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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 0-21835
SUN HYDRAULICS CORPORATION
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(Exact Name of Registration as Specified in its Charter)
FLORIDA 59-2754337
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1500 WEST UNIVERSITY PARKWAY
SARASOTA, FLORIDA 34243
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(Address of Principal Executive Offices) (Zip Code)
941/362-1200
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on March 21, 1997, was $36,504,237 based upon the reported
closing sale price of such shares on the Nasdaq Stock Market's National Market
for that date. As of March 21, 1997, there were 6,300,002 shares outstanding.
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PART I
ITEM 1. BUSINESS
Certain statements contained in this "Item 1. Business" that are not
historical facts are "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934. See "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operation - Forward-Looking
Information."
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. 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
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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 1996, 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 1996, and the Company believes that
aggregate sales by its distributors to the largest end user represented less
than 3% of net sales in 1996.
The Company believes that screw-in cartridge valves will continue to
achieve significant growth at the expense of conventional hydraulic valves as
design engineers recognize the inherent advantages of screw-in cartridge valves.
The Company believes that additional growth potential for screw-in cartridge
valve applications exists as a result of a trend toward miniaturization as end
users require smaller, lighter-weight and more efficient components. Custom
manifolds that utilize screw-in cartridge valves allow customers to design an
optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense. The United States and Western Europe are the
largest developed markets for screw-in cartridge valves, and the Company
believes future growth prospects are particularly attractive in the Pacific Rim,
Eastern Europe and India where the adoption of screw-in cartridge valves is in
the early stage. In 1996, approximately 34% of the Company's net sales were
outside the United States.
Management believes that the Company's success during its 27-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 Florida corporation in 1986 to take over
the operations of the business of the Company's predecessor, Suninco, Inc.
(f/k/a Sun Hydraulics Corporation)
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which was founded in 1970 by Robert E. Koski for the specific purpose of
developing and promoting screw-in cartridge valve technology. The address of the
Company's executive offices is 1500 West University Parkway, Sarasota, Florida
34243 and its telephone number is (941) 362-1200.
On June 28, 1996, Suninco, Inc. was merged into the Company. Prior to
the merger, the Company and Suninco were controlled by the same group of
stockholders and were operated as a common enterprise, with Suninco as the owner
and lessor of the Company's Sarasota, Florida, manufacturing plant and certain
equipment utilized by the Company at that location. See "Item 13. Certain
Relationships and Related Transactions - Suninco Merger." Immediately prior to
the Company's initial public offering of Common Stock in January 1997, the
Company acquired all of the outstanding shares of capital stock of Sun Hydraulik
Holdings Limited, a private limited company organized under the Laws of England
and Wales ("SHHL"), pursuant to an exchange offer made by the Company to all of
the stockholders of SHHL. See "Item 13. Certain Relationships and Related
Transactions - Reorganization with Sun Hydraulik Holdings Limited."
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
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Company's breadth of products offers many custom "packaging" opportunities that
allow design engineers to create custom, application-specific solutions using
the Company's cataloged "off-the-shelf" screw-in cartridge valves and related
components. End users can utilize screw-in valves and custom manifolds to design
an optimal solution for control of their fluid power systems that significantly
reduces assembly time and expense.
The Company estimates the global market for non-aerospace hydraulic
valves to be in excess of $3 billion, and believes that manufacturers of
screw-in hydraulic cartridge valves and manifolds and similar products have
captured approximately $550 million of the total market. The United States and
Western Europe are the largest developed markets for screw-in cartridge valves,
and the Company believes that future growth prospects are particularly
attractive in the Pacific Rim, Eastern Europe and India, where the adoption of
screw-in cartridge technology is in the early stage.
STRATEGY
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
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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. In March 1997, the Company commenced operations in a
new 60,000 square foot factory in Sarasota, Florida, that will house all of the
United States standard and custom manifold manufacturing operations.
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 1996, the Company generated approximately 34% of its net sales outside
the United States. The Company believes that further expansion of its
international manufacturing facilities could enhance its competitive position in
certain foreign markets. In addition, custom manifolds provide an opportunity
for distributors to offer significant local-added content through the local
production of manifolds that incorporate the Company's screw-in cartridge
valves. This strategy helps minimize potential tariffs and duties that could
inflate the price of the Company's products in foreign markets.
Maintain a Horizontal Organization with Entrepreneurial Spirit. The
Company believes that maintaining its horizontal management structure is
critical to retaining key personnel and an important factor in attracting top
talent from within the hydraulic valve and manifold industry. The Company will
strive to maintain its horizontal management structure that encourages
communication, creativity, an entrepreneurial spirit and individual
responsibility among employees. Employee initiatives have led to continuous
process improvement, resulting in considerable operating efficiencies and
quality control, as well as the maintenance of a safe and comfortable working
environment. The Company believes that a lack of job titles and direct formal
reporting responsibilities eliminates perceived barriers to advancement and
reduces the potential for adversarial relationships to arise within the
organization. A workplace without walls in the Company's offices as well as on
the shop floor encourages informal employee consultation and provides the
opportunity for all personnel to interface across functional areas.
Leverage Manufacturing Capability and Know-how as Competitive
Advantages. The Company believes one of its competitive advantages is its
ability to manufacture products to demanding specifications. The Company's
strong process capability allows it to machine parts to exacting dimensional
tolerances, resulting in the high performance characteristics of its screw-in
cartridge valves. The Company has the ability to control manufacturing processes
to replicate products consistently and can, if it desires, manufacture all
components of its products with the
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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 1996, 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, factory automation and robotics. The Company believes that
scaling
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involves minimal risk, as designs and manufacturing processes are already
proven. Future upward scaling of the product line currently is in a conceptual
stage.
The Company manufactures screw-in cartridge valves for load control,
pressure control, flow control and logic and directional control, with a broad
range of other unique functional offerings. Many variants of the same basic
functional products can be interchanged with each other to attain an optimum
level of performance in a customer's fluid power system. The Company's screw-in
cartridge valves are described more fully below.
Load Control Valves. The Company considers itself to be the
world's recognized leader in the design and manufacture of load control
valves and believes that it holds a dominant market share position in
multiple end use applications. Load control valves are pressure devices
that are used to control the motion and locking of linear and rotary
hydraulic actuators (cylinders and motors) and often are used as safety
devices in many critical system areas. Typical applications for these
products include cranes, manlifts and aerial platforms. The
uncompromising requirement for smooth and reliable operation in these
applications has helped build the Company's reputation as a high
quality, screw-in cartridge valve manufacturer. Load control valves
represent the Company's largest selling product family.
Pressure Control Valves. The Company manufactures screw-in
cartridge valves for limiting or regulating fluid pressure. Types of
pressure controls include relief valves, reducing valves,
reducing/relieving valves and sequence valves, each available in many
variants and configurations. Most hydraulic systems incorporate at
least one pressure relief valve for over-pressure protection.
Flow Control Valves. The Company manufactures a variety of
two-, three- and four-port valves to control the rate of flow of fluids
in fluid power systems. These valves typically are used to control
speed and are an integral component in most fluid power systems.
Variety and high flow capacity relative to physical size help
differentiate the Company in this product area.
Logic and Directional Control Valves. The Company manufactures
a variety of screw-in cartridge valves that can be used as directional
control devices. These valves are used to start, direct and stop the
flow of fluid in 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
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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.
- 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.
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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
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75 CNC machines in operation in the Company's manufacturing plants. The Company
employs more than 60 robots, including 45 intelligent (programmable) models, to
supplement traditional pick and place units. In addition, eight vision systems
are in use with three used for decision making tasks. In its manifold
manufacturing operations in Florida and England, the Company utilizes internally
developed, proprietary personal computer based software to program machines
off-line and to minimize setup times. This expert system also enables the
Company to utilize compound angle holes in its manifold designs, a technique
that allows manifolds to be made smaller in size with fewer potential leak
points.
At its Sarasota, Florida cartridge valve 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. Manufacturing processes at 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.
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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 1996
and approximately 34% of the Company's net sales were outside of the United
States in 1996.
In addition to distributors, the Company sells directly to other
companies within the hydraulic industry under a pricing program that does not
undermine the primary distributors' efforts. Companies that participate in this
program must utilize the Company's products in a value-added application,
integrating the Company's screw-in cartridge valves into other fluid power
products of their manufacture. This strategy strengthens the Company because it
encourages other manufacturers to buy from the Company instead of competing with
it. The "goodwill" relationships that result from this strategy also help to
keep the Company abreast of technological advances within the fluid power
industry, aiding in new product development. In 1996, direct sales to other
fluid power component manufacturers accounted for approximately 4% 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
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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 1996,
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.
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.
The Company's distributors are not authorized to approve the use of its
products in any of the following applications: (i) any product that comes under
the Federal Highway Safety Act, such as steering or braking systems for
passenger-carrying vehicles or on-highway trucks, (ii) aircraft or space
vehicles, (iii) ordnance equipment, (iv) life support equipment, and (v) any
product that, when sold, would be subject to the rules and regulations of the
United States Nuclear Regulatory Commission. These "application limitations"
have alleviated the need for the Company to maintain the internal bureaucracy
necessary to conduct business in these market segments.
COMPETITION
The hydraulic valve industry is highly fragmented and intensely
competitive. The Company has a large number of competitors, some of which are
full-line producers and others that are niche suppliers like the Company. Most
competitors market globally. Full-line producers have the ability to provide
total hydraulic systems to customers, including components
-13-
<PAGE> 14
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.
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, the Company is not aware that any major competitor produces products
that conform to the ISO standard.
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 March 14, 1997, the Company had approximately 420 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.
-14-
<PAGE> 15
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.
ITEM 2. PROPERTIES
The Company owns four manufacturing facilities, two in Sarasota,
Florida, one in Coventry, England, and one in Erkelenz, Germany. The Sarasota
cartridge valve facility has approximately 66,000 square feet, with additional
acreage at the site that can accommodate future expansion. The new manifold
facility in Sarasota has approximately 60,000 square feet and commenced
operations in March, 1997. The Coventry plant is comprised of approximately
25,000 square feet, with additional acreage at the site that can accommodate
future expansion. The new facility in Erkelenz, Germany that was completed in
March, 1997, has approximately 42,000 square feet that is used as a distribution
center and will be used for future manufacturing needs. Initially, the German
facility will utilize a small percentage of available space to assemble
cartridge valves and manifolds; the Company intends to sublease a portion of the
unused space.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings other than
routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
Prior to the Company's initial public offering, by written consent
dated December 17, 1996, holders of a majority of the outstanding shares of the
Company approved the Amended and Restated Articles of Incorporation of the
Company. The Amended and Restated Articles of Incorporation of the Company
include provisions establishing a classified board of directors, setting forth
requirements for the calling of special meetings of the shareholders,
prohibiting action by written consent of the shareholders if there are more than
30 shareholders of record, limiting the liability of directors, providing
indemnification to directors and officers to the full extent permitted by the
Florida Business Corporation Act, and requiring the affirmative vote of the
holders of at least 80% of the outstanding voting stock in order to amend
certain provisions of the Articles of Incorporation.
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<PAGE> 16
Pursuant to the written consent dated December 17, 1996, holders of a
majority of the outstanding shares of the Company also approved the Sun
Hydraulics Corporation 1996 Stock Option Plan (the "Plan"). Pursuant to the
Plan, the Company may issue up to 1,000,000 shares of Common Stock to officers,
Directors and employees of the Company. The options granted under the Plan may
be incentive stock options or nonstatutory options (except that options granted
to Directors who are not also employees of the Company must be nonstatutory
options). The exercise price for incentive stock options may not be less than
the fair market value of the Company's common stock on the date the options are
granted. The exercise price for nonstatutory options may be equal to or less
than the fair market value of the Common Stock on the date the options are
granted. Options granted under the Plan may expire no later than ten years after
the date of grant.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on The Nasdaq National Market of The
Nasdaq Stock Market under the symbol "SNHY." The Company completed its initial
public offering of Common Stock on January 14, 1997, and, accordingly, there was
no trading during either of the two prior fiscal years.
There were 93 shareholders of record of Common Stock on March 14, 1997,
including the Depository Trust Company, which was the shareholder of record for
over 2,300,000 shares on such date. The Depository Trust Company is a clearing
agency utilized by most brokers and banks to hold record title to stocks owned
by such brokers and banks and their customers.
The Company declared a cash dividend of $.035 per share on March 15,
1997, to shareholders of record on March 31, 1997, payable on April 15, 1997.
The Company currently intends to pay quarterly cash dividends of $.035 per
share, 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 Company's
agreement with its primary lender includes a covenant which restricts the
payment of dividends. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 6. SELECTED COMBINED FINANCIAL DATA
The following summary should be read in conjunction with the combined
financial statements and related notes and Exhibit 11.1 contained herein. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 1. Business."
