SEC Info  
    Home      Search      My Interests      Help      Sign In      Please Sign In

Hyco International, Inc. – IPO: ‘S-1’ on 5/12/06

On:  Friday, 5/12/06, at 3:56pm ET   ·   Accession #:  1193125-6-110769   ·   File #:  333-134066

Previous ‘S-1’:  None   ·   Next & Latest:  ‘S-1/A’ on 6/30/06

  in   Show  &   Hints

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/12/06  Hyco International, Inc.          S-1                   15:4.8M                                   RR Donnelley/FA

Initial Public Offering (IPO):  Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1         Registration Statement (General Form)               HTML   1.13M 
 2: EX-4.2      Stockholders' Agreement                             HTML     66K 
 3: EX-4.3      Registration Rights Agreement                       HTML     54K 
 4: EX-4.4      Hyco International, Inc. 1998 Stock Option Plan     HTML     46K 
 5: EX-10.1     Credit Agreement                                    HTML    370K 
 6: EX-10.2     Business Finance Agreement                          HTML    461K 
 7: EX-10.3     Business Finance Agreement                          HTML    398K 
 8: EX-10.4     Trust Indenture                                     HTML    381K 
 9: EX-10.5     Trust Indenture                                     HTML    403K 
10: EX-10.6     Tax-Exempt Credit Agreement                         HTML    235K 
11: EX-10.7     Taxable Credit Agreement                            HTML    236K 
12: EX-10.8     Lease Agreement                                     HTML    231K 
13: EX-10.9     Lease Between Ultra Metal Inc. and Huron Woods      HTML    150K 
                          Development Corp.                                      
14: EX-21.1     List of Subsidiaries of Hyco International, Inc.    HTML     12K 
15: EX-23.1     Consent of Deloitte & Touche LLP                    HTML      8K 


S-1   —   Registration Statement (General Form)
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Table of Contents
"Forward-Looking Statements
"Market and Industry Data
"Summary
"Risk Factors
"Dividend Policy
"Capitalization
"Dilution
"Selected Consolidated Financial Data
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Reorganization Transaction
"Management
"Certain Transactions with Affiliates and Management
"Principal and Selling Stockholders
"Description of Capital Stock
"Shares Eligible for Future Sale
"Material U.S. Federal Income Tax Considerations for Non-United States Holders
"Underwriting
"Legal Matters
"Experts
"Where You Can Find More Information
"Report of Independent Registered Public Accounting Firm
"Combined Consolidated Balance Sheets as of December 31, 2005 and 2004
"Combined Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
"Combined Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003
"Combined Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
"Notes to Combined Consolidated Financial Statements

This is an HTML Document rendered as filed.  [ Alternative Formats ]



  Form S-1  
Table of Contents

As filed with the Securities and Exchange Commission on May 12, 2006

Registration No. 333-            

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


HYCO INTERNATIONAL, INC.

(Exact name of registrant as specified in charter)

 


 

Delaware   3569   39-1927102

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 


100 Galleria Parkway, Suite 1000

Atlanta, Georgia 30339

(770) 980-1935

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)

 


Ronald C. Whitaker

100 Galleria Parkway, Suite 1000

Atlanta, Georgia 30339

(770) 980-1935

(Name, address, including zip code, and telephone number, including area code, of agent for service of process)

 


With copies to:

 

Gregory P. Patti, Esq.

O’Melveny & Myers LLP

7 Times Square

New York, New York 10036

(212) 326-2000

 

Edward S. Best, Esq.

Mayer, Brown, Rowe & Maw LLP

71 South Wacker Drive

Chicago, Illinois 60606

(312) 782-0600

 


Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

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

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

 


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

 


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

 


CALCULATION OF REGISTRATION FEE

 

 

Title of each Class

of Securities to be Registered

  

Proposed Maximum

Aggregate

Offering Price(1)(2)

   Amount of
Registration Fee

Common Stock, par value $0.001 per share

   $ 100,000,000    $ 10,700
 

 

  (1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
  (2) Including shares of common stock which may be purchased by the underwriters to cover over-allotments, if any.

 


The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 



Table of Contents

The information in this prospectus is not complete and may be changed. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold until the registration statement is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED MAY 12, 2006

                     Shares

LOGO

HYCO INTERNATIONAL, INC.

Common Stock

 


This is Hyco International, Inc.’s initial public offering. We are selling              shares, and our stockholders are selling              shares. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. We estimate that the initial public offering price will be between $             and $             per share. We intend to apply to list our common stock for quotation on the Nasdaq National Market under the symbol “HYCO.”

See “ Risk Factors” beginning on page 9 to read about factors you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share    Total

Initial public offering price

   $                    $                    

Underwriting discounts and commissions

   $    $

Proceeds, before expenses, to us

   $    $

Proceeds, before expenses, to the selling stockholders

   $    $

The underwriters may also purchase up to an additional              shares from the selling stockholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments of shares.

 


The underwriters expect to deliver the shares of common stock offered by this prospectus to purchasers on                     , 2006.

 


Joint Book-Running Managers

 

FRIEDMAN BILLINGS RAMSEY    HARRIS NESBITT

The date of this prospectus is                     , 2006


Table of Contents

TABLE OF CONTENTS

 

     Page

Forward-Looking Statements

   ii

Market and Industry Data

   iii

Summary

   1

Risk Factors

   9

Use of Proceeds

   18

Dividend Policy

   19

Capitalization

   20

Dilution

   21

Selected Consolidated Financial Data

   23

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   25

Reorganization Transaction

   38

Our Business

   39

Management

   51

Certain Transactions with Affiliates and Management

   57

Principal and Selling Stockholders

   58

Description of Capital Stock

   60

Shares Eligible for Future Sale

   63

Material U.S. Federal Income Tax Considerations for Non-United States Holders

   65

Underwriting

   68

Legal Matters

   71

Experts

   71

Where You Can Find More Information

   71

Index to Financial Statements and Financial Statement Schedule

   F-1

 


You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus or other date stated in this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date, and we have an obligation to provide updates to this prospectus only to the extent that the information contained in this prospectus becomes materially deficient or misleading after the date on the front cover.

 


As used in this prospectus, unless the context otherwise indicates, references to “Hyco,” “Hyco International,” our company,” “we,” “our,” and “us” refer to Hyco International, Inc. and its consolidated subsidiaries, including, as a result of the reorganization transaction described below, Hyco Acquisition LLC and its consolidated subsidiaries. References to the “Centre Entities” refer, collectively, to Centre Capital Investors II, L.P., a Delaware limited partnership, and the related entities described in footnote 2 under “Principal and Selling Stockholders.” Hyco International, Inc. is a Delaware corporation, and Hyco Acquisition LLC is a Delaware limited liability company.

Unless otherwise indicated or the context otherwise requires, financial data in this prospectus reflects the combined consolidated business and operations of Hyco International, Inc. and Hyco Hidrover Oleodinámica Indústria e Comércio LTDA, which we refer to as Hyco Hidrover LTDA, and their respective wholly-owned subsidiaries. Except where otherwise indicated, “$” indicates U.S. dollars.

 

i


Table of Contents

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors, including those discussed under “Risk Factors.” The following factors, among others, could cause our actual results and performance to differ materially from the results and performance projected in, or implied by, the forward-looking statements:

 

    competitive conditions in our industry;

 

    declines in the demand for mobile hydraulic cylinders;

 

    the loss of one or more key customers;

 

    price and availability of steel and other raw materials;

 

    risks inherent in conducting business outside the United States;

 

    adverse fluctuations in currency exchange rates;

 

    labor shortages, increases in labor costs or labor-related disruptions to our operations;

 

    an inability to expand our operations into new geographic and end-markets;

 

    an inability to acquire or find companies suitable for acquisition;

 

    an inability to integrate the operations of companies acquired in the future;

 

    the loss of key personnel or the inability to attract and retain qualified employees;

 

    the effects of environmental and health and safety laws and regulations;

 

    an inability to protect our proprietary manufacturing expertise and other trade secrets;

 

    the impact of litigation, including possible litigation involving patent infringement or product liability claims;

 

    the failure of our insurance to cover all potential exposures;

 

    technological changes in our industry;

 

    the failure to achieve and maintain effective internal control over financial reporting;

 

    the effect of this offering on our ability to use our net operating loss carryforwards and other tax attributes;

 

    the effect of current and future indebtedness;

 

    other adverse changes in our industry, applicable laws and regulations or the general economy; and

 

    other factors discussed under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Our Business.”

Although we believe that the expectations reflected in the forward-looking statements are reasonable based on our current knowledge of our business and operations, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. We assume no obligation to provide revisions to any forward-looking statements should circumstances change.

 

ii


Table of Contents

MARKET AND INDUSTRY DATA

This prospectus includes market share and industry data and forecasts that we derived from internal company records, publicly available information and industry publications and surveys. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal company records and forecasts, which we believe to be reliable as of the date hereof based upon management’s knowledge of the industry, have not been verified by any independent sources. Except where otherwise noted, statements as to our position relative to our competitors or as to market position or market share refer to the most recently available data.

 

iii


Table of Contents

SUMMARY

This summary highlights information about Hyco International, Inc. and this offering contained elsewhere in this prospectus. You should read this entire prospectus carefully, including “Risk Factors” and the combined consolidated financial statements and related notes, before making an investment decision.

Overview

We are a designer and manufacturer of custom-designed hydraulic cylinders used in mobile equipment. With six manufacturing facilities located on three continents, we believe that we are the world’s largest independent manufacturer of mobile hydraulic cylinders. Our manufacturing facilities are strategically located to facilitate a collaborative design and engineering process with our original equipment manufacturer, or OEM, customers, and to deliver our products on a timely basis. Our cylinders are shipped directly and indirectly to countries in North and South America, Europe and Asia, as we leverage our broad manufacturing footprint and each location’s specialized capabilities to serve the global needs of our customers. In 2005, we generated net sales and EBITDA of $189.1 million and $14.9 million, respectively.

Our mobile hydraulic cylinders primarily consist of single-stage, or rod, cylinders and multi-stage, or telescopic, cylinders, and can be found on a wide variety of machines used for construction, material handling, waste handling, agricultural and other applications. Mobile hydraulic cylinders are fundamental components of hydraulic systems, which convert the hydrostatic pressure in a fluid into mechanical power used for mobile equipment applications, such as steering, suspension, lifting, tilting, compaction, extension and stabilizing. Hydraulic cylinders are essential to the overall performance of mobile equipment, with cylinder failure generally rendering a machine inoperable.

Hyco was formed in 1998 by Centre Partners, a New York-based private equity firm, to acquire manufacturing facilities from Dana Corporation. Since then, we have completed three additional acquisitions of hydraulic cylinder manufacturers located in Canada (1999), Germany (1999) and Brazil (2001). In addition, in 2000 we moved to a greenfield manufacturing facility in Kitchener, Canada and expanded our facility in Alabama.

In 2003, a new senior management team led by our current President and Chief Executive Officer, Ron Whitaker, instituted a number of operational initiatives designed to increase sales and profitability. Our success in implementing these various strategic initiatives contributed to substantial sales growth and margin expansion.

Competitive Strengths

We believe that the following factors contribute to our success in the mobile hydraulic cylinder industry:

 

    Leading Market Position.    We believe we are the world’s largest independent designer and manufacturer of mobile hydraulic cylinders, serving the global needs of our customers from our six manufacturing facilities located in the United States, Canada, Brazil and Germany.

 

    Broad Manufacturing Footprint.    Our ability to design, manufacture and deliver cylinders on three continents and our leading market share among independent manufacturers allows us to provide a high level of customer and market focus to our multinational customers, most of the largest of which purchase cylinders from multiple Hyco facilities.

 

    High Value Added Products.    We provide our customers with custom-designed, mission critical hydraulic cylinders, typically engineered and manufactured for a specific application on a particular piece of mobile equipment.

 

1


Table of Contents
    Significant Barriers to Entry.    Our OEM customers’ rigorous qualification requirements, along with the custom-designed nature of our products, provide significant barriers to entry to potential competitors.

 

    Broad Array of End Market Applications.    We sell our cylinders to OEMs for use in a broad array of end market applications, primarily in mobile equipment that services the construction, material handling, waste handling and agricultural industries.

 

    Long-term Customer Relationships.    We have decades-long relationships with some of the largest multinational OEMs in the construction, material handling, waste handling and agricultural industries.

 

    Experienced Management Team.    We are led by a team of highly experienced senior executives, each of whom has at least 20 years of industrial manufacturing experience.

Operating and Growth Strategies

Our senior management team has developed the following operating and growth strategies to generate additional sales and increase profitability:

 

    Increase Penetration of OEM Customers.    We will continue to use our long-standing relationships with our major OEM customers and our manufacturing, engineering, purchasing and technical expertise to gain market share from our more geographically or technically limited independent competitors and our OEM customers’ “in-house” or “captive” manufacturing operations.

 

    Expand into New Geographic Markets.    We will expand our presence within selected geographic markets where we see opportunities for profitable growth.

 

    Expand into New End Markets.    We will continue to deploy operational resources toward those end markets where we see greatest opportunity.

 

    Grow through Acquisitions.    We will continue to seek opportunities to acquire independent manufacturers of custom-designed hydraulic cylinders and product lines as well as subsidiaries or divisions of other companies, including OEMs.

 

    Further Penetrate Regional Distributors and Aftermarket Sales.    While our traditional focus has been on selling directly to leading global mobile equipment OEMs, we intend to increase our sales through distributors, which service both original equipment and aftermarket customers.

 

    Identify Opportunities for Operational Improvement.    We expect to drive operational and financial enhancements through the ongoing implementation of improvement projects.

Pre-Offering Transactions

We expect that during the second quarter of 2006, Hyco Hidrover LTDA, which operates our Brazilian business and which is 99.99% owned by the Centre Entities, our principal stockholders, will pay a dividend on its outstanding share capital in the amount of approximately $575,000. Also in the second quarter of 2006, we expect to pay accrued dividends on our Series A preferred stock, all of which is owned by the Centre Entities, in the amount of $         million and to effect a partial redemption of our Series A preferred stock in the amount of $     million.

Immediately prior to the completion of this offering, the Centre Entities will contribute all of the outstanding interests in Hidrover Acquisition LLC, through which the Centre Entities hold their 99.99% interest in Hyco Hidrover LTDA, to Hyco International, Inc. in exchange for                  shares of our common stock. In

 

2


Table of Contents

addition, the Centre Entities expect to effect a cashless exercise of all of their outstanding warrants to purchase shares of our common stock, resulting in the issuance of              shares of our common stock to the Centre Entities.

We refer to these transactions collectively as the pre-offering transactions.

Corporate Information

Hyco International, Inc. was incorporated in 1998 as a Delaware corporation. Our principal executive office is located at 100 Galleria Parkway, Suite 1000, Atlanta, Georgia 30339-5954 and our telephone number is (770) 980-1935.

 

3


Table of Contents

The Offering

 

Common stock offered:

    

By us

     shares

By the selling stockholders

     shares
      

Total

     shares
      

Common stock to be outstanding after this offering

     shares(1)

Dividend policy

   We do not anticipate that we will pay cash dividends
in the foreseeable future.

Use of proceeds

   We estimate that we will receive proceeds from our
offering of common stock, after deducting
underwriting discounts and expenses, of
approximately $             million, assuming the shares
are offered at $             per share, which is the
midpoint of the estimated offering price range set
forth on the cover page of this prospectus. We intend
to use:

 

•      $             million to pay accrued dividends on our
outstanding Series A preferred stock;

 

•      $             million to redeem all of our outstanding
Series A preferred stock;

 

•      $             million to repay indebtedness
outstanding under our revolving credit facilities;

 

•      $             million to discharge capital leases; and

 

•      $             million to pay a transaction fee to Centre
Partners Management, LLC, an affiliate of our
principal stockholders (assuming an offering price
of $             per share, which is the midpoint of the
estimated price range set forth on the cover page
of the prospectus).

 

Any remaining net proceeds will be used for general
corporate purposes. In this prospectus, when we refer
to this offering, we mean the offering of shares by us
and the selling stockholders and the application of the
net proceeds of the sale of shares by us as described
under “Use of Proceeds.”

 

We will not receive any proceeds from the sale of our
common stock by the selling stockholders, including if
the underwriters exercise their over-allotment option
to purchase additional shares.

Risk factors

   For a discussion of factors you should consider in
making an investment, see “Risk Factors.”

Proposed Nasdaq National Market symbol

   HYCO

 

4


Table of Contents

(1) We expect that our board of directors will adopt a new equity incentive plan that will make available for issuance to our management and employees equity based awards representing, in the aggregate, up to             % of our then outstanding shares of common stock. These shares were excluded for the purposes of calculating the shares of our common stock to be outstanding after the completion of this offering.

Unless we indicate otherwise, all information in this prospectus:

 

    assumes no exercise of the over-allotment option granted to the underwriters;

 

    gives effect to a 1-for-     reverse split of our common stock before the closing of this offering, which we refer to in this prospectus as the reverse stock split;

 

    gives effect to the cashless exercise of warrants held by the Centre Entities and the resulting issuance to the Centre Entities of              shares of our common stock;

 

    gives effect to the issuance of              shares of our common stock to the Centre Entities in connection with the reorganization transaction; and

 

    is based upon 12,383,555 shares outstanding as of December 31, 2005.

 

5


Table of Contents

Summary Historical Combined Consolidated Financial Data

The following table sets forth our summary historical combined consolidated financial data at the dates and for the periods indicated. The summary historical combined consolidated balance sheet data as of December 31, 2005, and the summary historical combined consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005, have been derived from our audited combined consolidated financial statements included elsewhere in this prospectus. The contribution of the interests in Hidrover Acquisition LLC to Hyco International, Inc. has been treated, for accounting purposes, as a combination of entities under common control because of the Centre Entities’ controlling interest in each of the companies. This historical combined consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined consolidated financial statements and related notes included elsewhere in this prospectus.

Basic and diluted net income (loss) per share and basic and diluted weighted average shares outstanding for the years ended December 31, 2003, 2004 and 2005, and the summary historical combined consolidated balance sheet data as of December 31, 2005, are presented:

 

    on a historical basis;

 

    on a pro forma basis, giving effect to the pre-offering transactions and the reverse stock split; and

 

    on a pro forma as adjusted basis to give effect to (1) the pro forma adjustments described above, (2) this offering and (3) application of the net proceeds as described under “Use of Proceeds.”

 

     Year Ended December 31,  
              2003                     2004                   2005        
     (dollars in thousands)  

Combined Consolidated Statement of Operations Data:

      

Net sales

   $ 133,759     $ 166,834     $ 189,058  

Cost of goods sold

     117,603       140,863       162,187  
                        

Gross profit

     16,156       25,971       26,871  

Selling, general, and administrative expenses(1)

     13,088       13,149       14,573  

Interest expense

     2,116       2,371       1,646  

Other expenses—net

     1,496       317       1,465  
                        

Income (loss) from continuing operations before income taxes

     (544 )     10,134       9,187  

Income tax (benefit) expense

     906       2,057       (1,295 )
                        

Income (loss) from continuing operations

     (1,450 )     8,077       10,482  

Loss from discontinued operations—net of tax

     (2,095 )     (371 )     (103 )
                        

Net income (loss)

     (3,545 )     7,706       10,379  

Other comprehensive income:

      

Foreign currency translation adjustment

     3,940       2,569       325  

Minimum pension liability adjustment

     —         (51 )     (98 )
                        

Comprehensive income

   $ 395     $ 10,224     $ 10,606  
                        

(1) Expenses include (i) non-recurring fees associated with transaction advisory services of approximately $0.7 million in 2005 and (ii) management fees paid in each year to the Centre Entities of $          , which will no longer be paid following the completion of this offering.

 

6


Table of Contents
     Year Ended December 31,
     2003     2004    2005
Historical
   2005
Pro Forma
   2005
Pro Forma
As Adjusted

Basic net income (loss) per share

   $ (0.25 )   $ 0.54    $ 0.72      

Diluted net income (loss) per share

   $ (0.25 )   $ 0.23    $ 0.31      

Weighted average shares outstanding:

             

Basic

     14,318,118       14,318,118      14,318,118      

Diluted

     14,318,118       33,854,858      33,854,858      

 

     As of December 31, 2005  
      Historical     Pro Forma     Pro Forma As
Adjusted
 
     (in thousands)  

Combined Consolidated Balance Sheet Data:

      

Cash and cash equivalents

   $ 8,368     $       $    

Working capital

     30,600      

Total assets

     95,637      

Current maturities of long-term debt and capital lease obligations

     2,442      

Long-term debt

     27,762      

Shareholders’ equity

     34,829      
     Year Ended December 31,  
      2003     2004     2005  
     (in thousands)  

Other Financial Data:

      

EBITDA(1)

   $ 3,536     $ 16,217     $ 14,892  

Capital expenditures

     2,084       2,618       5,727  

Net cash provided by/(used in):

      

Operating activities

     524       1,819       14,432  

Investing activities

     (893 )     (1,958 )     (5,613 )

Financing activities

     2,609       498       (5,135 )

(1) EBITDA is defined as net income before deducting income taxes, interest, depreciation and amortization. Although EBITDA is not a measure of performance required by, or calculated in accordance with, GAAP, management believes that it is useful to an investor in evaluating our company because it is widely used as a measure to evaluate a company’s operating performance before debt expense and its cash flow. In addition, we use EBITDA internally to track company and plant performance and in bonus determinations. EBITDA does not purport to represent net income or cash generated by operating activities and should not be considered in isolation or as a substitute for measures of performance in accordance with GAAP. In addition, because EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and using this non-GAAP financial measure as compared to the most directly comparable U.S. GAAP financial measures. For instance, EBITDA does not include:

 

    interest expense, and because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue;

 

7


Table of Contents
    tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate; and

 

    depreciation and amortization expense, and because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue.

Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not consider certain cash requirements such as capital expenditures, contractual commitments, interest payments, tax payments and debt service requirements. Also the amounts shown for EBITDA as presented herein differ from the amounts calculated under the definition of EBITDA used in certain of our debt instruments, which further adjust for certain profits and losses and extraordinary items and is used to determine compliance with financial covenants.

The following table reconciles the GAAP measure of net income (loss) to EBITDA:

 

     Year Ended December 31,  
      2003     2004    2005  
     (in thousands)  

Net income (loss)

   $ (3,545 )   $ 7,706    $ 10,379  

Income tax (benefit) expense

     906       2,057      (1,295 )

Interest expense

     2,116       2,371      1,646  
                       

Income (loss) before interest and taxes

     (523 )     12,134      10,730  

Depreciation and amortization

     4,059       4,083      4,162  
                       

EBITDA

   $ 3,536     $ 16,217    $ 14,892  
                       

 

8


Table of Contents

RISK FACTORS

You should carefully consider the risks described below, as well as other information included in this prospectus, before making any investment in our common stock.

Risks Relating to Our Business

The mobile hydraulic cylinder market is generally characterized by intense competition, which could cause us to suffer price reductions, customer losses, reduced operating margins and loss of market share.

The mobile hydraulic cylinder market is highly fragmented and intensely competitive. We compete with a large number of manufacturers, some of which are full-line producers that have the ability to provide to customers total hydraulic systems, including components functionally similar to those we manufacture, and many of which are local, independent suppliers of cylinders.

In addition, many of our OEM customers have in-house cylinder manufacturing capabilities, and we compete with them both for their internal business and, sometimes, for other customers. It is possible that a decline in demand for mobile hydraulic cylinders would cause one or more of such OEMs to reduce their purchases of our products and rely increasingly on in-house production. We believe that we compete with these businesses based upon design expertise, quality, reliability, price, value, speed of delivery and technological characteristics. There can be no assurance that we will continue to be able to compete effectively with these companies.

Market demand for our products may suffer due to cyclical declines or adverse regulations or policy shifts.

The level of market demand for our products depends mostly on the general economic condition and government regulatory climate of the markets into which our OEM customers sell products. A substantial portion of our net sales is derived from customers in cyclical industries that typically are adversely affected by downward economic cycles, which may result in lower demand for products in the affected business segment. Specifically, we derive substantially all of our net sales from OEMs that sell into the construction, material handling, waste handling and agricultural industries. Reductions in mobile equipment spending in any of these end markets could result in a decrease in demand for our products.

The market for hydraulic cylinders peaked in the late 1990s before experiencing a reduction in demand from 1999 through 2002 in all of our primary end-markets due to a reduction in capital spending and general economic softness. There can be no assurance that such a reduction in demand will not occur again. In addition, some of our customers operate in markets that are influenced by government incentives or subsidies that encourage investment in equipment that uses our products. If these incentives or subsidies were reduced or eliminated, the demand for our products in these markets could decline.

We depend on a small number of customers for a significant portion of our net sales.

We are and believe we will continue to be heavily dependent upon a small number of customers. Our three largest customers represented approximately 32% and 34% of net sales in 2005 and 2004, respectively. Our largest customer, Caterpillar Inc., generated approximately 19% of our net sales in 2005 and 2004. The loss of one or more of our largest customers, or a significant slowdown in the business of any of these customers, could have a material adverse effect on our financial condition and results of operations.

Large or rapid increases in the costs of raw materials or a lack of availability of our raw materials could adversely affect our operations.

The primary raw materials that we use include steel tubing, steel castings and forgings, steel bar and preformed sealing elements. We do not have long-term contracts with most of our suppliers of raw materials nor

 

9


Table of Contents

any derivative contracts to hedge our exposure to commodity risks. Consequently, we are susceptible to increases in prices of such raw materials if we cannot pass them through to our customers, in a timely manner or at all. Market prices for certain materials such as steel have been rising, which could have a negative effect on our operating results and ability to manufacture our cylinders in a timely manner. Factors such as supply and demand, freight costs and transportation availability, the level of imports and general economic conditions may affect the prices of raw materials that we need. If we have difficulty in obtaining the raw materials we need from our existing suppliers on terms that we consider reasonable or experience deteriorating relations with such suppliers and we cannot identify alternative supply sources of raw materials, our ability to deliver cylinders to our customers in a timely manner could be adversely affected and may harm our operations.

Most of our business is conducted outside of the United States, and we intend to continue to expand our operations internationally. As a result, we are subject to a number of risks associated with foreign business activities.

We derive a significant majority of our sales from outside of the United States. In 2005, we generated approximately 82% of our net sales from sales of products manufactured outside the United States, including 51% in Germany, 20% in Canada and 11% in Brazil. An integral part of our geographic expansion strategy is to enter new foreign markets, principally China, and to further penetrate those foreign markets in which we are already active. Our ability to penetrate certain international markets may be limited, and our international sales and operations and our expansion strategy are subject to numerous risks inherent in international business activities, including:

 

    developments in the political and economic environment of some foreign countries that have an adverse effect on our operations in those countries;

 

    the imposition of tariffs or exchange controls or other trade restrictions;

 

    difficulty in managing an organization with operations located in various countries, including staffing and managing foreign operations;

 

    longer payment cycles for foreign customers than for United States customers;

 

    difficulty in complying with a variety of foreign laws and regulations and U.S. laws and regulations applicable to companies doing business outside of the United States;

 

    tax rates in certain foreign countries that exceed those in the United States, and withholding requirements on foreign earnings;

 

    exposure to export and import restrictions;

 

    restrictions on repatriation of cash; and

 

    difficulties in adapting our products to different country-specific requirements.

These and other factors could have a material adverse effect on our international operations or our business as a whole. As we continue to expand our business internationally, our success will increasingly depend on our ability to manage these risks effectively.

Our international operations pose currency risks.

Our operating results may be affected by volatility in currency exchange rates and our ability to manage effectively our currency transaction and translation risks. We conduct our business, earn revenue and incur costs in the local currency of the countries in which we operate. As a result, our international operations present special risks from currency exchange rate fluctuations. The financial condition and results of operations of each of our foreign operating subsidiaries are reported in the relevant local currency and then translated to U.S. dollars at the applicable currency exchange rate for inclusion in our combined consolidated financial statements. Changes in

 

10


Table of Contents

exchange rates between these foreign currencies and the U.S. dollar will affect the recorded levels of our foreign assets and liabilities, as well as our net sales, cost of goods sold and operating margins, and could result in exchange losses.

Our historical results of operations have been significantly affected by fluctuations in foreign currency exchange rates. In that regard, our net sales for 2005 increased by $22.2 million over 2004, and approximately $6.8 million of that increase was due to the favorable impact of foreign currency exchange rate changes on translated results, due primarily to the weakness of the U.S. dollar relative to the Euro, the Canadian dollar, the Brazilian real and certain other currencies.

In the future, we may not benefit from favorable exchange rate translation effects, and these effects may harm our operating results. In addition to currency translation risks, we incur currency transaction risks whenever one of our operating subsidiaries enters into either a purchase or a sale transaction using a different currency from the currency in which it receives revenues. In such cases we may suffer an exchange loss because we do not currently engage in currency swaps or other currency hedging strategies to address this risk.

Because some of our employees are unionized, we could experience a significant disruption of our operations or incur higher labor costs.

As of March 31, 2006, we had approximately 1,200 employees, approximately 950 of whom were unionized. The employees at our Ontario, Canada facility, our two German facilities and our Brazilian facility are unionized. The employees at our Alabama and Quebec, Canada facilities are not unionized. One of our collective bargaining agreements expires in June 2006, two expire in 2007 and one expires in 2008. We expect that, as is customary, the agreement that expires in June 2006 will be renewed for a one-year period. Although we believe that our working relationship with our employees is generally good, a strike, work stoppage or slowdown by our employees or a significant dispute with our employees could result in a significant disruption of our operations or higher ongoing labor costs.

We may not be able to consummate future acquisitions or successfully integrate future acquisitions into our business, which could result in unanticipated expenses and losses.

As part of our business strategy, we intend to pursue acquisitions. Our ability to execute this strategy successfully depends on, among other things, the availability of suitable acquisition candidates, the ability to obtain financing and our ability to quickly resolve challenges associated with integrating acquired businesses into our existing business. The expenses incurred in pursuing and consummating acquisitions, the time it takes to integrate an acquisition or our failure to integrate businesses successfully could result in unanticipated expenses and losses. Furthermore, we may not be able to realize any anticipated benefits from acquisitions.

The process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Some of the risks associated with acquisitions include:

 

    potential disruption of our ongoing business and distraction of management;

 

    unforeseen claims and liabilities, including unexpected environmental exposures;

 

    unforeseen adjustments, charges and write-offs;

 

    problems enforcing the indemnification obligations of sellers of businesses for claims and liabilities;

 

    unexpected losses of customers of, or suppliers to, the acquired business;

 

    difficulty in conforming the acquired business’ standards, processes, procedures and controls with our operations;

 

    variability in financial information arising from the implementation of purchase price accounting;

 

11


Table of Contents
    inability to coordinate new product and process development;

 

    loss of senior managers and other critical personnel;

 

    problems with new labor unions; and

 

    challenges arising from the increased scope, geographic diversity and complexity of our operations.

Any loss of key personnel and the inability to attract and retain qualified employees could have a material adverse impact on our operations.

We are dependent on the continued services of key executives including Ron Whitaker, our President and Chief Executive Officer, Craig Wolf, our Chief Financial Officer, Kurt Wittich, our Chief Operating Officer, and Kevin Chambers, our Vice President and Director of Global Marketing, as well as our plant general managers and engineering managers. The departure of key personnel without adequate replacement could severely disrupt our business operations. Additionally, we need skilled engineers and other employees with technical and manufacturing industry experience to operate our business successfully. From time to time there may be shortages of skilled labor that may make it more difficult and expensive for us to attract and retain qualified employees. If we are unable to attract and retain qualified individuals or our respective costs to do so increase significantly, our operations would be materially adversely affected.

Environmental and health and safety laws and regulations may result in additional costs.

We are subject to stringent federal, state, local and foreign laws, regulations and other requirements regarding public and worker health and safety and the environment. Any violations of these laws by us could cause us to incur unanticipated liabilities that could harm our operating results and cause our business to suffer. Pursuant to such laws, governmental authorities may require us to investigate or remediate, or contribute to the cost of investigating or remediating, sites owned or operated by us or third parties, now or in the past. Liability as an owner or operator, or as an arranger for the treatment or disposal of wastes, can be joint and several and can be imposed without regard to fault. There is a risk that our costs relating to these matters could be greater than what we currently expect or exceed our insurance coverage, or that additional remediation and compliance obligations could arise which require us to make material expenditures. In particular, the increased costs related to compliance with more stringent environmental laws, unanticipated remediation requirements or the discovery of previously unknown conditions could materially harm our financial condition and operating results. We are also required to comply with various environmental laws and maintain permits, some of which are subject to discretionary renewal from time to time, and we could suffer if we are unable to renew existing permits on favorable terms or to obtain any additional permits that we may require.

Our inability to protect our unpatented proprietary manufacturing expertise and other trade secrets could have a material adverse effect on our business, financial condition and results of operations.

We rely upon unpatented proprietary manufacturing expertise, continuing technological innovation and other trade secrets and know-how to develop and maintain our competitive position. We cannot assure you that such unpatented expertise and other information is adequately protected or that adequate remedies will be available in the event of an unauthorized use or disclosure of our trade secrets, manufacturing expertise or other proprietary information.

Litigation involving patent infringement claims by our competitors may result in significant legal costs or otherwise impede our ability to produce and distribute key products.

We could face patent infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. If we are found to be infringing on the proprietary technology

 

12


Table of Contents

of others, we may be liable for substantial damages, including in some cases treble damages, and we may be required to change our processes, to redesign our products partially or completely, to pay to use the technology of others or to stop using certain technologies or producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could prompt customers to switch to products that are not the subject of infringement suits.

We could be subject to damages based on product liability claims and other claims brought against us by our customers or end users, or lose customers as a result of the failure of our products to meet certain quality specifications.

Our products provide important performance attributes to our customers’ products. If one of our products fails to perform as expected due to design or manufacturing flaws, a customer or end user could seek replacement of the product or damages for costs incurred as a result of the performance failure. A successful claim or series of claims against us could have a material adverse effect on our financial condition and results of operations and could result in a loss of one or more customers.

We also face the risk of exposure to product liability claims if the use of any of our products results in personal injury or property damage. If any of our products prove to be defective, we may be required to recall or redesign such products. We maintain insurance against product liability claims, but there can be no assurance that such coverage will continue to be available on terms acceptable to us or that such coverage will be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage or any claim or product recall that results in significant adverse publicity against us may have an adverse effect on our financial condition, results of operations or future business prospects.

The insurance that we maintain may not fully cover all potential exposures.

We maintain property, business interruption, product liability and casualty insurance, but such insurance may not cover all risks associated with the hazards of our business and is subject to limitations, including deductibles and maximum liabilities covered. We may incur losses beyond the limits, or outside the coverage, of our insurance policies. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.

Technological changes in the fluid power industry could cause our products to become obsolete or noncompetitive.

The fluid power industry and its component parts are subject to technological change, evolving industry standards, changing customer requirements and improvements in and expansion of product offerings. If technologies or standards used in our cylinders become obsolete and we fail to adapt to the new technologies or standards, we could suffer customer losses and lose market share. Although we believe that we have the technological capabilities to remain competitive, there can be no assurance that developments by others will not render our cylinders or technologies obsolete or noncompetitive.

Failure to achieve and maintain effective internal control over financial reporting and disclosure controls in accordance with SEC rules could have a material adverse effect on our business and stock price.

Upon the effectiveness of the registration statement of which this prospectus forms a part, we will become subject to the rules of the Securities and Exchange Commission, or the SEC. Under current SEC rules, we will be required to document and test our internal control over financial reporting so that our management can certify, in annual reports beginning with the Form 10-K for 2007 to be filed with the SEC in the first quarter of 2008, as to the effectiveness of our internal control over financial reporting and our independent registered public accounting firm can render an opinion on management’s assessment and operating effectiveness of our internal controls. In addition, we will be required to implement and maintain effective disclosure controls and procedures. While we anticipate being able to fully implement these requirements and all other aspects of related SEC rules in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions, if

 

13


Table of Contents

any, or the impact of the same on our operations. The assessment of our internal control over financial reporting and evaluation of our disclosure controls and procedures will require us to expend significant management and employee time and resources and incur significant additional expense.

During our assessments of the effectiveness of our controls and procedures, we may identify material weaknesses in such controls and procedures, as well as any other significant deficiencies, which could harm our business and operating results, and could result in adverse publicity, regulatory scrutiny and a loss of investor confidence in the accuracy and completeness of our financial reports and SEC filings. In turn, this could have a material adverse effect on our stock price, and, if such weaknesses are not properly addressed, could adversely affect our ability to satisfy SEC filing requirements and report our financial results on a timely and accurate basis. We cannot assure you that we would be able to remedy any such material weaknesses or that additional deficiencies or weaknesses in our controls and procedures would not be identified. In addition, we cannot assure you that our independent registered public accounting firm will agree with our assessment that any identified material weaknesses in our internal control over financial reporting have been addressed. Moreover, we will continue to operate at a relatively small staffing level. Although our control procedures have been designed with this staffing level in mind, they are highly dependent on each individual’s performance or controls in the required manner. The loss of accounting personnel, particularly our Chief Financial Officer, would adversely impact the effectiveness of our control environment and our internal controls, including our internal control over financial reporting.

In addition, compliance with reporting and other requirements applicable to public companies will create additional costs for us and will require the time and attention of management. We cannot predict or estimate the amount of the additional costs we may incur, the timing of such costs or the degree of impact that our management’s attention to these matters will have on our business.

This offering will cause us to undergo an “ownership change” for purposes of Section 382 of the Internal Revenue Code, which will likely limit our ability to use our net operating loss carryforwards and certain other tax attributes.

At December 31, 2005, we had U.S. federal net operating loss carryforwards of $27.2 million, U.S. state net operating loss carryforwards of $16.4 million and foreign net operating loss carryforwards of $4.3 million. Under Section 382 of the Internal Revenue Code, because this offering will cause us to undergo an “ownership change,” our ability to use our pre-change of control net operating loss carryforwards and other pre-change tax attributes against our post-change income will likely be limited. These limitations would have the effect of reducing our after-tax cash flow.

Incurrence of indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry or to implement our strategic initiatives.

After giving effect to the offering and the application of a portion of the net proceeds to the repayment of debt as described under “Use of Proceeds,” as of December 31, 2005, we would have had total indebtedness of $             million. We may borrow additional funds in the future to finance acquisitions, capital expenditures or for other purposes. The terms of any such indebtedness could:

 

    require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;

 

    increase the amount of our interest expense;

 

    increase our vulnerability to general adverse economic and industry conditions;

 

    limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

14


Table of Contents
    place us at a disadvantage compared to our competitors that may have proportionately less debt;

 

    restrict us from making strategic acquisitions, introducing new technologies or otherwise exploiting business opportunities;

 

    make it more difficult for us to satisfy our obligations with respect to our existing indebtedness; and

 

    limit, along with the financial and other restrictive covenants in our existing indebtedness, among other things, our ability to borrow additional funds, dispose of assets or pay cash dividends.

Acts of God and war or terrorist activities may cause the economic conditions in the United States or abroad to deteriorate, which could harm our business.

Acts of God, such as hurricanes, earthquakes and pandemic diseases, war or terrorist attacks around the world may impact our operations or cause general economic conditions around the world to deteriorate. Any of these events could have a negative impact on our business, financial condition or results of operations.

Risks Relating to This Offering

The price of our common stock may be volatile and you could lose all or part of your investment.

Volatility in the market price of our common stock may prevent you from being able to sell your shares at or above the price you paid for your shares. The market price of our common stock could fluctuate significantly for various reasons, which include:

 

    our quarterly or annual earnings or those of other companies in our industry;

 

    the public’s reaction to our press releases, our other public announcements and our filings with the SEC;

 

    changes in earnings estimates or recommendations by research analysts who track our common stock or the stocks of other companies in our industry;

 

    changes in accounting standards, policies, guidance, interpretations or principles;

 

    changes in general conditions in the United States and global economies or financial markets, including those resulting from Acts of God, war, incidents of terrorism or responses to such events; and

 

    sales of common stock by our directors and executive officers.

In addition, in recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including companies in our industry. The price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our stock price.

In the past, following periods of market volatility in the price of a company’s securities, security holders have often instituted class action litigation. If the market value of our common stock experiences adverse fluctuations and we become involved in this type of litigation, regardless of the outcome, we could incur substantial legal costs and our management’s attention could be diverted from the operation of our business, causing our business to suffer.

There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity.

Prior to this offering, there has not been a public market for our common stock. An active market for our common stock may not develop following the completion of this offering, or if it does develop, may not be maintained. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price for the shares will be determined by negotiations between us,

 

15


Table of Contents

the selling stockholders and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering.

Future sales of our common stock, including shares purchased in this offering, in the public market could lower our stock price.

Sales of substantial amounts of our common stock in the public market following this offering by our existing stockholders, upon the exercise of outstanding stock options or by persons who acquire shares in this offering may adversely affect the market price of our common stock. Such sales could also create public perception of difficulties or problems with our business. These sales might also make it more difficult for us to sell securities in the future at a time and price that we deem necessary or appropriate.

Upon the completion of this offering, we will have outstanding              shares of common stock, of which:

 

                 shares are shares that we and the selling stockholders are selling in this offering and, unless purchased by affiliates, may be resold in the public market immediately after this offering; and

 

                 shares will be “restricted securities,” as defined in Rule 144 under the Securities Act, and eligible for sale in the public market pursuant to the provisions of Rule 144, of which              shares are subject to lock-up agreements and will become available for resale in the public market beginning 180 days after the date of this prospectus.

With limited exceptions, these lock-up agreements prohibit a stockholder from selling, contracting to sell or otherwise disposing of any common stock or securities that are convertible or exchangeable for common stock for 180 days from the date of this prospectus, although the lead underwriters, may, in their sole discretion and at any time without notice, release all or any portion of the securities subject to these lock-up agreements. The lead underwriters have advised us that they have no present intent or arrangement to release any shares subject to a lock-up, and will consider the release of any lock-up on a case-by-case basis. Upon a request to release any shares subject to a lock-up, the lead underwriters would consider the particular circumstances surrounding the request, including, but not limited to, the length of time before the lock-up expires, the number of shares requested to be released, reasons for the request, the possible impact on the market or our common stock and whether the holder of our shares requesting the release is an officer, director or other affiliate of ours. As a result of these lock-up agreements, notwithstanding earlier eligibility for sale under the provisions of Rule 144, none of these shares may be sold until at least 180 days after the date of this prospectus.

