export sales,
principally to Canada and Asia, of $3,092, $4,589 and $6,468 during 1993, 1994
and 1995, respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any material legal proceedings other than
routine litigation incidental to 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 by issuing 305,260
nonqualified stock options on September 30, 1996, and committing to issue
189,348 qualified incentive stock options upon the closing of the
Reorganization. Exercise prices of the nonqualified options will range from
$3.00 to $5.05. The employees will be immediately vested in their nonqualified
options upon issuance. The qualified options will vest over periods up to five
years. The Company recognized a charge in the nine months ended September 30,
1996 related to termination of the phantom stock agreements of approximately
$1,270.
F-19
<PAGE> 67
SUN HYDRAULICS INCORPORATED
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Also effective September 30, 1996, the Company granted 14,700 nonqualified
stock options to four Directors. These options have an exercise price of $3.00
per share, a term of 10 years and are immediately exercisable. The Company
recognized a charge during the nine months ended September 30, 1996 of
approximately $110 in connection with the issuance of these options.
The Company has committed to grant 100,000 qualified incentive stock
options to two executive officers of the Company following the Offering (see
Note 1).
F-20
<PAGE> 68
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sun Hydraulics Incorporated
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Sun Hydraulics Incorporated (the
"Company") at September 30, 1996 in conformity with generally accepted
accounting principles. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Tampa, Florida
November 1, 1996
F-21
<PAGE> 69
SUN HYDRAULICS INCORPORATED
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C>
ASSETS
Deferred offering costs................................................. $ 150
----
$ 150
====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Other accrued liabilities............................................. $ 150
----
Total liabilities............................................. $ 150
----
Stockholders' equity:
Preferred stock, par value $0.001 per share, 2,000,000 shares
authorized; no shares issued.......................................
Common stock, par value $0.001 per share, 20,000,000 shares
authorized; 1 share issued and outstanding.........................
Capital in excess of par value........................................
Retained earnings.....................................................
----
Total stockholders' equity....................................
----
$ 150
====
</TABLE>
The accompanying Notes are an integral part of this Balance Sheet
F-22
<PAGE> 70
SUN HYDRAULICS INCORPORATED
NOTES TO BALANCE SHEET
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE DATA)
1. ORGANIZATION
Sun Hydraulics Incorporated (the "Company"), a Delaware corporation, was
formed on September 27, 1996 with a nominal capital contribution solely in
anticipation of a business combination (the "Reorganization"). The Company plans
to issue approximately 4 million shares of stock (par value $0.001 per share) in
exchange for all of the issued and outstanding stock of Sun Hydraulics
Corporation ("Sun Hydraulics") and all of the issued and outstanding stock of
Sun Hydraulik Holdings Limited ("Sun Holdings").
The Reorganization will be accounted for in a manner similar to a pooling
of interests as the entities are under common control. In conjunction with the
Reorganization, the Company's Board of Directors approved an initial public
offering of the Company's common stock. The Company has filed a Registration
Statement on Form S-1 with the Securities and Exchange Commission. The
Reorganization will be effective immediately prior to the consummation of the
proposed initial public offering by the Company.
The balance sheet should be read in conjunction with the historical
combined financial statements of Sun Hydraulics Incorporated included elsewhere
in this Registration Statement.
2. DEFERRED OFFERING COSTS
The Company has incurred costs approximating $150 in connection with the
proposed initial public offering of the Company's common stock. The costs have
been reflected as deferred offering costs in the balance sheet as of September
30, 1996. If the offering is successful, the costs will be deducted from the
proceeds received from the offering. If the offering is not successful, the
costs will be charged to expense in the period a decision is made to terminate
the offering. In such an event, the costs would be paid by Sun Hydraulics.
F-23
<PAGE> 71
[Photographs and text on this page overlay outlines of schematic design drawings
of various unidentified cartridge valves and manifolds.]
[Photograph of the exterior of the Company's existing factory in Sarasota,
Florida]
Main manufacturing facility in Sarasota, Florida.
[Photograph of the interior of the Company's offices in Sarasota, Florida]
Open office environment encourages employee communication and involvement.
[Photograph of a portion of the interior of the Company's factory in Sarasota,
Florida]
Extensive use of CNC machines and factory automation ensures products are
consistently replicated.
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF
COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
S Corporation Distribution............ 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 22
Management............................ 32
Certain Transactions.................. 37
Principal Stockholders................ 38
The Reorganization.................... 40
Description of Capital Stock.......... 40
Shares Eligible for Future Sale....... 43
Underwriting.......................... 45
Legal Matters......................... 46
Experts............................... 46
Additional Information................ 46
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1997, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,000,000 SHARES
[SUN HYDRAULICS(R) LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
A.G. EDWARDS & SONS, INC.
ROBERT W. BAIRD & CO.
INCORPORATED
DECEMBER , 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 73
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
Offering described in this Registration Statement (other than the underwriting
discount) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ 8,015
NASD filing fee............................................................ 3,145
Nasdaq National Market listing fee......................................... 33,290
Printing expenses.......................................................... 130,000
Accounting fees and expenses............................................... 290,000
Legal fees and expenses.................................................... 200,000
Fees and expenses (including legal fees) for qualifications under state
securities laws.......................................................... 25,000
Registrar and Transfer Agent's fees and expenses........................... 10,000
Miscellaneous.............................................................. *
-------
Total............................................................ *
=======
</TABLE>
- ---------------
* To be included by amendment to the Registration Statement.
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
corporation, subject to certain limitations, to indemnify its Directors and
Officers against expenses (including attorneys' fees, judgments, fines and
certain settlements) actually and reasonably incurred by them in connection with
any suit or proceeding to which they are a party so long as they acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to a criminal action or
proceeding, so long as they had no reasonable cause to believe their conduct to
have been unlawful. The Company's Certificate of Incorporation and By-laws
provide that the Company shall indemnify its Directors, Officers, employees and
agents to the fullest extent permitted by Section 145 of the DGCL, as now
existing or as may hereafter be amended.
Section 102 of the DGCL permits a Delaware corporation to include in its
certificate of incorporation a provision eliminating or limiting a director's
liability to a corporation or its stockholders for monetary damages for breaches
of fiduciary duty. The enabling statute provides, however, that liability for
breaches of the duty of loyalty, acts or omissions not in good faith or
involving intentional misconduct or knowing violation of the law, and the
unlawful purchase or redemption of stock or payment of unlawful dividends or the
receipt of improper personal benefits cannot be eliminated or limited in this
manner. The Company's Certificate of Incorporation includes a provision which
eliminates, to the fullest extent permitted by the DGCL, director liability for
monetary damages for breaches of fiduciary duty. In addition, the Board of
Directors of the Company has approved the execution by the Company of
indemnification agreements with the Directors and certain Officers of the
Company, the form of which has been filed as an exhibit to this Registration
Statement.
The Company carries Directors' and Officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Between September 1, 1993 and the date of the filing of this Registration
Statement, the Company issued the following securities that were not registered
under the Act:
The Company was formed on September 27, 1996, and prior to the filing of
this Registration Statement issued only one share of Common Stock, to Clyde G.
Nixon, for $10 in cash. Immediately prior to the sale of
II-1
<PAGE> 74
the Common Stock covered by this Registration Statement, the Company intends to
effect a reorganization (the "Reorganization"). In the Reorganization, pursuant
to an Agreement and Plan of Share Exchange, the Company will acquire all of the
366,043 outstanding shares of capital stock of Sun Hydraulics Corporation
("SHC") and all of the 320,315 outstanding shares of Sun Hydraulik Holdings
Limited ("SHHL") and will issue 4,000,000 shares of Common Stock to the
stockholders of SHC and SHHL. Each share of SHC stock will be converted into
9.90373 shares of Common Stock and each share of SHHL stock will be converted
into 1.17013 shares of Common Stock.
Between September 1, 1993 and the date of the filing of this Registration
Statement, SHHL did not issue any securities.
SHC issued 25,212 shares of its common stock upon the exercise of employee
stock options as follows: in 1993, 4,500 shares of SHC's common stock were
purchased for $.01 per share; in 1994, 6,500 shares were purchased for $6.50 per
share and 2,000 shares were purchased for $.01 per share; in 1995, 7,500 shares
were purchased for $6.50 per share, and 1,000 shares were purchased for $.01 per
share; and in 1996, 3,712 shares of SHC's common stock were purchased for an
average of $16.64 per share. The board of directors of SHC deemed the exercise
prices of these stock options to be the fair market value of the shares at the
time of their issuance.
On June 28, 1996, pursuant to an agreement and plan of merger, Suninco,
Inc. was merged with and into SHC. SHC and Suninco, Inc. were controlled by the
same group of stockholders and were operated as a common enterprise. In the
merger, all of the issued and outstanding shares of Suninco, Inc.'s common stock
were cancelled, and the stockholders of Suninco, Inc. received 18,016 newly
issued shares of SHC's common stock.
In January 1996, SHC and Suninco, Inc. each issued 1,000 shares of common
stock, and in September 1996, SHHL issued 1,000 ordinary shares, to Curtis J.
Timm. These companies were obligated to issue such shares to Mr. Timm prior to
October 1993; however, they inadvertently were not issued. The shares had been
granted in consideration for Mr. Timm's agreement at the time the companies were
organized to serve as a member of the Board of Directors.
The Company relied upon the exemption from registration contained in
Section 4(2) of the Securities Act of 1933, as amended, with respect to the
issuance of the shares of Common Stock described in the above paragraphs and for
the issuance of shares of Common Stock in the Reorganization. The certificates
representing such shares are restricted as to transfer and are marked with
restricted transfer legends. There were no underwriters involved in any of the
foregoing transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Share Exchange between Sun Hydraulics Incorporated and Sun
Hydraulics Corporation dated November 13, 1996.
2.2 -- Recommended Offer by Sun Hydraulics Incorporated to acquire the whole of the issued
share capital of Sun Hydraulik Holdings Limited, dated November 13, 1996.
</TABLE>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------------------------
<S> <C> <C>
3.1* -- Certificate of Incorporation of the Company.
3.2* -- Bylaws of the Company.
4.1* -- Revolving Credit Agreement, dated March 9, 1992, between Sun Hydraulics Corporation
and Northern Trust Bank of Florida/Sarasota, N.A.
4.2* -- Modification Agreement, dated March 25, 1993, amending Revolving Credit Agreement
dated March 9, 1992, between Sun Hydraulics Corporation and Northern Trust Bank of
Florida, N.A.
4.3* -- Second Modification to Revolving Credit Agreement, dated May __, 1995, between Sun
Hydraulics Corporation and Northern Trust Bank of Florida, N.A.
4.4* -- Revolving Line of Credit Renewal Note, dated May __, 1995, in the amount of
$1,700,000.00 given by Sun Hydraulics Corporation to Northern Trust Bank of
Florida, N.A.
4.5* -- Mortgage and Security Agreement, dated January 9, 1992, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
4.6* -- Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun Hydraulics
Corporation, and Northern Trust Bank of Florida, N.A.
4.7* -- Security Agreement, dated March 29, 1996, between Suninco, Inc., Sun Hydraulics
Corporation, and Northern Trust Bank of Florida, N.A.
4.8* -- Modification and Additional Advance Agreement, dated March 29, 1996, between
Suninco, Inc. and Northern Trust Bank of Florida, N.A.
4.9* -- Consolidated Note, dated March 29, 1996, in the amount of $2,475,000.00, given by
Suninco, Inc. to Northern Trust Bank of Florida, N.A.
4.10* -- Loan Agreement, dated May 20, 1996, between Sun Hydraulics Corporation and Northern
Trust Bank of Florida, N.A.
4.11* -- Security Agreement, dated May 20, 1996, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A.
4.12* -- Consolidated Note, dated May 20, 1996, in the amount of $3,063,157.00, given by Sun
Hydraulics Corporation to Northern Trust Bank of Florida, N.A.
4.13* -- Loan Agreement, dated June 14, 1996, between Sun Hydraulics Corporation, Suninco
Inc., and Northern Trust Bank of Florida, N.A.
4.14* -- Mortgage, dated June 14, 1996, between Sun Hydraulics Corporation, Suninco Inc.,
and Northern Trust Bank of Florida, N.A.
4.15* -- Security Agreement, dated June 14, 1996, between Sun Hydraulics Corporation and
Northern Trust Bank of Florida, N.A.
4.16* -- Promissory Note, dated June 14, 1996, in the amount of $6,187,000.00, given by Sun
Hydraulics Corporation and Suninco, Inc. to Northern Trust Bank of Florida, N.A.
4.17* -- Revolving Loan Facility letter agreement, dated July 30, 1996, in the amount of
L800,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
4.18* -- Overdraft and Other Facilities letter agreement, dated June 7, 1996, in an amount
not to exceed L250,000, between Sun Hydraulics Ltd. and Lloyds Bank Plc.
4.19* -- Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and Dresdner Bank.