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<PAGE> 17
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $ 28,331 $ 32,431 $ 42,853 $ 55,388 $ 54,572
Cost of sales 17,946 21,971 27,512 34,581 37,185
-------- -------- -------- -------- --------
Gross profit 10,385 10,460 15,341 20,807 17,387
Selling, engineering and
administrative expenses 7,826 7,346 8,605 10,578 12,097(1)
-------- -------- -------- -------- --------
Operating income 2,559 3,114 6,736 10,229 5,290
Interest expense 997 931 859 814 823
Miscellaneous (income) expense (252) 249 66 (79) 267
-------- -------- -------- -------- --------
Income before income taxes 1,814 1,934 5,811 9,494 4,200
Deferred tax provision (2) 2,425
Income tax provision (benefit)(3) (201) (148) 408 633 704
-------- -------- -------- -------- --------
Net income $ 2,015 $ 2,082 $ 5,403 $ 8,861 $ 1,071
======== ======== ======== ======== ========
PRO FORMA STATEMENT OF
INCOME DATA:
Pro forma income
before income taxes $ 1,814 $ 1,934 $ 5,811 $ 9,494 $ 4,200
Pro forma income tax provision 580 604 2,738 3,611 1,583
-------- -------- -------- -------- --------
Pro forma net income(4) $ 1,234 $ 1,330 $ 3,073 $ 5,883 $ 2,617
======== ======== ======== ======== ========
Pro forma net income per
common share(5) $ .92 $ .40
Supplemental pro forma
net income(4) $ 2,870
========
Supplemental pro forma
net income per share (5) $ .44
========
Weighted average shares
outstanding(5) 6,424 6,509
OTHER FINANCIAL DATA:
Depreciation $ 1,971 $ 2,112 $ 2,197 $ 2,556 $ 2,857
Capital expenditures 1,987 3,005 5,130 7,657 16,963
</TABLE>
-17-
<PAGE> 18
<TABLE>
<CAPTION>
DECEMBER 31
1992 1993 1994 1995 1996 1996
---- ---- ---- ---- ---- ----
PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 1,128 $ 1,883 $ 2,371 $ 2,434 $ 1,038 $ 4,774
Working capital.................... 3,396 4,557 5,085 4,326 958 6,147
Total assets....................... 20,411 22,674 27,868 33,864 48,416 51,104
Total debt......................... 7,637 8,184 8,025 6,186 17,218 11,065
Shareholders' equity............... 10,805 12,051 15,624 21,529 22,397 31,238
</TABLE>
- --------------------
(1) Includes a non-recurring, non-cash compensation expense of
approximately $1.5 million related to the termination of phantom stock
compensation agreements and the issuance of options to Directors. See
Note 13 of the Notes to Financial Statements. Excluding such expense,
pro forma net income for the twelve months ended December 31, 1996
would have been approximately $3.8 million.
(2) Resulting from the termination of the Company's S Corporation status as
of December 31, 1996.
(3) The Company previously operated as an S Corporation. Therefore, the
historical income tax provision represents primarily foreign taxes.
(4) The pro forma net income is based on historical 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, 3 and
12 of the Notes to the Combined Financial Statements The supplemental
pro forma net income reflects reduced interest expense related to the
paydown of debt upon receipt of proceeds from the initial public
offering.
(5) The pro forma net income per share and the supplemental pro forma net
income per share are based on estimated weighted average number of
shares outstanding during the period, after giving effect to the
reorganization and the initial public offering.
ITEM. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Net sales were down
approximately 1.5% for fiscal year 1996 compared to 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
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<PAGE> 19
to remain relatively constant. The Company sells its products globally through
independent distributors. In 1996, the Company generated approximately 34% of
its net sales outside the United States, and the Company's single largest end
user customer represented less than 3% of net sales.
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. The fluid power industry peaked in mid-1995 and was generally
flat in 1996, with shipments up 0.3% for the year, according to reports by the
National Fluid Power Association.
In the twelve months ended December 31, 1996, the Company experienced a
decline in net sales that was consistent with industry business levels. In
addition to industry flatness, the Company attributes the decline in sales to
inventory reductions in its United States distribution channel and significant
slowdowns in Canadian and German sales. The Company's gross margin deteriorated
due to the inefficiencies at the Company's existing plant in Sarasota, Florida
which was operating near capacity. The Company believes that the new facility in
Sarasota, Florida that opened in March 1997, 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. Historically,
the Company has managed to mitigate negative consequences of cyclical downturns
with new product introductions and geographic and end user market diversity. The
demand for the Company's products is dependent upon demand for the capital goods
in which the Company's products are incorporated.
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. During 1996 new facilities in the United States and Germany were under
construction; both commenced operations in March 1997. The new plant in the
United States will be used for the production of manifolds, and the original
plant will be dedicated to the production of cartridge valves. The German
facility will continue as a distribution operation and will be used for future
manufacturing needs. 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.
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<PAGE> 20
Prior to January 1, 1997, the Company was 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 has terminated its S Corporation status as of December 31, 1996, and is
now fully subject to federal and state income taxes. Upon termination of S
Corporation status, the Company recognized approximately $2.4 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>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0%
Cost of sales............................. 64.2 62.4 68.1
----- ----- -----
Gross profit.............................. 35.8 37.6 31.9
Selling, engineering and
administrative expenses.................. 20.1 19.1 22.2
----- ----- -----
Operating income.......................... 15.7 18.5 9.7
Interest expense.......................... 2.0 1.5 1.5
Miscellaneous (income) expense............ 0.1 (0.1) 0.5
----- ----- -----
Income before income taxes................ 13.6% 17.1% 7.7%
===== ===== =====
</TABLE>
Comparison of Years Ended December 31, 1996 and 1995
Net sales decreased 1.5%, or $0.8 million, to $54.6 million in the
twelve month period ended December 31, 1996, compared to $55.4 million in the
twelve month period ended December 31, 1995. Domestic net sales decreased 1.9%,
or $0.7 million to $35.9 million in the twelve month period ended December 31,
1996. The decline primarily was due to a general decrease in fluid power
industry shipments for the first three quarters of the year, United States
distributor inventory corrections in the first half of the year and capacity
constraints throughout the year. International net sales decreased 1.5%, or $0.3
million, to $18.5 million in the twelve month period ended December 31, 1996.
United Kingdom, Pacific Rim and other foreign net sales increased 8.1% offset by
net sales decreases in Germany and Canada of 11.2% and 26.2%, respectively.
Gross profit decreased 16.4%, or $3.4 million, to $17.4 million in the
twelve month period ended December 31, 1996, compared to $20.8 million in the
twelve month period ended December 31, 1995. Gross profit as a percentage of net
sales decreased to 31.9% for the twelve month period ended December 31, 1996,
from 37.6% for the twelve month period ended
-20-
<PAGE> 21
December 31, 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 because the United States plant was
operating near capacity.
Selling, engineering and administrative expenses increased 14.4% or
$1.5 million, to $12.1 million in the twelve month period ended December 31,
1996, compared to $10.6 million in the twelve month period ended December 31,
1995. These expenses as a percentage of net sales increased to 22.2% for the
twelve month period ended December 31, 1996, from 19.1% for the twelve month
period ended December 31, 1995. The increase in selling, engineering and
administrative expenses primarily was due to a non-recurring, non-cash
compensation expense of $1.5 million related to the issuance of stock options
and the cancellation of phantom stock compensation agreements. Excluding the
$1.5 million compensation expense, selling, engineering and administrative
expenses as a percentage of sales would have been 19.4% for the twelve month
period ended December 31, 1996, compared to 19.1% for the twelve month period
ended December 31, 1995.
Comparison of Years Ended December 31, 1995 and 1994
Net sales increased 29.3%, or $12.5 million, to $55.4 million in 1995,
compared to $42.9 million in 1994. Domestic net sales increased 27.7%, or $7.9
million, to a total of $36.6 million in 1995, compared to $28.7 million in 1994.
International net sales increased 32.5%, or $4.6 million, to $18.8 million in
1995, compared to $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.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain quarterly financial information
for each of the Company's last eight quarters. The Company believes that this
information includes all
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<PAGE> 22
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such quarterly information when read in conjunction with
the Financial Statements and the Notes thereto included elsewhere herein. The
pro forma income tax provision and pro forma net income are presented as if the
Company were a C Corporation in the periods presented. The operating results for
any quarter are not necessarily indicative of the results for any future period
or for the entire year.
<TABLE>
<CAPTION>
QUARTER ENDED
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 13,632 $14,288 $ 14,798 $12,670 $13,806 $ 13,831 $13,596 $13,339
-------- ------- -------- ------- ------- -------- ------- -------
Cost of sales 8,185 8,901 9,275 8,220 9,491 9,125 9,287 9,282
-------- ------- -------- ------- ------- -------- ------- -------
Gross profit 5,447 5,387 5,523 4,450 4,315 4,706 4,309 4,057
Selling, engineering
and administrative
expenses 2,486 2,549 2,617 2,926 2,665 2,929 3,694(1) 2,809
-------- ------- -------- ------- ------- -------- ------- -------
Operating income 2,961 2,838 2,906 1,524 1,650 1,777 615 1,248
Interest expense 212 220 180 202 205 218 255 145
Miscellaneous (income)
expense (16) 5 (70) 2 53 (63) 117 160
-------- ------- -------- ------- ------- -------- ------- -------
Income before income
taxes 2,765 2,613 2,796 1,320 1,392 1,622 243 943
Pro forma tax
provision 987 933 1,149 542 554 646 55 328
-------- ------- -------- ------- ------- -------- ------- -------
Pro forma net income $ 1,778 $ 1,680 $ 1,647 $ 778 $ 838 $ 976 $ 188 $ 615
======== ======= ======== ======= ======= ======== ======= =======
Supplemental pro forma
net income $ 918 $ 1,061 $ 201 $ 690
======= ======== ======= =======
</TABLE>
(1) Includes non-recurring compensation expense of $1.5 million.
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 shareholders,
repurchase shares of the Company's Common Stock and service debt.
At December 31, 1996, the Company had working capital of approximately
$1.0 million. Cash generated from operations in 1996 was $7.0 million, compared
to $12.7 million in 1995 and $7.3 million in 1994. The decrease in the Company's
cash generated from operations reflects
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<PAGE> 23
a $7.8 million decrease in net income and approximately $0.8 million expended
for public offering expense.
Capital expenditures in 1996 were $17.0 million, compared to $7.7
million in 1995 and $5.1 million in 1994. In 1996, $12.6 million was spent for
the new manufacturing plants in the United States and Germany, both of which
commenced operations in March 1997. In 1996, the Company was awarded a grant of
$0.5 million by the German government, which helped to offset the cost of the
German facility. Also included in 1996 capital expenditures was $4.4 million for
machinery and equipment. Capital expenditures in 1995 included $0.9 million for
land and land improvements for the United States and German facilities.
At December 31, 1996, the Company had a $1.7 million line of credit,
secured by all inventory and accounts receivable. In February, 1997, this was
replaced by a $10.0 million unsecured revolving credit facility with a term of
one year and an interest rate equal to the bank lender's prime rate.
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 at December 31, 1996. The converted loan had an
interest rate of 8.25% and a maturity date of 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. At December
31, 1996, the existing Florida facility had a $2.4 million mortgage loan with an
interest rate of 8.25% and a maturity date of April 1, 2006. In England, the
Company has a $1.2 million line of credit, denominated in British pounds, which
bears interest at a floating rate (8.25% at December 31, 1996) equal to 2.25%
over the bank's base rate. None of these arrangements contain pre-payment
penalties. In addition, the Company has $2.1 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
shareholders, and do not allow for prepayment by the Company.
In January, 1997, the Company received $20.3 million of proceeds from
its initial public offering of common stock. Net proceeds after expenses were
approximately $19.3 million. In January, 1997, $9.5 million of the S Corporation
distribution was paid out representing 90% of the total distribution of $10.4
million. Also in January, the capital equipment loan balance of $2.9 million and
the mortgage balance of $2.4 million on the original United States facility were
paid off in full. In February, $0.9 million was paid on the revolving line of
credit in the United States.
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<PAGE> 24
The Company believes that cash generated from operations and borrowing
availability under the $10 million bank line of credit 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.
FORWARD-LOOKING INFORMATION
Certain oral statements made by management from time to time and
certain statements contained herein that are not historical facts are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 and because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward looking statements. Forward looking statements,
including those in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in "Item 1. Business," are statements
regarding the intent, belief or current expectations, estimates or projections
of the Company, its Directors or its Officers about the Company and the industry
in which it operates, and assumptions made by management, and include among
other items, (i) the Company's strategies regarding growth, including its
intention to develop new products, (ii) the Company's financing plans; (iii)
trends affecting the Company's financial condition or results of operations;
(iv) the Company's ability to continue to control costs and to meet its
liquidity and other financing needs; (v) the declaration and payment of
dividends; and (vi) the Company's ability to respond to changes in customer
demand domestically and internationally, including as a result of
standardization. Although the Company believes that its expectations are based
on reasonable assumptions, it can give no assurance that the anticipated
results will occur.
Important factors that could cause the actual results to differ
materially from those in the forward-looking statements include, among other
items, (i) the economic cyclicality of the capital goods industry in general and
the hydraulic valve and manifold industry in particular; (ii) conditions in the
capital markets, including the interest rate environment and the availability of
capital; (iii) changes in the competitive marketplace that could affect the
Company's revenue and/or cost bases, such as increased competition, lack of
qualified engineering, marketing, management or other personnel, and increased
labor and raw materials costs; (iv) changes in technology or customer
requirements, such as standardization of the cavity into which screw-in
cartridge valves must fit, which could render the Company's products or
technologies noncompetitive or obsolete; and (v) changes relating to the
Company's international sales, including changes in regulatory requirements or
tariffs, trade or currency restrictions, fluctuations in exchange rates, and tax
and collection issues.
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<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to financial statements:
<TABLE>
<S> <C> <C>
Report of Independent Certified Public Accountants.................................... 26
Combined Balance Sheets as of December 31, 1995 and 1996 and
Unaudited Pro Forma Balance Sheet as of December 31, 1996.................... 27
Combined Statements of Income for the years ended
December 31, 1994, 1995, and 1996............................................ 28
Combined Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995, and 1996............................................ 29
Combined Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996............................................ 30
Notes to Combined Financial Statements................................................ 31
</TABLE>
-25-
<PAGE> 26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Sun Hydraulics Corporation and Sun Hydraulik Holdings Limited
(collectively "Sun Hydraulics Corporation")
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 Corporation (the "Company") at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, 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
March 26, 1997
-26-
<PAGE> 27
SUN HYDRAULICS CORPORATION
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
IN THOUSANDS
- ----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA
DECEMBER 31 DECEMBER 31,
1995 1996 1996
(UNAUDITED)
(NOTE 2)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 2,434 $ 1,038 $ 4,774
Accounts receivable, net of allowance for
doubtful accounts of $40, $62 and $62 3,574 3,535 3,535
Inventories 4,478 4,451 4,451
Other current assets 222 1,132 1,132
-------- -------- ---------
Total current assets 10,708 10,156 13,892
Property, plant and equipment, net 23,129 37,212 37,212
Other assets 27 1,048 -
-------- -------- ---------
$ 33,864 $ 48,416 $ 51,104
======== ======== =========
Liabilities and Shareholders Equity
Current liabilities:
Accounts payable $ 2,992 $ 3,273 $ 3,273
Accrued expenses and other liabilities 1,188 1,961 1,961
Long-term debt due within one year 495 2,340 887
Notes payable to related parties due within one year 574 655 655
Accrued distributions to shareholders 643 508 508
Income taxes payable net 490 461 461
-------- -------- ---------
Total current assets 6,382 9,198 7,745
Long-term debt due after one year 2,553 12,314 7,614
Notes payable to related parties due after one year 2,564 1,909 1,909
Deferred income taxes 84 2,578 2,578
Other liabilities 752 20 20
-------- -------- ---------
Total liabilities 12,835 26,019 19,866
======== ======== =========
Commitments & contingencies (Notes 10 and 16)
Shareholders' equity:
Capital stock 2,181 2,179 6
Capital in excess of par value 997 2,719 24,165
Retained earnings 18,676 17,450 7,018
Equity adjustments for foreign currency translation (325) 49 49
-------- -------- ---------
Total shareholders' equity 21,529 22,397 31,238
-------- -------- ---------
$ 33,864 $ 48,416 $ 51,104
======== ======== =========
</TABLE>
The accompanying Notes to Combined Financial Statement
are an integral part of these financial statements.