At our request, the underwriters have reserved up to              shares, or       % of our common stock offered by this prospectus, for sale under a directed share program to our officers, directors, employees, business associates and other individuals who have family or personal relationships with our employees. If any of our current directors or executive officers subject to lock-up agreements purchase these reserved shares, the shares will be restricted from sale under the lock-up agreements. If any of these shares are purchased by other persons, such shares will not be subject to lock-up agreements.

As restrictions on resale end, our stock price could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These sales might also make it more difficult for us to sell securities in the future at a time and at a price that we deem appropriate.

We will have broad discretion in applying a portion of the net proceeds of this offering and may not use those proceeds in ways that will enhance our market value.

Our management has broad discretion over the use of the portion of the proceeds that we receive from this offering. If we do not apply these funds effectively, we may lose significant business opportunities. Furthermore, our stock price could decline if the market does not view our use of the proceeds from the offering favorably.

 

16


Table of Contents

You will suffer immediate and substantial dilution.

The initial public offering price per share is substantially higher than the pro forma net tangible book value per share immediately after the offering. As a result, you will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. Assuming an offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, you will incur immediate and substantial dilution in the amount of $             per share. If the underwriters exercise their over-allotment option, or if outstanding options and warrants to purchase our common stock are exercised, you will experience additional dilution. Any future equity issuances will result in even further dilution to holders of our common stock.

Certain provisions of Delaware law and our certificate of incorporation and bylaws that will be in effect after this offering may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price, and may make it more difficult for our stockholders to remove our board of directors and management.

Certain provisions of Delaware law, the state in which we are incorporated, and our certificate of incorporation and bylaws that will be in effect after this offering could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our board of directors or management, even if these events would be in the best interests of our stockholders. These provisions include the following:

 

    vacancies on our board of directors may be filled by a majority of the directors then in office, even if the remaining directors do not constitute a quorum, or by a sole remaining director;

 

    only the board of directors can change the number of directors;

 

    there is no provision for cumulative voting for directors;

 

    directors may only be removed for cause and then only by the holders of two-thirds of the shares entitled to be cast in the election of directors;

 

    the provisions of our certificate of incorporation regarding the removal of directors may only be changed by the holders of two-thirds of the shares entitled to be cast on the matter; and

 

    our stockholders are not permitted to act by written consent.

Although no shares of preferred stock will be outstanding upon the completion of this offering and the application of the net proceeds as described under “Use of Proceeds,” and although we have no present plans to issue any preferred stock, our certificate of incorporation authorizes the board of directors to issue up to 100,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which will be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting rights, including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock and, therefore, could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult or costly to acquire or effect, or delay, discourage or prevent, a change in control of our company. See “Description of Capital Stock.”

Since we do not expect to pay any dividends for the foreseeable future, investors in this offering may be forced to sell their stock in order to obtain a return on their investment.

We do not anticipate that we will pay any dividends to holders of our common stock for the foreseeable future. Any payment of cash dividends will be at the discretion of our board of directors and will depend on our financial condition, capital requirements, legal requirements, earnings and other factors. Our ability to pay dividends is restricted by the terms of our credit facilities and might be restricted by the terms of any indebtedness that we incur in the future. See “Dividend Policy.”

 

17


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from our offering of common stock, after deducting underwriting discounts and other expenses, of approximately $             million, assuming the shares are offered at $             per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus. We estimate that the offering expenses payable by us will be $             million. We will not receive any proceeds from the sale of the shares to be sold by the selling stockholders, including if the underwriters exercise their option to purchase additional shares to cover over-allotments.

We intend to use the net proceeds of our offering of common stock to:

 

    pay accrued dividends on our Series A preferred stock in the aggregate amount of $              million;

 

    redeem all of the outstanding shares of our Series A preferred stock for an aggregate redemption price of $              million;

 

    repay $              million of indebtedness outstanding under the revolving portions of our credit facilities;

 

    discharge $             million of our outstanding capital lease obligations; and

 

    pay a transaction fee to Centre Partners Management, LLC, an affiliate of our principal stockholders, in the amount of $             million (assuming the shares are offered at $              per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus).

Any remaining net proceeds will be used for general corporate purposes.

As of December 31, 2005, we had 17,662 shares of our Series A preferred stock outstanding, all of which were held by the Centre Entities. The holders of the shares of our Series A preferred stock are entitled to receive cumulative dividends accruing at the rate of 6% per annum payable quarterly in arrears, when and if declared by our board of directors. The Series A preferred stock ranks senior as to dividends and upon liquidation to our common stock and has a liquidation preference of $1,000 per share plus all undeclared and unpaid dividends.

We have three credit facilities, each of which provides for a revolving line of credit:

 

    Two of our North American subsidiaries, Hyco Holdings LLC and Hyco Alabama LLC, have a senior secured credit facility, which we refer to as the North American credit facility, with Harris N.A. This credit facility provides for revolving capacity of $13.0 million, of which $9.9 million was outstanding as of December 31, 2005. Borrowings under the revolving portion of the North American credit facility accrue interest at a LIBOR-based rate plus 3.00% or, at our election, a prime-based rate plus 0.50%. As of December 31, 2005, such borrowings accrued interest at a weighted average interest rate of 7.52%. All such borrowings mature on December 29, 2009 and are used to fund capital expenditures by and the working capital requirements of our North American operations. We expect to amend the North American credit facility prior to this offering to facilitate the payment of $     million in dividends from our North American subsidiaries.

 

    One of our German subsidiaries, Hyco Pacoma GmbH, which we refer to as Pacoma, has a senior secured credit facility with GE Commercial Finance Limited, which we refer to as the Pacoma credit facility. The Pacoma credit facility provides for revolving capacity of €13.2 million (or $15.6 million at the exchange rate as of December 31, 2005), of which €5.7 million (or $6.7 million at the exchange rate as of December 31, 2005) was outstanding as of December 31, 2005. Borrowings under the revolving portion of the Pacoma credit facility accrue interest at EURIBOR plus 2.00%. As of December 31, 2005, such borrowings accrued interest at a rate of 4.20%. All such borrowings mature on June 21, 2008 and are used to fund capital expenditures by and the working capital requirements of Pacoma’s operations.

 

18


Table of Contents
    Our other German subsidiary, Hyco Hengstler Hydraulik GmbH, which we refer to as Hengstler, has a revolving credit facility with GE Commercial Finance Limited, which we refer to as the Hengstler credit facility. The Hengstler credit facility provides for revolving capacity of €2.3 million (or $2.7 million at the exchange rate as of December 31, 2005), of which €0.9 million (or $1.0 million at the exchange rate as of December 31, 2005) was outstanding as of December 31, 2005. Borrowings under the Hengstler credit facility accrue interest at EURIBOR plus 2.00%. As of December 31, 2005, such borrowings accrued interest at a rate of 4.60%. All such borrowings mature on September 21, 2008 and are used to fund capital expenditures by and the working capital requirements of Hengstler’s operations.

We have not yet determined how we will allocate, among the three credit facilities, the approximately $             million of net proceeds that we intend to use to reduce indebtedness outstanding under the revolving portions of our credit facilities.

We have financed the purchase of certain machinery and equipment through capital lease finance agreements. These leases generally require monthly payments of principal and interest, and are scheduled to mature over the period from 2007 through 2010. On December 31, 2005, the outstanding balance under our capital leases, including current maturities, was $0.9 million and the interest rates on such leases ranged from 4.9% to 8.2% per annum.

DIVIDEND POLICY

We do not expect to declare or pay any cash or other dividends in the foreseeable future on our common stock, as we intend to reinvest cash flow generated by operations in our business. Our credit facilities restrict our ability to pay cash dividends on our common stock, and we may also enter into credit agreements or other borrowing arrangements in the future that restrict our ability to declare or pay cash dividends on our common stock. Any determination to pay cash dividends in the future will be at the discretion of our board of directors and will depend on various factors, including our financial condition, earnings, cash requirements, legal restrictions, restrictions under our credit facilities and other factors deemed relevant by our board of directors.

 

19


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2005:

 

    on a historical basis, without reflecting the pre-offering transactions;

 

    on a pro forma basis, giving effect to the pre-offering transactions and the reverse stock split; and

 

    on a pro forma as adjusted basis to give effect to (1) the pro forma adjustments described above, (2) this offering and (3) application of the net proceeds as described under “Use of Proceeds.”

You should read the following table in conjunction with the sections captioned “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and with our combined consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2005
     Historical     Pro Forma   

Pro Forma

As Adjusted

     (in thousands)

Cash and cash equivalents

   $ 8,368       
               

Long-term debt

       

Revolving portion of North American credit facility

     9,890       

Term loan portion of North American credit facility

     4,116       

Revolving portion of Pacoma credit facility

     6,724       

Term loan portion of Pacoma credit facility

     3,839       

Hengstler credit facility

     1,048       

Industrial revenue bonds

     2,770       

Note payable to Dana Corporation

     600       

Capital lease obligations

     890       

Other various loans

     327       
               

Total debt

   $ 30,204       

Less current portion of long-term debt and capital lease obligations

     (2,442 )     
               

Total long-term debt

   $ 27,762       

Shareholders’ equity

       

Capital stock

       

Series A preferred stock, $0.001 par value, 100,000 shares authorized, 17,662 shares issued and outstanding

     17,662       

Common stock, $0.001 par value, 40,000,000 shares authorized, 12,383,555 shares issued and outstanding(1)

     12       

Hidrover share quotas, $R1.00 par value, issued and outstanding, 6,001,190 share quotas in 2005 and 2004

     2,034       

Additional paid-in capital

     43,686       

Other comprehensive income

     2,652       

Retained deficit

     (31,217 )     
               

Total shareholders’ equity

     34,829       
               

Total capitalization

   $ 65,033       
             

(1) We expect that our board of directors will adopt a new equity incentive plan after the completion of this offering that will make available for issuance to our management and employees equity based awards representing, in the aggregate, up to       % of our then outstanding shares of common stock.

 

20


Table of Contents

DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the offering price per share of our common stock and the net tangible book value per share of our common stock upon completion of this offering.

As of December 31, 2005, without taking into account the pre-offering transactions, the reverse stock split or this offering, our historical net tangible book value was approximately $             million, or approximately $             per share, based on 12,383,555 shares of common stock outstanding on December 31, 2005. Historical net tangible book value per share represents the amount of our total consolidated tangible assets minus our total consolidated liabilities, divided by the actual number of shares of our common stock outstanding on December 31, 2005.

Our pro forma net tangible book value as of December 31, 2005 was approximately $            , or $             per share of our common stock, based on              shares of common stock outstanding after giving effect to the pre-offering transactions, including the issuance of              shares of common stock in connection therewith, and the reverse stock split. Pro forma net tangible book value represents the amount of our total combined consolidated tangible assets minus our total combined consolidated liabilities, divided by the pro forma number of shares of common stock outstanding after the pre-offering transactions and the reverse stock split but before giving effect to this offering.

Dilution in pro forma net tangible book value per share represents the difference between the amount per share paid by investors in this offering and the adjusted pro forma net tangible book value per share of our common stock immediately after the pre-offering transactions, the reverse stock split and this offering.

After giving effect to our sale of              shares of our common stock offered by this prospectus at an assumed public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the underwriters’ discounts and commissions and estimated offering expenses payable by us, our adjusted pro forma net tangible book value as of December 31, 2005 would have been approximately $             million, or approximately $             per share of our common stock. This represents an immediate increase in pro forma net tangible book value of $             per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $             per share to new investors purchasing shares of our common stock at the assumed public offering price. If the offering price is higher or lower, the dilution to new investors purchasing our common stock will be greater or less, respectively.

The following table illustrates this dilution on a per share basis:

 

Assumed public offering price per share

      $             

Historical net tangible book value per share as of December 31, 2005

   $     

Decrease per share due to the reverse stock split and pre-offering transactions, including the issuance of              shares in connection therewith

   $     

Pro forma net tangible book value per share as of December 31, 2005

   $     

Increase per share attributable to new investors

   $     

Adjusted pro forma net tangible book value per share after this offering

      $  
         

Dilution per share to new investors

      $  
         

 

21


Table of Contents

The following table summarizes as of December 31, 2005, as adjusted to give effect to the pre-offering transactions, the reverse stock split and this offering, the differences between our existing stockholders and new investors with respect to the number of shares of our common stock purchased from us, the total consideration paid to us and the average price per share paid:

 

    

Shares Purchased

    Total Consideration    

Average Price

Per Share

      Number    Percentage     Amount    Percentage    

Existing stockholders

           %           %   $             

New investors

                   %                   %  
                            

Total

      100 %      100 %  
                            

The preceding discussion and tables exclude any shares of our common stock issuable under the new equity incentive plan that we expect our board of directors will adopt after the completion of this offering. We expect that the new equity incentive plan will make available for issuance to our management and employees equity based awards representing, in the aggregate, up to         % of the shares of common stock outstanding after this offering.

If the underwriters’ over-allotment option is exercised in full:

 

    the percentage of our shares of common stock held by our existing holders of capital stock will decrease to approximately         % of the total number of shares of common stock outstanding after this offering;

 

    the number of shares of common stock held by investors purchasing common stock from us in this offering will increase to              shares, or approximately         % of the total number of shares of common stock outstanding after this offering; and

 

    pro forma adjusted dilution per share of common stock to new investors will decrease from $             to $            .

 

22


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected consolidated financial data at the dates and for the periods indicated. The selected combined consolidated balance sheet data as of December 31, 2004 and 2005, and the selected combined consolidated statement of operations data for the years ended December 31, 2003, 2004 and 2005, have been derived from our audited combined consolidated financial statements included elsewhere in this prospectus. The selected combined consolidated balance sheet data as of December 31, 2003 have been derived from our unaudited balance sheet as of such date not included in this prospectus. Such balance sheet was prepared on the same basis as our audited financial statements and includes, in the opinion of management, all adjustments that management considers necessary for a fair presentation of the financial information set forth therein. These financial statements are considered “combined” because the contribution of the interests in Hidrover Acquisition LLC to Hyco International, Inc. has been treated, for accounting purposes, as a combination of entities under common control. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Reorganization Transaction.”

The selected consolidated balance sheet data as of December 31, 2001 and 2002, and the selected consolidated statement of operations data for the years ended December 31, 2001 and 2002, have been derived from our consolidated financial statements not included in this prospectus. The selected consolidated statement of operations data for 2001 includes the results of operations of Hyco Hidrover LTDA for the period from May 15, 2001 through December 31, 2001 following our acquisition of Hyco Hidrover LTDA on May 15, 2001.

The results presented below are not necessarily indicative of the results to be expected in any future period and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.

 

23


Table of Contents
    Year Ended December 31,  
     2001     2002     2003     2004     2005  
    (in thousands, except per share amounts)  

Consolidated Statement of Operations Data:

         

Net sales

  $ 129,055     $ 116,913     $ 133,759     $ 166,834     $ 189,058  

Cost of goods sold

    125,400       108,369       117,603       140,863       162,187  
                                       

Gross profit

    3,655       8,544       16,156       25,971       26,871  

Selling, general, and administrative expenses

    16,145       11,891       13,088       13,149       14,573  

Interest expense

    4,032       2,524       2,116       2,371       1,646  

Other expenses—net

    16,834       2,071       1,496       317       1,465  
                                       

Income (loss) from continuing operations before income taxes

    (33,356 )     (7,942 )     (544 )     10,134       9,187  

Income tax expense (benefit)

    819       460       906       2,057       (1,295 )
                                       

Income (loss) from continuing operations

    (34,175 )     (8,402 )     (1,450 )     8,077       10,482  

Loss from discontinued operations—net of tax

    —         —         (2,095 )     (371 )     (103 )
                                       

Net income (loss)

    (34,175 )     (8,402 )     (3,545 )     7,706       10,379  

Other comprehensive income:

         

Foreign currency translation adjustment

    (998 )     (661 )     3,940       2,569       325  

Minimum pension liability adjustment

    —         —         —         (51 )     (98 )
                                       

Comprehensive income (loss)

  $ (35,173 )   $ (9,063 )   $ 395     $ 10,224     $ 10,606  
                                       

Basic net income (loss) per share

  $ (2.75 )   $ (0.68 )   $ (0.25 )   $ 0.54     $ 0.72  

Diluted net income (loss) per share

  $ (2.75 )   $ (0.68 )   $ (0.25 )   $ 0.23     $ 0.31  

Weighted average shares outstanding:

         

Basic

    12,448,557       12,383,555       14,318,118       14,318,118       14,318,118  

Diluted

    12,448,557       12,383,555       14,318,118       33,854,858       33,854,858  

Cash dividends declared per common share(1)

    —         —         —         —         —    
    As of December 31,  
    2001     2002     2003     2004     2005  
    (in thousands)  

Consolidated Balance Sheet Data:

         

Cash and cash equivalents

  $ 2,214     $ 2,063     $ 3,969     $ 4,678     $ 8,368  

Working capital

    9,156       9,587       15,875       28,168       30,600  

Total assets

    74,154       70,936       77,560       94,117       95,637  

Current maturities of long-term debt and capital lease obligations

    4,235       5,447       3,808       3,900       2,442  

Long-term debt and capital lease obligations less current maturities

    36,846       30,819       29,054       28,770       27,762  

Shareholders’ equity

    1,780       6,777       15,903       27,327       34,829  
    Year Ended December 31,  
     2001     2002     2003     2004     2005  
    (in thousands)  

Other Financial Data:

         

Capital expenditures

  $ 3,893     $ 1,180     $ 2,084     $ 2,618     $ 5,727  

Net cash provided by/(used in):

         

Operating activities

    (1,544 )     (2,763 )     524       1,819       14,432  

Investing activities

    (8,043 )     444       (893 )     (1,958 )     (5,613 )

Financing activities

    9,611       3,048       2,609       498       (5,135 )

(1) In December 2005, Hyco Hidrover LTDA declared a dividend in the amount of 2.8 million Brazilian reais (approximately $1.1 million at the exchange rate as of December 31, 2005) that was paid to the Centre Entities on December 15, 2005. Also in December 2005, Hyco Hidrover LTDA declared a dividend in the amount of 4.6 million Brazilian reais (approximately $2.0 million at the exchange rate as of December 31, 2005) that was paid to the Centre Entities in February 2006.

 

24


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our combined consolidated financial statements and related notes contained elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those contained in or implied by these forward-looking statements as a result of a variety of factors, including those set forth under “Forward-Looking Statements” and “Risk Factors” and elsewhere in this prospectus.

Overview

We are a designer and manufacturer of custom-designed hydraulic cylinders used in mobile equipment. With six manufacturing facilities located on three continents, we believe that we are the world’s largest independent manufacturer of mobile hydraulic cylinders. Our manufacturing facilities are strategically located to facilitate a collaborative design and engineering process with our OEM customers, and to deliver our products on a timely basis. Our cylinders are shipped directly and indirectly to countries in North and South America, Europe and Asia, as we leverage our broad manufacturing footprint and each location’s specialized capabilities to serve the global needs of our customers.

Our diverse and broad manufacturing capabilities provide us with the ability to design and manufacture custom cylinders in accordance with our OEM customers’ engineering requirements, while maintaining close geographic proximity to their manufacturing facilities. In addition, our regional presence allows us to exploit trends or changes in local business conditions, economies, politics and other factors that influence our end markets and the resulting demand for mobile equipment.

We have three reporting segments: Europe, North America and South America. Our European segment consists of the operations of our two German facilities. Our North American segment consists of the operations of our one U.S. facility and two Canadian facilities. Our South American segment consists of the operations of our Brazilian facility. Below is a table of our net sales and income (loss) from continuing operations, by segment, for 2003, 2004 and 2005. Sales are classified based on where our products are manufactured, and may not be indicative of where the equipment bearing our products is ultimately sold. Net sales outside the United States are translated into U.S. dollars at a weighted average exchange rate for the year.

 

     Year ended December 31,  
     2003     %     2004    %     2005    %  
     (dollars in thousands)  

Net Sales:

              

Europe

   $ 75,859     56.7 %   $ 89,677    53.8 %   $ 95,620    50.6 %

North America

     44,413     33.2 %     56,872    34.1 %     72,440    38.3 %

South America

     13,487     10.1 %     20,285    12.1 %     20,998    11.1 %
                                        

Total

   $ 133,759     100.0 %   $ 166,834    100.0 %   $ 189,058    100.0 %
                                        

Income (Loss) From Continuing Operations:

              

Europe

   $ 293     N.M.     $ 4,752    58.8 %   $ 4,573    43.6 %

North America

     (3,459 )   N.M.       96    1.2 %     3,780    36.1 %

South America

     1,716     N.M.       3,229    40.0 %     2,129    20.3 %
                                        

Total

   $ (1,450 )   N.M.     $ 8,077    100.0 %   $ 10,482    100.0 %
                                        

Demand for our cylinders generally follows the markets for the products in which our cylinders are incorporated and the economy as a whole. Almost all of our cylinders are sold into the following four end markets: construction, material handling, waste handling and agriculture. These end markets are cyclical in

 

25


Table of Contents

nature and display sensitivity to general economic conditions including residential and non-residential construction, interest rate movements and geo-political events. We believe our diversification across multiple end markets and geographies helps insulate us from economic downturns in individual markets while allowing us to pursue opportunities in rapidly growing markets.