4.20** -- Specimen of the Company's Common Stock Certificate.
5.1** -- Opinion of Shumaker, Loop & Kendrick, LLP as to the Common Stock being registered.
10.1* -- Form of Distributor Agreement (Domestic).
10.2* -- Form of Distributor Agreement (International).
10.3* -- 1996 Sun Hydraulics Incorporated Stock Option Plan.
10.4* -- Form of Indemnification Agreement.
11 -- Statement regarding Computation of Per Share Earnings.
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 nine months ended September 30, 1996 (For SEC purposes
only).
27.2 -- Financial Data Schedule for year ended December 31, 1995 (For SEC purposes only).
</TABLE>
II-3
<PAGE> 76
- ---------------
* Previously filed in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183).
** To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because the required information is not present
or is not present in amounts sufficient to require submission of the schedule or
because the information required is included in the financial statements or
notes thereto or the schedule is not required or inapplicable under the related
instructions.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Pre-effective Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sarasota, State of Florida on November 19, 1996.
SUN HYDRAULICS INCORPORATED
By: /s/ CLYDE G. NIXON
------------------------------------
Clyde G. Nixon,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-effective Amendment No. 2 to the Registration Statement has been signed by
the following persons in the capacities indicated on November 19, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
* Chairman of the Board of Directors
- ---------------------------------------------
Robert E. Koski
/s/ CLYDE G. NIXON President, Chief Executive Officer and
- --------------------------------------------- Director
Clyde G. Nixon
/s/ RICHARD J. DOBBYN Chief Financial Officer (Principal Financial
- --------------------------------------------- and Accounting Officer)
Richard J. Dobbyn
* Director
- ---------------------------------------------
Arthur B. Bodley
* Director
- ---------------------------------------------
James G. March
* Director
- ---------------------------------------------
Curtis J. Timm
* Director
- ---------------------------------------------
Taco van Tijn
* Director
- ---------------------------------------------
David N. Wormley
- ---------------------------------------------------------------------------------------
*By: /s/ CLYDE G. NIXON as attorney-in-fact pursuant to the power of
- --------------------------------------------- attorney included in the Registration
Clyde G. Nixon Statement as originally filed on October 15,
1996.
</TABLE>
II-5
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- --------------------------------------------------------------------- -------------
<C> <C> <S> <C>
1.1 -- Form of Underwriting Agreement.......................................
2.1 -- Agreement and Plan of Share Exchange between Sun Hydraulics
Incorporated and Sun Hydraulics Corporation dated November 13,
1996.................................................................
2.2 -- Recommended Offer by Sun Hydraulics Incorporated to acquire the whole
of the issued share capital of Sun Hydraulik Holdings Limited, dated
November 13, 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. .........................................
</TABLE>
II-6
<PAGE> 79
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT DESCRIPTION PAGE
- ------- --------------------------------------------------------------------- -------------
<S> <C> <C> <C>
4.17* -- Revolving Loan Facility letter agreement, dated July 30, 1996, in the
amount of L800,000, between Sun Hydraulics Ltd. and Lloyds Bank
Plc..................................................................
4.18* -- Overdraft and Other Facilities letter agreement, dated June 7, 1996,
in an amount not to exceed L250,000, between Sun Hydraulics Ltd. and
Lloyds Bank Plc......................................................
4.19* -- Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and
Dresdner Bank........................................................
4.20** -- Specimen of the Company's Common Stock Certificate...................
5.1** -- Opinion of Shumaker, Loop & Kendrick, LLP as to the Common Stock
being registered.....................................................
10.1* -- Form of Distributor Agreement (Domestic).............................
10.2* -- Form of Distributor Agreement (International)........................
10.3* -- 1996 Sun Hydraulics Incorporated Stock Option Plan...................
10.4* -- Form of Indemnification Agreement....................................
11 -- Statement regarding Computation of Per Share Earnings................
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 nine months ended September 30, 1996 (For
SEC purposes only)...................................................
27.2 -- Financial Data Schedule for year ended December 31, 1995 (For SEC
purposes only).......................................................
</TABLE>
- ---------------
* Previously filed in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183).
** To be filed by amendment.
II-7
<PAGE> 1
Exhibit 1.1
2,000,000 SHARES
COMMON STOCK
($.001 PAR VALUE)
UNDERWRITING AGREEMENT
_________________, 1996
A.G. EDWARDS & SONS, INC.
ROBERT W. BAIRD & CO. INCORPORATED
As Representative of the Several Underwriters
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
The undersigned, Sun Hydraulics Incorporated, a Delaware corporation
(the "Company"), 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")(the Company, SHC and SHHL are sometimes
referred to collectively as the "Company Parties") hereby address you as the
representatives (the "Representatives") of each of the persons, firms and
corporations listed on Schedule I hereto (collectively, the "Underwriters") and
hereby confirm their agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
to the Underwriters 2,000,000 shares of its Common Stock, par value $.001 per
share (the "Firm Shares"). Solely for the purpose of covering over-allotments
in the sale of the Firm Shares, the Company further proposes to grant to the
Underwriters the right to purchase up to an additional amount of shares equal
to 15% of the Firm Shares (the "Option Shares"), as provided in Section 3 of
this Agreement. The Firm Shares and the Option Shares are herein sometimes
referred to as the "Shares" and are more fully described in the Prospectus
hereinafter defined.
2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each such Underwriter agrees, severally and not jointly, (a)
to purchase from the Company, at a purchase price of $_____ per share, the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto and (b) to purchase from the Company any additional number of
Option Shares which such Underwriter may become obligated to purchase pursuant
to Section 3 hereof.
The Company will deliver definitive certificates for the Firm Shares
at the office of A.G. Edwards & Sons, Inc., 77 Water Street, New York, New York
("Edwards' Office"), or such other place as you and the Company may mutually
agree upon, for the accounts of the Underwriters
<PAGE> 2
against payment to the Company of the purchase price fo the Firm Shares sold by
it to the several Underwriters by wire transfer or certified or bank cashiers'
check in clearing house funds payable to the order of the Company, and
delivered to One North Jefferson Avenue, St. Louis, Missouri 63103, or at such
other place as may be agreed upon between you and the Company (the "Place of
Closing"), at 10:00 a.m., St. Louis time, on the third full business day
following the date of this Agreement, or at such other time and date thereafter
as you and the Company may agree, such time and date of payment and delivery
being herein called the "Closing Date."
The certificates for the Firm Shares so to be delivered will be made
available to you for inspection at Edwards' Office (or such other place as you
and the Company may mutually agree upon) at least one full business day prior
to the Closing Date and will be in such names and denominations as you may
request at least two full business days prior to the Closing Date.
It is understood that an Underwriter, individually, may (but shall not
be obligated to) make payment on behalf of the other Underwriters whose checks
shall not have been received prior to the Closing Date for Shares to be
purchased by such Underwriter. Any such payment by an Underwriter shall not
relieve the other Underwriters of any of their obligations hereunder.
It is understood that the Underwriters propose to offer the Shares to
the public upon the terms and conditions set forth in the Registration
Statement (as hereinafter defined).
3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES. The Company
hereby grants an option to the Underwriters to purchase from it up to 300,000
Option Shares on the same terms and conditions as the Firm Shares; provided,
however, that such option may be exercised only for the purpose of covering any
over-allotments which may be made by them in the sale of the Firm Shares. No
Option Shares shall be sold or delivered unless the Firm Shares previously have
been, or simultaneously are, sold and delivered.
The option is exercisable on behalf of the several Underwriters by
you, as Representatives, at any time, and from time to time, before the
expiration of 30 days from the date of this Agreement, for the purchase of all
or part of the Option Shares covered thereby, by notice given by you to the
Company in the manner provided in Section 12 hereof, setting forth the number
of Option Shares as to which the Underwriters are exercising the option, and
the date of delivery of said Option Shares, which date shall not be more than
five business days after such notice unless otherwise agreed to by the parties.
You may terminate the option at any time, as to any unexercised portion
thereof, by giving written notice to the Company to such effect.
You, as Representatives, shall make such allocation of the Option
Shares among the Underwriters as may be required to eliminate purchases of
fractional Shares.
Delivery of the Option Shares with respect to which the options shall
have been exercised shall be made to or upon your order at Edwards' Office (or
at such other place as you and the Company may mutually agree upon), against
payment by you of the per share purchase price to the Company by wire transfer
or certified or bank cashier's check or checks, payable in clearing house
funds. Such payment and delivery shall be made at 10:00 a.m., St. Louis time,
on the date designated in the notice given by you as above provided for, unless
some other date and time are
2
<PAGE> 3
agreed upon, which date and time of payment and delivery are called the "Option
Closing Date." The certificates for the Option Shares so to be delivered will
be made available to you for inspection at Edwards' Office at least one full
business day prior to the Option Closing Date and will be in such names and
denominations as you may request at least two full business days prior to the
Option Closing Date. On the Option Closing Date, the Company shall provide the
Underwriters such representations, warranties, opinions and covenants with
respect to the Option Shares as are required to be delivered on the Closing
Date with respect to the Firm Shares.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY, SHC
AND SHHL.
(a) The Company, SHC and SHHL represent and warrant to and agree
with each Underwriter that:
(i) A registration statement (Registration No. 333-14183)
on Form S-1 with respect to the Shares, including a preliminary
prospectus, and such amendments to such registration statement as may
have been required to the date of this Agreement, has been carefully
prepared by the Company pursuant to and in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"),
and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission under the Act. Copies of such
registration statement, including any amendments thereto, each related
preliminary prospectus (meeting the requirements of Rule 430 or 430A
of the Rules and Regulations) contained therein, the exhibits,
financial statements and schedules have heretofore been delivered by
the Company to you. If such registration statement has not become
effective under the Act, a further amendment to such registration
statement, including a form of final prospectus, necessary to permit
such registration statement to become effective will be filed promptly
by the Company with the Commission. If such registration statement
has become effective under the Act, a final prospectus containing
information permitted to be omitted at the time of effectiveness by
Rule 430A of the Rules and Regulations will be filed promptly by the
Company with the Commission in accordance with Rule 424(b) of the
Rules and Regulations. The term "Registration Statement" as used
herein means the registration statement as amended at the time it
becomes or became effective under the Act (the "Effective Date"),
including financial statements and all exhibits and, if applicable,
the information deemed to be included by Rule 430A of the Rules and
Regulations. The term "Prospectus" as used herein means (i) the
prospectus as first filed with the Commission pursuant to Rule 424(b)
of the Rules and Regulations or, (ii) if no such filing is required,
the form of final prospectus included in the Registration Statement at
the Effective Date or (iii) if a Term Sheet or Abbreviated Term Sheet
(as such terms are defined in Rule 434(b) and 434(c), respectively, of
the Rules and Regulations) is filed with the Commission pursuant to
Rule 424(b)(7) of the Rules and Regulations, the Term Sheet or
Abbreviated Term Sheet and the last Preliminary Prospectus filed with
the Commission prior to the time the Registration Statement became
effective, taken together. The term "Preliminary Prospectus" as used
herein shall mean a preliminary prospectus as contemplated by Rule
430 or 430A of the Rules and Regulations included at any time in the
Registration Statement.
3
<PAGE> 4
(ii) The Commission has not issued, and is not to the
knowledge of the Company threatening to issue, an order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus nor
instituted proceedings for that purpose. Each Preliminary Prospectus
at its date of issue, the Registration Statement and the Prospectus
and any amendments or supplements thereto contains or will contain, as
the case may be, all statements which are required to be stated
therein by, and in all material respects conform or will conform, as
the case may be, to the requirements of, the Act and the Rules and
Regulations. Neither the Registration Statement nor any amendment
thereto, as of the applicable effective date, and neither the
Prospectus nor any supplement thereto contains or will contain, as the
case may be, any untrue statement of a material fact or omits or will
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company Parties make no representation or warranty
as to information contained in or omitted from the Registration
Statement or the Prospectus, or any such amendment or supplement, in
reliance upon, and in conformity with, written information furnished
to the Company by or on behalf of the Underwriters specifically for
use in the preparation thereof.
(iii) The filing of the Registration Statement and the
execution and delivery of this Agreement have been duly authorized by
the Board of Directors of each of the Company Parties; this Agreement
constitutes a valid and legally binding obligation of each of the
Company Parties enforceable in accordance with its terms (except to
the extent the enforceability of the indemnification and contribution
provisions of Section 7 hereof may be limited by public policy
considerations as expressed in the Act as construed by courts of
competent jurisdiction; the issue and sale of the Shares by the
Company and the performance of this Agreement and the consummation of
the transactions herein contemplated by the Company Parties will not
result in a violation of the certificate of incorporation or bylaws of
any of the Company Parties or result in a breach or violation of any
of the terms and provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any properties or assets of any of the Company
Parties or their subsidiaries under, any statute, or under any
indenture, mortgage, deed of trust, note, loan agreement, sale and
leaseback arrangement or other agreement or instrument to which any of
the Company Parties or any of their subsidiaries is a party or by
which they are bound or to which any of the properties or assets of
any of the Company Parties or their subsidiaries is subject, or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over any of the Company Parties or their
subsidiaries or their properties, except to such extent as does not
materially adversely affect the business of the Company Parties and
their subsidiaries taken as a whole; no consent, approval,
authorization, order, registration or qualification of or with any
court or governmental agency or body is required for the consummation
of the transactions herein contemplated, except such as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Act or Rules and Regulations or any state
securities laws.