-27-
<PAGE> 28
SUN HYDRAULICS CORPORATION
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------
<TABLE>
Year ended December 31,
1994 1995 1996
<S> <C> <C> <C>
Net sales $42,853 $ 55,388 $54,572
Cost of sales 27,512 34,581 37,185
------- -------- -------
Gross profit 15,341 20,807 17,387
Selling, engineering and
administrative expenses 8,605 10,578 12,097
------- -------- -------
Operating income 6,736 10,229 5,290
Interest expense 859 814 823
Miscellaneous (income)
expense 66 (79) 267
------- -------- -------
Income before income taxes 5,811 9,494 4,200
Income tax provision 408 633 3,129
------- -------- -------
Net income $ 5,403 $ 8,861 $ 1,071
======= ======== =======
PRO FORMA INCOME
DATA (UNAUDITED) (NOTE 2):
Pro forma income before income taxes $ 9,494 $ 4,200
Pro forma income tax provision 3,611 1,583
-------- -------
Pro forma net income $ 5,883 $ 2,617
======== =======
Pro forma net income per share $ 0.92 $ 0.40
======== =======
Supplemental pro forma net income $ 2,870
=======
Supplemental pro forma net
income per share $ 0.44
=======
Pro forma average shares outstanding 6,424 6,509
======== =======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
-28-
<PAGE> 29
SUN HYDRAULICS CORPORATION
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
EQUITY
ADJUSTMENT
CAPITAL IN FOR FOREIGN
CAPITAL EXCESS OF RETAINED CURRENCY
STOCK PAR VALUE EARNINGS TRANSLATION TOTAL
<S> <C> <C> <C> <C> <C>
Balance, December 31, 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)
Realize tax benefit on debt
exchange (see Note 10) 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
Issuance of stock options 2,110 2,110
Suninco step-up for purchase accounting 185 185
Exercise of stock options 70 70
Repurchase and retirement of shares (41) (41)
Exchange of shares in merger (Note 2) (2) (602) 604 -
Adjustment for foreign
currency translation 374 374
Net income 1,071 1,071
Distributions to shareholders (2,901) (2,901)
----------- --------- -------------- ------------ -------------
Balance, December 31, 1996 2,179 2,719 17,450 49 22,397
Pro Forma (unaudited) (Note 2):
Issuance of stock in connection with
initial public offering 2 (2) -
Proceeds from initial public offering 20,321 20,321
S Corporation distribution (10,432) (10,432)
Deferred costs related to initial
public offering (1,048) (1,048)
Exchange of shares in merger (Note 2) (2,175) 2,175 -
----------- --------- -------------- ------------ -------------
Pro forma balance, December 31, 1996 $ 6 $ 24,165 $ 7,018 $ 49 $ 31,238
=========== ========== ============== ============ =============
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
-29-
<PAGE> 30
SUN HYDRAULICS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,403 $ 8,861 $ 1,071
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,197 2,556 2,857
Compensation expense of stock options - - 2,110
(Benefit from)/provision for deferred income taxes 328 (110) -
(Increase) decrease in:
Accounts receivable (937) (479) 39
Inventories (765) (679) 27
Other current assets (60) 307 (910)
Other assets (11) (4) (1,021)
Increase (decrease) in:
Accounts payable 1,014 1,146 281
Accrued expenses and other liabilities (5) 280 773
Income taxes payable, net - 490 2,465
Other liabilities 100 369 (732)
------- ------- -------
Net cash provided by operating activities 7,264 12,737 6,960
------- ------- -------
Cash flows from investing activities:
Capital expenditures (5,130) (7,657) (16,963)
Proceeds from dispositions of equipment - 23 23
------- ------- -------
Net cash used in investing activities (5,130) (7,634) (16,940)
------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 1,850 3,337 16,502
Repayment of long-term debt (1,563) (4,661) (4,896)
Proceeds from notes payable to related parties 1,940 - -
Repayment of notes payable to related parties (2,386) (515) (574)
Purchase accounting-Suniaco - - 185
Proceeds from exercise of stock options 105 149 70
Repurchase of shares - - (41)
Distributions to shareholders (1,900) (3,399) (3,036)
------- ------- -------
Net cash provided by (used in) financing activities (1,954) (5,089) 8,210
------- ------- -------
Foreign currency translation adjustment 308 49 374
------- ------- -------
Net increase (decrease) in cash and cash equivalents 488 63 (1,396)
------- ------- -------
Cash and cash equivalents, beginning of year 1,883 2,371 2,434
Cash and cash equivalents, end of year $ 2,371 $ 2,434 $ 1,038
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest (net of amounts capitalized) $ 875 $ 815 $ 324
======= ======= =======
Income taxes $ (223) $ 109 $ 587
======= ======= =======
Increase in assets associated with
purchase of minority interest shares (Note 2) $ 283
=======
</TABLE>
The accompanying Notes to Combined Financial Statements
are an integral part of these financial statements.
-30-
<PAGE> 31
SUN HYDRAULICS CORPORATION
NOTES TO THE COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS
Sun Hydraulics Corporation and its subsidiaries (the "Company") design,
manufacture and sell screw-in cartridge valves and manifolds used in hydraulic
systems, and has facilities in the United States, the United Kingdom and
Germany. Sun Hydraulics Corporation ("Sun Hydraulics"), located in Sarasota,
Florida, designs, manufactures and sells through independent distributors in the
United States. Sun Hydraulik Holdings Limited ("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. REORGANIZATION AND INITIAL PUBLIC OFFERING
The combined financial statements of Sun Hydraulics Corporation consist
of the financial position and results of operations of Sun Hydraulics and Sun
Holdings. Sun Hydraulics and Suninco, Inc. ("Suninco") completed a merger on
June 28, 1996 by exchanging Sun Hydraulics' common stock for all of the
outstanding stock of Suninco. The share exchange was accounted for in a manner
similar to a pooling of interests, except for shares held by the minority
shareholders which were accounted for at the fair market values of the
proportionate share of related assets and liabilities. The fair market value of
their minority interest shares in excess of net book value were allocated to Sun
Hydraulics' long-term assets on a pro-rata basis, resulting in an increase of
$38 and $245 to land and buildings, respectively.
Subsequent to year end, Sun Hydraulics effected a 9 to 1 stock split.
Also subsequent to year end, Sun Hydraulics issued 374,811 shares of common
stock in exchange for all of the issued and outstanding stock of Sun Holdings
(the "Reorganization"). The Reorganization was accounted for in a manner similar
to a pooling of interests except for shares held by the minority shareholders
which were accounted for at the fair market value of their proportionate share
of related assets and liabilities, which approximated book value on the date of
the transaction.
Upon Reorganization, the Company had 20,000,000 authorized shares of
common stock, par value $0.001, with 4,000,002 shares outstanding. The Company
also had 2,000,000 authorized shares of preferred stock, par value $0.001, with
no shares outstanding.
In conjunction with the Reorganization, the Company's Board of
Directors approved an initial public offering (the "IPO") of the Company's
common stock. The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission effective January 9, 1997. The effects of the
Reorganization, the S Corporation distribution (see Note 11), a charge to
recognize deferred income taxes (see Note 12) and the use of proceeds from the
IPO are reflected in the pro forma balance sheet as of December 31, 1996.
Pro Forma Balance Sheet and Changes in Shareholders' Equity
The effects of the Reorganization, a charge associated with the
provision for deferred income taxes of $2,425 which the Company recognized upon
its termination of S Corporation status (see Note 11) and the use of net
proceeds of $19,273 from the IPO
-31-
<PAGE> 32
are reflected in the pro forma balance sheet as of December 31, 1996. The use of
proceeds reflects distribution of previously taxed S Corporation retained
earnings of $10,432 and repayment of debt approximating $6,153.
Pro Forma Net Income
Pro forma net income reflects a provision for income taxes as if Sun
Hydraulics had been a C Corporation for all periods presented.
The computation of pro forma earnings per share is based on the
weighted average number of outstanding common shares, on a pro forma basis,
during the period plus common stock equivalents, if dilutive, consisting of
certain shares subject to stock options, after giving effect to the
Reorganization (see Note 2) and the initial public offering. 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.
Supplemental Pro Forma Net Income
The computation of supplemental pro forma earnings is calculated as
above, but gives effect to the repayment of debt, including interest expense and
related tax effect, as of the beginning of the year from the proceeds of the
IPO.
3. 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 and its subsidiaries. All significant
intercompany accounts and transactions are eliminated in combination.
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.
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.
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:
-32-
<PAGE> 33
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment 4-12
Furniture and fixtures 4-10
Land and leasehold improvements 5-15
Buildings 40
</TABLE>
Capitalized interest was $9 and $293 in 1995 and 1996, respectively.
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, 1996, management does
not believe that an impairment reserve is required.
Other Assets
Other assets consist primarily of deferred costs associated with the
IPO. Such costs have been charged against proceeds of the IPO in the
accompanying pro forma balance sheet.
Other Liabilities
At December 31, 1995 other liabilities consisted of accrued
compensation earned under the Company's phantom stock option plans (the
"Plans"). Compensation cost was measured as the amount by which the market
value, as defined in the Plans, of the stock on the measurement date exceeded
the market value on the date the phantom stock options were granted. The market
value was defined in the Plans as the higher of: the last arms length sale price
of said stock between unrelated parties if there had been a sale in the
preceding six months period, or the book value of said stock. Compensation cost
was accrued over the service period and adjusted in periods subsequent to the
measurement date for changes in the market value of the stock.
Effective September 30, 1996, the Board of Directors of the Company
approved a stock option plan to replace the phantom stock agreements by issuing
305,260 nonqualified stock options and 189,348 incentive stock options. Exercise
prices of the nonqualified options range from $3.00 to $5.05. The employees were
immediately vested in their nonqualified options upon issuance. The incentive
stock options will vest over periods up to seven years. The Company recognized a
charge during 1996 related to termination of the phantom stock agreements of
approximately $1,378.
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 expenses are
amounts incurred for research and development of the Company's manufacturing
processes and related software which approximated $1,276, $1,337 and $1,007 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Advertising Costs
The Company expenses the costs for advertising and promotional
literature during the year incurred. Included in selling, engineering and
administrative expenses are amounts incurred for advertising and promotional
literature which approximated $791, $792 and $641 for the years ended December
31, 1994, 1995 and 1996, respectively.
-33-
<PAGE> 34
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 Sun
Hydraulics 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 other
non-operating 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 for 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
12). Effective December 31, 1996, Sun Hydraulics converted to C Corporation
status and Sun Hydraulics' subsequent earnings are subject to corporate income
taxes. Accordingly, for informational purposes, the statement of income reflects
a pro forma income tax provision which would have been recorded if Sun
Hydraulics had been a C Corporation, based on the tax laws in effect during
those periods.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("FAS 123") during 1996. Upon
adoption, the Company retained the intrinsic value method of accounting for
stock-based compensation and will disclose the effects of adopting this
pronouncement in the notes to the financial statements (see Note 13).
4. FAIR VALUE OF INVESTMENTS
In 1995, the Company adopted Statement of Financial Accounting
Standards No.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.
-34-
<PAGE> 35
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 and $2,645 at
December 31, 1995 and 1996, respectively.
5. INVENTORIES
The components of inventory are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996
------ ------
<S> <C> <C>
Raw materials $ 127 $ 147
Work in process 3,236 2,758
Finished goods 1,115 1,546
------ ------
$4,478 $4,451
====== ======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Machinery and equipment $ 20,666 $ 24,930
Furniture and fixtures 4,221 4,938
Buildings 4,861 5,071
Land and leasehold improvements 532 586
-------- --------
30,280 35,525
Less-accumulated depreciation (11,684) (14,281)
-------- --------
18,596 21,244
Construction in progress 3,414 14,558
Land 1,119 1,410
-------- --------
$ 23,129 $ 37,212
======== ========
</TABLE>
As a result of the merger of Sun Hydraulics and Suninco in June 1996
(see Note 2), a portion of which was accounted for under the purchase method of
accounting, land and buildings were increased $38 and $245, respectively.
During 1995, the Company purchased land for $461 and began construction
of a new production facility in Sarasota, Florida. The aggregate cost incurred
as of year end of the new production facility was $10,185 with an anticipated
$460 cost to complete and the facility was placed in service during March 1997.
Also during 1995, the Company purchased land in Erkelenz, Germany for
approximately $429 for construction of a new production and distribution
facility. The aggregate cost of the facility was $3,596 and the facility was
placed in service March 1997.