The broader market for mobile hydraulic cylinders grew significantly in the 1990’s, and peaked in 1999 before experiencing a broad-based decline from 2000 to 2002. This decline was unusual in that it impacted each of our top four end markets simultaneously. Causes for this downturn included a reduction in capital spending and general economic softness around the world. From the end of 2003, the industry began to experience a turnaround with year-over-year shipments of mobile hydraulic cylinders growing in each of 2004 and 2005, amidst a broad upturn in capital spending and sustained strength across a wide range of mobile equipment end markets, particularly from OEM customers supplying their products to rapidly-growing geographic regions, such as China and India.

In January 2003, we hired a new senior management team led by our current President and Chief Executive Officer Ron Whitaker, which commenced a broad-based strategic review of our operations. The new team instituted a number of initiatives, including a successful strategy to increase sales and profitability, improvements in operational efficiency, the closure of one manufacturing facility and reductions in headcount.

Reorganization Transaction

Immediately prior to the completion of this offering, the Centre Entities will contribute all of the outstanding interests in Hidrover Acquisition LLC, our sister company that operates our Brazilian business, to Hyco International, Inc. in exchange for                      shares of our common stock. We refer to this transaction as the reorganization transaction. The completion of the reorganization transaction is contingent upon the consummation of this offering.

The reorganization transaction will be treated, for accounting purposes, as a combination of entities under common control because of the Centre Entities’ controlling interest in each of the companies. Unless otherwise indicated or the context otherwise requires, financial data set forth in this section and elsewhere in this prospectus reflects the consolidated and combined business and operations of Hyco International, Inc., Hyco Hidrover LTDA and their respective wholly owned subsidiaries.

Significant Statement of Operations Items

Net Sales

We derive substantially all of our net sales from the sale of single-stage and multi-stage hydraulic cylinders to the mobile equipment market. Our top ten customers have been purchasing hydraulic cylinders from us or our predecessors for approximately 25 years. Our three largest customers represented approximately 32% and 34% of net sales in both 2005 and 2004, respectively. Our largest customer, Caterpillar Inc., generated approximately 19% of our net sales in 2005 and 2004. Sales are generally made via purchase orders from our customers which we receive several months in advance of required delivery.

Substantially all of our sales occur within four general end markets: construction, material handling, waste handling and agriculture. In 2005, construction accounted for approximately 53% of net sales, material handling represented approximately 19% of net sales, waste handling represented approximately 17% of net sales and agriculture accounted for approximately 6% of net sales. While we expect these four end markets to continue to comprise the bulk of our sales, we continue to pursue other attractive end markets. One recent example of this has been our entry into the oilfield equipment market.

Approximately 82% of our net sales were derived from our manufacturing facilities outside of the United States, an increase from 81% over 2004. We expect that our proportion of foreign sales will continue to increase as we seek to exploit international opportunities, particularly within the construction market. While the location of our sales is tracked via the facility in which our cylinders are manufactured and sold, we believe the majority of our cylinders are installed into mobile equipment that is subsequently shipped to foreign markets including China and countries in Africa, in addition to the regions in which we currently manufacture.

 

26


Table of Contents

Cost of Goods Sold

Cost of goods sold includes the materials used in our products, direct labor, depreciation and manufacturing overhead.

We estimate that steel represented approximately half of our cost of goods sold in 2005. Currently, we do not have long-term contracts with our suppliers of raw materials or any derivative contracts to hedge our exposure to commodity risk. Typically, we purchase steel at either market prices, or negotiated annual prices which are subject to quarterly surcharge escalators/de-escalators based on agreed upon indices. During the past 24 months the market price of steel has increased to historical highs. Factors such as supply and demand, freight costs and transportation availability, inventory levels, the level of imports and general economic conditions may affect the prices of raw materials that we need.

In 2004 and 2005, our gross margin was negatively affected by rising steel costs. Throughout this period we were able to pass along some of these cost increases to our customers in the form of higher cylinder selling prices. In 2005, we entered into index arrangements with the majority of our customers to systematically adjust pricing to reflect changes in raw material costs.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses, or SG&A, include sales and marketing expenses, payroll and related costs, design engineering, insurance and professional fees, property and other non-income taxes and administrative and other types of overhead expenses. We expect SG&A expenses will increase in absolute terms as we increase our sales and expand into additional geographic regions as well as incur additional costs associated with operating as a public company.

Results of Operations

Combined Consolidated Results of Operations

 

    Year Ended December 31,  
    2003     %     2004     %     2005     %  
    (dollars in thousands)  

Net Sales

  $ 133,759     100.0 %   $ 166,834     100.0 %   $ 189,058     100.0 %

Cost of Goods Sold

    117,603     87.9       140,863     84.4       162,187     85.8  
                                         

Gross Profit

    16,156     12.1       25,971     15.6       26,871     14.2  

Selling, General and Administrative Expenses

    13,088     9.8       13,149     7.9       14,573     7.7  

Interest Expense

    2,116     1.6       2,371     1.4       1,646     0.9  

Other Expenses—Net

    1,496     1.1       317     0.2       1,465     0.8  
                                         

Income (Loss) From Continuing Operations Before Income Taxes

    (544 )   N.M.       10,134     6.1       9,187     4.9  

Income Tax (Benefit) Expense

    906     0.7       2,057     1.2       (1,295 )   N.M.  
                                         

Income (Loss) from Continuing Operations

    (1,450 )   N.M.       8,077     4.8       10,482     5.5  

Loss from Discontinued Operations—Net of tax

    (2,095 )   N.M.       (371 )   N.M.       (103 )   N.M.  
                                         

Net Income (Loss)

  $ (3,545 )   N.M.     $ 7,706     4.6     $ 10,379     5.5  
                             

2005 Compared to 2004

Net Sales.    In 2005, our net sales increased by 13.3% to $189.1 million from $166.8 million in 2004. This increase was primarily the result of strong global economic conditions, continued strength in most of the end markets in which our OEM customers operate, new market penetration initiatives, and cylinder price increases to partially offset increases in the cost of steel. Exchange rate movements increased net sales by $6.8 million, or 4.1%.

 

27


Table of Contents

Cost of Goods Sold.    In 2005, our cost of goods sold increased by 15.1% to $162.2 million from $140.9 million in 2004. This increase was due principally to increased sales volume. As a percentage of net sales, cost of goods sold increased only slightly, to 85.8% from 84.4% in 2004, primarily reflecting continued increases in the cost of steel. Increases in the cost of raw materials were largely offset by our ability to pass such increases through to our customers and implement other operating improvements.

Gross Profit.    In 2005, our gross profit increased by 3.5% to $26.9 million from $26.0 million in 2004. As a percentage of net sales, gross profit decreased to 14.2% from 15.6% in 2004, due principally to a lag between steel material cost increases and customer price adjustments.

Selling, General and Administrative Expenses.    In 2005, our selling, general and administrative expenses, or SG&A expenses, increased by 10.8% to $14.6 million from $13.1 million in 2004. As a percentage of net sales, SG&A expenses decreased to 7.7% from 7.9% in 2004.

Interest Expense.    In 2005, our interest expense decreased by 30.6% to $1.6 million from $2.4 million in 2004. The decrease in interest expense reflects modest debt reduction and the refinancing of our senior credit facilities on more favorable terms, partially offset by rising short-term interest rates.

Income Tax (Benefit) Expense.    In 2005, our income tax expense decreased to $(1.3) million from $2.1 million in 2004. This decrease was primarily the result of the reversal of our valuation allowance against net deferred tax assets in foreign jurisdictions pursuant to FASB No. 109, as described in more detail in the notes to our audited financial statements included elsewhere in this prospectus.

Net Income.    In 2005, our net income increased by 34.7% to $10.4 million from $7.7 million in 2004, due to the factors described above. As a percentage of net sales, net income increased to 5.5% from 4.6% in 2004.

2004 Compared to 2003

Net Sales.    In 2004, net sales increased by 24.7% to $166.9 million from $133.8 million in 2003. This increase was primarily the result of improving global economic conditions, strength in most of the end markets in which our OEM customers operate and increases in selling prices to previously low margin accounts. Exchange rate movements increased net sales by $10.1 million, or 7.5%.

Cost of Goods Sold.    In 2004, our cost of goods sold increased by 19.8% to $140.9 million from $117.6 million in 2003. This increase was due principally to increased sales volume and increases in the cost of steel. As a percentage of net sales, cost of goods sold decreased to 84.4% from 87.9% in 2003.

Gross Profit.    In 2004, our gross profit increased by 60.8% to $26.0 million from $16.2 million in 2003. As a percentage of net sales, gross profit increased to 15.6% from 12.1% in 2003, due principally to the success of the operational initiatives implemented by our new management team in 2003 and 2004, the closure of our Mexican facility in 2003 and increased utilization of excess capacity across all of our facilities. Additionally, capacity shortages in the custom-designed cylinder market allowed us to increase prices selectively.

Selling, General and Administrative Expenses.    In 2004, our SG&A expenses remained unchanged from 2003. As a percentage of net sales, operating expenses decreased to 7.9% from 9.8% in 2003. The decrease in operating expenses as a percentage of net sales was a result of the closure of our Mexican facility in 2003 and the success of other efforts to streamline operations, including headcount reductions and efforts to reduce non-essential costs.

Interest Expense.    In 2004, our interest expense increased by 12.1% to $2.4 million from $2.1 million in 2003. The increase in interest expenses resulted from increases in prevailing market interest rates, which affect our variable-rate borrowings under our credit facilities and additional borrowing costs and charges associated with extending what was then our largest credit facility.

 

28


Table of Contents

Income Tax Expense.    In 2004, our income tax expense increased to $2.1 million from $0.9 million in 2003, as a result of increased taxable income.

Net Income.    In 2004, our net income increased to $7.7 million, from a net loss of $3.5 million in 2003, due to the factors described above.

Results of Operations by Segment

2005 Compared to 2004

Europe

     Year ended December 31,  
     2004    %     2005    %  
     (dollars in thousands)  

Net Sales

   $ 89,677    100.0 %   $ 95,620    100.0 %

Income From Continuing Operations

     4,752    5.3       4,573    4.8  

Net Sales. In 2005, net sales of products manufactured in our German facilities increased by 6.6% to $95.6 million from $89.7 million in 2004. This increase was primarily the result of strong economic conditions in Europe, continued strength in most of the end markets in which the OEM customers of our German facilities operate, and cylinder price increases to partially offset increases in the cost of steel. Exchange rate movements increased net sales by $0.7 million, or 0.8%.

Income From Continuing Operations. In 2005, income from continuing operations of our European segment decreased by 3.8% to $4.6 million from $4.8 million in 2004, principally due to a lag between steel cost increases and customer price adjustments.

North America

     Year ended December 31,  
     2004    %     2005    %  
     (dollars in thousands)  

Net Sales

   $ 56,872    100.0 %   $ 72,440    100.0 %

Income From Continuing Operations

     96    0.2       3,780    5.2  

Net Sales. In 2005, net sales of products manufactured in our North American facilities increased by 27.4% to $72.4 million from $56.9 million in 2004. This increase was primarily the result of strong economic conditions in North America, continued strength in most of the end markets in which the OEM customers of our North American facilities operate, new market penetration initiatives, and our ability to increase pricing to our customers primarily reflecting increases in the cost of steel. Exchange rate movements between the U.S. and Canadian dollar increased net sales by $2.6 million, or 4.6%.

Income From Continuing Operations. In 2005, income from continuing operations of our North American segment increased to $3.8 million from $0.1 million in 2004, principally due to the increase in net sales and our ability to offset increases in raw material costs with price increases, as well as the results of operational improvements.

South America

 

     Year ended December 31,  
     2004    %     2005    %  
     (dollars in thousands)  

Net Sales

   $ 20,285    100.0 %   $ 20,998    100.0 %

Income From Continuing Operations

     3,229    15.9       2,129    10.1  

 

29


Table of Contents

Net Sales. In 2005, net sales of products manufactured in our Brazilian facility increased by 3.5% to $21.0 million from $20.3 million in 2004. Exchange rate movements increased net sales by $3.5 million, or 17.0%. In addition, our Brazilian facility benefited from the successful expansion of its business in the construction market. These positive developments were partially offset by general weakness in the Brazilian economy, and in particular the market for agricultural equipment.

Income From Continuing Operations. In 2005, income from continuing operations of our South American segment decreased by 34.1% to $2.1 million from $3.2 million in 2004, due to the factors described above and a lag between steel cost increases and customer price adjustments, as well as increased selling expenses and wages.

2004 Compared to 2003

Europe

     Year ended December 31,  
     2003    %     2004    %  
     (dollars in thousands)  

Net Sales

   $ 75,859    100.0 %   $ 89,677    100.0 %

Income From Continuing Operations

     293    0.4       4,752    5.3  

Net Sales. In 2004, net sales of products manufactured in our German facilities increased by 18.2% to $89.7 million from $75.9 million in 2003. This increase was partially the result of improving conditions in the European economy, strength in most of the end markets in which the OEM customers of our German facilities operate, and capacity shortages in the custom-designed cylinder market which allowed us to increase prices selectively. Exchange rate movements increased net sales by $7.7 million, or 10.1%.

Income From Continuing Operations. In 2004, income from continuing operations of our European segment increased to $4.8 million from $0.3 million in 2003, principally due to the success of the operational initiatives implemented by our new management team in 2003 and 2004 and increased utilization of excess capacity.

North America

     Year ended December 31,  
     2003     %     2004    %  
     (dollars in thousands)  

Net Sales

   $ 44,413     100.0 %   $ 56,872    100 %

Income (Loss) From Continuing Operations

     (3,459 )   N.M.       96    0.2  

Net Sales. In 2004, net sales of products manufactured in our North American facilities increased by 28.1% to $56.9 million from $44.4 million in 2003. This increase was primarily the result of strong economic conditions in North America, strength in most of the end markets in which the OEM customers of our North American facilities operate and increases in selling prices to previously low margin accounts. Exchange rate movements between the U.S. and Canadian dollar increased net sales by $1.7 million, or 3.8%.

Income (Loss) From Continuing Operations. In 2004, income (loss) from continuing operations of our North American segment increased to $0.1 million from $(3.5) million in 2003, primarily due to the factors described above and operational initiatives implemented by our new management team.

South America

     Year ended December 31,  
     2003    %     2004    %  
     (dollars in thousands)  

Net Sales

   $ 13,487    100.0 %   $ 20,285    100.0 %

Income From Continuing Operations

     1,716    12.7       3,229    15.9  

 

30


Table of Contents

Net Sales. In 2004, net sales of products manufactured in our Brazilian facility increased by 50.4% to $20.3 million from $13.5 million in 2003. This increase was due primarily to improving conditions in the Brazilian economy, strength in the Brazilian market for agricultural equipment, increases in selling prices to previously low margin accounts and the addition of a large customer in Brazil that also purchases cylinders from some of our other facilities. Exchange rate movements increased net sales by $0.7 million, or 4.9%.

Income From Continuing Operations. In 2004, income from continuing operations of our South American segment increased by 88.2% to $3.2 million from $1.7 million in 2003, principally due to the operational initiatives implemented by our new management team in 2003 and 2004 and increased utilization of excess capacity in our Brazilian facility.

Liquidity and Capital Resources

Historically, our primary sources of capital have been cash generated from operations and sales of common and preferred stock and warrants to the Centre Entities. Short-term fluctuations in working capital requirements have been met through borrowings under revolving lines of credit, as needed. Our principal uses of cash have been to pay operating expenses, make capital expenditures, service debt and pay dividends.

Hyco International, Inc. is a holding company, and the stock of its subsidiaries is its only material asset. Consequently, the direct and indirect subsidiaries of Hyco International conduct all of our operations and own all of our operating assets. These subsidiaries are separate and distinct legal entities and have no legal obligation to make funds available to Hyco International for the payment of dividends. The terms of each subsidiary’s credit facilities significantly restrict them from paying dividends, making loans or other distributions and otherwise transferring assets to Hyco International or related entities. Furthermore, some or all of such subsidiaries may incur additional indebtedness that may restrict or prohibit the payment of dividends, the making of loans or other distributions or the transfer of assets to Hyco International.

Working Capital and Cash Flows

Net cash provided by operating activities in 2005 was $14.4 million, compared to $1.8 million in 2004 and $0.5 million in 2003. The $12.6 million increase in net cash provided by operating activities in 2005 was due primarily to an increase in net income and a decline in outstanding accounts receivable. There was also a significant reduction in inventories, resulting from a management program to use working capital more efficiently, which was partly offset by a corresponding decline in accounts payable and other liabilities. The increase in net cash provided by operating activities in 2004 compared to 2003 was due primarily to an increase in net income, partly offset by increases in accounts receivable and inventories.

Net cash used in investing activities in 2005 was $5.6 million, compared to $2.0 million in 2004 and $0.9 million in 2003. The $3.6 million increase in net cash used in investing activities in 2005 was due primarily to increased purchases of property, plant and equipment. Examples of these purchases include a new manufacturing line at our Brazil facility to build construction cylinders and a production line at the Pacoma facility to make rods. The increase in net cash used in investing activities in 2004 compared to 2003 was due primarily to increased capital expenditures.

Net cash used in financing activities in 2005 was $5.1 million, compared to net cash provided by financing activities of $0.5 million in 2004 and $2.6 million in 2003. The $5.6 million decrease in net cash provided by financing activities in 2005 was due primarily to an increase in dividends paid and payments made to lower our outstanding balances on our revolving lines of credit. The decrease in net cash provided by financing activities in 2004 compared to 2003 was due primarily to reduced capital contributions and shareholder advances and an increase in payments of long-term debt, which was partly offset by advances of long-term debt and borrowings under our revolving credit facilities. The activity regarding long-term debt was due to the refinancing of the North American credit facility.

 

31


Table of Contents

As part of the operational initiatives implemented by our new management team in 2003, we significantly improved our working capital management practices. Since 2002, our working capital has grown with increases in net sales. Total working capital at December 31, 2005 was $30.6 million. We believe that cash provided by operating activities, together with net proceeds from this offering and borrowings under our revolving credit facilities, will be sufficient to satisfy our working capital and capital expenditure requirements for at least the next 12 months.

Capital Expenditures

Our capital expenditures, consisting primarily of purchases of machinery and equipment, were $5.7 million in 2005, compared to $2.6 million in 2004 and $2.1 million in 2003. We believe that our facilities are generally well maintained and are adequate for us to operate our business. We anticipate that capital expenditures will be approximately $7.0 million in 2006.

Long-Term Debt

The following table sets forth certain information about our three credit facilities.

 

Credit Facility

  Term
Amount
  Revolver
Capacity
  Total   Maturity  

Outstanding Balance at
December 31, 2005

Term Revolver Total

    Weighted
Average
Rate at
December 31,
2005
    Maximum
Additional Revolver
Capacity at
December 31, 2005
 
    (dollar and euro amounts in millions)  

North America

  $ 4.8   $ 13.0   $ 17.8   12/29/09   $ 4.1     $ 9.9     $ 14.0     7.52 %   $ 1.2  

Pacoma

  3.3   13.2   16.5   6/21/08   3.2 (1)   5.7 (2)   8.9 (3)   4.20 %   1.4 (4)

Hengstler

    —     2.3   2.3   9/23/08     —       0.9 (5)   0.9 (5)   4.60 %   1.4 (4)

(1) Approximately $3.8 million at the exchange rate as of December 31, 2005.
(2) Approximately $6.7 million at the exchange rate as of December 31, 2005.
(3) Approximately $10.5 million at the exchange rate as of December 31, 2005.
(4) Approximately $1.7 million at the exchange rate as of December 31, 2005.
(5) Approximately $1.0 million at the exchange rate as of December 31, 2005.

North America.    On December 29, 2004, Hyco Holdings LLC and Hyco Alabama LLC entered into the North American credit facility, which provides for a revolving loan and a term loan. The North American credit facility contains certain covenants, including restrictions on incurring additional indebtedness, granting liens, paying dividends and other distributions, and selling assets; and covenants requiring us to maintain a minimum tangible net worth, maximum debt service coverage ratios, maximum capital expenditures and maximum operating lease expenditures. As of December 31, 2005, we were in compliance with all covenants under the North American credit facility. All borrowings under the North American credit facility mature on December 29, 2009. We expect to amend the North American credit facility prior to this offering to extend the maturity of borrowings thereunder and facilitate the payment by our North American subsidiaries of pre-offering dividends in the amount of $     million.