(iv) Except as described in the Prospectus, none of the
Company Parties have sustained since the date of the latest audited
financial statements included in the
4
<PAGE> 5
Prospectus any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree. Except as contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company, SHC and SHHL
taken as a whole have not incurred any material liabilities or
material obligations, direct or contingent, other than in the ordinary
course of business, or entered into any material transactions not in
the ordinary course of business, and there has not been any material
change in the capital stock or long-term debt of the Company, SHC and
SHHL taken as a whole or any material adverse change in the condition
(financial or other), net worth, business, affairs, management,
prospects or results of operations of the Company and its subsidiaries
taken as a whole. The Company, SHC and SHHL have filed all necessary
federal, state and foreign income and franchise tax returns and paid
all taxes shown as due thereon; all tax liabilities are adequately
provided for on the books of the Company, SHC and SHHL except to such
extent as would not materially adversely affect the business of the
Company, SHC and SHHL taken as a whole; the Company, SHC and SHHL have
made all necessary payroll tax payments and are current and up-to-date
as of the date of this Agreement; and the Company, SHC and SHHL have
no knowledge of any tax proceeding or action pending or threatened
against the Company or its subsidiaries which might materially
adversely affect their business or property.
(v) Except described in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened or
contemplated, any action, suit or proceeding to which the Company, SHC
or SHHL is a party before or by any court or public, regulatory or
governmental agency or body which might be expected to result
(individually or in the aggregate) in any material adverse change in
the condition (financial or other), business or prospects of the
Company, SHC and SHHL taken as a whole, or might be expected to
materially and adversely affect (individually or in the aggregate) the
properties or assets thereof; and there are no contracts or documents
of the Company, SHC or SHHL which would be required to be filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations which have not been filed as exhibits to the Registration
Statement.
(vi) The Company has duly and validly authorized capital
stock as described in the Prospectus; all outstanding shares of Common
Stock of the Company and the Shares conform, or when issued will
conform, to the description thereof in the Registration Statement and
the Prospectus and have been, or, when issued and paid for will be,
duly authorized, validly issued, fully paid and nonassessable; and the
issuance of the Shares to be purchased from the Company hereunder is
not subject to any preemptive or similar rights. All offers and sales
of the securities of the Company Parties during the past three years
were at all relevant times duly registered or exempt from the
registration requirements of the Act and were duly registered or the
subject of an exemption from the registration requirements of
applicable state securities or Blue Sky laws. Except as set
forth in the Prospectus, the Company Parties do not have outstanding,
and at the Closing Date, will not have outstanding, any options to
purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts, or
5
<PAGE> 6
commitments to issue or sell any shares of Common Stock or any such
warrants, convertible securities or obligations. There are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to the Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(vii) At the Closing Date, the only active subsidiaries (as
defined in the Rules and Regulations) of the Company will be as
provided in Exhibit 21 of the Registration Statement. The Company has
been and its subsidiaries at the Closing Date will have been duly
incorporated and are validly existing as corporations in good standing
under the laws of the states or other jurisdictions in which they are
incorporated, with full power and authority (corporate and other) to
own, lease and operate their properties and conduct their businesses
as described in the Registration Statement; the Company is and its
subsidiaries at the Closing Date will be duly qualified to do business
as foreign corporations in good standing in each state or other
jurisdiction in which their ownership or leasing of property or
conduct of business legally requires such qualification, except where
the failure to be so qualified would not have a material adverse
effect on the ability of the Company and its subsidiaries to conduct
its or their business as described in the Registration Statement; at
the Closing Date the outstanding shares of capital stock of the
Company's subsidiaries will have been duly authorized and validly
issued, are fully paid and nonassessable and will be owned (100% as to
SHC and at least 90% as to SHHL) by the Company free and clear of any
mortgage, pledge, lien, encumbrance, charge or adverse claim and will
not be the subject of any agreement or understanding with any person;
and at the Closing Date no options, warrants or other rights to
purchase, agreement or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership
interests in the subsidiaries will be outstanding.
(viii) Price Waterhouse LLP, the accounting firm which has
certified the financial statements filed with the Commission as a part
of the Registration Statement, is an independent public accounting
firm within the meaning of the Act and the Rules and Regulations.
(ix) The combined financial statements and schedules of
the Company, including the notes thereto, filed with and as a part of
the Registration Statement, are accurate in all material respects and
present fairly the combined financial position of the companies
reflected therein as of the respective dates thereof and the results
of operations and statements of cash flow for the respective periods
covered thereby, all in conformity with generally accepted accounting
principles applied on a consistent basis throughout the periods
involved except as otherwise disclosed in the Prospectus. The
financial and statistical data included in the Registration Statement
and Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited financial
statements in the Registration Statement and Prospectus.
6
<PAGE> 7
(x) None of the Company Parties is nor at the Closing
Date will be in default with respect to any contract or agreement to
which it is a party; provided that this representation shall not apply
to defaults which in the aggregate are not materially adverse to the
condition, financial or other, or the business or prospects of the
Company Parties taken as a whole.
(xi) None of the Company Parties is nor at the Closing
Date will be in violation of any other laws, ordinances or
governmental rules or regulations to which it is subject, and neither
the Company, SHC or SHHL has failed to obtain any other license,
permit, franchise, easement, consent, or other governmental
authorization necessary to the ownership, leasing and operation of its
properties or to the conduct of its business, which violation or
failure would materially adversely affect the business, operations,
affairs, properties, prospects, profits or condition (financial or
other) of the Company, SHC and SHHL taken as a whole. None of the
Company, SHC or SHHL has, at any time during the past five years, (A)
made any unlawful contributions to any candidate for any political
office, or failed fully to disclose any contribution in violation of
law, or (B) made any payment to any state, federal or foreign
government official, or other person charged with similar public or
quasi-public duty (other than payment required or permitted by
applicable law).
(xii) Except as described in the Prospectus, the Company,
SHC and SHHL own or possess, or can acquire on reasonable terms,
adequate patents, patent licenses, trademarks, service marks and trade
names necessary to conduct the business now operated by them, and none
of the Company, SHC or SHHL has received any notice of infringement of
or conflict with asserted rights of others with respect to any
patents, patent licenses, trademarks, service marks or trade names
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the conduct of the business, operations, financial condition or income
of the Company, SHC and SHHL taken as a whole.
(xiii) The Company, SHC and SHHL have good and marketable
title to all property owned by them, free and clear of all liens,
encumbrances, restrictions and defects except such as are described in
the Registration Statement or do not interfere with the use made and
proposed to be made of such property; and any property held under
lease or sublease by the Company, SHC or SHHL is held under valid,
subsisting and enforceable leases or subleases with such exceptions as
are not material and do not interfere with the use made and proposed
to be made of such property by the Company, SHC and SHHL, and none of
the Company, SHC or SHHL has any notice or knowledge of any material
claim of any sort which has been, or may be, asserted by anyone
adverse to the Company's, SHC's or SHHL's rights as lessee or
sublessee under any lease or sublease described above, or affecting or
questioning the Company's, SHC's or SHHL's rights to the continued
possession of the leased or subleased premises under any such lease or
sublease in conflict with the terms thereof.
(xiv) Except as described in the Prospectus, there is no
factual basis for any action, suit or other proceeding involving the
Company, SHC or SHHL or any of their
7
<PAGE> 8
material assets for any failure of the Company, SHC or SHHL, or any
predecessor thereof, to comply with any requirements of federal, state
or local regulation relating to air, water, solid waste management,
hazardous or toxic substances, or the protection of health or the
environment. Except as described in the Prospectus, none of the
property owned or leased by the Company, SHC or SHHL is, to the best
knowledge of the Company, contaminated with any waste or hazardous
substances, and none of the Company, SHC or SHHL may be deemed an
"owner or operator" of a "facility" or "vessel" which owns, possesses,
transports, generates or disposes of a "hazardous substance" as those
terms are defined in Section 9601 of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. Section
9601 et seq.
(xv) No labor disturbance exists with the employees of the
Company, SHC or SHHL or is imminent which would have a material
adverse effect on the Company, SHC and SHHL taken as a whole.
(xvi) The Company has not taken and will not take, directly
or indirectly, any action designed to or which might reasonably be
expected to cause or result in stabilization or manipulation of the
price of the Company's Common Stock, and the Company is not aware of
any such action taken or to be taken by affiliates of the Company.
(xvii) The Company is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(xviii) The Company's system of internal accounting controls
taken as a whole is sufficient to meet the broad objectives of
internal accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that
would be material in relation to the Company's financial statements;
and, except as disclosed in the Prospectus, neither the Company nor
any employee or agent of the Company has made any payment of funds of
the Company or received or retained any funds in violation of any law,
rule or regulation, the receipt or payment of which could have a
material adverse effect on the Company.
(xix) There is no document or contract of a character
required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
that is not described or filed as required. All such contracts to
which the Company, SHC or SHHL is a party have been duly authorized,
executed and delivered by the Company, SHC or SHHL, constitute valid
and binding agreements of the Company, SHC or SHHL and are enforceable
against the Company, SHC or SHHL in accordance with the terms thereof.
(xx) No statement, representation, warranty or covenant
made by the Company in this Agreement or made in any certificate or
document required by this Agreement to be delivered to you was or will
be, when made, inaccurate, untrue or incorrect in any material
respect.
8
<PAGE> 9
(xxi) No holder of securities of the Company, SHC or SHHL
has rights to the registration of any securities of the Company
because of the filing of the Registration Statement.
(xxii) Other than as contemplated by this Agreement, there
is no broker, finder or other party that is entitled to receive from
the Company, SHC or SHHL any brokerage or finder's fee or other fee or
commission as a result of any of the transactions contemplated by this
Agreement.
(b) Any certificate signed by any officer of the Company, SHC or
SHHL and delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty to each Underwriter as to the matters covered
thereby.
5. ADDITIONAL COVENANTS. The Company covenants and agrees with
the several Underwriters that:
(a) If the Registration Statement is not effective under the Act,
the Company will use its best efforts to cause the Registration Statement to
become effective as promptly as possible, and it will notify you, promptly
after it shall receive notice thereof, of the time when the Registration
Statement has become effective. The Company (i) will prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations, if
required, a Prospectus containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations or otherwise or a Term Sheet or Abbreviated Term Sheet,
as applicable; (ii) will not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Underwriters shall not previously
have been advised and furnished with a copy or to which the Underwriters shall
have reasonably objected in writing or which is not in compliance with the
Rules and Regulations; and (iii) will promptly notify you after it shall have
received notice thereof of the time when any amendment to the Registration
Statement becomes effective or when any supplement to the Prospectus has been
filed.
(b) The Company will advise the Underwriters promptly, after it
shall receive notice or obtain knowledge thereof, of any request of the
Commission for amendment of the Registration Statement or for supplement to the
Prospectus or for any additional information, or of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution or threatening of
any proceedings for that purpose, and the Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending the use of
the Prospectus and to obtain as soon as possible the lifting thereof, if
issued.
(c) The Company will cooperate with the Underwriters and their
counsel in endeavoring to qualify the Shares for sale under the securities laws
of such jurisdictions as they may have designated and will make such
applications, file such documents, and furnish such information as may be
necessary for that purpose, provided the Company shall not be required to
qualify as a foreign corporation or to file a general consent to service of
process in any
9
<PAGE> 10
jurisdiction where it is not now so qualified or required to file such a
consent or to subject itself to taxation as doing business in any jurisdiction
where it is not now so taxed. The Company will, from time to time, file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Underwriters may
reasonably request.
(d) The Company will deliver to, or upon the order of, the
Underwriters, without charge from time to time, as many copies of any
Preliminary Prospectus as they may reasonably request. The Company will
deliver to, or upon the order of, the Underwriters without charge as many
copies of the Prospectus, as it thereafter may be amended or supplemented, as
they may from time to time reasonably request; provided, however, that the
expense of the preparation and delivery of any Prospectus required for use
after the expiration of the time period required by law for delivery by an
Underwriter or dealer shall be borne by the Underwriters required to deliver
such Prospectus. The Company consents to the use of such Prospectus by the
Underwriters and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for such other purposes
and for such period of time thereafter as the Prospectus is required by law to
be delivered in connection with the offering or sale of the Shares. The
Company will deliver to the Underwriters at or before the Closing Date two
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the Underwriters
such number of copies of the Registration Statement, without exhibits, and of
all amendments thereto, as they may reasonably request.