-35-
<PAGE> 36
7. ACCRUED EXPENSES AND OTHER LIABILITIES
The components of accrued expenses and other liabilities are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Compensation and benefits $ 863 $1,161
Deferred revenue - 462
Taxes - 112
Interest 111 93
Warranty expense - 44
Other accrued expenses 214 89
------ ------
$1,188 $1,961
====== ======
</TABLE>
8. LONG-TERM DEBT
The components of long-term debt are summarized as follows:
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
1995 1996 1996
---- ---- ----
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C>
Lines of credit agreements, interest payable
at lender's prime rate (8.50% and
8.25% at December 31, 1995 and 1996) $ 38 $ 1,512 $ 588
Secured equipment loan, interest only payable
monthly at 10.25% in 1995 and 8.25%
in 1996 443 2,874 -
8.25% mortgage note payable secured by real
property due in monthly principal and
interest installments of $20 1,714 2,355 -
Variable rate mortgage note (13.0% at
December 31, 1995 and 1996) secured by real property, principal and interest
payable in monthly installments of $8
through 2007 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 277 46 46
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 - 7,867 7,867
Capital lease obligations at varying
interest rates from 8.45% to 12.45%
through 1999 65 - -
------ ------- ------
3,048 14,654 8,501
Less amounts due within one year (495) (2,340) (887)
------ ------- ------
$2,553 $12,314 $7,614
====== ======= ======
</TABLE>
The remaining principal payments are due as follows: 1998-$835;
1999-$955; 2000-$1,035; 2001-$1,122; 2002 and thereafter $8,367.
-36-
<PAGE> 37
The Company had a $1,700 revolving credit agreement, secured by all
inventory and accounts, bearing interest at the lender's prime rate with a
maturity date of March 1, 1997. At December 31, 1996, $775 of this amount was
available to the Company. The agreement required Sun Hydraulics to maintain
certain financial ratios and places certain limitations on fixed asset
expenditures. A waiver of this limitation was obtained as of September 30, 1996
for the remainder of fiscal 1996 from the bank.
Subsequent to December 31, 1996, the Company negotiated a one year,
unsecured revolving credit facility. The agreement provides for a maximum
availability of $10,000, payable on demand at the lender's prime rate of
interest.
In January 1995, the Company obtained the secured equipment loan for
capital equipment expenditures at a fixed interest rate, with interest only for
the first year, converting to a five year amortization with monthly principal
and interest payments of $13. In May 1996, the loan was converted to a
seven-year term loan and additional funds were advanced. As of December 31, 1995
and 1996, the Company had drawn $443 and $2,874, respectively, on this equipment
line of credit.
During 1996, the mortgage note was increased by approximately $794 and
the interest rate reduced from 9% 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 through the completion of
construction and then conversion to a 10-year note with a 15-year amortization
schedule.
9. CAPITAL STOCK
At December 31, 1995 and 1996, prior to effects of the Reorganization
(see Note 2), the combined par value of common stock consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Sun Hydraulics Corporation $ 3 $ 4
Suninco, Inc. 3 -
Sun Hydraulik Holdings Limited 2,175 2,175
------ ------
$2,181 $2,179
====== ======
</TABLE>
Other information by entity, prior to the effects of Reorganization, is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<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 342,815 366,043
Suninco, Inc.
Par value per share $ 0.01 $ -
Shares authorized 1,000,000 -
Shares issued and outstanding 302,735 -
Sun Hydraulik Holdings Limited
Par value per share $ 6.81 $ 6.81
Shares authorized 421,052 421,052
Shares issued and outstanding 319,315 320,315
</TABLE>
-37-
<PAGE> 38
10. RELATED PARTIES
Notes Payable to Related Parties
Notes payable to related parties include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
15% unsecured notes payable for repurchase and
retirement of stock, quarterly principal
and interest installments ranging from
$43 to $142 through 2001 $2,849 $2,303
10% unsecured notes payable for phantom
compensation, quarterly principal and
interest payments of $14 payable
through 2002 289 261
------ ------
3,138 2,564
Less amounts due within one year (574) (655)
------ ------
$2,564 $1,909
====== ======
</TABLE>
The remaining principal payments are due as follows: 1998-$757;
1999-$586; 2000-$365; 2001-$135; 2002 and thereafter-$66.
At the time of issuance, the 15% notes payable for the repurchase and
retirement of stock were to related parties. These notes represent the
repurchase of shares of common stock from four retiring employees, one employee
of retirement age who was still employed by the Company at the time the shares
were repurchased, and nine former shareholders related to the principal
shareholder of the Company. These agreements contain a provision disallowing
prepayment.
During 1995, Sun Hydraulics entered into a 35 month agreement with
SunOpTech ("SunOpTech"), a limited partnership formed to further development of
manufacturing software used in the Company's production process. In exchange for
the development of computer software and computer support, Sun Hydraulics will
pay approximately $955 over the three year period and reimburse SunOpTech for
reasonable expenses related to the software development. During 1995 and 1996,
$90 and $555, respectively were paid to SunOpTech under the agreement. Future
payments are scheduled as follows: 1997-$325 and 1998-$30. For the years ended
December 31, 1995 and 1996, Sun Hydraulics paid expenses of SunOpTech of $25 and
$203, respectively. Additionally, Sun Hydraulics provided certain administrative
support and office space to SunOpTech at no charge. These expenses are included
in selling, engineering and administrative expenses.
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 $1,250,
$1,310 and $1,104 of products from the Company in fiscal 1994, 1995 and 1996,
respectively.
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.
11. DISTRIBUTIONS TO SHAREHOLDERS
The Company declared distributions of $2,514, $3,154 and $2,901 to
shareholders in 1994, 1995 and 1996, respectively, a portion of which was to
fund shareholders' individual income tax liabilities related to the S
Corporation taxable earnings.
-38-
<PAGE> 39
Approximately half of the distributions in 1996 have been to fund
shareholders' individual income tax liabilities related to the S Corporation
taxable earnings.
Subsequent to year end the Company will distribute all of Sun
Hydraulics' previously undistributed retained earnings totaling $10,432 related
to the S Corporation. A distribution of $9,446 representing 90% of the total
undistributed retained earnings was paid in January 1997.
12. 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,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
United States $4,914 $7,489 $2,190
Foreign 897 2,005 2,010
------ ------ ------
Total $5,811 $9,494 $4,200
====== ====== ======
</TABLE>
The income tax provision consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current tax expense (benefit):
United States $197 $ (3) $ 7
State and local - - -
Foreign 154 746 621
---- ----- ------
Total current 351 743 628
---- ----- ------
Deferred tax expense (benefit):
United States (82) (88) 2,170
State and local (37) (16) 255
Foreign 176 (6) 76
---- ----- ------
Total deferred 57 (110) 2,501
---- ----- ------
Total income tax provision $408 $ 633 $3,129
==== ===== ======
</TABLE>
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
U.S. federal taxes at statutory rate $ 1,976 $ 3,228 $ 1,428
Increase (decrease):
Foreign income taxed at higher rates 12 28 14
Book/tax basis differences on disposed
equipment 131 - -
Taxable gain eliminated from book income 127 - -
Conversion of S Corporation to C Corporation - - 2,354
S Corporation income (1,839) (2,684) (724)
Nondeductible items 45 46 57
State and local taxes, net (37) (16) -
Other (7) 31 -
------- ------- -------
Income tax provision $ 408 $ 633 $ 3,129
======= ======= =======
</TABLE>
-39-
<PAGE> 40
Deferred tax assets and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Deferred taxes, non-current:
Assets
Accrued expenses and reserves
not currently deductible $ - $ 182
Phantom stock compensation 218 558
Florida NOL carry forward 15 18
---- ------
Deferred tax asset, non-current $233 $ 758
==== ======
Liabilities
Depreciation differences $317 $3,336
---- ------
Deferred tax liability, non-current $317 $3,336
==== ======
Net deferred tax liability, non-current $ 84 $2,578
==== ======
</TABLE>
At December 31, 1996, the Company has a Florida income tax net
operating loss carry forward of approximately $328 available to offset future
taxable income. These carry forwards expire through 2010. Utilization of these
carry forwards may be limited in the event of certain ownership changes.
The Company is required to recognize deferred income taxes upon
termination of the S Corporation status (see Note 2) and recognize deferred
income taxes for cumulative temporary differences between income for financial
and tax reporting purposes.
PRO FORMA TAXES (UNAUDITED)
The reconciliation between the effective income tax rate and the U.S.
federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996
---- ----
<S> <C> <C>
U.S. federal taxes at statutory rate $3,228 $1,428
Increase:
Foreign income taxed at higher (lower) rates 28 14
Nondeductible items 81 57
State and local taxes, net 243 84
Other 31 -
------ ------
Income tax provision $3,611 $1,583
====== ======
</TABLE>
Pro forma deferred tax assets and liabilities at December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Pro forma deferred taxes, non-current:
Assets
<S> <C>
Accrued expenses and reserves not currently deductible $ 182
Phantom stock compensation 558
Florida NOL carry forward 18
------
Pro forma deferred tax asset, non-current $ 758
======
Liabilities
Depreciation difference $3,336
Pro forma deferred tax liability, non-current $3,336
Pro forma net deferred tax liability, non-current $2,578
======
</TABLE>
-40-
<PAGE> 41
13. STOCK OPTION PLANS
Under stock option plans which have expired, the Company had granted
incentive stock options to certain employees which were exercisable at a price
equal to the fair market value on the date of grant. No shares were available
for granting at December 31, 1994, 1995 or 1996. The Company had stock option
activity related to these plans for the three years ended December 31, 1996 as
follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at 12/31/94.... 44,000 $7.37 27,000 $8.12 8,000 $8.83
Exercised.................. (17,000) 6.17 (19,000) 7.83 (8,000) 8.83
------ ----- ------ ----- ----- -----
Outstanding at 12/31/95.... 27,000 $8.12 8,000 $8.83 0 $ -
====== ====== ======
Options exercisable at
12/31/96.................. 13,000 2,000 0
</TABLE>
During 1996, the Company adopted the 1996 Stock Option Plan (the "Stock
Option Plan"), which provides for the grant of incentive stock options and
nonqualified stock options for the purchase of up to an aggregate of 1,000,000
shares of the Company's common stock by officers, employees and directors of the
Company. Under terms of the plan, incentive stock options may be granted to
employees at an exercise price per share of not less than the fair value per
common share on the date of the grant (not less than 110% of the fair value in
the case of holders of more than 10% of the Company's voting stock).
Nonqualified stock options may be granted at the discretion of the Company's
Board of Directors.
Effective September 30, 1996, the Board of Directors of the Company
approved a plan to replace previously granted 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 Reorganization. Exercise
prices of the nonqualified options range from $3.00 to $5.05. The employees were
immediately vested in the nonqualified options upon Reorganization. The
qualified options will vest over periods up to seven years. The Company
recognized a charge in 1996 related to the termination of the phantom stock
agreements of approximately $1,378.
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 exercisable upon
Reorganization. The Company recognized a charge during 1996 of approximately
$110 in connection with the issuance of these options.
Options granted under the Stock Option Plan expire seven and ten years
from the date of the grant.
-41-
<PAGE> 42
A summary of the Stock Option Plan as of December 31, 1996, and changes
during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
<S> <C> <C>
Outstanding at 12/31/95.... - $ -
Granted.................... 319,960 3.91
Exercised.................. - -
------- ---
Outstanding at 12/31/96.... 319,960 $3.91
======= =====
Options exercisable at
12/31/96.................. - -
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND EXERCISABLE
-----------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED
OUTSTANDING AT REMAINING AVERAGE
RANGE OF EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ ----------------- ---------------- --------------
<S> <C> <C> <C>
$ 3.00..................... 14,700 9.75 $3.00
3.00-5.50................ 305,260 9.73 3.95
-------
319,960 3.91
=======
</TABLE>
Fair Value Disclosures
Had compensation cost for the Company's stock option grants been
determined based on the fair value of the stock options at the grant dates as
prescribed in FAS 123, the Company's net income and net income per share would
not have changed during 1995 as no options were granted during that year. The
Company would have recorded additional expense (after tax effect) during 1996
of approximately $82, resulting in adjusted net income of $989 and adjusted
pro forma net income of $2,535 for the year. Pro forma net income per share,
adjusted for the additional compensation cost, would have been $0.39 per share.
The fair value of each option grant is estimated on the date of grant using
the fair market value method with the following assumptions used for grants
during the applicable period: cumulative volatility of 82%; dividend yield of
1.38%; risk-free interest rate of 6.60% for options granted during the year
ended December 31, 1996; and an estimated weighted average expected option term
of 5 years.
14. 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 $796, $901 and
$586 during 1994, 1995 and 1996, 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 $1,242, $1,490 and $1,348
during 1994, 1995 and 1996, respectively. Long-term disability and life
insurance benefits are also provided to
-42-
<PAGE> 43
employees, the premiums for which are paid directly by Sun Hydraulics. Payments
amounted to approximately $110, $132 and $157 for 1994, 1995 and 1996,
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 $43, $56 and $69 during 1994, 1995 and 1996, respectively.
The Company had phantom stock agreements with certain employees. Under
these agreements, 92,801 phantom options were 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 $105 and $353 is included in selling,
engineering and administrative expenses in 1994 and 1995, respectively.
Effective September 30, 1996 the Board of Directors of the Company approved a
plan to replace the phantom stock agreements.
15. INFORMATION ABOUT THE COMPANY'S OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
The individual companies comprising the Company operate predominantly
in a single industry as manufacturers and distributors of hydraulic components.
The companies are multinational with operations in the United States, the United
Kingdom and Germany. Intercompany transfers between geographic areas are
accounted for based on sales prices that approximate those to third parties. In
computing earnings from operations for the foreign companies, no allocations of
general corporate expenses, interest or income taxes have been made.
Identifiable assets of the foreign companies are those assets related
to the operation of those companies. United States assets consist of all other
operating assets of the companies.
Geographic information is as follows:
<TABLE>
<CAPTION>
UNITED UNITED
STATES KINGDOM GERMANY ELIMINATION COMBINED
------ ------- ------- ----------- --------
<S> <C> <C> <C> <C>
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) -
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
1996
Sales to unaffiliated customers $42,180 $8,866 $3,526 - $54,572
Intercompany sales 5,194 1,895 - $(7,089) -
Operating profits 14,765 3,108 1,262 (1,748) 17,387
Identifiable assets 37,565 6,750 4,544 (443) 48,416
Depreciation expense 2,203 570 84 - 2,857
Capital expenditures 12,626 3,162 1,175 - 16,963
</TABLE>
-43-
<PAGE> 44
Total liabilities attributable to foreign operations were $2,493,
$2,674 and $4,940 at December 31, 1994, 1995 and 1996, respectively. Net foreign
currency gains (losses) reflected in results of operations were ($19), $10 and
$117 for the years ended 1994, 1995 and 1996, 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 $4,589, $6,468 and $6,090 during 1994, 1995
and 1996, respectively.