Borrowings under the revolving portion of the North American credit facility accrue interest at LIBOR plus 3.00% or Prime plus 0.50%. Borrowings under the revolver are limited to the sum of (1) 85% of our North American eligible accounts receivable and (2) the lesser of $6.0 million or 55% of our North American eligible finished goods inventory plus 55% of all other North American inventory, excluding work in progress inventory. We refer to this sum as the borrowing base. Availability for each subsidiary is limited to its separate borrowing base with aggregate revolving loan availability limited to $13.0 million. As of December 31, 2005, we had borrowings of $9.9 million outstanding under the revolving portion of the North American credit facility, with remaining availability of $1.2 million.

The term loan under the North American credit facility had an original principal amount of $4.8 million and accrues interest at LIBOR plus 3.50% or Prime plus 1.00%. As of December 31, 2005, $4.1 million of principal amount remained outstanding under the term loan.

 

32


Table of Contents

Borrowings under the North American credit facility are secured by all personal property and fixtures of Hyco Holdings LLC, Hyco Alabama LLC and each subsidiary guarantor of such borrowings, except for the share capital of Hyco Hidrover LTDA held by Hyco Holdings LLC. In addition, such borrowings are secured by our facilities in Alabama and St. Wenceslas, Quebec, Canada.

Pacoma.    On June 21, 2005, Pacoma refinanced its previously existing credit agreement by entering into the Pacoma credit facility, which provides for a revolving loan and a term loan. The Pacoma credit facility contains certain covenants, including restrictions on dispositions of collateral, restrictions on the granting of liens, paying dividends, debt service coverage ratios and maximum capital expenditures. As of December 31, 2005, we were in compliance with all covenants under the Pacoma credit facility. All borrowings under the Pacoma credit facility mature on June 21, 2008.

Borrowings under the revolving portion of the Pacoma credit facility accrue interest at EURIBOR plus 2.00%. Borrowings under the revolver are limited to the sum of (1) the lesser of €12 million or 85% of Pacoma’s eligible accounts receivable and (2) the lesser of €1.2 million or 60% of Pacoma’s eligible finished goods inventory and 30% of Pacoma’s eligible raw materials and work in progress inventory, less preferential creditors, valued at the lower of FIFO cost or market. Aggregate revolving loan availability is limited to €13.2 million. As of December 31, 2005, we had borrowings of €5.7 million (approximately $6.7 million at the exchange rate as of December 31, 2005) outstanding under the revolving portion of the Pacoma credit facility, with remaining availability of $1.7 million.

The term loan under the Pacoma credit facility is in the principal amount of €3.2 million and accrues interest at EURIBOR plus 2.00%.

Borrowings under the Pacoma credit facility are secured by substantially all of Pacoma’s personal property; accounts receivables; patents, trademarks and other intellectual property rights; the pledged share capital of a Pacoma subsidiary; and our facility at Eschwege, Germany.

Hengstler.    On September 23, 2005, Hengstler entered into the Hengstler credit facility, which provides for a revolving loan based on Hengstler’s eligible accounts receivable. The Hengstler credit facility contains certain covenants, including restrictions on dispositions of collateral, restrictions on the granting of liens, paying dividends, debt service coverage ratios and maximum capital expenditures. As of December 31, 2005, we were in compliance with all covenants under the Hengstler credit facility. All borrowings under the Hengstler credit facility mature on September 23, 2008.

Borrowings under the Hengstler credit facility accrue interest at EURIBOR plus 2.00%. Borrowings are limited to the lesser of €2.3 million or 85% of eligible accounts receivable. As of December 31, 2005, we had borrowings of €0.9 million (approximately $1.0 million at the exchange rate as of December 31, 2005) outstanding under the Hengstler credit facility, with remaining availability of $1.7 million.

Borrowings under the Hengstler credit facility are secured by substantially all of Hengstler’s accounts receivable.

Industrial Revenue Bonds

Construction of a portion of our Alabama facilities was financed by the issuance of industrial revenue bonds in the original principal amount of $4.0 million. The industrial revenue bonds contain certain covenants, including a fixed charged coverage limitation, limitations on capital expenditures and a minimum EBITDA. As of December 31, 2005, we were in compliance with all such covenants. As of December 31, 2005, the outstanding balance on the industrial revenue bonds was $2.8 million. Of that amount, $1.9 million accrues interest at a rate of 4.53% and matures on September 1, 2008, and $0.9 million accrues interest at a rate of 3.61% and matures on September 1, 2015.

 

33


Table of Contents

The industrial revenue bonds are not directly secured by any of our assets. When Hyco Alabama LLC issued the industrial revenue bonds, however, it caused Regions Bank to post irrevocable letters of credit on which funds can be drawn to make payments on the bonds. As security for its obligations under the credit agreement pursuant to which Regions Bank agreed to post such letters of credit, Hyco Alabama LLC granted to Regions Bank a security interest in a portion of our Alabama facility and all machinery and equipment in such facility.

Capital Leases

We have financed the purchase of certain manufacturing equipment through capital lease finance agreements. These leases generally require monthly payments of principal and interest and are scheduled to mature over a period from 2007 to 2010. As of December 31, 2005, the outstanding balance under our capital leases, excluding current maturities, was $0.9 million. Our capital leases bear interest at rates ranging from 4.9% to 8.2%.

Other Long-Term Debt

In connection with our purchase of certain assets of Dana Corporation in 1998, we issued a note payable to Dana in the principal amount of $1.4 million. As of December 31, 2005, $0.6 million remained outstanding under the note, which does not bear interest. We will make quarterly principal payments to Dana in the amount of $34,000 until January of 2011. As a result of a restructuring of the note in February of 2003 that eliminated our obligation to make cash interest payments, we discounted the note by $0.3 million to reflect imputed interest at 7%.

In 2002, the Centre Entities loaned $950,000 to Pacoma. This loan bore interest at a rate of 6.00%. In 2005, all amounts outstanding under this loan were repaid.

Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2005. The following table does not give effect to the application of the net proceeds from this offering as described under “Use of Proceeds.”

 

      Payments Due by Year
      2006    2007    2008    2009    2010    Thereafter    Total
     (in thousands)

Long-term debt obligations

   $ 2,083    $ 2,140    $ 11,822    $ 12,197    $ 251    $ 821    $ 29,314

Operating lease obligations

     603      429      356      335      306      1,611      3,640

Capital lease obligations

     359      249      117      123      42      —        890
                                                

Total

   $ 3,045    $ 2,818    $ 12,295    $ 12,655    $ 599    $ 2,432    $ 33,844
                                                

Net Operating Loss Carryforwards

At December 31, 2005, we had U.S. federal net operating loss carryforwards aggregating approximately $27.2 million, U.S. state net operating loss carryforwards of approximately $16.4 million and foreign net operating loss carryforwards of approximately $4.3 million, which expire at various times between 2015 and 2024. Since this offering will cause us to undergo an ownership change, our ability to use our existing net operating loss carryforwards will likely be limited.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies

In preparing our financial statements in accordance with U.S. GAAP, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as

 

34


Table of Contents

well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of our accounting policies require the application of significant judgment by management in the selection of appropriate assumptions for determining these estimates. By their nature, these judgments are subject to a degree of uncertainty; therefore, we cannot assure you that actual results will not differ from estimated results. We base these judgments on our historical experience, advice from experienced consultants, management’s forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 3 to the Combined Consolidated Financial Statements included elsewhere in this prospectus. Our most critical accounting policies are as follows.

Basis of Presentation

Hyco International and Hyco Hidrover LTDA are considered entities under the common control of the Centre Entities, as defined in EITF 02-5 “Definition of Common Control in Relation to FASB Statement of Financial Accounting Standards No. 141, Business Combinations.” Accordingly, the Combined Consolidated Financial Statements include the accounts of Hyco International, Hyco Hidrover LTDA and their respective wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in combination and consolidation.

Revenue Recognition

Revenue from product sales is recognized upon shipment to customers once risk of loss and title has transferred to the customer. Provisions for discounts and rebates to customers and returns are provided for in the same period the related sales are recorded. Additionally, we provide an allowance for estimated uncollectible accounts based on age of receivables and management judgment.

Inventories

Inventories, consisting primarily of hydraulic cylinders, component parts, rods and tubing, are stated at the lower of cost or market. Cost includes materials, labor, and manufacturing overhead determined using the first-in, first-out (“FIFO”) method. We reserve for slow moving inventory based on historical and anticipated usage.

Income Taxes

We provide for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset- and liability-based approach in accounting for income taxes.

Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenue and expense items for financial statement and income tax purposes. Valuation allowances are provided against assets not likely to be realized. In assessing the realizability of the deferred tax assets, we consider the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies.

Goodwill

Goodwill represents the excess of the purchase price over the net tangible and identifiable intangible assets of acquired businesses and, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, is not amortized. As of December 31, 2005, we had recorded goodwill of $3.8 million in relation to the purchase of our Ontario, Canada facility, which we refer to as Ultrametal. Impairment analyses performed on January 1, 2006 did not result in any impairment charges.

Valuation of Long-Lived Assets

Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we periodically evaluate long-lived assets, including property, plant and equipment and definite-lived intangible

 

35


Table of Contents

assets, whenever events or changes in conditions may indicate that the carrying value of such assets may not be recoverable. A long-lived asset is considered impaired when its fair value is less than its carrying value. We believe that long-lived assets in the combined consolidated balance sheets included elsewhere in this prospectus are appropriately valued.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries are translated into U.S. dollars using the exchange rate at the balance sheet date, and revenues, expenses, gains and losses are translated at a weighted average exchange rate for the year. Foreign currency transaction gains and losses are recorded in income.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The FASB issued SFAS No. 151 in order to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This statement requires that those items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 also requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. This statement is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. We have not assessed the impact of adoption of this statement on our financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which replaced SFAS No. 123, Accounting for Stock-Based Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the measurement of all share-based payments to employees and directors, including grants of employee stock options, using a fair-value-based method, and the recording of such expense in our statements of operations. SFAS No. 123R applies to reporting periods beginning after December 15, 2005. We are evaluating SFAS No. 123R and, to the extent that we decide to issue share-based payments, expect it to have an impact on our results of operations, net income (loss) and net income (loss) per share.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which replaced APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS No. 154 is issued. We are required to adopt the provisions of SFAS No. 154, as applicable, beginning in 2006.

Quantitative and Qualitative Disclosures about Market Risk

Commodity Risk

We are exposed to price risks associated with raw material purchases, most significantly purchases of steel. We do not have long-term or fixed-price contracts with our raw-materials suppliers. Our commodity risk is, however, mitigated by our ability to pass through to our customers, increases in the prices of raw materials. In 2005, a 1% increase or decrease in the price of steel would have affected our gross profit by $0.8 million.

 

36


Table of Contents

Interest-Rate Risk

We are exposed to changes in interest rates on borrowed funds, which could impact our financial condition and results of operations. As of December 31, 2005, we had $28.4 million in variable-rate indebtedness outstanding. We have not hedged our exposure to interest-rate fluctuations. In 2005, a 1% change in interest rates up or down would have affected our income before taxes by $0.3 million at the level of variable-rate indebtedness then outstanding.

Foreign Currency Risk

Our non-U.S. operations accounted for 82% of our net sales in 2005 and 81% of our net sales in 2004. As a result, we are exposed to foreign exchange risks to transactions denominated in foreign currencies. These transactions include foreign currency denominated imports and exports of raw materials and finished goods. In all cases, the functional currency is the business unit’s local currency.

We have not historically hedged our foreign currency risk through forward or option contracts. Our foreign currency risk is, however, mitigated because we operate in several foreign countries, reducing the concentration of risk in any one currency. In addition, our foreign operations have limited imports and exports, reducing the potential impact of exchange rate fluctuations. In 2005, a 1% fluctuation in the Euro, Canadian dollar or Brazilian real against the U.S. dollar would have affected our income before taxes by the following amounts:

 

        C$    Real
     (in millions)

Effect on 2005 net income

   0.070    0.043    0.041

Investment Risk

Our financial instruments include cash and cash equivalents and accounts and notes receivable. These are all short-term in nature. Accordingly, we believe that we are not exposed to material investment risk.

Inflation

The impact of inflation on our operating results has been moderate in recent years, reflecting generally low rates of inflation in the economies in which we operate. While inflation has not had, and we do not expect that it will have, a material impact on operating results, we cannot assure you that our business will not be affected by inflation in the future.

 

37


Table of Contents

REORGANIZATION TRANSACTION

In May 2001, we completed the purchase of all of the capital stock of Hyco Hidrover LTDA for a net purchase price of approximately $5 million.

From May 2001 until August 2003, Hyco Hidrover LTDA was a subsidiary of Hyco International, Inc. In August 2003, we completed the sale of 82.8% of the shares of Hidrover for $4.8 million to Hidrover Acquisition LLC, a wholly owned subsidiary of the Centre Entities. In December 2003, we sold our remaining shares in Hidrover, other than one share which we retained for Brazilian law purposes, to Hidrover Acquisition LLC for a $1.2 million note, which was paid in January 2004.

Immediately prior to the completion of this offering, pursuant to a contribution agreement to be entered into by Hyco International, Inc. and the Centre Entities, the Centre Entities will contribute to us all of the outstanding interests in Hidrover Acquisition LLC in exchange for                      shares of our common stock. We refer to this transaction as the reorganization transaction. The completion of the reorganization transaction is contingent upon the consummation of this offering.

 

38


Table of Contents

OUR BUSINESS

Overview

We are a designer and manufacturer of custom-designed hydraulic cylinders used in mobile equipment. With six manufacturing facilities located on three continents, we believe that we are the world’s largest independent manufacturer of mobile hydraulic cylinders. Our manufacturing facilities are strategically located to facilitate a collaborative design and engineering process with our OEM customers, and to deliver our products on a timely basis. Our cylinders are shipped directly and indirectly to countries in North and South America, Europe and Asia, as we leverage our broad manufacturing footprint and each location’s specialized capabilities to serve the global needs of our customers. In 2005, we generated net sales and EBITDA of $189.1 million and $14.9 million, respectively.

Our mobile hydraulic cylinders primarily consist of single-stage, or rod, cylinders and multi-stage, or telescopic, cylinders, and can be found on a wide variety of machines used for construction, material handling, waste handling, agricultural and other applications. Mobile hydraulic cylinders are fundamental components of hydraulic systems, which convert the hydrostatic power of a fluid into mechanical power used for mobile equipment applications, such as steering, suspension, lifting, tilting, compaction, extension, and stabilizing functions. Hydraulic cylinders are essential to the overall performance of mobile equipment, with cylinder failure generally rendering a machine inoperable.

The following are examples of our cylinders and their uses:

 

Typical Single-Stage Hydraulic Cylinders    Typical Single-Stage Cylinder Application
LOGO    LOGO

 

Typical Multi-Stage Hydraulic Cylinder    Typical Multi-Stage Cylinder Application
LOGO    LOGO

 

39


Table of Contents

We design substantially all of our products in close collaboration with our OEM customers, almost always utilizing integrated design and engineering teams. We have long-standing relationships (many of over 25 years) with a variety of leading multinational OEMs, including AGCO, Caterpillar, CNH, Dover, JCB, Manitowoc, Terex, Tigercat, Volvo, Wastequip and others. In 2005, we manufactured approximately 710,000 cylinders, ranging in size from one-half inch to 36 inches in diameter, and from six inches in retracted length to over 60 feet fully-extended. We believe that our cylinders are well-known to mobile equipment manufacturers for their application-specific features, including sealing elements, induction hardened chrome plated piston rods and roller burnished tube bores.

Our products are principally utilized in the construction, material handling, waste handling and agricultural industries.

The pie chart below illustrates an approximate breakdown of our net sales by our end market classifications in 2005 and representative applications within each of our end markets:

LOGO

Hyco was formed in 1998 by Centre Partners, a New York-based private equity firm, to acquire manufacturing facilities from Dana Corporation. Since then, we have completed three additional acquisitions of hydraulic cylinder manufacturers located in Canada (1999), Germany (1999) and Brazil (2001). In addition, in 2000 we moved to a greenfield manufacturing facility in Kitchener, Canada and expanded our facility in Alabama.

In 2003, a new senior management team led by our current President and Chief Executive Officer Ron Whitaker instituted a number of operational initiatives designed to increase sales and profitability. The new management team focused on making the company more market driven, enabling us to target faster growing end markets and geographic regions. As part of this process, we conducted a full scale strategic review of our business to better understand customer-level and product-level profitability, and used these metrics as a tool to drive strategy. Additionally, we looked outward to underserved markets and geographies, targeting those which represented attractive growth opportunities. We also examined our existing operations to determine the most effective ways to reduce costs and improve operational efficiencies. To this end, we closed one manufacturing facility, streamlined our financial reporting process, improved product level costing capabilities, identified and optimized production bottlenecks, reduced inventory, focused on purchasing savings and scrap reduction, and undertook a headcount reduction. Our success in implementing these various strategic initiatives contributed to substantial sales growth and margin expansion.

 

40


Table of Contents

Industry and Market Overview

Hydraulic equipment is a key segment of the broader fluid power industry, which consists of products used in the generation and control of energy using a pressurized medium in the form of water or oil (hydraulics) or air (pneumatics) to move machines and their parts. Fluid power systems can be found on a wide range of equipment such as automobiles, trucks, construction and agricultural equipment (mobile applications) as well as in machine tools (industrial applications) and aerospace applications.

Hydraulic cylinders are critical components of larger hydraulic systems, which typically also include pumps, valves, motors and other parts. Hydraulic cylinders are used to provide the powerful pushes and pulls which make mobile equipment productive. Applications for these cylinders include, for example, earthmoving machines, mobile cranes, drilling rigs, forklift trucks, garbage and dump trucks and agricultural equipment.

The global market for mobile hydraulic cylinders can be divided into two broad product categories: (i) custom-designed cylinders, which are designed to optimize performance for specific applications; and (ii) multi-use cylinders, which typically operate in light-duty applications. We focus on the custom-designed cylinder market. In 2005, more than 90% of our net sales were attributable to custom-designed cylinders, and the remainder to multi-use cylinders.

The global mobile hydraulic cylinder industry is highly fragmented, comprised of both independent manufacturers and OEMs with in-house cylinder manufacturing capabilities. We estimate that no cylinder manufacturer (independent or OEM) has greater than 10% market share worldwide. Mobile equipment OEMs generally manufacture cylinders for their own internal needs, with a few also having limited sales to third-party customers.

Independent manufacturers are typically focused on serving the hydraulic cylinder needs of a limited number of OEMs, usually located in close proximity to the cylinder manufacturing facilities. Many independent manufacturers also supply cylinders through distributors to small and mid-sized OEMs as well as original and refurbished cylinders and components for aftermarket replacements.

Demand for mobile hydraulic cylinders typically follows the markets for the mobile equipment in which these cylinders are incorporated, and the economy as a whole. In general, the market for mobile hydraulic cylinders grew throughout the 1990’s, and peaked in 1999 before experiencing a reduction in demand from 2000 to 2002 as a result of declines in all of our top four end markets concurrently. Causes for this downturn included a reduction in capital spending and general economic softness around the world. Since the end of 2003, shipments of mobile hydraulic cylinders have grown in each year amidst a broad upturn in capital spending and sustained strength in a wide range of mobile equipment end markets.

According to an industry study by Global Industry Analysts, Inc., the worldwide hydraulic cylinder market (which includes both the mobile hydraulic cylinder market in which we participate and the industrial hydraulic cylinder market in which we do not participate) is projected to reach $3.9 billion in 2006 and to grow at a compound annual growth rate of 4.1% from 2001 through 2010. The United States and Europe represent the most mature cylinder markets, which are projected to grow by 3.6% and 3.9% per year, respectively, from 2001 through 2010. Asia Pacific is the fastest growing market with projected annual growth of 5.9% per year from 2001 through 2010.

 

41


Table of Contents

Competitive Strengths

We believe that the following factors contribute to our success in the mobile hydraulic cylinder industry:

 

    Leading Market Position.    We believe we are the world’s largest independent designer and manufacturer of mobile hydraulic cylinders, serving the global needs of our customers from our six manufacturing facilities located in the United States, Canada, Brazil and Germany. With a significant presence in four major end markets, we provide our multinational OEM customer base with a broad product line and geographically diverse supply solution to meet its varied mobile hydraulic cylinder needs.

 

    Broad Manufacturing Footprint.    Our ability to design, manufacture and deliver cylinders on three continents and our leading market share among independent manufacturers within each of these markets allows us to provide a high level of customer and market focus to our multinational customers, most of the largest of which purchase cylinders from multiple Hyco facilities. As our OEM customers target different end markets and geographies for their products, we support them as a value-added supplier with the breadth and flexibility to meet their changing needs. We are able to leverage our international facilities to transfer design and manufacturing data from one facility to another in order to cut the cost of product introduction and reduce the supply chain risk inherent in such transfers. In addition, our presence and scale in different geographies enables us to have access to a large network of raw materials, which we can obtain more advantageously than our more geographically limited competitors. We can also leverage regional variances in production costs and currency rates to obtain the lowest delivered cost for our customers.