(e) If, during the period in which a prospectus is required by law
to be delivered by an Underwriter or dealer, any event shall occur as a result
of which, in the judgment of the Company or in your judgment or in the opinion
of counsel for the Underwriters, it becomes necessary to amend or supplement
the Prospectus in order to make the statements therein, in light of the
circumstances existing at the time the Prospectus is delivered to a purchaser,
not misleading, or, if it is necessary at any time to amend or supplement the
Prospectus to comply with any law, the Company promptly will prepare and file
with the Commission an appropriate amendment to the Registration Statement or
supplement to the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with law;
provided, however, that the expense of the preparation and delivery of any
Prospectus required for use after the expiration of the time period required by
law for delivery by an Underwriter or dealer, as well as the expense of the
preparation and filing of an amendment to the Registration Statement relating
to such Prospectus, shall be borne by the Underwriters required to deliver such
Prospectus.
(f) The Company will make generally available to its stockholders
and will file as an exhibit in a report pursuant to the Securities and Exchange
Act of 1934, as amended (the "1934 Act"), as soon as it is practicable to do
so, but in any event not later than 90 days after the end of the period covered
thereby, an earnings statement in reasonable detail, covering a period of at
least 12 consecutive months beginning after the effective date of the
Registration Statement, which earnings statement shall satisfy the requirements
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will
advise the Underwriters in writing when such statement has been so made
available.
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(g) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives at their principal executive offices a
reasonable number of copies of annual reports, quarterly reports, current
reports and copies of all other documents, reports and information furnished by
the Company to its stockholders or filed with any securities exchange pursuant
to the requirements of such exchange or with the Commission pursuant to the Act
or the 1934 Act. The Company will deliver to the Representatives similar
reports with respect to any significant subsidiaries, as that term is defined
in the Rules and Regulations, which are not consolidated in the Company's
financial statements. Any report, document or other information required to be
furnished under this paragraph (g) shall be furnished as soon as practicable
after such report, document or information becomes available.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth in the description under "Use of Proceeds" in the
Prospectus, which description complies in all respects with the requirements of
Item 504 of Regulation S-K.
(i) The Company will supply you with copies of all correspondence
to and from, and all documents issued to and by, the Commission in connection
with the registration of the Shares under the Act.
(j) Prior to the Closing Date (and, if applicable, the Option
Closing Date), the Company will furnish to you, as soon as they have been
prepared, copies of any unaudited interim consolidated financial statements of
the Company and its subsidiaries for any periods subsequent to the periods
covered by the financial statements appearing in the Registration Statement and
the Prospectus.
(k) Prior to the Closing Date (and, if applicable, the Option
Closing Date), the Company will not issue any press releases or other
communications directly or indirectly and will hold no press conferences with
respect to the Company or any of its subsidiaries, the financial condition,
results of operations, business, properties, assets or liabilities of the
Company or any of its subsidiaries, or the offering of the Shares, without your
prior written consent.
(l) The Company will use its best efforts to obtain approval for,
and maintain the quotation of the Shares on, the National Association of
Securities Dealers, Inc. Automated Quotation/National Market System (the
"Nasdaq/NMS").
(m) Except pursuant to this Agreement or with the prior written
consent of A.G. Edwards & Sons, Inc., the Company will not, and the Company has
provided agreements executed by each of the Company's officers and directors
and each record or beneficial owner of more than five percent (5%) of the
shares of Company's Common Stock providing that none of them will, for a period
of 180 days from the Effective Date, directly or indirectly, make, agree to or
cause any offer, sale (including short sale but excluding any sale of shares to
any employee of the Company pursuant to the exercise of options under the
Company's 1996 Stock Option Plan), loan, pledge or other disposition of, or
grant any options (other than options under the Company's 1996 Stock Option
Plan) or other rights with respect to, or otherwise reduce any risk of
ownership, directly or indirectly, of any shares of Common Stock or other
capital stock of the Company, or any securities that are convertible into or
exchangeable or exercisable for shares of
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<PAGE> 12
Common Stock or other capital stock of the Company, or derivatives thereof, or
request the registration of any of the foregoing.
(n) The Company and its subsidiaries will maintain and keep
accurate books and records reflecting their assets and maintain internal
accounting controls which provide reasonable assurance that (1) transactions
are executed in accordance with management's authorization, (2) transactions
are recorded as necessary to permit the preparation of the Company's
consolidated financial statements and to maintain accountability for the assets
of the Company and its subsidiaries, (3) access to the assets of the Company
and its subsidiaries is permitted only in accordance with management's
authorization, and (4) the recorded accounts of the assets of the Company and
its subsidiaries are compared with existing assets at reasonable intervals.
(o) If at any time during the 25 day period after the Registration
Statement is declared effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which, in your opinion, the
market price for the Shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising it as to the effect set forth above, prepare, consult
with you concerning the substance of and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or commenting
on such rumor, publication or event.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase and pay for the Shares, as provided
herein, shall be subject to the accuracy in all material respects, as of the
date hereof and as of the Closing Date (and, if applicable, the Option Closing
Date), of the representations and warranties of the Company contained herein,
to the performance in all material respects by the Company of its covenants and
obligations hereunder, and to the following additional conditions:
(a) All filings required by Rule 424 and Rule 430A of the Rules
and Regulations shall have been made. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time,
shall have been issued and no proceeding for that purpose shall have been
initiated or, to the knowledge of the Company or any Underwriter, threatened or
contemplated by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of the Underwriters.
(b) No Underwriter shall have disclosed in writing to the Company
on or prior to the Closing Date (and, if applicable, the Option Closing Date),
that the Registration Statement or Prospectus or any amendment or supplement
thereto contains an untrue statement of fact which, in the opinion of counsel
to the Underwriters, is material, or omits to state a fact which, in the
opinion of such counsel, is material and is required to be stated therein or is
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(c) On the Closing Date (and, if applicable, the Option Closing
Date), you shall have received the opinion of counsel for the Company,
addressed to you and dated the Closing Date (and, if applicable, the Option
Closing Date), to the effect that:
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<PAGE> 13
(i) The Company and its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of the states or other jurisdictions in which they are
incorporated, with full power and authority (corporate and other) to
own, lease and operate their properties and conduct their business as
described in the Registration Statement; the Company and its
subsidiaries are duly qualified to do business as foreign corporations
in good standing in each state or other jurisdiction in which their
ownership or leasing of property or conduct of business legally
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the ability of
the Company and its subsidiaries to conduct its or their business as
described in the Registration Statement; and the outstanding shares of
capital stock of the Company's subsidiaries have been duly authorized
and validly issued, are fully paid and nonassessable and, to the
knowledge of such counsel, are owned by the Company free and clear of
any mortgage, pledge, lien, encumbrance, charge or adverse claim and
are not the subject of any agreement or understanding with any person;
to the knowledge of such counsel, no options, warrants or other rights
to purchase, agreement or other obligations to issue or other rights
to convert any obligations into shares of capital stock or ownership
interests in the subsidiaries are outstanding.
(ii) The Company has duly and validly authorized capital
stock as set forth under the heading "Capitalization" in the
Prospectus; all outstanding shares of Common Stock of the Company and
the Shares conform to the description thereof in the Prospectus under
the heading "Description of Capital Stock", and the outstanding shares
of Common Stock have been duly authorized and are validly issued,
fully paid and non-assessable; the Shares to be sold by the Company
have been duly authorized and, when delivered and paid for in
accordance with this Agreement, will be validly issued, fully paid and
non-assessable, and the stockholders of the Company have no preemptive
rights with respect to the Shares. To the knowledge of such counsel,
all offers and sales of the Company's securities during the past three
years were at all relevant times duly registered or exempt from the
registration requirements of the Act and were duly registered or the
subject of an exemption from the registration requirements of
applicable state securities or Blue Sky laws.
(iii) Such counsel has been advised by the staff of the
Commission that the Registration Statement has become effective under
the Act and, to the knowledge of such counsel after due inquiry, no
stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act.
(iv) The Registration Statement and the Prospectus, and
each amendment or supplement thereto, as of their respective effective
or issue date, comply as to form and appear on their face to be
appropriately responsive in all material respects to the requirements
of the Act and the applicable rules and regulations (except that such
counsel need express no opinion as to the financial statements or
other financial data).
(v) The descriptions in the Registration Statement and
Prospectus of contracts and other documents filed as exhibits to the
Registration Statement are accurate in all
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<PAGE> 14
material respects; to the knowledge of such counsel, all other
material agreements between the Company and third parties expressly
referenced in the Prospectus are legal, valid and binding obligations
of the Company.
(vi) To the knowledge of such counsel, no authorization,
approval, consent, order, registration or qualification of or with of
any court or governmental body, authority or agency is required with
respect to the Company in connection with the transactions
contemplated by this Agreement, except such as may be required under
the Act or the Rules and Regulations or as may be required by the NASD
or under state securities laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(vii) The filing of the Registration Statement has been
duly authorized by the Board of Directors of the Company. The
performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a violation of the Company's
certificate of incorporation or bylaws or, to the knowledge of such
counsel, result in a breach or violation of any of the terms and
provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
properties or assets of the Company and its subsidiaries under, any
statute, or under any indenture, mortgage, deed of trust, note, loan
agreement, sale and leaseback arrangement, or any other agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which they are bound or to which any of
the properties or assets of the Company or its subsidiaries are
subject, or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the
Company or its subsidiaries or their properties, except, in the case
of any such violation, breach, default, creation or imposition, to
such extent as does not materially adversely affect the business of
the Company and its subsidiaries taken as a whole.
(viii) To the knowledge of such counsel,(A) there are no
material (individually, or in the aggregate) legal, governmental or
regulatory proceedings pending or threatened to which the Company or
any subsidiary is a party or of which the business or properties of
the Company or any subsidiary is the subject which are not disclosed
in the Registration Statement and Prospectus; (B) there are no
contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit
to the Registration Statement which are not described or filed as
required; and (C) there are no statutes or regulations required to be
described in th Registration Statement or Prospectus which are not
described as required.
(ix) To the knowledge of such counsel, the Company and
each of its subsidiaries hold all licenses, certificates, permits and
approvals from all state, federal and other regulatory authorities,
and have satisfied in all material respects the requirements imposed
by regulatory bodies, administrative agencies or other governmental
bodies, agencies or officials, that are required for the Company and
its subsidiaries lawfully to own, lease and operate its properties and
conduct its business as described in the Prospectus, and, to the
knowledge of such counsel, each of the Company and its subsidiaries is
conducting its business in compliance in all material respects with
all of
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<PAGE> 15
the laws, rules and regulations of each jurisdiction in which
it conducts its business.
(x) The statements made in the Registration Statement
under the captions "Dividend Policy", "Capitalization", and
"Description of Capital Stock", to the extent that they constitute
summaries of documents referred to therein or matters of law or legal
conclusions, have been reviewed by such counsel and are accurate
summaries and fairly present the information disclosed therein.
(xi) The Company is not an "investment company" or a
company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(xii) There are no contracts, agreements or understandings
known to such counsel between the Company and any person granting such
person the right to require the Company to file a registration
statement under the Act with respect to any securities of the Company
owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant
to any other registration statement filed by the Company under the
Act.
(xiii) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and legally binding
obligation of the Company enforceable in accordance with its terms,
except (A) as such enforceability may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance or similar laws now
or hereafter in effect relating to creditors' rights or debtors'
obligations generally; (B) that the remedies of specific performance
and injunctive and other forms of relief are subject to general
equitable principles, whether enforcement is sought at law or in
equity, and that such enforcement may be subject to the discretion of
the court before which any proceedings therefor may be brought; and
(C) as rights to indemnity and contribution may be limited by state or
Federal laws relating to securities or the policies underlying such
laws.
Such counsel shall confirm that in the course of its duties in
connection with the preparation of the Registration Statement and Prospectus,
nothing came to such counsel's attention that would lead them to believe that
either the Registration Statement or Prospectus or any amendment or supplement
thereto (other than the financial statements or other financial data as to
which such counsel need express no opinion) contains any untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
In rendering the foregoing opinion, such counsel may rely, provided
that the opinion shall state that you and they are entitled to so rely, as to
all matters of fact, upon certificates and written statements of the executive
officers of, and accountants for, the Company and various public officials.
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<PAGE> 16
(d) You shall have received on the Closing Date (and, if
applicable, the Option Closing Date), from Nelson Mullins Riley & Scarborough,
L.L.P., counsel to the Underwriters, such opinion or opinions, dated the
Closing Date (and, if applicable, the Option Closing Date) with respect to the
incorporation of the Company, the validity of the Shares, the Registration
Statement, the Prospectus and other related matters as you may reasonably
require; the Company shall have furnished to such counsel such documents as
they reasonably request for the purpose of enabling them to pass on such
matters.