16. 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.
-44-
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III.
ITEM. 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company currently consists of six
members. The Board is divided into three classes of Directors serving staggered
three-year terms. Directors hold their positions until the annual meeting of
shareholders in the year in which their term expires, and until their respective
successors are elected and qualified or until their earlier resignation, removal
from office or death. Executive officers serve at the pleasure of the Board of
Directors.
The following table sets forth the names and ages of the Company's
Directors and executive officers and the positions they hold with the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert E. Koski............................... 67 Chairman of the Board of Directors (term
expiring in 1997) and a member of the
Compensation Committee
Clyde G. Nixon................................ 61 President, Chief Executive Officer, Director
(term expiring in 1998)
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 (term expiring in 1997) and a
member of the Audit Committee
</TABLE>
-45-
<PAGE> 46
<TABLE>
<S> <C> <C>
James G. March................................ 68 Director (term expiring in 1997) and a
member of the Compensation Committee
Taco van Tijn................................. 72 Director (term expiring in 1999) and a
member of the Audit Committee
David N. Wormley.............................. 57 Director (term expiring in 1999) and a
member of the Compensation Committee
</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 is 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
-46-
<PAGE> 47
the principal of Copeman Consulting, and performed consulting services for the
Company from March 1996 to July 1996. From January 1994, to October 1995, Mr.
Copeman was a partner with Coopers & Lybrand, Australia; from July 1989, to
December 1993, he was a Director of Coopers & Lybrand's International
Manufacturing Practice. From January 1985, to July 1989, he served in various
management positions with Vickers, Incorporated, most recently as Vice
President. From August 1967, to January 1985, he served in various management
positions with Double A Products Company, most recently as Vice President. Mr.
Copeman is a Certified Manufacturing Engineer and a graduate of Georgia
Institute of Technology and the Krannert Business School of Purdue University.
Mr. Copeman has over 22 years experience in the fluid power industry.
MR. DOBBYN joined the Company in October 1995, and was named Chief
Financial Officer in July 1996. From June 1995 to October 1995, Mr. Dobbyn
served as the Controller of Protek Electronics. From July 1994 to June 1995, he
served as the Fiscal Director of a non- profit child care agency. From September
1984 to July 1994, Mr. Dobbyn was Senior Vice President-Finance and
Administration for Loral Data Systems, formerly Fairchild Weston Systems, a
Schlumberger company. Mr. Dobbyn is a Certified Public Accountant and a graduate
of Boston College.
MR. ROBSON has served as a Director of Sun Hydraulics Limited,
Coventry, England, since May 1993, and has been employed by the Company as the
General Manager of its United Kingdom operations since 1982. Mr. Robson is a
Chartered Engineer and a graduate of Coventry University. Mr. Robson has over 30
years experience in the fluid power industry.
MR. BODLEY has served as President and Chief Executive Officer of Atlas
Fluid Components Company, Inc., a fluid power distributorship in Akron, Ohio,
since January 1966. Mr. Bodley has over 30 years experience in the fluid power
industry. He has served as a Director of the Company since January 1973.
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. 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.
-47-
<PAGE> 48
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 has Audit and Compensation Committees. The
Company does not have a Nominating Committee; instead, the entire Board of
Directors functions as a Nominating Committee.
The functions of the Audit Committee are to recommend annually to the
Board of Directors the appointment of the independent public accountants of the
Company, to discuss and review the scope of and the fees for the prospective
annual audit with the independent public accountants, to review the results
thereof with the independent public accountants, to review and approve non-audit
services of the independent public accountants, to review compliance with
existing major accounting and financial policies of the Company, to review the
adequacy of the financial organization of the Company, to review management's
procedures and policies relative to the adequacy of the Company's internal
accounting controls, to review compliance with federal and state laws relating
to accounting practices and to review and approve (with the concurrence of a
majority of the disinterested Directors of the Company) transactions, if any,
with affiliated parties.
The functions of the Compensation Committee are to review and approve
annual salaries and bonuses for all executive officers, to review, approve and
recommend to the Board of Directors the terms and conditions of all employee
benefit plans or changes thereto, to administer the Company's stock option plans
and carry out the responsibilities required by the rules of the Securities and
Exchange Commission.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's Directors, officers and holders of more than 10% of the Company's
Common Stock to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of Common Stock and any other
equity securities of the Company. As the Company's initial public offering of
its Common Stock did not occur until 1997, no Section 16(a) reports were
required in 1996.
-48-
<PAGE> 49
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY 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 1996 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
========================================================================================================================
LONG TERM
COMPENSATION
AWARDS-- OTHER ANNUAL
SECURITIES COMPENSATION
NAME AND UNDERLYING ------------
PRINCIPAL POSITION YEAR SALARY OPTIONS/SARS (#) (3)
------------------ ---- ------ ---------------- ---
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert E. Koski, 1996 $106,000 --- $18,798 (4)
Chairman of the 1995 106,000 --- 28,033 (4)
Board of Directors 1994 106,000 --- 18,837
Clyde G. Nixon, 1996 180,000 94,765 (1) 12,239
President and 1995 165,000 110,739 (2) 21,807
Chief Executive Officer 1994 150,000 --- 30,827 (5)
Robert J. Devereaux 1996 129,000 48,306 (1) 11,160
Vice President 1995 123,500 --- 19,771
1994 118,500 --- 19,171
Jeffrey Cooper 1996 116,000 43,689 (1) 9,314
Engineering Manager 1995 110,500 --- 10,280
1994 105,000 --- 9,840
====================================================================================================================
</TABLE>
- ----------
(1) Represents nonqualified stock options granted in conjunction with the
termination of the executive's phantom stock compensation agreement.
(2) Represents phantom stock compensation award.
(3) Except as otherwise noted, reflects primarily contributions made by the
Company on behalf of the employee to the Company's 401(k) plan and
excess life insurance premiums.
(4) Includes payment by the Company of certain professional fees on behalf
of Mr. Koski in 1996 and 1995 in the amounts of $11,478 and $7,250,
respectively.
(5) Includes payment by the Company of certain club dues on behalf of Mr.
Nixon in the amount of $12,000.
-49-
<PAGE> 50
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
=============================================================================================================================
INDIVIDUAL GRANTS
===============================================================================
NUMBER
OF PERCENT OF
SECURITIES TOTAL
UNDER- OPTIONS
LYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES OR BASE POTENTIAL REALIZABLE VALUE AT ASSUMED
GRANTED IN FISCAL PRICE EXPIRATION ANNUAL RATES OF STOCK PRICE APPRECIATION
NAME (#) YEAR ($/SH) DATE FOR OPTION TERM (1)
- -----------------------------------------------------------------------------------------------------------------------------
5% ($) 10% ($) 0% ($)
(a) (b) (c) (d) (e) (f) (g) (h)
--- --- --- --- --- --- --- ---
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert E. Koski 0 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Clyde G. Nixon 94,765 31% $4.95 1/09/07 $997,354 $1,865,975 $431,181
- -----------------------------------------------------------------------------------------------------------------------------
Robert J. Devereaux 48,306 16% 3.47 1/09/07 579,889 1,022,665 291,285
- -----------------------------------------------------------------------------------------------------------------------------
Jeffrey Cooper 43,689 14% 3.43 1/09/07 526,212 926,668 265,192
=============================================================================================================================
</TABLE>
- ----------
(1) Assumes a market price at date of grant of $9.50, which was the initial
public offering price for the shares of common stock on January 9,
1997. The 5% and 10% assumed annual rates of stock price appreciation
are provided in compliance with Regulation S-K under the Securities
Exchange Act of 1934. The Company does not necessarily believe that
these appreciation calculations are indicative of actual future stock
option values or that the price of Common Stock will appreciate at such
rates.
-50-
<PAGE> 51
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
================================================================================================================
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FISCAL AT FISCAL
SHARES YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE (1)
(a) (b) (c) (d) (e)
--- --- --- --- ---
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert E. Koski 0 -- 0/0 0/0
- --------------------------------------------------------------------------------------------------------------
Clyde G. Nixon 21,006 $164,257 94,765/0 $431,181/0
- --------------------------------------------------------------------------------------------------------------
Robert J. Devereaux 0 -- 48,306/0 291,285/0
- --------------------------------------------------------------------------------------------------------------
Jeffrey Cooper 0 -- 43,689/0 265,192/0
==============================================================================================================
</TABLE>
- ----------
(1) Value is based upon the difference between the initial public offering
price of $9.50 per share on January 9, 1997, and the exercise price.
EXECUTIVE COMPENSATION AGREEMENTS
In September 1996, in connection with the termination of certain
individual phantom stock compensation agreements, the Company issued to eight
employees of the Company and SHHL, including Messrs. Cooper, Devereaux, Nixon
and Robson, who are Executive Officers of the Company, options to purchase
305,260 shares of Common Stock. The exercise prices for such options ranged from
$3.00 to $5.05, with a weighted average of $3.95. Such options are exercisable
and have a term of 10 years. As part of the same agreements, following its
initial public offering the Company also issued to such employees incentive
stock options to purchase 189,348 shares of Common Stock at the initial public
offering price of the Common Stock of $9.50 per share. Such incentive stock
options vest over varying periods of up to seven years.
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, 1996, and the initial compensation for the
current fiscal year through the date hereof. In the future, the Compensation
Committee of the Board of Directors will determine the compensation
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<PAGE> 52
of the Company's Executive Officers. See "Item 10. Directors and Executive
Officers of the Registrant."
DIRECTOR COMPENSATION
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 also are
reimbursed for their expenses incurred in connection with their attendance at
such meetings.
In September, 1996, the Company granted non-statutory options to
Directors Bodley and van Tijn, and to former Director Curtis J. Timm, to
purchase 3,920 shares of the Company's common stock. The Company also granted
non-statutory options to Director Wormley to purchase 2,940 shares of the
Company's Common Stock. All of the foregoing options were exercisable upon
grant, at an exercise price of $3.00 per share, and they expire in January,
2007.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 14, 1997, information as to
the beneficial ownership of the Company's Common Stock 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, (iii) each named
executive officer of the Company, as defined in Item 402(a)(3) of Regulation S-K
under the Securities Exchange Act of 1934 ("Named Executive Officer"), and (iv)
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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP CLASS (2)
- ---------------------------------------- -------------------- ---------
<S> <C> <C>
Koski Family Limited Partnership........................... 2,258,546 35.8
5619 Preston Oaks Road
Dallas, Texas 75240
Christine L. Koski(3)...................................... 2,322,835 36.9
5619 Preston Oaks Road
Dallas, Texas 75240
Robert C. Koski(3)......................................... 2,258,546 35.8
315 Sycamore Street
Decatur, Georgia 30030
</TABLE>
-52-
<PAGE> 53
<TABLE>
<S> <C> <C>
Thomas L. Koski(3)......................................... 2,258,546 35.8
Six New Street
East Norwalk, Connecticut 06855
Robert E. Koski(3)(4)...................................... 2,544,927 40.4
Beverly Koski(3)(4)........................................ 2,544,927 40.4
Robert S. and Ann R. Ferrell(5)............................ 420,437 6.7
5924 Cranbrook Way, #101
Naples, Florida 34112
Robert J. Devereaux(6)..................................... 251,203 4.0
Clyde G. Nixon(7).......................................... 202,740 3.2
Peter G. Robson(8)......................................... 76,308 1.2
James G. March(9).......................................... 53,572 *
Jeffrey Cooper(8).......................................... 49,109 *
Arthur B. Bodley(10)....................................... 13,860 *
Russell G. Copeman(8)...................................... 10,526 *
Taco van Tijn(10).......................................... 8,920 *
Richard J. Dobbyn(8)....................................... 7,000 *
David N. Wormley(11)....................................... 3,940 *
All Directors and Executive Officers as a
Group (11 persons)......................................... 3,222,105 48.7
</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) This column set forth shares of the Company's Common Stock which are
deemed to be "beneficially owned" by the persons named in the table
under Rule 13d-3 of the Securities and Exchange Commission. All of the
persons named in the table have sole voting and investment power with
respect to all shares beneficially owned by them except as otherwise
described in the following footnotes.
(3) Includes 2,258,546 shares owned by the Koski Family Limited
Partnership, over which Christine L. Koski, Robert C. Koski, Thomas L.
Koski, Robert E. Koski and Beverly Koski share dispositive power. Each
of the foregoing individuals has the sole right to vote 451,709 shares
of Common Stock held by the Koski Family Limited Partnership. Christine
L. Koski, Robert C. Koski and Thomas L. Koski are the adult children of
Robert E. Koski and Beverly Koski.
(4) Includes 151,216 shares owned by Beverly Koski and 135,165 shares owned
by Robert E. Koski. Beverly Koski is the spouse of Robert E. Koski.
(5) According to information supplied to the Company by the Ferrells in
connection with the initial public stock offering of the Company on
January 9, 1997. Includes 240,125 shares
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<PAGE> 54
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 58,832 shares subject to currently exercisable
options.
(7) Includes 97,449 shares which are owned jointly by Mr. Nixon and his
spouse. Also includes 105,291 shares subject to currently exercisable
options.
(8) Represents shares subject to currently exercisable options.
(9) Shares are owned jointly by Dr. March and his spouse.
(10) Includes 3,920 shares subject to currently exercisable options.
(11) Includes 2,940 shares subject to currently exercisable options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth herein briefly describes transactions during
the past fiscal year between the Company and its Directors, officers and 5%
shareholders. 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 and will be on terms no less
favorable to the Company than those that could be obtained from unaffiliated
parties.