 

    High Value Added Products.    We provide our customers with custom-designed, mission critical hydraulic cylinders, typically engineered and manufactured for a specific application on a particular piece of mobile equipment. This equipment can range in price from approximately $18,000 for a basic skid steer loader, to upwards of $20 million for a fully equipped land-based drilling rig, with a typical piece of mobile equipment costing approximately $180,000. A large majority of our cylinders are designed in close collaboration with our OEM customers to conform to their exacting design requirements and tight manufacturing tolerances. Our manufacturing facilities create cylinders that we believe are well-known throughout a variety of end markets for their application-specific features, including sealing elements, induction hardened chrome plated piston rods and roller burnished tube bores.

 

    Significant Barriers to Entry.    Due to the mission critical nature of mobile hydraulic cylinders, almost all of our OEM customers require us to comply with rigorous qualification programs by manufacturing facility and product, each of which can take up to nine months to complete. Current customer qualifications include Caterpillar, DaimlerChrysler, JCB, Komatsu, Manitowoc, Terex, Toyota, Volvo and others. These customer qualifications effectively increase the cost to our local and regional competitors of penetrating the custom-designed mobile hydraulic cylinder market. In addition, each cylinder’s specific design and the integral nature of the product, make it time-consuming and expensive for OEMs to shift suppliers of hydraulic cylinders during the production run of a particular model.

 

    Broad Array of End Market Applications.    We sell our cylinders to OEMs primarily for use in mobile equipment that services the construction, material handling, waste handling and agricultural industries. These four end markets accounted for approximately 53%, 19%, 17%, and 6%, respectively, of our net sales in 2005. While these end markets have consistently accounted for most of our revenues, we are able to use our broad manufacturing resources to actively shift resources to focus on selected existing and new end markets which we believe offer the greatest opportunity. For example, we recently began manufacturing custom-designed hydraulic cylinders for oilfield equipment. We believe our broad diversification helps to insulate us from adverse conditions in limited end markets or geographic areas, and our ongoing effort to selectively exploit attractive market opportunities provides opportunities for additional growth.

 

   

Long-term Customer Relationships.    We have decades-long relationships with some of the largest multinational OEMs in the construction (Caterpillar, CNH, JCB, Manitowoc, Terex, Tigercat, Volvo),

 

42


Table of Contents
 

material handling (Caterpillar, Manitowoc), waste handling (Dover, Wastequip) and agricultural industries (AGCO, CNH, Deere). As our business is focused on consistently delivering quality cylinders to a diverse group of mobile equipment OEMs, we work closely with our customers to custom-design cylinders specifically suited for certain applications or functions.

 

    Experienced Management Team.    We are led by a team of highly experienced senior executives, each of whom has at least 20 years of industrial manufacturing experience. Our President and Chief Executive Officer, Ron Whitaker, and Chief Financial Officer, Craig Wolf, have together successfully led three manufacturing businesses, including Hyco. Other members of our senior executive team include Kurt Wittich, who was recently promoted to Chief Operating Officer after serving as the general manager of our largest manufacturing facility, and our Vice President and Director of Global Marketing, Kevin Chambers, who joined us in 1998 after 20 years in the fluid power industry.

Operating and Growth Strategies

Our senior management team has developed the following operating and growth strategies to generate additional sales and increase profitability:

 

    Increase Penetration of OEM Customers.    We will continue to use our long-standing relationships with our major OEM customers and our manufacturing, engineering, purchasing and technical expertise to gain market share from more geographically or technically limited independent competitors and our OEM customers’ “in-house” or “captive” manufacturing operations. We believe that our cylinders compare favorably with these in-house operations across critical metrics, including quality, on-time delivery, technical specification and cost.

 

    Expand into New Geographic Markets.    We will expand our presence within selected geographic markets where we see opportunities for profitable growth. We believe our track record of successfully acquiring and integrating manufacturing facilities on three different continents positions us well to continue to capitalize on this strategy. We have already demonstrated success in South America and Europe and are now focusing on potential growth opportunities in Asia.

 

    Expand into New End Markets.    We will continue to deploy operational resources toward those end markets where we see greatest opportunity. As an example of this strategy, during the fourth quarter of 2005 we began to actively pursue the construction, waste handling and materials handling end markets in South America. Our Brazilian facility had previously focused primarily on agricultural equipment. Also during 2005, we began to sell custom-designed cylinders to OEMs in the oilfield services market, thus capitalizing on the rapid growth of that sector.

 

    Grow through Acquisitions.    We have a demonstrated history of successfully acquiring and integrating cylinder operations and manufacturing facilities into our existing infrastructure. Since our founding in 1998, we have acquired additional mobile hydraulic cylinder businesses on three continents, significantly expanding our manufacturing footprint. We have already identified a number of independent manufacturers of custom-designed niche hydraulic cylinders which represent potential acquisition candidates for us. In addition, we have identified product lines as well as subsidiaries and divisions of larger OEMs that appear to have limited strategic fit within those organizations and that we believe could be divested with little to no interruption to the OEM’s core business. Additional acquisitions would allow us to expand our customer base, acquire complementary product lines, obtain and strengthen technological and engineering expertise and expand our geographic footprint.

 

   

Further Penetrate Regional Distributors and Aftermarket Sales.    While our traditional focus has been on selling directly to leading global mobile equipment OEMs, we believe there is significant opportunity to increase our share of sales to distributors. Hydraulic cylinder distributors typically sell new cylinders to a diverse group of small and mid-sized mobile equipment OEMs and supply replacement parts to the

 

43


Table of Contents
 

aftermarket. In North America, we have recently partnered with several distributors to establish a regional service center/warehouse network, which will enable us to serve smaller regional distributors and end users with a full line of aftermarket cylinder products. In addition, we have recently developed a proprietary Web-based aftermarket sales capability that will enable distributors and end users throughout the world to efficiently access product and pricing information through the internet.

 

    Identify Opportunities for Operational Improvement.    We expect to drive operational and financial enhancements through the ongoing implementation of continuous improvement projects. We have identified a number of projects and process improvements which we believe would require limited capital investments and could result in immediately positive financial returns. Examples of such projects include flow line improvements, material handling substitutions, and alternative sourcing of raw materials.

Our Business Segments

We operate our business in three geographic operating segments: Europe, North America and South America.

Europe

Our European business segment consists of cylinders designed and manufactured in our Hengstler manufacturing facility in Hausach, Germany and our Pacoma manufacturing facility in Eschwege, Germany. In 2005, we manufactured approximately 403,000 cylinders in these facilities, and our European business segment generated approximately $95.6 million in net sales. Our principal end markets in Europe are construction and material handling. Our three largest OEM customers in this segment are Caterpillar, Dover and Volvo, which accounted for approximately 27%, 8% and 7%, respectively, of 2005 net sales in Europe.

North America

Our North American business segment consists of cylinders designed and manufactured in our manufacturing facilities in Alabama, St. Wenceslas, Quebec and Kitchener, Ontario. In 2005, we manufactured approximately 213,600 cylinders in these facilities, and our North American business segment generated approximately $72.4 million in net sales. Our principal end markets in North America are construction, waste handling and material handling. Our three largest OEM customers in this segment are Dover, Wastequip and Manitowoc, which accounted for approximately 15%, 15% and 8%, respectively, of 2005 net sales in North America.

South America

Our South American business segment consists of cylinders designed and manufactured in our manufacturing facility in Caxias do Sul, Brazil. In 2005, we manufactured approximately 90,600 cylinders in this facility, and our South American business segment generated approximately $21.0 million in net sales. Our principal end markets in South America are construction and agriculture. Our three largest OEM customers in this segment are AGCO, Caterpillar and CNH, which accounted for approximately 23%, 18% and 16%, respectively, of 2005 net sales in South America.

Products

The global market for mobile hydraulic cylinders can be divided into two broad product categories: (i) custom-designed cylinders, which are designed to optimize performance for specific applications; and (ii) multi-use cylinders, which have multiple end-uses, and typically operate in light duty applications. We have chosen to focus on the custom-designed segment of the market because the multi-use cylinder market is characterized by a significant level of local competition, low barriers to entry and intense pricing pressure. In 2005, more than 90% of our net sales were attributable to custom-designed cylinders.

 

44


Table of Contents

In 2005, we manufactured approximately 710,000 cylinders, ranging in size from one-half inch to 36 inches in diameter, and from six inches in retracted length to over 60 feet fully extended. We handle both Imperial and Metric specifications. Our custom-designed cylinders command a significant price premium over less sophisticated, multi-use cylinders. The average price of our custom-designed cylinders is approximately $270 per cylinder with certain cylinders selling for as much as $46,000 each.

Single-stage, or rod, cylinders are those without the ability to extend beyond twice their original casing length. While rod cylinders are used in many applications worldwide, we focus on producing cylinders that are custom-designed in collaboration with OEM customers for specific applications. We do not focus on simple rod cylinders like tie rods and most industrial positioning applications. We instead focus on rod cylinders used for applications in telehandling, stabilizing of equipment, arm manipulation on cranes, shipyard container handling, backhoes and steering mechanisms for earth moving equipment. Rod cylinders represented approximately 88% of our net sales in 2005. Over the past two years, we have shifted our rod cylinder focus to manufacturing fewer but more highly priced and higher margin rod cylinders.

Multi-stage, or telescopic, cylinders are hollow rod cylinders with several stages of rods nested internal to the cylinder wall. When extended, these cylinders are several times the length of the outside casing. Telescopic cylinders are common components in such uses as the compaction of trash in garbage haulers, the tipping of materials from dump trucks and the positioning of large containers. Telescopic cylinders represented approximately 12% of our net sales in 2005. Due to the higher average selling price and margins of telescopic cylinders, we have actively focused on increasing the number of such cylinders that we manufacture. From 2004 to 2005, our unit volume of telescopic cylinders grew at a rate of approximately 15%.

 

Cylinder Type

  

Applications

   Price Range, Average Price and
Percentage of Net Sales

Rod

LOGO

  

•      Agricultural equipment

•      Construction equipment

•      Material handing equipment

•      On-road vehicles

•      Mining trucks

   •      Price range: $30–$15,000
•      Average price: $242
•      88% of net sales in 2005

 

Telescopic

LOGO

  

•      Waste handling equipment

•      On-road vehicles

•      Dump trucks

•      Roll-offs

  

•      Price range: $250–$46,000

•      Average price: $1,018

•      12% of net sales in 2005

We believe that our cylinders are well-known throughout the industry for their superior technology and quality. Given the critical nature of potential end-user applications, we have closely collaborated with OEM customers to develop the design and production engineering capabilities necessary to manufacture best-in-class cylinders which meet our customers’ rigorous demands. We strive to improve the performance, strength and durability of our cylinders. We utilize many of the industry’s most technologically advanced features such as:

 

    induction hardened, chrome plated piston rods designed to provide long service life in harsh operating conditions;

 

    HycoSeal package designed to completely eliminate leakage, operate in a wide temperature range (-30°F to +230°F) and provide longer service life than traditional V-style packaging seals;

 

    skived and roller burnished tube bores, providing a smooth, low-friction surface to aid sealing;

 

45


Table of Contents
    cushioned designs to protect cylinder and equipment integrity; and

 

    integrated valves and position sensors to enhance system efficiency.

End Markets

Our cylinders are used in various construction, material handling, waste handling and agricultural equipment. Management’s estimates of net sales by end market for 2003 through 2005 are set forth in the table below and discussed in the paragraphs that follow.

 

End Market

   2003   

% of

Net sales

    2004   

% of

Net sales

    2005   

% of

Net sales

 
     (dollars in millions)  

Construction

   $ 68.8    51.5 %   $ 88.1    52.8 %   $ 100.2    53.0 %

Material Handling

     22.6    16.9       29.4    17.6       35.7    18.9  

Waste Handling

     21.9    16.4       27.5    16.5       31.3    16.6  

Agriculture

     15.3    11.4       18.4    11.0       11.4    6.0  

Other

     5.1    3.8       3.5    2.1       10.5    5.5  
                                       

Total

   $ 133.7    100 %   $ 166.9    100 %   $ 189.1    100 %
                                       

Construction

Cylinders for construction equipment, which represents our largest end market, accounted for 53% of our 2005 net sales. Our cylinders are used in equipment such as excavators, trenchers, backhoes, and wheel loaders, among others. Construction equipment manufacturers demand hydraulic cylinders capable of operating in the harshest environments and compatible with a large variety of applications. These cylinders are also frequently subjected to severe side loads and often used as structural components in mobile equipment. We have responded to this challenge by increasing the structural integrity of our cylinders through continued product and process improvements. Most types of construction equipment have at least four hydraulic cylinders that control multiple functions. Typical applications include stabilizing, lifting, tilting, positioning and steering.

Material Handling

Cylinders for material handling equipment accounted for 19% of our 2005 net sales. Material handling OEM customers include manufacturers of forklifts, telehandlers, mobile cranes, automotive lifts and other equipment. To serve these OEMs, we must adhere to strict international design specifications for hydraulic systems which aim to neutralize operator and system failures. We use our technology and design capabilities to integrate safety and control functions into our cylinders, while maintaining competitive prices. We specialize in manufacturing custom-designed cylinders for forklift manufacturers, which typically require short delivery lead times. Specifically, we have established a facility within our Pacoma, Germany plant that is dedicated to the design and build requirements of these manufacturers and which can provide a five day order-to-delivery manufacturing cycle on most forklift cylinders.

Waste Handling

Cylinders for waste handling equipment (dump trucks and garbage trucks) accounted for 17% of our 2005 net sales. The majority of our waste handling cylinder manufacturing takes place in our North American facilities. The waste industry demands hydraulic cylinders that can reliably perform highly repetitive actions while exposed to aggressive and often corrosive environments. These cylinders are subjected to extreme pressures and side loads because of an inconsistent mix of waste materials. Therefore, it is necessary for the hydraulic cylinders in this market to be designed in close collaboration with customers to provide for extra dependability and longevity. The waste industry is evolving towards smaller, faster and quieter equipment

 

46


Table of Contents

requiring even higher performance cylinders. The new cylinder package will require pump, valve and cylinder manufacturers to work in close collaboration to optimize the performance of the total package. To meet this requirement, we are currently developing cylinder applications with hydraulic pump and valve manufacturers. Specifically, we have developed an internally cushioned cylinder design and new sealing systems that significantly improve waste handling equipment performance. We are also working on new surface treatments to make our cylinders more tolerant of environmental and operator abuse and are testing alternative sealing elements to isolate sensitive internal features from system contaminants.

Agricultural

Cylinders for agricultural equipment accounted for 6% of our 2005 net sales, over half of which are manufactured at our Brazil facility. Agricultural OEMs typically require a wide variety of hydraulic cylinders for use in tractors, combines and various agricultural implements. Rising labor costs have increased the need for larger and more sophisticated machines. As a result of the significant capital costs of agricultural equipment, such equipment is required to operate at a high utilization rate. Accordingly, at the high end of the agricultural equipment market there is an increased need for customized, highly reliable cylinders capable of year-round operation similar to the cylinders used in construction equipment. For example, many farm vehicles now use hydraulically suspended axles which allow them to be driven at high speed on public roads in order to move from location to location while retaining the stability needed for field work. We have been a major participant in the agricultural equipment market for more than three decades and our customers include major multinational OEMs.

Customers

We have decades-long relationships with some of the largest OEMs in the construction, material handling, waste handling and agricultural industries. Many of our largest customers are global OEMs, such as Caterpillar, Dover and Volvo. Our customers include nine of the 10 largest construction equipment OEMs, the three largest agricultural and waste handling equipment OEMs, and some of the largest material handing companies in the world, measured by revenues.

We maintain strong relationships with our customers on both a global and a regional basis and often work with the same customers in multiple end markets. In 2005, our top eight customers by dollar volume did business with multiple Hyco locations. Our globally coordinated and regionally managed customer strategy allows us to remain close to our customers at the user level, while giving us high visibility on future revenues and equipment programs.

Our overall customer base consists of over 1,000 customers, with our largest customer being Caterpillar. Sales to Caterpillar represented approximately 19% of net sales in 2005. No other customer represented more than 10% of our net sales in 2005.

Some of our largest customers have in-house cylinder manufacturing capabilities, including Caterpillar, Deere, Dover, JCB and Volvo. Management believes there is an opportunity to expand our existing business by further investing in our relationships with our long standing OEM customers to enable them to increasingly focus on their core businesses and further outsource the manufacturing of cylinders.

Manufacturing

Hydraulic systems are key components of mobile equipment that are critical to overall functionality and safety. Acceptable standards for normal machine shop components are not acceptable in the operational environments of most of the mobile applications in which our cylinders operate. The system operating pressures involved and the structural demands made of the cylinders require the use of minimum tolerance and highly repeatable manufacturing techniques. This applies to the bores which provide a key sealing element as well as to all of the metal components which must have predictable structural integrity. The entire process must be managed cost effectively in the relatively low order size environment of the hydraulic cylinder industry.

 

47


Table of Contents

All of our plants use the same basic raw materials:

 

    steel tubing;

 

    steel castings and forgings;

 

    steel bar;

 

    preformed sealing elements; and

 

    specialty steels and other metals for specific applications.

The manufacturing process includes three machining operations, some of which we sub-contract to qualified third parties, and all of which are strictly controlled:

 

    Tube manufacturing.    Cut to length, deburring, machining, internal and/or external finishing, welding (ports and bases), washing and, in some cases, chrome plating.

 

    Rods.    Either purchased pre-chromed and then machined in-house or purchased in bulk and then cut to length, machined, ground and chrome plated in house. Where relevant, rod ends are friction/inertia welded to the rods, providing superior structural integrity.

 

    Metal components (bases, glands, pistons, rod ends, blocks).    Machined cylinder components are either purchased complete from third-party quality-approved sources worldwide, or, increasingly, are made in-house using cell technology.

These three major components groups are combined with the sealing elements and other parts in a clean area where they are assembled and tested. Contained in this simplified process description are the complex operations which are vital to the application integrity of the cylinder, including multiple washing operations to ensure component and assembly cleanliness, skiving and roller burnishing to provide precise and optimal internal tube finishes, manual and robotic welding to give structural integrity and repeatability, precision grinding operations to produce the necessary rod and tube surfaces to give the cylinder its application life, and final wash, paint and pack and shipping.

We continually invest in process improvements and have adopted manufacturing techniques which help to make our products even more attractive to our customers, particularly in the areas of cost containment. In 2005, new machining centers were introduced in one of our European plants and revised rod and component machining operations were created in our Brazil plant, both as part of the process improvement program.

Lean manufacturing and other production tools such as Six Sigma are integral parts of our manufacturing philosophy, as is recognition of the world quality standards in the ISO/QS designations. All of our manufacturing facilities are ISO 9001 qualified and certain facilities maintain additional qualifications, including VDA6 (QS9000 equivalent), ISO 14000 and ISO 9002.

Sales and Marketing

Our sales and marketing efforts are driven by our customers’ global and regional strategies and our focus on expanding end markets and geographic regions. All sales and marketing efforts are coordinated at the corporate level but are managed locally. This strategy allows our regional facilities to maintain daily communications with, and provide quick response to, their customers, while maintaining a solid understanding of the global strategies and needs of our customers. Each facility has a customer sales and service group responsible for the day-to-day customer contact and a designated sales team, which maintains relationships with current customers and targets new customers. Each sales team contributes to the corporate marketing department, which identifies and analyzes market trends and creates action plans to address market changes.

There is a high degree of communication between our regional facilities on customer initiatives and among facilities. The corporate marketing department provides the regional sales forces with advertising support, promotional materials, market intelligence and other shared services. As of March 31, 2006, we employed 17 customer service personnel, including 13 sales professionals, and utilized 152 dealers and distributors in the

 

48


Table of Contents

United States and Canada and three distributors in Mexico. Our dealers and distributors purchase cylinders from us to sell to smaller local OEMs. In addition, as of March 31, 2006 there were 15 third-party service centers in the United States and one third-party repair center in the United Kingdom, which we have authorized to repair and rebuild our cylinders locally to save the time and expense of transporting cylinders back to our factories.

Raw Materials and Suppliers

We obtain raw materials, component parts and supplies from a variety of sources and generally from more than one supplier. Our principal raw material is steel. Our suppliers and sources of raw materials are based in the United States, Canada, Brazil, and Europe. We purchase steel at market prices, which during the past 24 months have increased to historical highs as a result of a relatively low level of supply and a relatively high level of demand. In 2005, we entered into index arrangements with the majority of our customers to systematically adjust pricing to reflect changes in raw material costs.

We believe our scale and broad geographic presence have aided us in developing relationships with our raw material suppliers. These relationships became increasingly important in recent years as basic raw materials such as steel tubing, forgings and castings became scarce, and helped us avoid many of the recent material shortages experienced by some of our competitors.

In 2005, no single supplier accounted for more than 10% of our raw material purchases. We believe that we can access alternative suppliers for the raw materials used in our manufacturing process.

Competition

The mobile hydraulic cylinder industry is highly fragmented with competitors ranging from major OEMs with in-house cylinder manufacturing facilities (including our own OEM customers such as Caterpillar, Deere, Dover, JCB and Volvo), to other independent manufacturers who produce mobile cylinders among other industrial products, to small local manufacturers. Independent or “merchant” manufacturers such as Hyco are focused exclusively on serving the mobile hydraulic cylinder needs of third-party customers. Unlike Hyco, with few exceptions, competitors in the merchant cylinder business are locally focused. We believe that we compete with the businesses described above based upon design expertise, quality, reliability, price, value, speed of delivery and technological sophistication.