(e) You shall have received at or prior to the Closing Date from
Nelson Mullins Riley & Scarborough, L.L.P., a memorandum or memoranda, in form
and substance satisfactory to you, with respect to the qualification for
offering and sale by the Underwriters of the Shares under state securities or
Blue Sky laws of such jurisdictions as the Underwriters may have designated to
the Company.
(f) On the business day immediately preceding the date of this
Agreement and on the Closing Date (and, if applicable, the Option Closing
Date), you shall have received from Price Waterhouse LLP, a letter or letters,
dated the date of this Agreement and the Closing Date (and, if applicable, the
Option Closing Date), respectively, in form and substance satisfactory to you,
confirming that they are independent public accountants with respect to the
Company within the meaning of the Act and the published Rules and Regulations,
and the answer to Item 509 of Regulation S-K set forth in the Registration
Statement is correct insofar as it relates to them, and stating to the effect
set forth in Schedule II hereto.
(g) Except as contemplated in the Prospectus, (i) none of the
Company Parties nor any of their subsidiaries shall have sustained since the
date of the latest audited financial statements included in the Prospectus any
loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; and (ii) subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, none of the Company Parties nor any of their subsidiaries
shall have incurred any liability or obligation, direct or contingent, or
entered into transactions, and there shall not have been any change in the
capital stock or long-term debt of any of the Company Parties and their
subsidiaries or any change in the condition (financial or other), net worth,
business, affairs, management, prospects or results of operations of any of the
Company Parties or their subsidiaries, the effect of which, in any such case
described in clause (i) or (ii), is in your judgment so material or adverse as
to make it impracticable or inadvisable to proceed with the public offering or
the delivery of the Shares being delivered on such Closing Date (and, if
applicable, the Option Closing Date) on the terms and in the manner
contemplated in the Prospectus.
(h) There shall not have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on the New
York Stock Exchange or the American Stock Exchange or the establishing on such
exchanges by the Commission or by such exchanges of minimum or maximum prices
which are in force and effect on the date hereof; (ii) a general moratorium on
commercial banking activities declared by either federal or state authorities;
(iii) the outbreak or escalation of hostilities involving the United States or
the declaration by the United States of a national emergency or war, if the
effect of any such event specified in this
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<PAGE> 17
clause (iii) in your judgment makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares in the manner
contemplated in the Prospectus; (iv) any calamity or crisis, change in
national, international or world affairs, act of God, change in the
international or domestic markets, or change in the existing financial,
political or economic conditions in the United States or elsewhere, if the
effect of any such event specified in this clause (iv) makes it impracticable
or inadvisable to proceed with the public offering or the delivery of the
Shares in the manner contemplated in the Prospectus; or (v) the enactment,
publication, decree, or other promulgation of any federal or state statute,
regulation, rule, or order of any court or other governmental authority, or the
taking of any action by any federal, state or local government or agency in
respect of fiscal or monetary affairs, if the effect of any such event
specified in this clause (v) in your judgment makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares
in the manner contemplated in the Prospectus.
(i) You shall have received certificates, dated the Closing Date
(and, if applicable, the Option Closing Date) and signed by the President and
the Chief Financial Officer of the Company stating that (i) they have carefully
examined the Registration Statement and the Prospectus as amended or
supplemented and nothing has come to their attention that would lead them to
believe that either the Registration Statement or the Prospectus, or any
amendment or supplement thereto as of their respective effective or issue
dates, contained, and the Prospectus as amended or supplemented at such Closing
Date, contains any untrue statement of a material fact, or omits to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and, that (ii) all representations and warranties made herein
by the Company are true and correct in all material respects at such Closing
Date, with the same effect as if made on and as of such Closing Date, and all
agreements herein to be performed by the Company on or prior to such Closing
Date have been duly performed in all material respects.
(j) The Company shall not have failed, refused, or been unable, at
or prior to the Closing Date (and, if applicable, the Option Closing Date) to
have performed in all material respects any agreement on its part to be
performed or any of the conditions herein contained and required to be
performed or satisfied by it at or prior to such Closing Date.
(k) The Company shall have furnished to you at the Closing Date
(and, if applicable, the Option Closing Date) such other certificates as you
may have reasonably requested as to the accuracy, on and as of such Closing
Date, of the representations and warranties of the Company herein and as to the
performance by the Company of its obligations hereunder.
(l) The Shares shall have been approved for trading upon official
notice of issuance on the Nasdaq/NMS.
(m) The agreements mentioned in Section 5(m) shall be in full
force and effect.
(n) The Reorganization shall have been consummated.
All such opinions, certificates, letters and documents will be in
compliance with the
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<PAGE> 18
provisions hereof only if they are reasonably satisfactory to you and to Nelson
Mullins Riley & Scarborough, L.L.P., counsel for the several Underwriters. The
Company will furnish you with such conformed copies of such opinions,
certificates, letters and documents as you may request.
If any of the conditions specified above in this Section 6 shall not
have been satisfied at or prior to the Closing Date (and, if applicable, the
Option Closing Date) or waived by you in writing, this Agreement may be
terminated by you on notice to the Company.
7. INDEMNIFICATION. (a) The Company will indemnify and hold
harmless each Underwriter, the directors, officers, employees and agents of
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or in any blue sky
application or other document executed by the Company or based on any
information furnished in writing by the Company, filed in any jurisdiction in
order to qualify any or all of the Shares under the securities laws thereof
("Blue Sky Application"), or arise out of or are based upon the omission or
alleged omission therein of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and will reimburse each Underwriter and
each such controlling person for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, or such amendment or supplement, or any Blue Sky Application in
reliance upon and in conformity with written information furnished to the
Company by you or by any Underwriter through you, specifically for use in the
preparation thereof; and provided, further, that if any Preliminary Prospectus
or the Prospectus contained any alleged untrue statement or allegedly omitted
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading and such statement or omission shall
have been corrected in a revised Preliminary Prospectus or in the Prospectus or
in an amended or supplemented Prospectus, the Company shall not be liable to
any Underwriter or controlling person under this subsection (a) with respect to
such alleged untrue statement or alleged omission to the extent that any such
loss, claim, damage or liability of such Underwriter or controlling person
results from the fact that such Underwriter sold Shares to a person to whom
there was not sent or given, at or prior to the written confirmation of such
sale, such revised Preliminary Prospectus or Prospectus or amended or
supplemented Prospectus. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company,
each of its directors, each of its officers who have signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages or liabilities, joint or
several, to which the Company or any such director, officer or controlling
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<PAGE> 19
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, any amendment or supplement thereto, or any Blue Sky Application or
arise out of or are based upon the omission or the alleged omission therein of
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, such Preliminary Prospectus or the
Prospectus, such amendment or supplement, or any Blue Sky Application in
reliance upon and in conformity with written information furnished to the
Company by any such Underwriter specifically for use in the preparation
thereof; and will reimburse any legal or other expenses reasonably incurred by
the Company or any such director, officer or controlling person in connection
with investigating or defending any such loss, claim, damage, liability or
action. The Company acknowledges that the statements set forth under the
heading "Underwriting" in any Preliminary Prospectus and the Prospectus
constitute the only information relating to the Underwriters furnished in
writing to the Company by the Underwriters expressly for inclusion in the
Registration Statement, any Preliminary Prospectus or the Prospectus.
(c) Any person (as defined in the Act) which proposes to assert
the right to be indemnified under this Section 7 shall, within ten days after
receipt of notice of commencement of any action, suit or proceeding against
such party in respect of which a claim is to be made against an indemnifying
party under this Section 7, notify each such indemnifying party of the
commencement of such action, suit or proceeding, enclosing a copy of all papers
served, but the omission so to notify such indemnifying party of any such
action, suit or proceeding shall not relieve such indemnifying party from any
liability which it may have to any indemnified party otherwise than under this
Section 7. In case any such action, suit or proceeding shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
in, and, to the extent that it shall wish, jointly with any other indemnifying
party, similarly notified, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party for any legal or other expenses, other than reasonable costs of
investigation, subsequently incurred by such indemnified party in connection
with the defense thereof. The indemnified party shall have the right to employ
its own counsel in any such action, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the employment of
counsel by such indemnified party at the expense of the indemnifying party has
been authorized by the indemnifying party, (ii) the indemnified party shall
have been advised by such counsel in a written opinion that there may be a
conflict of interest between the indemnifying party and the indemnified party
in the conduct of the defense, or certain aspects of the defense, of such
action (in which case the indemnifying party shall not have the right to direct
the defense of such action with respect to those matters or aspects of the
defense on which a conflict exists or may exist on behalf of the indemnified
party) or (iii) the indemnifying party shall not in fact have employed counsel
to assume the defense of such action, in any of which events such fees and
expenses to the extent applicable shall be borne by the indemnifying party. An
indemnifying party shall not be liable for any
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<PAGE> 20
settlement of any action or claim effected without its consent. Each
indemnified party, as a condition of such indemnity, shall cooperate in good
faith with the indemnifying party in the defense of any such action or claim.
(d) If the indemnification provided for in this Section 7 is for
any reason, other than pursuant to the terms thereof, judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right to appeal)
to be unavailable to an indemnified party under subsections (a), (b) or (c)
above in respect of any losses, claims, damages or liabilities (or actions in
respect thereof) referred to therein, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages
or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault, as
applicable, of the Company and the Underwriters in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as other relevant
equitable considerations. The relative benefits received by, as applicable,
the Company and the Underwriters shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue statement of
a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection (d) were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this subsection (d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company contained in
Sections 7 and 11 herein or in certificates delivered pursuant hereto, and the
agreements of the Underwriters contained in Section 7 hereof, shall remain
operative and in full force and effect regardless of any termination
20
<PAGE> 21
or cancellation of this Agreement or any investigation made by or on behalf of
any Underwriter, the Company or other indemnified party and shall survive
delivery of the Shares to the Underwriters hereunder.
9. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter shall
default in its obligation to purchase the Shares which it has agreed to
purchase hereunder, you may in your discretion arrange for you or another party
or other parties to purchase such Shares on the terms contained herein. If
within thirty-six hours after such default by any Underwriter you do not
arrange for the purchase of such Shares, then the Company shall be entitled to
a further period of thirty-six hours within which to procure another party or
parties reasonably satisfactory to you to purchase such Shares on such terms.
In the event that, within the respective prescribed periods, you notify the
Company that you have so arranged for the purchase of such Shares, or the
Company notifies you that it has so arranged for the purchase of such Shares,
you or the Company shall have the right to postpone the Closing Date for a
period of not more than seven days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus, or
in any other documents or arrangements, and the Company agrees to file promptly
any amendments to the Registration Statement or the Prospectus which in your
opinion may thereby be made necessary. The term "Underwriter" as used in this
Agreement shall include any persons substituted under this Section 9 with like
effect as if such person had originally been a party to this Agreement with
respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters made by you or the
Company as provided in subsection (a) above, the aggregate number of Shares
which remains unpurchased does not exceed one tenth of the total Shares to be
sold on the Closing Date, then the Company shall have the right to require each
non-defaulting Underwriter to purchase the Shares which such Underwriter agreed
to purchase hereunder and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of Shares which
such Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase
of the Shares of a defaulting Underwriter or Underwriters made by you or the
Company as provided in subsection (a) above, the number of Shares which remains
unpurchased exceeds one tenth of the total Shares to be sold on the Closing
Date, or if the Company shall not exercise the right described in subsection
(b) above to require the non-defaulting Underwriters to purchase Shares of the
defaulting Underwriter or Underwriters, then this Agreement shall thereupon
terminate, without liability on the part of any non-defaulting Underwriter or
the Company except for the expenses to be borne by the Company and the
Underwriters as provided in Section 11 hereof and the indemnity and
contribution agreements in Section 7 hereof; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
10. EFFECTIVE DATE AND TERMINATION. (a) This Agreement shall
become effective at 1:00 p.m., St. Louis time, on the first business day
following the effective date of the Registration
21
<PAGE> 22
Statement, or at such earlier time after the effective date of the Registration
Statement as you in your discretion shall first release the Shares for offering
to the public; provided, however, that the provisions of Section 7 and 11 shall
at all times be effective. For the purposes of this Section 10(a), the Shares
shall be deemed to have been released to the public upon release by you of the
publication of a newspaper advertisement relating to the Shares or upon release
of telegrams, facsimile transmissions or letters offering the Shares for sale
to securities dealers, whichever shall first occur.
(b) In the event that the Company refuses or fails to perform
hereunder, this Agreement may be terminated by you at any time before it
becomes effective in accordance with Section 10(a) by notice to the Company;
provided, however, that the provisions of this Section 10 and of Section 7 and
Section 11 hereof shall at all times be effective. In the event of any
termination of this Agreement pursuant to Section 9 or this Section 10(b)
hereof, the Company shall not then be under any liability to any Underwriter
except as provided in Section 7 or Section 11 hereof.
(c) This Agreement may be terminated by you at any time at or
prior to the Closing Date by notice to the Company if any condition specified
in Section 6 hereof shall not have been satisfied on or prior to the Closing
Date. Any such termination shall be without liability of any party to any
other party except as provided in Sections 7 and 11 hereof.