REORGANIZATION WITH SUN HYDRAULIK HOLDINGS LIMITED
Immediately prior to the Company's initial public offering of Common
Stock in January, 1997, the Company effected a 9.90373 for 1 stock split of its
capital stock. The Company at the same time acquired all of the outstanding
shares of capital stock of Sun Hydraulik Holdings Limited, a private limited
company organized under the Laws of England and Wales ("SHHL"), pursuant to an
exchange offer made by the Company to all of the stockholders of SHHL (the
"Reorganization"). Pursuant to the terms of the exchange offer, the Company
issued 1.17013 shares of Common Stock (for a total of 374,810 shares of Common
Stock) and $0.16 in cash for each share of stock of SHHL acquired by it. No
registration rights were granted to the SHHL stockholders, and the shares of the
Company's Common Stock issued to them in the Reorganization are "restricted
securities" under the Securities Act of 1933.
Prior to the Reorganization, the Company and SHHL were controlled by
the same group of stockholders and were operated as a common enterprise, with
all of the Company's European operations carried out through subsidiaries of
SHHL operating in England and Germany. The relative values of the Company and
SHHL for purposes of the Reorganization were established
-54-
<PAGE> 55
by appraisals conducted for this purpose. These appraisals also were used to
establish the relative values of the Company and Suninco, Inc. for the June 1996
merger of those two corporations. See "Suninco Merger" below.
SUNOPTECH, LTD.
In October 1995, the Company contributed certain intangible assets to
SunOpTech, Ltd. ("SunOpTech"), a limited partnership formed to further the
development of manufacturing software. In January 1996, the Company distributed
to its stockholders the 65% limited partnership interest in SunOpTech which it
received in exchange for the contributed intangible assets. Robert E. Koski owns
51% of the common stock of the general partner of SunOpTech, and Messrs. Koski
and Clyde G. Nixon are members of the board of directors of the general partner.
The Company currently has no ownership interest in SunOpTech.
The Company entered into a contract with SunOpTech for a 35-month term
beginning November 1995, for the development of computer software and computer
support to the Company. The Company will pay approximately $955,000 over the
contract term, provide office space and equipment and reimburse SunOpTech for
reasonable expenses related to the software development. During 1996, the
Company paid fees of $555,000 and expenses of $203,000 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.
SUNINCO MERGER
On June 28, 1996, Suninco, Inc. ("Suninco") was merged into the
Company. Prior to the merger, the Company and Suninco were controlled by the
same group of stockholders and were operated as a common enterprise, with
Suninco as the owner and lessor of the Company's Sarasota, Florida,
manufacturing plant and certain equipment utilized by the Company at that
location. The relative values of the Company and Suninco in the merger were
established by appraisals conducted for this purpose. In structuring the merger,
the Company concluded that, based upon such appraisals, the issuance of 178,426
shares of Common Stock to the former Suninco stockholders represented fair value
for the acquired assets of Suninco.
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 $1.1 million,
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<PAGE> 56
$1.3 million and $1.2 million of products from the Company in fiscal 1996, 1995
and 1994, respectively.
PART IV
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
<S> <C> <C>
(a) 1. The following financial statements are included in Part II, Item 8:
Report of Independent Certified Public Accountants....................................26
Combined Balance Sheets as of December 31, 1995 and 1996 and
Unaudited Pro Forma Balance Sheet as of December 31, 1996....................27
Combined Statements of Income for the years ended
December 31, 1994, 1995, and 1996............................................28
Combined Statements of Shareholders' Equity for the years ended
December 31, 1994, 1995, and 1996............................................29
Combined Statements of Cash Flows for the years ended
December 31, 1994, 1995, and 1996............................................30
Notes to Combined Financial Statements................................................31
</TABLE>
2. 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.
3. Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C> <C>
3.1* Amended and Restated Articles of Incorporation of the Company
(previously filed as Exhibit 3.1 in the Pre-Effective
Amendment No. 4 to the Company's Registration Statement on
Form S-1 filed on December 19, 1996 (File No. 333-14183)).
3.2* Amended and Restated Bylaws of the Company (previously filed
as Exhibit 3.2 in the Pre-Effective Amendment No. 4 to the
Company's Registration Statement on Form S-1 filed on December
19, 1996 (File No. 333-14183)).
</TABLE>
-56-
<PAGE> 57
<TABLE>
<S> <C> <C>
4.1* Revolving Credit Agreement, dated March 9, 1992, between Sun
Hydraulics Corporation and Northern Trust Bank of
Florida/Sarasota, N.A. (previously filed as Exhibit 4.1 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
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. (previously filed as Exhibit 4.2 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.3* Second Modification to Revolving Credit Agreement, dated May
__, 1995, between Sun Hydraulics Corporation and Northern
Trust Bank of Florida, N.A. (previously filed as Exhibit 4.3
in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183)).
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.
(previously filed as Exhibit 4.4 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183)).
4.5* Mortgage and Security Agreement, dated January 9, 1992,
between Suninco, Inc., Sun Hydraulics Corporation, and
Northern Trust Bank of Florida, N.A. (previously filed as
Exhibit 4.5 in the Company's Registration Statement on Form
S-1 filed on October 15, 1996 (File No. 333-14183)).
4.6* Loan Agreement, dated March 29, 1996, between Suninco, Inc.,
Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.6 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.7* Security Agreement, dated March 29, 1996, between Suninco,
Inc., Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.7 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.8* Modification and Additional Advance Agreement, dated March 29,
1996, between Suninco, Inc. and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.8 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
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. (previously filed as Exhibit 4.9 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
</TABLE>
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<PAGE> 58
<TABLE>
<S> <C> <C>
4.10* Loan Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.10 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.11* Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.11 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
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. (previously filed as Exhibit 4.12
in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183)).
4.13* Loan Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.13 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.14* Mortgage, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.14 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.15* Security Agreement, dated June 14, 1996, between Sun
Hydraulics Corporation and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.15 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
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.
(previously filed as Exhibit 4.16 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.17* Revolving Loan Facility letter agreement, dated July 30, 1996,
in the amount of (pound)800,000, between Sun Hydraulics Ltd.
and Lloyds Bank Plc. (previously filed as Exhibit 4.17 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.18* Overdraft and Other Facilities letter agreement, dated June 7,
1996, in an amount not to exceed (pound)250,000, between Sun
Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as
Exhibit 4.18 in the Company's Registration Statement on Form
S-1 filed on October 15, 1996 (File No. 333-14183)).
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C> <C>
4.19* Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and
Dresdner Bank (previously filed as Exhibit 4.19 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.20* Amendment to Recommended Offer by Sun Hydraulics Corporation
to acquire the whole of the issued share capital of Sun
Hydraulik Holdings Limited, dated December 17, 1996
(previously filed as Exhibit 2.1 in the Pre-Effective
Amendment No. 4 to the Company's Registration Statement on
Form S-1 filed on December 19, 1996 (File No. 333-14183)).
4.21 Master Note, dated February 3, 1997, in the amount of
$10,000,000.00, made by the Company to evidence a line of
credit granted to the Company by Northern Trust Bank of
Florida, N.A.
10.1* Form of Distributor Agreement (Domestic) (previously filed as
Exhibit 10.1 in the Company's Registration Statement on Form
S-1 filed on October 15, 1996 (File No. 333-14183)).
10.2* Form of Distributor Agreement (International) (previously
filed as Exhibit 10.2 in the Company's Registration Statement
on Form S-1 filed on October 15, 1996 (File No. 333-14183)).
10.3* 1996 Sun Hydraulics Corporation Stock Option Plan (previously
filed as Exhibit 10.3 in the Pre-Effective Amendment No. 4 to
the Company's Registration Statement on Form S-1 filed on
December 19, 1996 (File No. 333-14183)).
10.4*+ Form of Indemnification Agreement (previously filed as Exhibit
10.4 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on December 19, 1996
(File No. 333- 14183)).
11.1 Statement regarding Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule for year ended December 31, 1996. (For
SEC purposes only)
</TABLE>
* Previously filed.
+ Executive management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
-59-
<PAGE> 60
<TABLE>
<S> <C> <C>
(c) Exhibits -- The Exhibits listed in Item 14(a)(3) of this
report are filed with this Form 10-K.
(d) Financial Statement Schedules -- None.
</TABLE>
-60-
<PAGE> 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sarasota, State of Florida on March 26, 1997.
SUN HYDRAULICS CORPORATION
By: /s/ Clyde G. Nixon
----------------------------------
Clyde G. Nixon, President and
Chief Executive Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on March 26, 1997.
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
/s/ Robert E. Koski
- ----------------------------------
Robert E. Koski Chairman of the Board of Directors
/s/ Clyde G. Nixon
- ----------------------------------
Clyde G. Nixon President, Chief Executive Officer
and Director
/s/ Richard J. Dobbyn
- ----------------------------------
Richard J. Dobbyn Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ Arthur B. Bodley
- ----------------------------------
Arthur B. Bodley Director
/s/ James G. March
- ----------------------------------
James G. March Director
/s/ Taco van Tijn
- ----------------------------------
Taco van Tijn Director
/s/ David N. Wormley
- ----------------------------------
David N. Wormley Director
</TABLE>
-61-
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C> <C>
3.1* Amended and Restated Articles of Incorporation of the Company
(previously filed as Exhibit 3.1 in the Pre-Effective
Amendment No. 4 to the Company's Registration Statement
ooration and Northern Trust Bank of Florida/Sarasota, N.A.
(previously filed as Exhibit 4.1 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183)).
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. (previously filed as Exhibit 4.2 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.3* Second Modification to Revolving Credit Agreement, dated May
__, 1995, between Sun Hydraulics Corporation and Northern
Trust Bank of Florida, N.A. (previously filed as Exhibit 4.3
in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183)).
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.
(previously filed as Exhibit 4.4 in the Company's Registration
Statement on Form S-1 filed on October 15, 1996 (File No.
333-14183)).
4.5* Mortgage and Security Agreement, dated January 9, 1992,
between Suninco, Inc., Sun Hydraulics Corporation, and
Northern Trust Bank of Florida, N.A. (previously filed as
Exhibit 4.5 in the Company's Registration Statement on Form
S-1 filed on October 15, 1996 (File No. 333-14183)).
4.6* Loan Agreement, dated March 29, 1996, between Suninco, Inc.,
Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.6 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
</TABLE>
-62-
<PAGE> 63
<TABLE>
<S> <C> <C>
4.7* Security Agreement, dated March 29, 1996, between Suninco,
Inc., Sun Hydraulics Corporation, and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.7 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.8* Modification and Additional Advance Agreement, dated March 29,
1996, between Suninco, Inc. and Northern Trust Bank of
Florida, N.A. (previously filed as Exhibit 4.8 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
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. (previously filed as Exhibit 4.9 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.10* Loan Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.10 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.11* Security Agreement, dated May 20, 1996, between Sun Hydraulics
Corporation and Northern Trust Bank of Florida, N.A.
(previously filed as Exhibit 4.11 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
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. (previously filed as Exhibit 4.12
in the Company's Registration Statement on Form S-1 filed on
October 15, 1996 (File No. 333-14183)).
4.13* Loan Agreement, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.13 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.14* Mortgage, dated June 14, 1996, between Sun Hydraulics
Corporation, Suninco Inc., and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.14 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.15* Security Agreement, dated June 14, 1996, between Sun
Hydraulics Corporation and Northern Trust Bank of Florida,
N.A. (previously filed as Exhibit 4.15 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
</TABLE>
-63-
<PAGE> 64
<TABLE>
<S> <C> <C>
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.
(previously filed as Exhibit 4.16 in the Company's
Registration Statement on Form S-1 filed on October 15, 1996
(File No. 333-14183)).
4.17* Revolving Loan Facility letter agreement, dated July 30, 1996,
in the amount of (pound)800,000, between Sun Hydraulics Ltd.
and Lloyds Bank Plc. (previously filed as Exhibit 4.17 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.18* Overdraft and Other Facilities letter agreement, dated June 7,
1996, in an amount not to exceed (pound)250,000, between Sun
Hydraulics Ltd. and Lloyds Bank Plc. (previously filed as
Exhibit 4.18 in the Company's Registration Statement on Form
S-1 filed on October 15, 1996 (File No. 333-14183)).
4.19* Mortgage, dated April 11, 1996, between Sun Hydraulik GmbH and
Dresdner Bank (previously filed as Exhibit 4.19 in the
Company's Registration Statement on Form S-1 filed on October
15, 1996 (File No. 333-14183)).
4.20* Amendment to Recommended Offer by Sun Hydraulics Corporation
to acquire the whole of the issued share capital of Sun
Hydraulik Holdings Limited, dated December 17, 1996
(previously filed as Exhibit 2.1 in the Pre-Effective
Amendment No. 4 to the Company's Registration Statement on
Form S-1 filed on December 19, 1996 (File No. 333-14183)).
4.21 Master Note, dated February 3, 1997, in the amount of
$10,000,000.00, made by the Company to evidence a line of
credit granted to the Company by Northern Trust Bank of
Florida, N.A.
10.1* Form of Distributor Agreement (Domestic) (previously filed as
Exhibit 10.1 in the Company's Registration Statement on Form
S-1 filed on October 15, 1996 (File No. 333-14183)).
10.2* Form of Distributor Agreement (International) (previously
filed as Exhibit 10.2 in the Company's Registration Statement
on Form S-1 filed on October 15, 1996 (File No. 333-14183)).
10.3*+ 1996 Sun Hydraulics Corporation Stock Option Plan (previously
filed as Exhibit 10.3 in the Pre-Effective Amendment No. 4 to
the Company's Registration Statement on Form S-1 filed on
December 19, 1996 (File No. 333-14183)).
</TABLE>
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<PAGE> 65
<TABLE>
<S> <C> <C>
10.4*+ Form of Indemnification Agreement (previously filed as Exhibit
10.4 in the Pre-Effective Amendment No. 4 to the Company's
Registration Statement on Form S-1 filed on December 19, 1996
(File No. 333- 14183)).
11.1 Statement regarding Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule for year ended December 31, 1996. (For
SEC purposes only)
</TABLE>
* Previously filed.
+ Executive management contract or compensatory plan or arrangement.