Government Regulation and Environmental Matters

Our business is subject to a broad array of employee health and safety laws and regulations, including those under the Occupational Safety and Health Act. We also are subject to similar state laws and regulations, and foreign laws and regulations for our non-U.S. operations.

We are subject to numerous foreign, federal, state and local environmental laws, regulations and other requirements, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated properties.

Liabilities associated with the investigation and cleanup of hazardous substances, as well as personal injury, property damages, or natural resource damages arising from the release of, or exposure to, such hazardous substances, may be imposed in many situations without regard to violations of laws or regulations or other fault, and may also be imposed jointly and severally (so that a responsible party may be held liable for more than its share of the losses involved, or even the entire loss). Such liabilities also may be imposed on many different entities with a relationship to the hazardous substances at issue, including, for example, entities that formerly owned or operated the property affected by the hazardous substances and entities that arranged for the disposal of the hazardous substances at the affected property, as well as entities that currently own or operate such property. We are subject to such laws, including the federal Comprehensive Environmental Response, Compensation and Liability Act, commonly known as CERCLA or Superfund, in the United States, and similar foreign and state laws.

Our management is actively involved in evaluating environmental matters and, based on information currently available to it, believes that we are in material compliance with applicable environmental laws,

 

49


Table of Contents

regulations and requirements. Historically, we have not incurred significant expenditures to comply with these laws, regulations and requirements. However, future developments, including developments affecting contractual or other obligations that we may have, and increasingly stringent environmental laws, regulations and requirements could require us to make additional unforeseen environmental expenditures. We cannot assure you that, as a result of former, current or future operations, there will not be some future impact on us relating to new regulations or additional environmental remediation or restoration liabilities.

Employees

As of March 31, 2006, we had approximately 1,200 employees. We believe that our relationship with our employees is good overall and we have operated our facilities without any work stoppages or strikes.

As of March 31, 2006, we employed approximately 350 people in our three North American facilities. Of these facilities, only the workforce at our Ultrametal facility, comprising approximately 100 employees, is covered by a collective bargaining agreement. The agreement expires in November 2007.

As of March 31, 2006, we employed approximately 600 people in our two European facilities. The workforces at both our Pacoma and Hengstler facilities are covered by bargaining agreements in conformance with German government industrial policy. The agreement for Pacoma expires in May 2007 and the agreement for Hengstler expires in December 2008.

As of March 31, 2006, we employed approximately 250 people in our Brazilian facility. The workforce at our Brazilian facility is covered by a bargaining agreement in conformance with Brazilian government’s industrial policy. The agreement expires in June 2006. We expect that, as is customary, this agreement will be renewed for a one-year period.

Properties and Equipment

We have six manufacturing facilities on three continents. We believe that our facilities are generally well maintained and are adequate for us to operate our business. Our Ultrametal, Pacoma and Brazil facilities have additional capacity for increasing production, and we believe we could significantly increase our manufacturing output without substantial additional capital expenditures.

Set forth below is information regarding our administrative offices and manufacturing facilities:

 

Location

   Principal Use    Owned/Leased    Approximate
Square
Footage
   Qualification(s)

Atlanta, Georgia

   Principal executive offices    Leased    3,000    N/A

Arab, Alabama

   Manufacturing    Owned    148,000    ISO 9001

St. Wenceslas, Quebec, Canada

   Manufacturing    Owned    100,000    ISO 9001

Kitchener, Ontario, Canada

   Manufacturing    Leased    45,000    ISO 9002

Hausach, Germany

   Manufacturing    Owned    150,000    ISO 9001

Eschwege, Germany

   Manufacturing    Owned    500,000    VDA6 (QS9000)
and ISO 9001

Caxias do Sul, Brazil

   Manufacturing    Owned    105,000    ISO 9001 and
ISO 14000

Legal Proceedings

We are involved now and from time to time in legal proceedings arising out of the normal course of business. Management is not aware of any existing, pending or contingent liabilities that could have a material adverse effect on the business.

 

50


Table of Contents

MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information with respect to our executive officers and directors as of March 31, 2006. Each director is elected for a term of one year and serves until a successor is duly elected and qualified or until his or her death, resignation or removal. The term of each director will expire at the next annual meeting of our stockholders. Each executive officer serves at the discretion of our board of directors.

 

Name

   Age   

Position

Ronald C. Whitaker

   58    Chief Executive Officer, President and Director

Craig V. Wolf

   57    Chief Financial Officer and Corporate Secretary

Kurt Wittich

   54    Chief Operating Officer

Richard W. Detweiler

   64    Director

David L. Jaffe

   47    Director

Jonathan O’Herron

   76    Director

Scott Perekslis

   38    Director

Ronald C. Whitaker joined us as a director in 2001 and became Chief Executive Officer and President in January 2003. From 1995 to 2003, Mr. Whitaker served as Chief Executive Officer and/or Chairman of the Board at various manufacturing companies, including Strategic Distribution, Inc. from 2000 to 2003, Johnson Worldwide Associates, Inc. from 1996 to 1999 and EWI (Studebaker) Inc. from 1995 to 1996. Mr. Whitaker currently serves on the board of directors of Firearms Training Systems, Inc. and Strategic Distribution, Inc. Mr. Whitaker received a Masters of Business Administration degree from the Amos Tuck School of Business Administration at Dartmouth College.

Craig V. Wolf joined us as Chief Financial Officer in January 2004, after serving as a consultant to the company in 2003. Prior to joining us, Mr. Wolf worked for his own consulting firm from 1998 to 2004 providing financial and operational consulting services to various industrial, technology and business services companies. In 1998, Mr. Wolf also served as Vice President of Finance of Rough Brothers, Inc. Mr. Wolf spent the first four years of his career as a Senior Auditor at Arthur Andersen & Co. after serving three years with the U.S. Navy as a supply officer. Mr. Wolf received a Masters of Business Administration degree from Villanova University.

Kurt Wittich was named Chief Operating Officer in 2006, after serving as general manager of our Pacoma facility since 2004. From 2000 to 2004, Mr. Wittich held the position of plant manager at our Pacoma facility and from 1997 to 2000 he served as research and development manager at Pacoma. Mr. Wittich also served in the German navy.

Richard W. Detweiler joined us as a director in 2002. Mr. Detweiler is a managing director of Carlisle Enterprises, LLC. Prior to joining Carlisle in 1996, Mr. Detweiler served as Chairman and Chief Executive Officer of Precision Aerotech, Inc. Previously, Mr. Detweiler was the Co-Chief Executive Officer of Hyco. Mr. Detweiler currently serves as a director of RBX Corporation and Pacific Aerospace.

David L. Jaffe joined us as a director in 2001. Mr. Jaffe has been a managing director of Centre Partners since 2001. Prior thereto, he was a managing director at DLJ Merchant Banking Partners where he had been a founding member in 1985. He joined DLJ Securities Corporation in 1984. Mr. Jaffe received an A.B. from Harvard College and an M.B.A. from Wharton School of the University of Pennsylvania.

Jonathan O’Herron joined us as a director in 1998. Mr. O’Herron is a managing director in the banking group of Lazard, where he has worked as an investment banker since 1971. Mr. O’Herron holds a Masters of Business Administration degree from Harvard Business School.

Scott Perekslis joined us as a director in 1998. Mr. Perekslis currently serves as a managing director of Centre Partners, after joining Centre Partners in 1991. Mr. Perekslis began his career in the mergers and acquisitions department of Lazard Frères & Co. He currently serves as a director of Firearms Training Systems, Inc. and Connors Bros. Income Fund. Mr. Perekslis received an A.B. from Princeton University.

 

51


Table of Contents

Board of Directors

Our certificate of incorporation provides that our board of directors shall consist of such number of directors as determined from time to time by resolution of the board. We are in the process of identifying persons who will join our board of directors upon the consummation of this offering. In accordance with the rules of The Nasdaq National Market, a majority of our board of directors, which we expect will ultimately include five members, will be comprised of independent directors no later than one year after completion of this offering. As required by The Nasdaq National Market, our independent directors will hold regularly scheduled meetings at which only independent directors are present.

Security Ownership

Certain of our executive officers and directors own securities of our company. See “Principal and Selling Stockholders.”

Committees of the Board

Our board of directors will establish various committees to assist it with its responsibilities. Those committees are described below.

Audit Committee

After this offering, our board of directors will designate an audit committee that will consist of at least three directors. Each member of the audit committee will be financially literate at the time such member is appointed. The composition of the audit committee will satisfy the independence requirements of The Nasdaq National Market and the SEC.

The audit committee will have at least four regular meetings each year. The results of each meeting will be reported at the next regular meeting of our board of directors.

The audit committee will have responsibility for overseeing:

 

    our accounting and financial reporting processes;

 

    the reliability of our financial statements;

 

    the effective evaluation and management of our financial risks;

 

    our compliance with laws and regulations; and

 

    the maintenance of an effective and efficient audit of our financial statements by a qualified and independent auditor.

To fulfill these responsibilities, the audit committee will:

 

    be aware of the current areas of greatest financial risk to us and ensure that management is effectively assessing and managing risks;

 

    ensure that we establish and maintain effective disclosure controls and procedures to promote timely, accurate, compliant and meaningful disclosure in our periodic reports filed with the SEC;

 

    periodically review with the independent auditors their assessment as to the adequacy of our structure of internal controls over financial accounting and reporting, and their qualitative judgments as to the accounting principals employed and related disclosures by us and the conclusions expressed in our financial reports;

 

    review our accounting policies and practices to ensure they meet the requirements with respect to the FASB, the SEC and the American Institute of Certified Public Accountants;

 

52


Table of Contents
    select, evaluate and, if necessary, replace our independent auditors;

 

    engage in dialogue with the independent auditors with respect to any disclosed relationships or services that may impact the objectivity or independence of the independent auditors;

 

    meet with the independent auditors and the senior management to review the scope and methodology of the proposed audit;

 

    establish procedures to ensure rapid and current disclosures of material changes in condition or operations;

 

    discuss with management policies and practices regarding earnings press releases, as well as financial information and earnings guidelines provided to analysts and rating agencies;

 

    set clear hiring policies with respect to any current or former employees of our independent auditors; and

 

    establish procedures for the (1) receipt, retention and treatment of complaints we receive regarding our internal accounting controls or auditing matters and (2) confidential, anonymous submission by employees of their concerns regarding our internal accounting controls and auditing matters.

Our board of directors will adopt a written charter for our audit committee. Deloitte & Touche LLP currently serves as our independent auditors.

Nominating and Corporate Governance Committee

After this offering, our board of directors will designate a nominating and corporate governance committee that will consist of at least three directors. The composition of the nominating and corporate governance committee will satisfy the independence requirements of The Nasdaq National Market. The nominating and corporate governance committee will:

 

    identify individuals qualified to serve as our directors;

 

    nominate qualified individuals for election to our board of directors at annual meetings of stockholders;

 

    recommend to our board the directors to serve on each of our board committees; and

 

    recommend to our board a set of corporate governance guidelines.

To fulfill these responsibilities, the nominating and governance committee will:

 

    review periodically the composition of our board;

 

    identify and recommend director candidates for our board;

 

    recommend to our board nominees for election as directors;

 

    recommend to our board the composition of the committees of the board;

 

    review periodically our corporate governance guidelines and recommend governance issues that should be considered by our board;

 

    review periodically our code of conduct and obtain confirmation from management that the policies included in the code of conduct are understood and implemented;

 

    evaluate periodically the adequacy of our conflicts of interest policy;

 

    review related party transactions;

 

    consider with management public policy issues that may affect us;

 

    review periodically our committee structure and operations and the working relationship between each committee and the board; and

 

    consider, discuss and recommend ways to improve our board’s effectiveness.

 

53


Table of Contents

Compensation Committee

After this offering, our board of directors will designate a compensation committee that will consist of at least three directors. The composition of the compensation committee will satisfy the independence requirements of The Nasdaq National Market. The nominating and governance committee will recommend to our board of directors nominees for the compensation committee. The compensation committee will meet at least twice during each year. The primary responsibility of the compensation committee will be to develop and oversee the implementation of our philosophy with respect to the compensation of our officers. In that regard, the compensation committee will:

 

    develop and maintain a compensation policy and strategy that creates a direct relationship between pay levels and corporate performance and returns to shareholders;

 

    recommend to our board of directors for approval, compensation and benefit plans;

 

    review and approve annually corporate and personal goals and objectives to serve as the basis for the chief executive officer’s compensation, evaluation of the chief executive officer’s performance in light of the goals and, based on such evaluation, determine the chief executive officer’s compensation;

 

    determine the annual total compensation for our named executive officers;

 

    with respect to any equity-based compensation plans that we adopt, approve the grants of stock options, restricted stock, performance shares, stock appreciation rights and other equity-based incentives as permitted under our compensation plans;

 

    review and recommend to our board of directors compensation for non-employee directors; and

 

    review and recommend to our board of directors regarding employment agreements, severance arrangements and change of control plans that provide for benefits upon a change in control, or other provisions for our executive officers and directors.

Our board of directors will adopt a written charter for our compensation committee.

Director Compensation

We paid management fees to Mr. O’Herron in the amount of $50,000 in 2005 and have paid $25,000 through April 2006. We will pay management fees to Mr. O’Herron at the rate of $3,125 per month until the completion of this offering.

Following this offering, we will pay a $             annual director’s fee to each of our independent directors. In addition, all independent members of our board of directors will receive $             for attending each meeting of our board of directors or a committee of our board of directors, and $             for telephonic meetings of the board of directors or a committee of our board of directors. We will pay an additional annual fee of $             to the chair of the audit committee of our board of directors and an additional annual fee of $             to the chair of the other committees of our board of directors. Each member of our board of directors will be reimbursed for reasonable out-of-pocket expenses associated with service on our behalf and with attendance at or participation of the board of directors or a committee of our board of directors, including reasonable travel expenses. Our directors also will be provided with insurance coverage under our directors and officers insurance policy, which coverage will be commensurate with industry standards. Other than such reimbursement and insurance coverage, directors who are also our executive officers will not receive any compensation for their services as directors.

 

54


Table of Contents

Executive Compensation

The following table sets forth, for the periods indicated, the total compensation for services in all capacities to us received by our Chief Executive Officer and our two other executive officers whose aggregate compensation exceeded $100,000 during 2005. These executives are referred to as our named executive officers elsewhere in this prospectus.

SUMMARY COMPENSATION TABLE

 

Name and Principal Position

  Year   Annual Compensation
    Salary   Bonus   Other Annual
Compensation(1)
       
        ($)   ($)   ($)

Ronald C. Whitaker

  2005   500,000   175,000   —  

Chief Executive Officer and President

       

Craig V. Wolf

  2005   260,000   75,000   —  

Chief Financial Officer

       

Kurt Wittich

  2005   217,000   22,345   —  

Chief Operating Officer

       

(1) In accordance with SEC rules, the compensation described in this table does not include perquisites and other personal benefits received by a named executive officers that do not exceed the lesser of $50,000 or 10% of such named executive officer’s total annual compensation.

Option/SAR Grants in Last Fiscal Year

No stock options or SARs were granted to our named executive officers in 2005.

Aggregated Option/SAR Exercises in Last Fiscal Year, and Fiscal Year End Option/SAR Value

None of our named executive officers held or exercised options or SARs in 2005.

Benefit Plans

We expect that our board of directors will adopt a new equity incentive plan after the completion of this offering that will make available for issuance to our management and employees equity based awards representing, in the aggregate, up to         % of our then outstanding shares of common stock.

Employment Agreements

We currently do not have employment agreements with any of our named executive officers. We expect to enter into employment agreements with our named executive officers in connection with this offering.

Transaction Bonuses

Upon consummation of this offering, the selling stockholders will fund, on a pro rata basis according to the amount of net proceeds received by them in this offering, a management bonus pool in an amount equal to the sum of $1.0 million and 2% of the excess of the enterprise value of Hyco implied by the initial offering price over $100.0 million. Assuming an initial pubic offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover of this prospectus, the bonus pool would equal $             million. Such funds will be used to pay special transaction bonuses to certain of our officers and employees, including the named executive officers other than Mr. Whitaker. Our senior management will determine, in its discretion, which of our officers and employees will receive such bonuses and when and in what amounts.

 

55


Table of Contents

In addition, upon consummation of this offering or shortly thereafter, the selling stockholders will pay a transaction bonus in the amount of $             million, consisting of cash and shares of our common stock, to Mr. Whitaker.

Compensation Committee Interlocks and Insider Participation

None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our compensation committee. No interlocking relationship exists between any member of the board of directors or any member of the compensation committee of any other company.

Director and Officer Indemnification and Limitation on Liability

Our certificate of incorporation provides that, to the fullest extent permitted by the Delaware General Corporation Law and except as otherwise provided in our bylaws, none of our directors shall be liable to us or our stockholders for monetary damages for a breach of fiduciary duty. In addition, our certificate of incorporation provides for indemnification of any person who was or is made, or threatened to be made, a party to any action, suit or other proceeding, whether criminal, civil, administrative or investigative, because of his or her status as a director or officer of the company, or service as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise at our request to the fullest extent authorized under the Delaware General Corporation Law against all expenses, liabilities and losses reasonably incurred by such person. Further, our certificate of incorporation provides that we may purchase and maintain insurance on our own behalf and on behalf of any other person who is or was a director, officer or agent of the company or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise.

Insofar as indemnification for liabilities under the Securities Act may be permitted to our directors and officers pursuant to the foregoing provisions or otherwise, we have been informed that, in the opinion of the SEC, indemnification for liabilities under the Securities Act is against public policy and is unenforceable.

 

56


Table of Contents

CERTAIN TRANSACTIONS WITH AFFILIATES AND MANAGEMENT

We describe below transactions during our last three fiscal years to which we were or will be a party, in which

 

    the amounts involved exceeded or will exceed $60,000; and

 

    a director, executive officer, holder of more than 5% of our common stock or any member of their immediate family had or will have a direct or indirect material interest.

Management Fees

We paid management fees to the Centre Entities in the amount of $150,000 in 2005 and have paid $50,000 through April 2006. We will pay management fees to the Centre Entities at the rate of $12,500 per month until the completion of this offering.

We paid management fees to Mr. O’Herron in the amount of $50,000 in 2005 and have paid $25,000 through April 2006. We will pay management fees to Mr. O’Herron at the rate of $3,125 per month until the completion of this offering.

Shareholder Loan

During 2002, the Centre Entities loaned $950,000 to Pacoma. This loan accrued interest at a rate of 6%. In 2005, Pacoma repaid this loan in full with related interest.

Transaction Fees

Upon completion of this offering, we will pay a transaction fee to Centre Partners Management, LLC, an affiliate of our principal stockholders, in the amount of $         million (assuming an offering price of $             per share, which is the midpoint of the estimated price range set forth on the cover page of the prospectus).

Dividend Payments to Affiliates

In December 2005, Hyco Hidrover LTDA declared a dividend in the amount of 2.8 million Brazilian reais (approximately $1.1 million at the exchange rate as of December 31, 2005) that was paid to the Centre Entities on December 15, 2005. Also in December 2005, Hyco Hidrover LTDA declared a dividend in the amount of 4.6 million Brazilian reais (approximately $2.0 million at the exchange rate as of December 31, 2005) that was paid to the Centre Entities in February 2006.

Pre-Offering Transactions

We expect that during the second quarter of 2006, Hyco Hidrover LTDA will pay a dividend on its outstanding share capital in the amount of approximately $575,000. Also in the second quarter of 2006, we expect to pay accrued dividends on our Series A preferred stock in the amount of $3.1 million and to effect a partial redemption of our Series A preferred stock in the amount of $1.9 million.

Immediately prior to the completion of this offering, the Centre Entities will contribute all of the outstanding interests in Hidrover Acquisition LLC, through which the Centre Entities hold their 99.99% interest in Hyco Hidrover LTDA, to Hyco International, Inc. in exchange for              shares of our common stock. In addition, the Centre Entities will effect a cashless exercise of all of its outstanding warrants to purchase shares of our common stock, resulting in an issuance of              shares of our common stock to the Centre Entities.

 

57


Table of Contents

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2006 by:

 

    each person known to us to beneficially own more than 5% of the outstanding shares of common stock;

 

    each of the named executive officers;

 

    each of our directors;

 

    all directors and executive officers as a group; and

 

    each selling stockholder.

The table also sets forth such persons’ beneficial ownership of common stock immediately after the offering, as adjusted to reflect their sale of shares in this offering and after giving effect to the pre-offering transactions and the reverse stock split.

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws. We have based our calculation of the percentage of beneficial ownership on 12,383,555 shares of common stock outstanding on March 31, 2006 and                      shares of common stock outstanding upon completion of this offering.

In computing the number of shares of common stock beneficially owned by a person or group and the percentage ownership of that person or group, we deemed to be outstanding any shares of common stock subject to options held by that person or group that are currently exercisable or exercisable within 60 days after March 31, 2006. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

 

58


Table of Contents

Unless otherwise noted below, the address of each beneficial owner listed in the table is c/o Hyco International, Inc., 100 Galleria Parkway, Suite 1000, Atlanta, Georgia 30339.