(d) This Agreement also may be terminated by you, by notice to the
Company as to any obligation of the Underwriters to purchase the Option Shares,
if any condition specified in Section 6 hereof shall not have been satisfied at
or prior to the Option Closing Date or as provided in Section 9 of this
Agreement.
If you terminate this Agreement as provided in Sections 10(b), 10(c)
or 10(d), you shall notify the Company by telephone or telegram, confirmed by
letter.
11. COSTS AND EXPENSES. The Company Parties will bear and pay the
costs and expenses incident to the registration of the Shares and public
offering thereof, including, without limitation, (a) the fees and expenses of
the Company's accountants and the feesand expenses of counsel for the Company,
(b) the preparation, printing, filing, delivery and shipping of the
Registration Statement, each Preliminary Prospectus, the Prospectus and any
amendments or supplements thereto (except as otherwise expressly provided in
Section 5(d) or (e) hereof) and the printing, delivery and shipping of this
Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement,
Underwriters' Questionnaires and Powers of Attorney and Blue Sky Memoranda, (c)
the furnishing of copies of such documents (except as otherwise expressly
provided in Section 5(d) or (e) hereof) to the Underwriters, (d) the
registration or qualification of the Shares for offering and sale under the
securities laws of the various states, including the reasonable fees and
disbursements of Underwriters' counsel relating to such registration or
qualification, (e) the fees payable to the NASD and the Commission in
connection with their review of the proposed offering of the Shares, (f) all
printing and engraving costs related to preparation of the certificates for the
Shares, including transfer agent and registrar fees, (g) all initial transfer
taxes, if any, (h) all fees and expenses relating to the authorization of the
Shares for trading on Nasdaq/NMS, (i) all travel expenses, including air fare
and accommodation expenses, of representatives of the Company in connection
with the offering of the Shares and
22
<PAGE> 23
(j) all of the other costs and expenses incident to the performance by the
Company of the registration and offering of the Shares; provided, however, that
the Underwriters will bear and pay the fees and expenses of the Underwriters'
counsel (other than fees and disbursements relating to the registration or
qualification of the Shares for offering and sale under the securities laws of
the various states and clearance with the NASD), the Underwriters'
out-of-pocket expenses, and any advertising costs and expenses incurred by the
Underwriters incident to the public offering of the Shares.
If this Agreement is terminated by you in accordance with the
provisions of Section 10(b) or 10(c), the Company shall reimburse the
Underwriters for all of their out-of-pocket expenses, including the reasonable
fees and disbursements of counsel to the Underwriters.
12. NOTICES. All notices or communications hereunder, except as
herein otherwise specifically provided, shall be in writing and if sent to the
Underwriters shall be mailed, delivered, sent by facsimile transmission, or
telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One North Jefferson
Avenue, St. Louis, Missouri 63103, Attention: Syndicate, facsimile number (314)
289-7387, or if sent to any of the Company Parties shall be mailed, delivered,
sent by facsimile transmission, or telegraphed and confirmed to the Company at
1500 West University Parkway, Sarasota, Florida 34243, facsimile number (941)
355-4497. Notice to any Underwriter pursuant to Section 7 shall be mailed,
delivered, sent by facsimile transmission, or telegraphed and confirmed to such
Underwriter's address as it appears in the Underwriters' Questionnaire
furnished in connection with the offering of the Shares or as otherwise
furnished to the Company.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the Underwriters and each of the Company Parties and their
respective successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person, corporation or
other entity, other than the parties hereto and their respective successors and
assigns and the officers, directors and other persons referred to in Section 7,
any legal or equitable right, remedy or claim under or in respect of this
Agreement or any provision herein contained; this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective successors and assigns and
said officers, directors and other persons, and for the benefit of no other
person, corporation or other entity. No purchaser of any of the Shares from
any Underwriter shall be construed a successor or assign by reason merely of
such purchase.
In all dealings with the Company Parties under this Agreement you
shall act on behalf of each of the several Underwriters. The Company Parties
shall be entitled to act and rely upon any statement, request, notice or
agreement on behalf of the Underwriters, made or given by you on behalf of the
Underwriters, as if the same shall have been made or given in writing by the
Underwriters.
14. COUNTERPARTS. This Agreement may be executed by any one or
more of the parties hereto in any number of counterparts, each of which shall
be deemed to be an original, but all such counterparts shall together
constitute one and the same instrument.
23
<PAGE> 24
15. PRONOUNS. Whenever a pronoun of any gender or number is used
herein, it shall, where appropriate, be deemed to include any other gender and
number.
16. APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Missouri.
If the foregoing is in accordance with your understanding, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement between the Company Parties and the
Underwriters.
SUN HYDRAULICS INCORPORATED
By:
---------------------------------
Title:
---------------------------------
SUN HYDRAULICS CORPORATION
By:
---------------------------------
Title:
---------------------------------
SUN HYDRAULIK HOLDINGS LIMITED
By:
---------------------------------
Title:
---------------------------------
Accepted in St. Louis,
Missouri as of the date
first above written, on
behalf of ourselves and each
of the several Underwriters
named in Schedule I hereto.
A.G. EDWARDS & SONS, INC.
ROBERT W. BAIRD & CO. INCORPORATED
By: A.G. Edwards & Sons, Inc.
By:
---------------------------------
24
<PAGE> 25
Title:
---------------------------------
25
<PAGE> 26
SCHEDULE I
Number
Name of Shares
- ---- ---------
A.G. Edwards & Sons, Inc. __________
Robert W. Baird & Co. Incorporated __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
____________________________ __________
Total __________
<PAGE> 27
SCHEDULE II
Pursuant to Section 6(f) of the Underwriting Agreement, Price
Waterhouse LLP shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants
with respect to the Company and its subsidiaries within the meaning of the Act
and the applicable Rules and Regulations thereunder.
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules audited (and, if applicable,
prospective financial statements and/or pro forma financial information
examined) by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the applicable Rules and Regulations thereunder;
and, if applicable, they have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of the
unaudited consolidated interim financial statements, selected financial data,
pro forma financial information, prospective financial statements and/or
condensed financial statements derived from audited financial statements of the
Company for the periods specified in such letter, as indicated in their reports
thereon, copies of which have been furnished to the Representatives of the
Underwriters (the "Representatives").
(iii) On the basis of limited procedures, not constituting
an audit in accordance with generally accepted auditing standards, consisting
of a reading of the unaudited financial statements and other information
referred to below, performing the procedures specified by the AICPA for a
review of interim financial information as discussed in SAS No. 71, Interim
Financial Information, on the latest available interim financial statements of
the Company and its subsidiaries, inspection of the minute books of the Company
and its subsidiaries since the date of the latest audited financial statements
included in the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in such letter, nothing came to
their attention that caused them to believe that:
(A) any material modifications should be made to
the unaudited statements of consolidated income, statements of consolidated
financial position and statements of consolidated cash flows included in the
Prospectus for them to be in conformity with generally accepted accounting
principles, or the unaudited statements of consolidated income, statements of
consolidated financial position and statements of consolidated cash flows
included in the Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published Rules and Regulations thereunder.
(B) any other unaudited income statement data and
balance sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial statements from
which such data and items were derived, and any such unaudited data and items
were not determined on a basis substantially consistent with the basis
<PAGE> 28
for the corresponding amounts in the audited consolidated financial statements
included in the Prospectus.
(C) the unaudited financial statements which were
not included in the Prospectus but from which were derived any unaudited
financial statements referred to in Clause (A) and any unaudited income
statement data and balance sheet items included in the Prospectus and referred
to in Clause (B) were not determined on a basis substantially consistent with
the basis for the audited consolidated financial statements included in the
Prospectus.
(D) any unaudited pro forma consolidated
financial statements included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and
the published rules and regulations thereunder or the pro forma adjustments
have not been properly applied to the historical amounts in the compilation of
those statements.
(E) as of a specified date not more than five
days prior to the date of such letter, there have been any changes in the
consolidated capital stock or any increase in the consolidated long-term debt
of the Company and its subsidiaries, or any decreases in consolidated working
capital, net current assets or net assets or other items specified by the
Representative, or any changes in any items specified by the Representatives,
in each case as compared with amounts shown in the latest balance sheet
included in the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may occur or which
are described in such letter.
(F) for the period from the date of the latest
financial statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in consolidated net revenues or
operating profit or the total or per share amounts of consolidated net income
or any other changes in any other items specified by the Representatives, in
each case as compared with the comparable period of the preceding year and with
any other period of corresponding length specified by the Representatives,
except in each case for changes, decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in such letter.
(iv) In addition to the audit referred to in their
report(s) included in the Prospectus and the limited procedures, inspection of
minute books, inquiries and other procedures referred to in paragraph (iii)
above, they have carried out certain specified procedures, not constituting an
audit in accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Representatives, which are derived from the general accounting records of the
Company and its subsidiaries for the periods covered by their reports and any
interim or other periods since the latest period covered by their reports,
which appear in the Prospectus, or in Part II of, or in exhibits and schedules
to, the Registration Statement specified by the Representatives, and have
compared certain of such amounts, percentages and financial information with
the accounting records of the Company and its subsidiaries and have found them
to be in agreement.
<PAGE> 1
Exhibit 2.1
AGREEMENT AND PLAN OF SHARE EXCHANGE
This Agreement and Plan of Share Exchange (the "Agreement"), entered
into between SUN HYDRAULICS INCORPORATED, a Delaware corporation ("the
Company"), and SUN HYDRAULICS CORPORATION, a Florida corporation ("Sunopco");
W I T N E S S E T H:
WHEREAS, Sunopco is in the business of designing, manufacturing and
marketing screw-in hydraulic cartridge valves and manifolds;
WHEREAS, Sun Hydraulik Holdings Limited, a private limited company
organized under the laws of England and Wales ("Holdings") and an affiliate of
Sunopco under common control and management, is also in the business of
designing, manufacturing and marketing screw-in hydraulic cartridge valves and
manifolds;
WHEREAS, management and the Boards of Directors of Sunopco and
Holdings have determined that it is in best interests of Sunopco and Holdings
to join together as wholly-owned subsidiaries of a United States holding
company and to that end have caused the Company to be formed to serve as such a
holding company;
WHEREAS, in order to effect the transfer of all of the shares of the
capital stock of Sunopco from the current shareholders thereof to the Company
in exchange for common stock of the Company (the "Share Exchange") as a
tax-exempt exchange pursuant to Section 351 of the Internal Revenue Code of
1986, as amended, and as a statutory share exchange pursuant to the provisions
of Section 607.1102 of the Florida Business Corporation Act (the "FBCA"), the
Boards of Directors of the Company and Sunopco have proposed, declared
advisable, and approved by resolution this Agreement which will effect the
Share Exchange;
NOW, THEREFORE, in consideration of the premises, of the mutual
covenants, agreements, representations and warranties herein contained and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Sunopco hereby make this Agreement and set
forth the terms and conditions of the Share Exchange and the mode of carrying
out the same as follows:
1. Share Exchange. Upon the terms and subject to the
satisfaction of the conditions precedent contained in this Agreement, the Share
Exchange shall be completed pursuant to the provisions of, and with the effect
provided in, the FBCA. At the Effective Time (as hereinafter defined), each of
the outstanding shares of common stock of Sunopco, par value $.01 per share
("Sunopco Common Stock") shall be exchanged for and shall thereafter represent
the right to receive 9.90372627 shares of
<PAGE> 2
validly issued, fully paid, nonassessable shares of the common stock of the
Company, par value $.001 per share ("Company Common Stock").
2. Effective Time of the Share Exchange. If (a) all conditions
precedent to the Share Exchange have either been satisfied or waived and (b)
this Agreement and the Share Exchange are not thereafter terminated as
permitted by the provisions of this Agreement, then duly executed articles of
share exchange (the "Articles of Share Exchange") shall be filed with the
Department of State of the State of Florida (the "Florida Department of State")
in the manner provided in Section 607.1105 of the FBCA. The Share Exchange
shall become effective at the time and on the date specified in the Articles of
Share Exchange (the "Effective Time"), which date shall be the Closing Date (as
hereinafter defined).
3. Closing Date. The consummation of the Share Exchange shall be
on the date (the "Closing Date") of the closing of the sale by the Company to
the public of 2,000,000 shares of Company Common Stock (the "IPO"), pursuant to
that certain registration statement on Form S-1, filed with the Securities and
Exchange Commission on October 15, 1996 (SEC File No. 333-14183). The Share
Exchange shall be consummated immediately prior to the closing of the IPO.
4. Conditions Precedent. The following conditions must occur on
or before the Closing Date in order for the Share Exchange to be effectuated:
(i) approval of this Agreement by all of the holders of
the outstanding shares of Sunopco Common Stock;
(ii) acceptance by the holders of at least 90% of all of
the outstanding shares of capital stock of Holdings of the offer by the Company
to acquire such shares; and
(iii) the closing of the IPO.