-65-
<PAGE> 1
Exhibit 4.21
Dated as of February 3, 1997
MASTER NOTE
(CORPORATION, PARTNERSHIP OR JOINT VENTURE)
This Note has been executed by SUN HYDRAULICS CORPORATION, a
corporation formed under the laws of the State of Florida ("Borrower"); if more
than one entity executes this Note, the term "Borrower" refers to each of them
individually and some or all of them collectively, and their obligations
hereunder shall be joint and several.* If a land trustee executes this Note,
"Borrower" as used in sections 6 and 7 below also includes any beneficiary(ies)
of the land trust.**
FOR VALUE RECEIVED, on or before February 3, 1998, the scheduled
maturity date hereof, Borrower promises to pay to the order of NORTHERN TRUST
BANK OF FLORIDA, N.A., a national banking association (hereafter, together with
any subsequent holder hereof, called "Lender), at its banking office at 1515
Ringling Blvd., Sarasota, FL., or at such other place as Lender may direct, the
aggregate unpaid principal balance of each advance (a "Loan" and collectively
the "Loans") made by Lender to Borrower hereunder. The total principal amount of
Loans outstanding at any one time hereunder shall not exceed TEN MILLION AND
00/100 UNITED STATES DOLLARS ($10,000,000.00).
Lender is hereby authorized by Borrower at any time and from time to
time at Lender's sole option to attach a schedule (grid) to this Note and to
endorse thereon notations with respect to each Loan specifying the date and
principal amount thereof, the Interim Maturity Date (as defined below) (if
applicable), the applicable interest rate and rate option, and the date and
amount of each payment of principal and interest made by Borrower with respect
to each such Loan. Lender's endorsements as well as its records relating to
Loans shall be rebuttably presumptive evidence of the outstanding principal and
interest on the Loans, and, in the event of inconsistency, shall prevail over
any records of Borrower and any written confirmations of Loans given by
Borrower.
If Borrower wishes to obtain a Loan under this Note, Borrower shall
notify Lender orally or in writing on a banking day. Any such notice shall be
irrevocable; if the notice is received after 2:00 p.m. Eastern time the Loan may
not be available until the next banking day. Additional procedures for "Bank
Offered Rate" Loans, if available, are set forth below.
- --------
* Insert "N/A" in any blank in this Note which is not
applicable.
** Land trustee may not sign upon direction of individual
beneficiary(ies) unless Loans are for business purposes.
<PAGE> 2
Each request for a Loan shall be deemed to be a representation and
warranty by Borrower to Lender that: (i) no Event of Default or Unmatured Event
of Default (in each case as defined below) has occurred and is continuing as of
the date of such request or would result from the making of the Loan; and (ii)
Borrower's representations and warranties herein are true and correct as of such
date as though made on such date. Upon receipt of each Loan request Lender in
its sole discretion shall have the right to request that Borrower provide to
Lender, prior to Lender's funding of the Loan, a certificate executed by
Borrower's President, Treasurer, or Chief Financial Officer (if Borrower is a
corporation), or a general partner or joint venturer of Borrower (if Borrower is
a partnership or joint venture) to such effect.
1. INTEREST.
Borrower agrees to pay interest on the unpaid principal amount
from time to time outstanding hereunder at the following rate per
year: (CHECK ONE ONLY)
/x/ (i) The "Prime-Based Rate", which shall mean the Prime Rate
plus zero percent (0%).
/ / ***(ii) The "Bank Offered Rate", which shall be equal to that rate of
interest offered by Lender and accepted by Borrower and fixed for
periods of up to one year ("Interest Period(s)") (the last day of any
Interest Period being referred to as an "Interim Maturity Date"). Other
description N/A .
"Prime Rate" means that rate of interest announced from time to time by Lender
called its prime rate, which rate may not at any time be the lowest rate charged
by Lender. Changes in the rate of interest on the Loans resulting from a change
in the Prime Rate shall take effect on the date set forth in each announcement
of a change in the Prime Rate.
Without limiting Borrower's obligation to repay all outstanding Loans
in full on the scheduled maturity date, each Loan at the Bank Offered Rate shall
be due and payable in full on its Interim Maturity Date. After the maturity of
any Loan, whether by acceleration or otherwise, such Loan shall bear interest
until paid, at a rate equal to six percent (6%) in addition to the rate in
effect immediately prior to maturity (but not less than the Prime Rate in effect
at maturity).
If this Note bears interest at the Bank Offered Rate and Borrower
requests a Loan, Lender shall in its sole discretion offer or decline to offer a
Bank Offered Rate (and if it offers a Bank Offered Rate, the rate of such Bank
Offered Rate shall be in
- ------------------
*** Do not use if collateral includes real estate.
2
<PAGE> 3
Lender's sole discretion), and Borrower shall irrevocably accept or decline such
particular Bank Offered Rate and the related Loan and confirm such acceptance in
writing by letter or other written communication dated and sent the date of such
borrowing. Any confirmation by lender of the rate and Interest Period for any
Bank Offered Rate Loan shall be conclusive in the absence of manifest error.
Without limiting Borrower's obligations under any other document or instrument,
Lender may relay without inquiry upon any person whom it reasonably believes to
be a party authorized to accept or decline such Bank Offered Rate and the
related Loan. Lender has no obligation to make a new Loan to Borrower when a
Loan at the Bank Offered Rate matures on its Interim Maturity Date.
Interest shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days, including the date a Loan is made and
excluding the date a Loan or any portion thereof is paid or prepaid. Interest
shall be due and payable as follows:
/x/ Monthly, on the 1st day of each month, beginning March 1, 1997, with
all accrued but unpaid interest being due and payable in full with the
final principal payment due hereunder.
/ / Quarterly, on the N/A day of each ,
-------- ---------------------------
, , and
-------------------- ------------- ---------------------------
in each year, beginning , with all accrued but unpaid interest being
due and payable in full with the final principal payment due hereunder.
/ / Other N/A
---------------------------------------------------------------
In addition, if the Bank Offered Rate is available under this Note, interest on
any Loan at the Bank Offered Rate, if not otherwise previously due and payable
as indicated above, shall be due and payable in full on the last day of each
Interest Period. After maturity interest shall be payable on demand.
2. PREPAYMENTS.
Borrower may prepay without penalty or premium any principal bearing
interest at the Prime-Based Rate. If Borrower prepays any principal bearing
interest at the Bank Offered Rate in whole or in part, or if the maturity of any
such Bank Offered Rate principal is accelerated, then, to the fullest extent
permitted by law Borrower shall also pay Lender for all losses (including but
not limited to interest rate margin and any other losses of anticipated profits)
and expenses incurred by reason of the liquidation or re-employment of deposits
acquired by Lender to make the Loan or maintain principal outstanding at the
Bank Offered Rate. Upon Lender's demand in writing specifying such losses and
expenses, Borrower shall promptly pay them, Lender's specification shall be
deemed
3
<PAGE> 4
correct in the absence of manifest error. Each Loan bearing interest at the Bank
Offered Rate shall be conclusively deemed to have been funded by or on behalf of
Lender by the purchase of a deposit corresponding in amount to such Loan and in
maturity to the Interest Period specified by Lender.
3. REFERENCES TO PREVIOUS NOTES, FACILITY TYPE, COLLATERAL,
GUARANTIES, LOAN & OTHER AGREEMENTS. (Check As Applicable)
LINE OF CREDIT: This Note has been executed pursuant to a line of credit. At the
present time Lender intends to make available to Borrower credit as outlined
herein or in any related letter until the maturity day indicated above unless in
Lender's sole judgment there has occurred an adverse change in the assets,
condition or prospects of Borrower or any guarantor. THE LINE OF CREDIT MAY BE
CANCELLED OR REDUCED BY LENDER AT LENDER'S SOLE OPTION WITHOUT PRIOR NOTICE TO
BORROWER OR ANY OTHER PERSON OR ENTITY. THE LINE OF CREDIT IS REVOCABLE
NOTWITHSTANDING PAYMENT OF ANY FEES OR MAINTENANCE OF ANY ACCOUNT BALANCES, AS
AND IF PROVIDED IN ANY ACCOMPANYING LETTER OR OTHER DOCUMENT PERTAINING TO SUCH
FEES AND/OR BALANCES. Any such fees and/or balances shall be deemed compensation
to Lender for being prepared to respond to Borrower's requests for credit under
this Note.
/ / This Note amends, restates, renews and replaces in its entirety the note
dated N/A in the amount of $ N/A , and any previously renewed note(s). Borrower
hereby expressly confirms that all collateral and guaranties given for such
prior note(s) shall secure or guarantee this Note. All amounts outstanding under
such previous note(s) shall be deemed automatically outstanding hereunder.
/ / This Note is secured without limitation as provided in the following and all
related documents, in each case as amended, modified, renewed, restated or
replaced from time to time:
/ / Security Agreement dated as of N/A .
----------------------------
/ / Mortgage dated as of N/A on
----------------------------
property all or part of which is commonly known as
-------------------------------------------------------------
-------------------------------------------------------------
/ / Pledge Agreement dated as of N/A .
------------------------------
/ / Other (describe) N/A
------------------------------------------
------------------------------------------
/ / Payment of this Note has been unconditionally guaranteed by
N/A
-------------------------------------------------------------------
-------------------------------------------------------------------
4
<PAGE> 5
(each individually an all collectively referred to as "guarantor")
as provided in separately executed guaranties.
/ / This Note has been executed pursuant to a N/A Agreement, dated as of the
date hereof, as amended, modified, restated, renewed, or replaced from time to
time, containing covenants and other terms, to which reference is hereby made.
4. USE OF PROCEEDS. CHECK ONE:
/ / Borrower represents and warrants that the proceeds of this Note will be used
solely for business purposes, and not for personal, family or household use,
within the meaning of Federal Truth-in-Lending and similar state laws and
regulations.
/ / ****Borrower represents that the proceeds of this Note will be used for
personal, family or household use. IF THIS OPTION IS CHECKED, THE FIRST LOAN
MUST BE IN THE AMOUNT OF $25,001 OR MORE.
If Loan proceeds will be used to purchase or refinance the purchase of any
property describe:
N/A
- ------------------------------------------------------------------------------
.
- ------------------------------------------------------------------------------
Notwithstanding any other provision hereof, if this Note is covered by
Regulation Z of the Federal Reserve Board (Truth-in-Lending) or any like
disclosure requirement, this Note shall be secured by collateral referenced
herein or in any other document only if disclosed in a related disclosure
statement.
5. REPRESENTATIONS.
Borrower hereby represents and warrants to Lender that:
(a) Borrower and any "Subsidiary" (as defined below) are existing and
in good standing under the laws of their state of formation, are duly
qualified, in good standing and authorized to do business in each
jurisdiction where failure to do so might have a material adverse
impact on the consolidated assets, condition or prospects of Borrower;
the execution, delivery and performance of this Note and all related
documents and instruments are within Borrower's powers and have been
authorized by all necessary corporate, partnership or joint venture
action;
(b) the execution, delivery and performance of this Note and
all related documents and instruments have received any and
all necessary governmental approval, and do not and will not
- ------------------------
**** If this box is checked and a land trustee is signing the
Note, do not take real estate as collateral.
5
<PAGE> 6
contravene or conflict with any provision of law or of the partnership
or joint venture or similar agreement, charter or by-laws of Borrower
or any agreement affecting Borrower or its property; and
(c) there has been no material adverse change in the business,
condition, properties, assets, operations or prospects of Borrower or
any guarantor since the date of the latest financial statements
provided on behalf of Borrower or any guarantor to Lender prior to the
execution of this Note.
"Subsidiary" means any corporation, partnership, joint venture, trust, or other
legal entity of which Borrower owns directly or indirectly fifty percent (50%)
or more of the outstanding voting stock or interest, or of which Borrower has
effective control, by contract or otherwise.
6. EVENTS OF DEFAULT. The occurrence of any of the following
shall constitute an "Event of Default":
(a) failure to pay, when and as due, any principal, interest or other
amounts payable hereunder; failure to comply with or perform any agreement or
covenant of Borrower contained herein; or failure to furnish (or caused to be
furnished to) Lender when and as requested by Lender (but not more often than
once every twelve months) fully completed personal financial statement(s) of any
individual guarantor on Lender's then-standard form together with such
supporting information as Lender may reasonably request; or
(b) any default, event of default, or similar event shall occur or
continue under any other instrument, document, note, agreement, or guaranty
delivered to Lender in connection with this Note, or any such instrument,
document, note, agreement, or guaranty shall not be, or shall cease to be,
enforceable in accordance with its terms; or
(c) there shall occur any default or event of default, or any event or
condition that might become such with notice or the passage of time or both, or
any similar event, or any event that requires the prepayment of borrowed money
or the acceleration of the maturity thereof, under the terms of any evidence of
indebtedness or other agreement issued or assumed or entered into by Borrower,
any Subsidiary, any general partner or joint venturer of Borrower, or any
guarantor, or under the terms of any indenture, agreement, or instrument under
which any such evidence of indebtedness or other agreement is issued, assumed,
secured, or guaranteed, and such event shall continue beyond any applicable
period of grace; or
(d) any representation, warranty, schedule, certificate, financial
statement, report, notice or other writing furnished by or on behalf of
Borrower, any Subsidiary, any general partner or
6
<PAGE> 7
joint venturer of Borrower, or any guarantor to Lender is false or misleading in
any material respect on the date as of which the facts therein set forth are
stated or certified; or
(e) any guaranty of or pledge of collateral security for this Note
shall be repudiated or become unenforceable or incapable of performance, or
(f) Borrower or any Subsidiary shall fail to maintain their existence
in good standing in their state of formation or shall fail to be duly qualified,
in good standing and authorized to do business in each jurisdiction where
failure to do so might have a material adverse impact on the consolidated
assets, condition or prospects of Borrower; or
(g) Borrower, any Subsidiary, any general partner or joint venturer of
Borrower, or any guarantor shall die, become incompetent, dissolve, liquidate,
merge, consolidate, or cease to be in existence for any reason; or any general
partner or joint venturer of Borrower shall withdraw or notify any partner or
joint venturer of Borrower of its or his/her intention to withdraw as a partner
or joint venturer (or to become a limited partner) of Borrower, or any general
or limited partner or joint venturer of Borrower shall fail to make any
contribution required by the partnership or joint venture agreement of Borrower
as and when due under such agreement; or there shall be any change in the
partnership or joint venture agreement of Borrower from that in force on the
date hereof which may have a material adverse impact on the ability of Borrower
to repay this Note, or
(h) any person or entity presently not in control of a corporate,
partnership or joint venture Borrower, any corporate general partner or joint
venturer of Borrower, or any guarantor, shall obtain control directly or
indirectly of Borrower, such a corporate general partner or joint venturer, or
any guarantor, whether by purchase or gift of stock or assets, by contract, or
otherwise; or
(i) any proceeding (judicial or administrative) shall be commenced
against Borrower, any Subsidiary, any general partner or joint venturer of
Borrower, or any guarantor, or with respect to any assets of Borrower, any
Subsidiary, any general partner or joint venturer of Borrower, or any guarantor
which shall threaten to have a material and adverse effect on the assets,
condition or prospects of Borrower, any Subsidiary, any general partner or joint
venturer of Borrower, or any guarantor; or final judgment(s) and/or
settlement(s) in an aggregate amount in excess of One Hundred Thousand UNITED
STATES DOLLARS ($100,000.00) in excess of insurance for which the insurer has
confirmed coverage in writing, a copy of which writing has been furnished to
Lender, shall be entered or agreed to in any suit or action commenced against
Borrower, any
7
<PAGE> 8
Subsidiary, any general partner or joint venturer of Borrower or
any guarantor; or
(j) Borrower shall grant or any person (other than Lender) shall obtain
a security interest in any collateral for this Note; Borrower or any other
person shall perfect (or attempt to perfect) such a security interest; a court
shall determine that Lender does not have a first-priority security interest in
any of the collateral for this Note enforceable in accordance with the terms of
the related documents; or any notice of a federal tax lien against Borrower or
any general partner or joint venturer of Borrower shall be filed with any public
recorder; or
(k) there shall be any material loss or depreciation in the value of
any collateral for this Note for any reason, or Lender shall otherwise
reasonably deem itself insecure; or, unless expressly permitted by the related
documents, all or any part of any collateral for this Note or any direct,
indirect, legal, equitable or beneficial interest therein is assigned,
transferred or sold without Lender's prior written consent; or
(l) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, liquidation, dissolution, or similar proceeding, domestic or
foreign, is instituted by or against Borrower, any Subsidiary, any general
partner or joint venturer of Borrower, or any guarantor; or Borrower, any
Subsidiary, any general partner or joint venturer of Borrower, or any guarantor
shall take any steps toward, or to authorize, such a proceeding; or
(m) Borrower, any Subsidiary, any general partner or joint venturer of
Borrower, or any guarantor shall become insolvent, generally shall fail or be
unable to pay its debts as they mature, shall admit in writing its inability to
pay its debts as they mature, shall make a general assignment for the benefit of
its creditors, shall enter into any composition or similar agreement, or shall
suspend the transaction of all or a substantial portion of its usual business.