5. Fractional Shares. No fractional shares of Company Common
Stock, nor certificates therefor, shall be issued by the Company. If the
number of shares of Company Common Stock issuable to a shareholder of Sunopco
pursuant to Section 1 hereof includes a fraction, the number of shares shall be
rounded up to the next whole number.
6. Stock Options. Each outstanding option to purchase a share of
Sunopco Common Stock shall be converted on the Closing Date into an option to
purchase 9.90372627 shares of Company Common Stock, at a purchase price equal
to the purchase price for the share of Sunopco Common Stock divided by
9.90372627. No options for fractional shares of Company Common Stock shall be
issued by the Company. If the aggregate number of shares of Company Common
-2-
<PAGE> 3
Stock issuable to a optionholder of Sunopco pursuant to this Section 6 for all
stock options held by such optionholder which have identical purchase prices,
vesting dates and termination dates includes a fraction, the number of shares
shall be rounded up to the next whole number. All of such options to purchase
shares of Company Common Stock shall be issued under and pursuant to the terms
of the Company's 1996 Stock Option Plan.
7. Physical Exchange of Shares. Within three (3) business
days after the Closing Date, the Company shall issue and deliver to each
shareholder of Sunopco a letter of transmittal in the form attached hereto as
Exhibit A. Within twenty (20) days after receipt by the Company from a
shareholder of Sunopco of a duly executed letter of transmittal, accompanied by
stock certificates representing such shareholders Sunopco Common Stock, a
certificate representing the shares of Company Common Stock issuable to such
shareholder shall be mailed by the Company to such shareholder. From and after
the Effective Time and until surrendered in accordance with the provisions of
this Section 7, each Sunopco stock certificate shall represent for all purposes
the right to receive Company Common Stock pursuant to the terms of this
Agreement. Unless and until any outstanding Sunopco stock certificate shall be
so surrendered, no dividend or other distribution (cash or stock), if any,
payable to holders of record of the Company Common Stock as of any date
subsequent to the Effective Time shall be paid to the holder of such
outstanding Sunopco stock certificate; provided, however, that upon such
surrender of such outstanding Sunopco stock certificate there shall be paid to
the record holder of such certificate the amount of dividends and other
distributions, if any, but without interest, that have theretofore become
payable with respect to the number of whole shares of the Company Common Stock
represented by such certificate issued upon such surrender and exchange. All
shares of Company Common Stock issued upon the surrender of Sunopco stock
certificates pursuant to this Section 7 shall be deemed to have been made in
full satisfaction of all rights pertaining to the converted and exchanged
shares of Sunopco Common Stock represented by such Sunopco stock certificates.
8. Closing of Stock Transfer Books. The stock transfer books of
Sunopco shall be closed upon the execution of this Agreement. In the event of
a transfer of ownership of Sunopco Common Stock which is not registered in the
transfer records of Sunopco, Company Common Stock issuable with respect thereto
may be distributed to a transferee if the certificate representing such Sunopco
Common Stock is presented to the Company accompanied by all documents required
to evidence and effect such transfer and by payment of any applicable stock
transfer taxes. The Company shall be entitled to rely upon the stock transfer
books of Sunopco to establish the identity of those persons entitled to receive
the considerations specified in this Agreement for their shares of Sunopco
Common Stock, which books shall be conclusive with respect
-3-
<PAGE> 4
to the ownership of such shares. In the event of a dispute with respect to the
ownership of any shares of Sunopco Common Stock, the Company shall be entitled
to deposit any consideration represented thereby in escrow with an independent
party and thereafter be relieved with respect to any claims to such
considerations.
9. Dissenters' Rights. Under Sections 607.1302 and 607.1320 of
the FBCA, each Sunopco shareholder is entitled to demand and receive payment of
the fair value of his or her shares in cash if dissenting to the Share Exchange
if such shareholder:
(i) files with the Company, before the vote is taken, a
written notice of his intent to demand payment for
his or her shares if the Share Exchange is effected;
(ii) does not vote in favor of the Share Exchange; and
(iii) within 20 days after the Company notifies the holder
of the authorization of the Share Exchange, files
with the Company a written notice of election to
dissent stating the holder's name and address and the
number, class, and series of the shares to which he
dissents, and demanding payment of the fair value of
those shares, and simultaneously deposits with the
Company the certificates for any certified shares.
10. Supplemental Action. At any time after the Effective Time, if
the Company shall determine that any further conveyances, agreements,
documents, instruments, and assurances or any further action is necessary or
desirable to effectuate the provisions of this Agreement, the appropriate
officers of the Company and Sunopco, as the case may be, whether past or
remaining in office, shall execute and deliver all conveyances, agreements,
documents, instruments, and assurances, and perform all acts reasonably
necessary or desirable to effectuate the provisions of this Agreement.
11. Amendment and Waiver. Any of the terms or conditions of this
Agreement may be amended or modified in whole or in part at any time before the
vote of the shareholders of Sunopco on the Share Exchange by an agreement in
writing executed in the same manner as this Agreement (but not necessarily by
the same persons), or at any time thereafter so long as such change is in
accordance with Section 607.1103 of the FBCA. The conditions precedent set
forth in Section 4(i) and 4(ii) hereof may be waived by the joint action of the
Boards of Directors of the Company and Sunopco, provided that, with respect to
Section 4(i), this Agreement and the Share Exchange have been approved by the
holders of at least a majority of the outstanding shares of Sunopco Common
Stock, and with respect to Section 4(ii), the holders of at least 90% of the
-4-
<PAGE> 5
outstanding shares of capital stock of Holdings have accepted the offer of the
Company to acquire such shares.
12. Termination and Abandonment.
A. At any time prior to the Effective Time (whether before or
after filing the Articles of Share Exchange), this Agreement may be terminated
and the Share Exchange abandoned by joint action of the Boards of Directors of
the Company and Sunopco, notwithstanding approval of the Share Exchange by the
shareholders of Sunopco.
B. This Agreement shall be canceled automatically if Articles of
Share Exchange are not filed with the Secretary of State on or before January
31, 1997, specifying an Effective Time of not later than 11:59 p.m. on January
31, 1997. In the event of the abandonment of the Share Exchange and the
termination of this Agreement pursuant to the foregoing provision, this
Agreement shall become void and have no effect, without any liability on the
part of any of the parties or their stockholders, directors, or officers.
13. Entire Agreement. This Agreement constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
supersedes all prior and contemporaneous agreements and understandings of the
parties in connection herewith.
14. Severability. The Company and Sunopco hereby agree and affirm
that none of the above provisions is dependent on the validity of any other
provision and invalidity as to any provision or any part thereof shall not
affect any other provision.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed by its authorized officer and its corporate seal affixed, all as of
the 13th day of November, 1996.
ATTEST: SUN HYDRAULICS INCORPORATED,
a Delaware corporation
/s/ Gregory C. Yadley By: /s/ Clyde G. Nixon
- ------------------------------ --------------------------------
Secretary Clyde G. Nixon, President
ATTEST: SUN HYDRAULICS CORPORATION,
a Florida corporation
/s/ Gregory C. Yadley By: /s/ Robert E. Koski
- ------------------------------ --------------------------------
Secretary Robert E. Koski, Chairman
-5-
<PAGE> 1
Exhibit 2.2
RECOMMENDED OFFER BY SUN HYDRAULICS INCORPORATED, A DELAWARE CORPORATION, TO
ACQUIRE THE WHOLE OF THE ISSUED SHARE CAPITAL OF SUN HYDRAULIK HOLDINGS LIMITED
("HOLDINGS").
The terms of this Offer are recommended by all the directors of Holdings.
All acceptances of this Offer must be received by 4:00 p.m. on December 11,
1996. The procedure for acceptance is set out in clause C.5.
CONTENTS
A. DEFINITIONS
B. OFFER
C. CONDITIONS AND DETAILS OF OFFER
D. OTHER INFORMATION
E. DOCUMENTS ACCOMPANYING THE OFFER
F. DOCUMENTS AVAILABLE FOR INSPECTION
ANNEX - FORM OF ACCEPTANCE
A. DEFINITIONS
A.1 "The Company" means Sun Hydraulics Incorporated, a Delaware
corporation, having its registered office c/o Corporation Trust Company at
Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware (which is
the offeror for the purpose of the Offer).
A.2 "Holdings" means Sun Hydraulik Holdings Limited (No. 2537433), a
company duly incorporated under the laws of England and Wales having its
registered office at the offices of Messrs. Taco van Tijn, 71-73 Carter Lane,
London EC4V 5EQ.
A.3 "the Offer" means the offer made by this document.
A.4 "the Sale Shares" means the 320,315 ordinary shares of L.4.75 each and
2 ordinary shares of L.1 each in the capital of Holdings with all rights
attaching to them including all dividends and other distributions made after
the date of this document.
A.5 "Company Shares" means shares of the common stock, par value $.001 per
share, of the Company.
A.6 "the Companies Act" means the Companies Act of 1985 of the United
Kingdom.
A.7 "the Date of the Offer" means November 13, 1996.
<PAGE> 2
A.8 "the Acceptance Time and Date" means 4:00 p.m. on December 11, 1996,
or such later date or dates as the Company from time to time decides and gives
notice to Holdings' shareholders.
B. OFFER
From: Sun Hydraulics Incorporated (the "Company")
1500 West University Parkway
Sarasota, FL 34243
Directors: Arthur B. Bodley
Robert E. Koski
James G. March
Clyde G. Nixon
Curtis J. Timm
Taco van Tijn
David N. Wormley
To: each of the shareholders of ordinary shares of L.4.75
and L.1 each respectively in the capital of Holdings.
B.1 Date of the Offer
The date on which this document is issued to the shareholders of Holdings is
November 13, 1996.
B.2 Offer
The Company offers to buy the whole of the issued share capital of Holdings on
the terms set forth in this document.
B.3 Consideration
1.17013042 Company Shares and $0.16 for every one ordinary share of L.4.75 or
L.1 par value in the capital of Holdings.
B.4 Acceptance
The Offer is open for acceptance until the Acceptance Time and Date but will
lapse under clause C.2 of this document if the conditions mentioned in that
clause are not duly satisfied.
-2-
<PAGE> 3
Acceptances, once delivered duly completed and executed, are irrevocable and
cannot be withdrawn.
B.5 Conditions of Offer
The Offer is subject to the terms and conditions contained in the whole of this
document and the forms of acceptance and transfer and the instructions to them.
C. CONDITIONS AND DETAILS OF OFFER
C.1 Title of Sale Shares
The Sale Shares are to be transferred free from all liens, charges, equities
and encumbrances. Signature and delivery of the enclosed form of acceptance
will constitute a warranty by the accepting shareholder to that effect in
respect of the Sale Shares for which the Offer is accepted.
C.2 Offer Conditional on Acceptances and Approval
C.2.1 This Offer is conditional on valid acceptances being received by the
Company at or before the Acceptance Time and Date in respect of 90% of
the Sale Shares but the Offer will not become unconditional unless the
Company has acquired or agreed to acquire pursuant to the Offer
C.2.1.1. shares carrying more than 90% of the voting rights then
exercisable in general meetings of Holdings; and
C.2.1.2. shares carrying more than 90% of the votes attributable to
the equity share capital of Holdings.
C.2.2 This Offer is conditional upon the approval of the Agreement and Plan
of Share Exchange dated November 13, 1996, between Sun Hydraulics
Corporation and the Company and the acquisition by the Company, on or
before January 31, 1997, of all of the outstanding shares of common
stock of Sun Hydraulics Corporation.
C.3 Lapse of Offer
The Offer will lapse if the acceptances and approval conditions in clause C.2
above fail to be satisfied by the respective dates mentioned in clause C.2.
-3-
<PAGE> 4
C.4 Announcement
The Company shall give notice to the shareholders of the acceptance of
shares but failure to give such notice shall not cause the Offer or
the acceptances of shares to be ineffective.
C.5 Procedure for acceptance of Offer
C.5.1 Shareholders who wish to accept the Offer must do so by completing and
signing the enclosed form of acceptance and transfer in accordance
with the instructions on it.
C.5.2 Completed forms (together with share certificates) for the number of
shares in respect of which a shareholder wishes to accept the Offer
should be returned to the Company at 1500 West University Parkway,
Sarasota, FL 34243, to arrive not later than the Acceptance Time and
Date.
C.6 Settlement
If the Offer becomes unconditional and the forms of acceptance and transfer are
completely satisfactory and in order then share certificates for the
appropriate number of Company Shares and the appropriate cash consideration
will be sent to shareholders by first-class prepaid post at their risk within
10 days of the Offer becoming unconditional.
D. OTHER INFORMATION
D.1 Basis for offer; business of the Company
The purpose of the Company's offer to acquire the Sale Shares is to effect a
reorganization whereby Holdings and Sun Hydraulics Corporation will become
wholly-owned subsidiaries of the Company and the existing shareholders of
Holdings and Sun Hydraulics Corporation will receive for their shares in such
companies 4,000,000 of the Company Shares (representing all of the outstanding
shares at the completion of the reorganization) in the relative proportions
that their stock bore to their percentage ownership of Holdings and Sun
Hydraulics Corporation. The Company also has filed a registration statement
with the Securities and Exchange Commission for the public sale of an
additional 2,000,000 Company Shares (the "Sun IPO") immediately following the
completion of the reorganization.
The exchange ratios for the Company's offer to acquire the Sale Shares and
effect the share exchange with Sun Hydraulics Corporation are based on the
relative fair market values of Holdings and Sun Hydraulics Corporation, as
determined by Sheldrick, McGehee & Kohler in valuation reports prepared with
respect to those entities (the "Appraisals").
-4-
<PAGE> 5
The Appraisals, conducted by Sheldrick, McGehee & Kohler with respect to Sun
Hydraulics Corporation, Holdings and Suninco, Inc. ("Suninco") as of December
31, 1995, were delivered on May 22, 1996. Suninco was merged with and into Sun
Hydraulics Corporation as of June 28, 1996. In that transaction, the former
Suninco shareholders received newly issued shares of common stock of Sun
Hydraulics Corporation using an exchange ratio based on the relative fair
market values of Sun Hydraulics Corporation and Suninco, as determined by the
Appraisals. Using those same relative values, Sun Hydraulics Corporation
(following the Suninco merger) represented approximately 91% of the combined
value of Sun Hydraulics Corporation and Holdings represented the remaining
approximately 9%. Using the relative values, the exchange ratio for the Plan
and for the Company's offer to acquire the Sale Shares was selected so that the
shareholders of Sun Hydraulics Corporation and Holdings would receive a total
of 4,000,000 Company Shares. The Company intends to sell an additional
2,000,000 Company Shares to the public in the Sun IPO (2,300,000 shares if the
"over-allotment option" granted to the underwriters is exercised).
D.2 Compulsory acquisition of shares
If the Offer is accepted in respect of 90% of the Sale Shares and becomes
unconditional under subparagraph C.2.2 above, the Company reserves the right to
exercise its rights to compulsorily acquire the remainder of the Sale Shares
under the Companies Act, Part XIII A.
D.3 Fractional shares
No fractional shares, nor certificates therefor, shall be issued by the
Company. The issuance of Company Shares shall be in whole number nonfractional
shares. Any fractional interests resulting from the acceptance of the Offer
shall be rounded up to represent the next whole number of shares. Such
variation from the distribution shall be seen as part of the consideration paid
for the Sale Shares.
D.4 United States Income Tax Treatment
Section 367(b) of the United States Internal Revenue Code of 1986, as amended
(the "Code"), imposes a "toll charge" on the transfer of stock in a foreign
corporation to a United States person that would otherwise qualify for tax free
treatment under Code Section 368. The Company believes that the acquisition of
the Sale Shares pursuant to the Offer will qualify for tax free treatment under
Code Section 351 rather than Code Section 368. Therefore, shareholders of
Holdings should be taxed only to the extent of the cash consideration received
by them pursuant to the Offer and not on receipt of Company Shares. This issue
is, however, not completely free from doubt. Neither the Company nor Holdings
has obtained a ruling from the United States Internal Revenue Service or an
opinion of counsel regarding this issue. Accordingly, each shareholder is
advised to consult his or her own tax adviser.
-5-
<PAGE> 6
D.4 Restrictions on Resale of the Company Shares
Company Shares issued to the shareholders of Holdings will be
"restricted securities" under the United States Securities Act of 1933, as
amended (the "Securities Act"), and may only be sold in the United States
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 Company Shares may be sold after December 1998, in
accordance with the volume limitations and manner of sale provisions set forth
in Rule 144. See "Shares Eligible For Future Sale" in the Preliminary
Prospectus for a more complete discussion of the Company Shares to be
outstanding after consummation of the Sun IPO and a discussion of the
provisions of Rule 144.
E. DOCUMENTS ACCOMPANYING THE OFFER
Preliminary Prospectus dated November 7, 1996, describing the Company and its
business (prepared on the assumptions that (i) the share exchange between Sun
Hydraulics Corporation and the Company is completed, (ii) this Offer is
accepted by the holders of 100% of the Sale Shares, and (iii) the Sun IPO are
completed in accordance with their respective terms).
F. DOCUMENTS AVAILABLE FOR INSPECTION
1. Valuation Reports of Sun Hydraulics Corporation, Sun Hydraulik
Holdings Limited and Suninco, Inc., prepared by Sheldrick,
McGehee & Kohler as of December 31, 1995, and delivered May 22,
1996.
2. Form of Underwriting Agreement between Sun Hydraulics
Incorporated and its Underwriters for the initial public offering
of common stock.
3. Agreement and Plan of Share Exchange between Sun Hydraulics
Incorporated and Sun Hydraulics Corporation dated November 13,
1996.
4. Certificate of Incorporation of Sun Hydraulics Incorporated.
5. Bylaws of Sun Hydraulics Incorporated.
6. Revolving Credit Agreement, dated March 9, 1992, between Sun
Hydraulics Corporation and Northern Trust Bank of
Florida/Sarasota, N.A.
7. 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.
8. Second Modification to Revolving Credit Agreement, dated May __,
1995, between Sun Hydraulics Corporation and Northern Trust Bank
of Florida, N.A.
-6-
<PAGE> 7
9. 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.
10. Mortgage and Security Agreement, dated January 9, 1992, between
Suninco, Inc., Sun Hydraulics Corporation, and Northern Trust
Bank of Florida, N.A.
11. Loan Agreement, dated March 29, 1996, between Suninco, Inc., Sun
Hydraulics Corporation, and Northern Trust Bank of Florida, N.A.
12. Security Agreement, dated March 29, 1996, between Suninco, Inc.,
Sun Hydraulics Corporation, and Northern Trust Bank of Florida,
N.A.
13. Modification and Additional Advance Agreement, dated March 29,
1996, between Suninco, Inc. and Northern Trust Bank of Florida,
N.A.
14. 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.
15. Loan Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
16. Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
17. 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.
18. Loan Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A.
19. Mortgage, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A.
20. Security Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
21. 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.
22. Revolving Loan Facility Letter Agreement, dated July 30, 1996, in
the amount of L.800,000, between Sun Hydraulics Ltd. and Lloyds
Bank PLC.
23. 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.
24. Mortgage, dated April 11, 1996, between Sun Hydraulik GMBH and
Dresdner Bank.
-7-
<PAGE> 8
25. Specimen of the Stock Certificate for Shares of common stock of
Sun Hydraulics Incorporated.
26. 1996 Sun Hydraulics Incorporated Stock Option Plan.
27. Form of Indemnification Agreement for Officers and Directors of
Sun Hydraulics Incorporated.
28. Subsidiaries of Sun Hydraulics Incorporated.
G. DELIVERY OF OFFER
This Offer is made as of this 13th day of November, 1996.
Sun Hydraulics Incorporated
By: /s/ Clyde G. Nixon
-----------------------------
Clyde G. Nixon, President
and Chief Executive Officer
-8-
<PAGE> 9
ANNEX
FORM OF ACCEPTANCE
To: The Directors
Sun Hydraulics Incorporated
1500 West University Parkway
Sarasota, FL 34243
I hereby accept your Offer dated November 13, 1996, for the purchase of my
shares in the capital of Sun Hydraulik Holdings Limited on the terms and
conditions therein stated. I accordingly enclose a signed stock transfer form
and relative share certificate for my shares. If the Offer becomes
unconditional, please forward to me my certificate for the consideration shares
of common stock in the capital of your company and cash in the amount of $0.16
for each of my Sun Hydraulik Holdings Limited shares acquired.
Dated _____________, 1996
Signed:
................................................
Signature of Shareholder
Enclosed: Signed stock transfer form
Share certificate
-9-
<PAGE> 1
EXHIBIT 11
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year ended Period ended
December 31, September 30,
1995 1996
------------ -------------
<S> <C> <C>
Primary
Net income $5,883 $2,002
====== ======
Weighted average shares outstanding 3,986 4,037
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 164 203
Assuming S Corporation distribution (1) 1,052 1,052
------ ------
Weighted average common shares as adjusted 5,202 5,292
------ ------
Earnings per share assuming full dilution $ 1.13 $ 0.38
====== ======
Fully Diluted
Net income $5,883 $2,002
====== ======
Weighted average shares outstanding 3,987 4,037
Assuming exercise of options reduced by the
number of shares which could have been
purchased with the proceeds from exercise
of such options 213 190
Assuming shares issued for S Corporation
distribution (1) 1,052 1,052
------ ------
Weighted average common shares as adjusted 5,252 5,279
------ ------
Earnings per share assuming full dilution $ 1.12 $ 0.38
====== ======
Dilutive effect 0.9% 0.0%
Supplemental Pro Forma Calculation (2)
Net income as reported $5,883 $2,002
====== ======
Add: interest paid 160 300
Less: tax effect (61) (114)
------ ------
Net income as adjusted $5,982 $2,188
====== ======
Weighted average number of shares as reported 5,202 5,292
Shares to be issued (weighted by dates of
issuance of debt to be repaid) 229 430
------ ------
Weighted average shares, as adjusted 5,431 5,722
------ ------
Supplemental primary EPS $ 1.10 $ 0.38
====== ======
Dilutive effect 2% 0%
</TABLE>
(1) In accordance with SAB Topic 1B #3 Other Matters, dividends declared as of
the balance sheet date (S Corporation distribution of $9,905) is reflected
in the pro forma calculation of Earnings Per Share (EPS).
(2) Effect of Supplemental EPS for debt retirement is less than 3% dilutive,
therefore disclosure is not required.
The treasury stock method was used in the calculation of the average shares
outstanding for EPS. The denominator includes the weighted average number
of common shares outstanding during the year plus the number of shares from
assumed exercise of all outstanding stock options less the number of
treasury shares that would be able to be repurchased from the proceeds of
such exercise. For primary EPS, the average stock price for the year is
used in the calculation of treasury shares assumed to be purchased from the
proceeds of exercised options; in the calculation for fully diluted EPS,
the year-end stock price is used.
Prior year outstanding stock was converted for the Reorganization using the
actual number of shares outstanding for each entity times the applicable
exchange rate as outlined in the Reorganization agreements. This pro forma
information was calculated in accordance with Regulation S-X, Article 11,
paragraph b(6). Additionally, since the Reorganization results in a change
in capitalization, EPS is shown only for the prior year and the most recent
period.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated September 30, 1996,
except as to the subsequent event described in Note 16 which is as of October 5,
1996, relating to the financial statements of Sun Hydraulics Incorporated, which
appears in such Prospectus. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Prospectus. However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Tampa, Florida
November 26, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
BALANCE SHEETS AND COMBINED STATEMENTS OF INCOME OF THE REGISTRANT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,187
<SECURITIES> 0
<RECEIVABLES> 4,266<F1>
<ALLOWANCES> 0
<INVENTORY> 4,377
<CURRENT-ASSETS> 9,981
<PP&E> 33,264<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,681
<CURRENT-LIABILITIES> 6,917
<BONDS> 12,788
0
0
<COMMON> 2,179
<OTHER-SE> 21,666
<TOTAL-LIABILITY-AND-EQUITY> 43,681
<SALES> 41,233
<TOTAL-REVENUES> 41,233
<CGS> 27,903
<TOTAL-COSTS> 27,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678
<INCOME-PRETAX> 4,042
<INCOME-TAX> 727
<INCOME-CONTINUING> 2,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,530
<EPS-PRIMARY> 0. <F3>
<EPS-DILUTED> 0. <F3>
<FN>
<F1>Net of allowance for doubtful accounts of $62.
<F2>Net of accumulated depreciation of $13,075.
<F3>Not applicable. Financial data is presented on a combined basis for two
different companies under common control, but which have different
capitalizations.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,434
<SECURITIES> 0
<RECEIVABLES> 3,574<F1>
<ALLOWANCES> 0
<INVENTORY> 4,478
<CURRENT-ASSETS> 10,708
<PP&E> 23,129<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 33,864
<CURRENT-LIABILITIES> 6,382
<BONDS> 5,117
0
0
<COMMON> 2,181
<OTHER-SE> 19,348
<TOTAL-LIABILITY-AND-EQUITY> 33,864
<SALES> 55,388
<TOTAL-REVENUES> 55,388
<CGS> 34,581
<TOTAL-COSTS> 34,581
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 814
<INCOME-PRETAX> 9,494
<INCOME-TAX> 633
<INCOME-CONTINUING> 8,861
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,861
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Net of allowance of $40.
<F2>Net of accumulated depreciation of $11,684.
<F3>Not applicable. Financial data is presented on a combined basis for two
different companies under common control, but which have different
capitalizations.
</FN>
</TABLE>