7. DEFAULT REMEDIES.
(a) Upon the occurrence and during the continuance of any Event of
Default specified in Section 6(a)-(k), Lender at its option may declare this
Note (principal, interest and other amounts) immediately due and payable without
notice or demand of any kind. Upon the occurrence of any Event of Default
specified in Section 6(l)-(m), this Note (principal, interest and other amounts)
shall be immediately and automatically due and payable without action of any
kind on the part of Lender. Upon the occurrence and during the continuance of
any Event of Default, Lender may exercise any rights and remedies under this
Note, any related document or instrument (including without limitation any
pertaining to collateral), and at law or in equity.
8
<PAGE> 9
In addition, without limiting the Lender's right to accelerate this
Note as provided above, if an Event of Default occurs and is continuing under
Section 6(a)-(k) (including without limitation failure to furnish or cause to be
furnished financial statements as required by this Note or any related
document), then, at the Lender's election and beginning five (5) days after
written notice of such an Event of Default is given by Lender and continuing
until such Event of Default is no longer continuing and the Lender is aware of
such fact, the interest rate hereunder shall increase by one quarter of one
percent (.25%) during the first thirty (30) day period beginning five (5) days
after such notice is given, and increase (cumulatively) by an additional one
quarter of one percent (.25%) during and effective with respect to each thirty
(30) day period thereafter during which such Event of Default continues. The
increased interest rate(s) provided for in the previous sentence shall apply to
the entire outstanding principal balance hereunder, and the interest rate shall
revert to the otherwise applicable interest rate effective on the date on which
the Event of Default is no longer continuing and the Lender is aware of such
fact; the provisions of this sentence and the preceding sentence shall not apply
if this Note is covered by Regulation Z of the Federal Reserve Board (Truth in
Lending) or any like disclosure requirement.
(b) Lender may, by written notice to Borrower, at any time and from
time to time, waive any Event of Default or "Unmatured Event of Default" (as
defined below), which shall be for such period and subject to such conditions as
shall be specified in any such notice. In the case of any such waiver, Lender
and Borrower shall be restored to their former position and rights hereunder,
and any Event of Default or Unmatured Event of Default so waived shall be deemed
to be cured and not continuing; but no such waiver shall extend to or impair any
subsequent or other Event of Default or Unmatured Event of Default. No failure
to exercise, and no delay in exercising, on the part of Lender of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies of Lender herein provided are cumulative and not exclusive of any
rights or remedies provided by law. "Unmatured Event of Default" means any event
or condition which would become an Event of Default with notice of the passage
of time or both.
8. NO INTEREST OVER LEGAL RATE.
Borrower does not intend or expect to pay, nor does Lender intend or
expect to charge, accept or collect any interest which, when added to any fee or
other charge upon the principal which may legally be treated as interest, shall
be in excess of the highest lawful rate. If acceleration, prepayment or any
other charges upon the principal or any portion thereof, or any other
circumstance, result in the computation or earning of interest in excess of the
9
<PAGE> 10
highest lawful rate, then any and all such excess is hereby waived and shall be
applied against the remaining principal balance. Without limiting the generality
of the foregoing, and notwithstanding anything to the contrary contained herein
or otherwise, no deposit of funds shall be required in connection herewith which
will, when deducted from the principal amount outstanding hereunder, cause the
rate of interest hereunder to exceed the highest lawful rate.
9. PAYMENTS, ETC.
All payments hereunder shall be made in immediately available funds,
and shall be applied first to accrued interest and then to principal; however,
if an Event of Default occurs, Lender may, in its sole discretion, and in such
order as it may choose, apply any payment to interest, principal and/or lawful
charges and expenses then accrued. Borrower shall receive immediate credit on
payments received during Lender's normal banking hours if made in cash,
immediately available funds, or by debit to available balances in an account at
Lender; otherwise payments shall be credited after clearance through normal
banking channels. Borrower authorizes Lender to charge any account of Borrower
maintained with Lender for any amounts of principal, interest, taxes, duties, or
other charges or amounts due or payable hereunder, with the amount of such
payment subject to availability of collected balances in Lender's discretion;
unless Borrower instructs otherwise, all Loans shall be credited to an
account(s) of Borrower with Lender. LENDER AT ITS OPTION MAY MAKE LOANS
HEREUNDER UPON TELEPHONIC INSTRUCTIONS AND IN SO DOING SHALL BE FULLY ENTITLED
TO RELY SOLELY UPON INSTRUCTIONS, INCLUDING WITHOUT LIMITATION INSTRUCTIONS TO
MAKE TRANSFERS TO THIRD PARTIES, REASONABLY BELIEVED BY LENDER TO HAVE BEEN
GIVEN BY AN AUTHORIZED PERSON, WITHOUT INDEPENDENT INQUIRY OF ANY TYPE. All
payments shall be made without deduction for or on account of any present or
future taxes, duties or other charges levied or imposed on this Note or the
proceeds. Lender or Borrower by any government or political subdivision thereof.
Borrower shall upon request of Lender pay all such taxes, duties or other
charges in addition to principal and interest, including without limitation all
documentary stamp and intangible taxes, but excluding income taxes based solely
on Lender's income.
10. SETOFF.
At any time and without notice of any kind, any account, deposit or
other indebtedness owing by Lender to Borrower, and any securities or other
property of Borrower delivered to or left in the possession of Lender or its
nominee or bailee, may be set off against and applied in payment of any
obligation hereunder, whether due or not.
10
<PAGE> 11
11. NOTICES.
All notices, requests and demands to or upon the respective parties
hereto shall be deemed to have been given or made when deposited in the mail,
postage prepaid, addressed if to Lender to its banking office indicated above
(Attention: Division Head, Lending Division), and if to Borrower to its address
set forth below, or to such other address as may be hereafter designated in
writing by the respective parties hereto or, as to Borrower, may appear in
Lender's records.
12. MISCELLANEOUS.
This Note and any document or instrument executed in connection
herewith shall be governed by and construed in accordance with the internal law
of the State of Florida, and shall be deemed to have been executed in the State
of Florida. Unless the context requires otherwise, wherever used herein the
singular shall include the plural and vice versa, and the use of one gender
shall also denote the other. Captions herein are for convenience of reference
only and shall not define or limit any of the terms or provisions hereof;
references herein to Sections or provisions without reference to the document in
which they are contained are references to this Note. This Note shall bind
Borrower, its heirs, trustees (including without limitation successor and
replacement trustees), executors, personal representatives, successor and
assigns, and shall inure to the benefit of Lender, its successors and assigns,
except that Borrower may not transfer or assign any of its rights or interest
hereunder without the prior written consent of Lender. Borrower agrees to pay
upon demand all expenses (including without limitation attorneys' fees, legal
costs and expenses, and time charges of attorneys who may be employees of
Lender, in each case whether in or out of court, in original or appellate
proceedings or in bankruptcy) incurred or paid by Lender or any holder hereof in
connection with the enforcement or preservation of its rights hereunder or under
any document or instrument executed in connection herewith. Borrower expressly
and irrevocably waives notice of dishonor or default as well as presentment,
protest, demand and notice of any kind in connection herewith. If there shall be
more than one person or entity constituting Borrower, each of them shall be
primarily, jointly and severally liable for all obligations hereunder.
13. WAIVER OF JURY TRIAL, ETC.
BORROWER HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S SOLE AND
ABSOLUTE ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS WITH RESPECT TO,
ARISING OUT OF OR IN CONNECTION WITH THIS NOTE OR ANY DOCUMENT OR INSTRUMENT
EXECUTED IN CONNECTION HEREWITH SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING
SITUS WITHIN OR JURISDICTION OVER THE STATE OF FLORIDA. BORROWER HEREBY CONSENTS
AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN
OR
11
<PAGE> 12
HAVING JURISDICTION OVER SUCH STATE, AND HEREBY IRREVOCABLY WAIVES ANY RIGHT IT
MAY HAVE TO REQUEST OR DEMAND TRIAL BY JURY, TO TRANSFER OR CHANGE THE VENUE OF
ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT BY LENDER IN ACCORDANCE WITH THIS
PARAGRAPH, OR TO CLAIM THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.
/ / See Rider attached hereto and incorporated herein by
reference.
Lender is hereby authorized by Borrower without notice to Borrower to
fill in any blank spaces and dates and strike inapplicable terms herein or in
any related document to conform to the terms upon which the Loan(s) evidenced
hereby are or may be made, for which purpose Lender shall be deemed to have been
granted an irrevocable power of attorney coupled with an interest.
Florida documentary stamp tax required by law in the amount of
$ N/A has been paid or will be paid directly to the Department of
Revenue. Certificate of Registration No. .
------------
Address for Notices:
SUN HYDRAULICS CORPORATION, 1500 University Parkway
- -------------------------------- -------------------------------
a Florida Corporation Sarasota, FL 34243
-------------------------------
By: /s/ Jean A. Snyder
- -------------------------------- -------------------------------
Jean A. Snyder
Title: Corporate Accounts Manager Attention:
--------------------------- -------------------
12
<PAGE> 1
Exhibit 11.1
Statement Regarding Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year ended December 31
1995 1996
---- ----
<S> <C> <C>
PRIMARY
Pro forma net income $ 5,883 $ 2,617
======== ========
Weighted average shares outstanding
including the effects of the IPO 6,424 6,509
Primary EPS $ 0.92 $ 0.40
======== ========
FULLY DILUTED
Pro forma net income $ 5,883 $ 2,617
======== ========
Weighted average shares outstanding
including the effects of the IPO 6,474 6,488
Fully diluted EPS $ 0.91 $ 0.40
======== ========
SUPPLEMENTAL PRO FORMA EPS
Pro forma net income as reported $ 5,883 $ 2,617
======== ========
Add back: interest expense 253
--------
Supplemental pro forma net income (1) $ 2,870
Weighted average shares outstanding
including the effects of the IPO 6,509
Supplemental pro forma net income $ 0.44
========
</TABLE>
The treasury stock method was used in the calculation of the average shares
outstanding for EPS. The denominator includes the 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 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. The initial public offering price of
$9.50 on January 9, 1997, was assumed to be the year-end stock price. The
number of shares issued in connection with the initial public offering are also
included in the denominator as though the shares had been outstanding since the
beginning of the year, in accordance with Regulation S-X, Article 11.
(1) Supplemental pro forma net income reflects reduced interest expense
(tax-effected) as if debt repaid from the initial public offering
proceeds had been repaid as of the beginning of the year, in
accordance with Regulation S-X, Article 11.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Organized under the laws of:
Sun Hydraulik Holdings Limited England and Wales
Sun Hydraulik GmbH The Federal Republic of
Germany
Sun Hydraulics Limited England and Wales
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,038
<SECURITIES> 0
<RECEIVABLES> 3,535<F1>
<ALLOWANCES> 0
<INVENTORY> 4,451
<CURRENT-ASSETS> 10,156
<PP&E> 37,212<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,416
<CURRENT-LIABILITIES> 9,198
<BONDS> 14,223
0
0
<COMMON> 2,179
<OTHER-SE> 20,218
<TOTAL-LIABILITY-AND-EQUITY> 48,416
<SALES> 54,572
<TOTAL-REVENUES> 54,572
<CGS> 37,185
<TOTAL-COSTS> 37,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 823
<INCOME-PRETAX> 4,200
<INCOME-TAX> 3,129
<INCOME-CONTINUING> 1,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,071
<EPS-PRIMARY> 0<F3>
<EPS-DILUTED> 0<F3>
<FN>
<F1>Net of allowance for doubtful amounts of $62.
<F2>Net of accumulated depreciation of $14,280.
<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>