 

    Before Offering         After Offering(1)

Name of Beneficial Owner

  Number of Shares
of Common Stock
Beneficially Owned
 

Percent of

Common Stock

Beneficially

Owned

    Number of Shares
Offered in this
Offering
  Number of Shares
of Common Stock
Beneficially Owned
 

Percent of

Common Stock

Beneficially

Owned

Centre Capital Investors II, L.P.(2)

  11,953,125   96.5 %      

Richard S. Melrose(3)

  203,125   1.6 %      

FM Hydraulic Investors, L.C.(4)

  68,555   *        

Richard J. Habegger(5)

  65,000   *        

Robert F. Overholser(6)

  62,500   *        

Jonathan O’Herron

  31,250   *        

Ronald C. Whitaker

  —     —          

Craig V. Wolf

  —     —          

Kurt Wittich

  —     —          

 * Represents beneficial ownership of less than 1%.
(1) After giving effect to the pre-offering transactions, the reverse stock split and this offering.
(2) Includes (i) 5,505,060 shares owned by The State Board of Administration of Florida, which are subject to an investment management agreement with Centre Partners, (ii) 1,179,678 shares owned by Centre Capital Tax-Exempt Investors II, L.P., (iii) 798,899 shares owned by Centre Capital Co-Investment, L.P., (iv) 788,798 shares owned by Centre Capital Offshore Investors II, L.P. and (v) 55,582 shares owned by Centre Parallel Management Partners, L.P. The address of each of such beneficial owners is c/o Centre Partners Management, LLC is 30 Rockefeller Plaza, 50th Floor, New York, New York 10020.
(3) The address of such beneficial owner is 17 Paces West Drive, Atlanta, Georgia 30327.
(4) The address of such beneficial owner is One Village Green Circle, Charlottesville, Virginia 22903.
(5) The address of such beneficial owner is 5515 South 930 East, Wolcottville, Indiana 46795.
(6) The address of such beneficial owner is 3807 Harbor Lane, Quincy, Illinois 62305.

 

59


Table of Contents

DESCRIPTION OF CAPITAL STOCK

General

Our authorized capital stock currently consists of 40,000,000 shares of common stock, par value $0.001 per share and 100,000 shares of preferred stock, par value of $0.001 per share. As of December 31, 2005, there were 12,383,555 shares of common stock and 17,662 shares of Series A preferred stock issued and outstanding.

All of our existing stock is, and the shares of common stock being offered by us in this offering will be, upon payment therefor, validly issued, fully paid and nonassessable. This discussion set forth below describes the most important terms of our capital stock, certificate of incorporation and bylaws as will be in effect upon completion of this offering. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description, you should refer to our certificate of incorporation and bylaws, which will be filed as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of the Delaware law, the state in which we are incorporated.

Common Stock

The holders of our common stock are entitled to receive ratable dividends if, as and when dividends are declared from time to time by our board of directors out of funds legally available for that purpose, after payment of dividends required to be paid on outstanding preferred stock, if any. The terms of our indebtedness impose restrictions on our ability to declare dividends on our common stock. Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders. Our common stock is not entitled to preemptive or other similar subscription rights to purchase any of our securities. Upon our liquidation, dissolution or winding up, the holders of our common stock are entitled to receive pro rata our assets which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of preferred stock then outstanding.

Preferred Stock

Our board of directors may, without further action by our stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of preferred stock would reduce the amount of funds available for the payment of dividends on shares of common stock. Holders of shares of preferred stock may be entitled to receive a preference payment in the event of our liquidation, dissolution or winding-up before any payment is made to the holders of shares of common stock. Under specified circumstances, the issuance of shares of preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of our securities or the removal of incumbent management. Upon the affirmative vote of a majority of the total number of directors then in office, the board of directors, without stockholder approval, may issue shares of preferred stock with voting and conversion rights which could adversely affect the holders of shares of common stock.

As of December 31, 2005, we had 17,662 shares of our Series A preferred stock outstanding, all of which were held by the Centre Entities. The holders of the shares of our Series A preferred stock are entitled to receive cumulative dividends accruing at the rate of 6% per annum payable quarterly in arrears, when and if declared by our board of directors. The Series A preferred stock ranks senior as to dividends and upon liquidation to our common stock and has a liquidation preference of $1,000 per share plus all undeclared and unpaid dividends. Prior to the offering, we will amend the certificate of designations that governs the Series A preferred stock to provide that it is mandatorily redeemable upon consummation of the offering, at a price per share equal to the aggregate liquidation preference per share plus accrued and unpaid dividends thereon. Accordingly, upon the completion of this offering and the application of the net proceeds as described under “Use of Proceeds,” there will be no shares of Series A preferred stock outstanding, and we have no present intention to issue any further shares of preferred stock.

 

60


Table of Contents

Anti-Takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware Law

Our certificate of incorporation and bylaws, as will be amended upon completion of the offering, will contain, and Delaware law does contain certain provisions that are intended to enhance the likelihood of continuity and stability in the composition of the board of directors and that may have the effect of delaying, deferring or preventing a future takeover or change in control of the company unless such takeover or change in control is approved by the board of directors. These provisions include:

Removal of Directors

Our certificate of incorporation will provide that a director may be removed only for cause and only by the affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors. This provision, when coupled with the provision in our bylaws authorizing our board of directors to fill vacant directorships, precludes stockholders from removing incumbent directors, except for cause and with a substantial affirmative vote, and filling the vacancies created by the removal with their own nominees.

Anti-takeover Statute

Subject to specified exceptions, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder. “Business combinations” include mergers, asset sales and other transactions resulting in a financial benefit to the “interested stockholder.” Subject to various exceptions, an “interested stockholder” is a person who together with his or her affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s outstanding voting stock. A Delaware corporation may elect, through an amendment to its certificate of incorporation or bylaws, not to be governed by these provisions. We have not made such an election and, therefore, we will be subject to these provisions when we become a public company.

Special Meetings

Our certificate of incorporation and bylaws will provide that special meetings of our stockholders may be called only by the chairman of the board of directors, our chief executive officer, a majority of our board of directors, or the holder or holders of 25% or more of the outstanding capital stock of our company entitled generally to vote in the election of directors.

Stockholder Action

Our certificate of incorporation will provide that stockholders may not act by written consent, but rather may only act at duly called meetings. Should any stockholder desire to present business at any meeting, they must comply with certain advance notice provisions in our bylaws described below.

Amendment to Our Certificate of Incorporation

Our certificate of incorporation may be amended only by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter, except for those provisions relating to the removal of directors, which may be amended only by the affirmative vote of the holders of not less than two-thirds of all of the votes entitled to be cast on the matter.

Advance Notice Procedures

Our bylaws will establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to the board of

 

61


Table of Contents

directors. Stockholders at an annual meeting will only be able to consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder who was a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has given our Secretary timely written notice, in proper form, of the stockholder’s intention to bring that business before the meeting. Although the bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding other business to be conducted at a special or annual meeting, the bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed or may discourage or defer a potential acquirer from conducting a solicitation of proxies to elect its own slate of directors or otherwise attempting to obtain control of the company.

Authorized but Unissued Shares

Our authorized but unissued shares of common stock and preferred stock will be available for future issuance without stockholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of a majority of our common stock by means of a proxy contest, tender offer, merger or otherwise.

Nasdaq National Market Trading

We intend to apply to have our common stock approved for quotation on The Nasdaq National Market under the symbol “HYCO”.

Transfer Agent and Registrar

We intend to appoint a transfer agent and registrar for our common stock prior to the completion of this offering.

 

62


Table of Contents

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common stock. We cannot predict the effect, if any, that market sales of shares, or the availability of shares for sale, will have on the market price of our common stock prevailing from time to time. Sales of our common stock in the public market after the restrictions described below lapse, or the perception that those sales may occur, could cause the prevailing market price to decline or to be lower than it might be in the absence of those sales or perceptions.

Sale of Restricted Shares

Upon completion of this offering, we will have              shares of common stock outstanding, based on 12,383,555 shares of common stock outstanding as of December 31, 2005. Of these shares, the shares sold in this offering, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable without restriction under the Securities Act, except for any shares purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. In general, affiliates include executive officers, directors, and 10% stockholders. Shares purchased by affiliates will remain subject to the resale limitations of Rule 144.

The remaining shares outstanding prior to this offering are restricted securities within the meaning of Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k), or 701 promulgated under the Securities Act, which are summarized below.

Taking into account the lock-up agreements, and assuming the underwriters do not release shares from these agreements, the following shares will be eligible for sale in the public market at the following times:

 

    beginning on the effective date of the registration statement of which this prospectus forms a part, the shares sold in this offering will be immediately available for sale in the public market and approximately              shares will be eligible for sale pursuant to Rule 144(k),              of which are held by affiliates; and

 

    beginning 180 days after the effective date of the registration statement of which this prospectus forms a part (unless the lock-up period is extended as described below and in “Underwriting”), approximately additional shares held by affiliates will be eligible for sale subject to volume, manner of sale, and other limitations under Rule 144;              additional shares held by nonaffiliates will be eligible for sale pursuant to Rule 701; and additional shares will be eligible for sale pursuant to Rule 144(k).

Lock-Up Agreements

Our directors, executive officers, and certain stockholders will enter into lock-up agreements in connection with this offering, generally providing that they will not offer, sell, contract to sell, or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of the underwriters. Despite possible earlier eligibility for sale under the provisions of Rules 144, 144(k), and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are waived by the underwriters. These agreements are more fully described in “Underwriting.”

We have been advised by the underwriters that they may at their discretion waive the lock-up agreements; however, they have no current intention of releasing any shares subject to a lock-up agreement. The release of any lock-up would be considered on a case-by-case basis. In considering any request to release shares covered by a lock-up agreement, the representatives would consider circumstances of emergency and hardship. No agreement has been made between the underwriters and us or any of our stockholders pursuant to which the representatives will waive the lock-up restrictions.

 

63


Table of Contents

Rule 144

In general, under Rule 144, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of the following:

 

    1% of the number of shares of common stock then outstanding; or

 

    the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice, and the availability of current public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell his or her shares without complying with the manner of sale, public information, volume limitation, or notice provisions of Rule 144. Therefore, unless otherwise restricted pursuant to the lock-up agreements or otherwise, those shares may be sold immediately upon the completion of this offering.

Rule 701

Under Rule 701, each of our employees, officers, directors, and consultants who purchased shares pursuant to a written compensatory plan or contract is eligible to resell these shares 90 days after the effective date of this offering in reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation, or notice provisions of Rule 144.

Form S-8 Registration Statements

We intend to file one or more registration statements on Form S-8 under the Securities Act as soon as practicable after the completion of this offering for shares issued upon the exercise of options and shares to be issued under our employee benefit plans. As a result, any such options or shares will be freely tradable in the public market. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice, and public information requirements of Rule 144 unless otherwise resalable under Rule 701.

 

64


Table of Contents

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS

The following discussion is a general summary of the material U.S. federal income tax consequences of the ownership and disposition of our common stock applicable to “non-U.S. holders.” As used herein, a non-U.S. holder means a beneficial owner of our common stock that is not a U.S. person or a partnership for U.S. federal income tax purposes, and that will hold shares of our common stock as capital assets (i.e., generally, for investment). For U.S. federal income tax purposes, a U.S. person includes:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation (or other business entity treated as a corporation) created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia;

 

    an estate the income of which is includible in gross income regardless of source; or

 

    a trust that (A) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons, or (B) otherwise has elected to be treated as a U.S. domestic trust.

If a partnership holds shares of our common stock, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership.

This summary does not consider specific facts and circumstances that may be relevant to a particular non-U.S. holder’s tax position and does not consider U.S. state and local or non-U.S. tax consequences. It also does not consider non-U.S. holders subject to special tax treatment under the U.S. federal income tax laws (including partnerships or other pass-through entities, banks and insurance companies, dealers in securities, holders of our common stock held as part of a “straddle,” “hedge,” “conversion transaction” or other risk-reduction transaction, controlled foreign corporations, passive foreign investment companies, companies that accumulate earnings to avoid U.S. federal income tax, foreign tax-exempt organizations, former U.S. citizens or residents and persons who hold or receive common stock as compensation). This summary is based on provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), applicable Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service (“IRS”) and judicial decisions, all as in effect on the date hereof, and all of which are subject to change, possibly on a retroactive basis, and different interpretations.

This summary is included herein as general information only. Accordingly, each prospective non-U.S. holder is urged to consult its tax advisor with respect to the U.S. federal, state, local and non-U.S. income, estate and other tax consequences of holding and disposing of our common stock.

U.S. Trade or Business Income

For purposes of this discussion, dividend income, and gain on the sale or other taxable disposition of our common stock, will be considered to be “U.S. trade or business income” if such dividend income or gain is (i) effectively connected with the conduct by a non-U.S. holder of a trade or business within the United States and (ii) in the case of a non-U.S. holder that is eligible for the benefits of an income tax treaty with the United States, attributable to a permanent establishment (or, for an individual, a fixed base) maintained by the non-U.S. holder in the United States. Generally, U.S. trade or business income is not subject to U.S. federal withholding tax (provided the non-U.S. holder complies with applicable certification and disclosure requirements); instead, U.S. trade or business income is subject to U.S. federal income tax on a net income basis at regular U.S. federal income tax rates in the same manner as a U.S. person. Any U.S. trade or business income received by a non-U.S. holder that is a corporation also may be subject to a “branch profits tax” at a 30% rate, or at a lower rate prescribed by an applicable income tax treaty, under specific circumstances.

 

65


Table of Contents

Dividends

Distributions of cash or property that we pay on our common stock will be taxable as dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). A non-U.S. holder generally will be subject to U.S. federal withholding tax at a 30% rate, or at a reduced rate prescribed by an applicable income tax treaty, on any dividends received in respect of our common stock. If the amount of a distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a tax-free return of capital to the extent of the non-U.S. holder’s tax basis in our common stock, and thereafter will be treated as capital gain. In order to obtain a reduced rate of U.S. federal withholding tax under an applicable income tax treaty, a non-U.S. holder will be required to provide a properly executed IRS Form W-8BEN (or appropriate substitute or successor form) certifying its entitlement to benefits under the treaty. A non-U.S. holder of our common stock that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS. A non-U.S. holder should consult its own tax advisor regarding its possible entitlement to benefits under an income tax treaty.

The U.S. federal withholding tax does not apply to dividends that are U.S. trade or business income, as described above, of a non-U.S. holder who provides a properly executed IRS Form W-8ECI (or appropriate substitute or successor form), certifying that the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business within the United States.

Dispositions of Our Common Stock

A non-U.S. holder generally will not be subject to U.S. federal income or withholding tax in respect of any gain on a sale or other disposition of our common stock unless:

 

    the gain is U.S. trade or business income, as described above;

 

    the non-U.S. holder is an individual who is present in the United States for 183 or more days in the taxable year of the disposition and meets other conditions; or

 

    we are or have been a “U.S. real property holding corporation” (a “USRPHC”) under section 897 of the Code at any time during the shorter of the five-year period ending on the date of disposition and the non-U.S. holder’s holding period for our common stock.

In general, a corporation is a USRPHC if the fair market value of its “U.S. real property interests” equals or exceeds 50% of the sum of the fair market value of its worldwide (domestic and foreign) real property interests and its other assets used or held for use in a trade or business. For this purpose, real property interests include land, improvements, and associated personal property. We have not made a determination as to whether or not we are or have been a USRPHC. If we are found to be a USRPHC, a non-U.S. holder, nevertheless, will not be subject to U.S. federal income or withholding tax in respect of any gain on a sale or other disposition of our common stock so long as our common stock is “regularly traded on an established securities market” as defined under applicable Treasury regulations and a non-U.S. holder owns, actually and constructively, 5% or less of our common stock during the shorter of the five-year period ending on the date of disposition and such non-U.S. holder’s holding period for our common stock. Prospective investors should be aware that no assurance can be given that our common stock will be so regularly traded when a non-U.S. holder sells its shares of our common stock.

Information Reporting and Backup Withholding Requirements

We must annually report to the IRS and to each non-U.S. holder any dividend income that is subject to U.S. federal withholding tax, or that is exempt from such withholding tax pursuant to an income tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the non-U.S. holder resides. Under certain circumstances, the Code

 

66


Table of Contents

imposes a backup withholding obligation (currently at a rate of 28%) on certain reportable payments. Dividends paid to a non-U.S. holder of our common stock generally will be exempt from backup withholding if the non-U.S. holder provides a properly executed IRS Form W-8BEN (or appropriate substitute or successor form) or otherwise establishes an exemption.

The payment of the proceeds from the disposition of our common stock to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the owner certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge or reason to know that the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds from the disposition of common stock to or through a non-U.S. office of a non-U.S. broker will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States (a “U.S. related person”). In the case of the payment of the proceeds from the disposition of our common stock to or through a non-U.S. office of a broker that is either a U.S. person or a U.S. related person, the Treasury regulations require information reporting (but not the backup withholding) on the payment unless the broker has documentary evidence in its files that the owner is a non-U.S. holder and the broker has no knowledge to the contrary. Non-U.S. holders should consult their own tax advisors on the application of information reporting and backup withholding to them in their particular circumstances (including upon their disposition of our common stock).

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder will be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, if the non-U.S. holder provides the required information to the IRS.

 

67


Table of Contents

UNDERWRITING

Friedman, Billings, Ramsey & Co., Inc., and Harris Nesbitt Corp. are acting as representatives of the underwriters. Subject to the terms and conditions in the underwriting agreement, each underwriter named below has agreed to purchase from us and the selling stockholders, on a firm commitment basis, the respective number of shares of common stock shown opposite its name below:

 

Underwriters

   Number of Shares

Friedman, Billings, Ramsey & Co., Inc.  

  

Harris Nesbitt Corp.  

  

Total

  

The underwriting agreement provides that the underwriters’ obligations to purchase our common stock are subject to approval of legal matters by counsel and the satisfaction of other conditions. These conditions include, among others, the continued accuracy of representations and warranties made by us in the underwriting agreement, delivery of legal opinions from O’Melveny & Myers LLP, and the absence of material adverse changes in our assets, business or prospects after the date of this prospectus. The underwriters are obligated to purchase all of the shares (other than those covered by the over-allotment option described below) if they purchase any shares.

The representatives have advised us that the underwriters propose to offer the common stock directly to the public at the public offering price presented on the cover page of this prospectus and to selected dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $             per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $             per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

The following table summarizes the underwriting discounts and commissions that we and the selling stockholders will pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.

 

     Total
     Per Share    Without
Over-Allotment
   With Full
Over-Allotment

Initial public offering price

   $                 $                 $             

Underwriting discount paid by us

        

Underwriting discount paid by selling stockholders

        

We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately $             million.

The selling stockholders have granted to the underwriters an option to purchase up to an aggregate of              shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option in whole or in part at any time until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriter’s initial commitment as indicated in the preceding table. If this option is not exercised in full, the number of shares as to which it is exercised will be apportioned among certain selling stockholders on a pro rata basis.

 

68


Table of Contents

We and our executive officers, directors and our stockholders representing substantially all of our shares have agreed not to, with certain limited exceptions, directly or indirectly, offer to sell, contract to sell, or otherwise sell, pledge, dispose of or hedge any common stock or any securities convertible into or exchangeable for shares of common stock for a period of 180 days from the date of this prospectus, except with the prior written consent of the representatives.

Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated among the representatives and the selling stockholders. In determining the initial public offering price of our common stock, the representatives will consider:

 

    prevailing market conditions;

 

    our historical performance and capital structure;

 

    estimates of our business potential and earnings prospects;

 

    an overall assessment of our management; and

 

    the consideration of these factors in relation to market valuation of companies in related businesses.

We intend to apply to have our common stock approved for quotation on the Nasdaq National Market under the symbol “HYCO.”

We have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act and liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities.

The representatives may engage in over-allotment transactions, stabilizing transactions, syndicate covering transactions, penalty bids or purchases and passive market making for the purposes of pegging, fixing or maintaining the price of the common stock, in accordance with Regulation M under the Securities Exchange Act of 1934.

 

    Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market.

 

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum.

 

    Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, thus creating a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

 

    Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

69


Table of Contents
    In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchase shares of our common stock until the time, if any, at which a stabilizing bid is made.

These stabilizing transactions, syndicate covering transactions penalty bids and passive market making may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time.

Neither we nor the selling stockholders nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor the selling stockholders nor any of the underwriters make any representation that the representatives will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

At our request, the underwriters have reserved up to              shares, or       % of our common stock offered by this prospectus, for sale under a directed share program to our officers, directors, employees, business associates and other individuals who have family or personal relationships with our employees. If any of our current directors or executive officers subject to lock-up agreements purchase these reserved shares, the shares will be restricted from sale under the lock-up agreements. We will determine the specific allocation of the shares to be offered under the directed share program in our sole discretion. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Shares committed to be purchased by directed share participants that are not so purchased will be reallocated for sale to the general public in the offering. All sales of shares under the directed share program will be made at the initial public offering price set forth on the cover page of this prospectus.

The underwriters expect to facilitate Internet distribution for this offering to certain of their Internet subscription customers through affiliated broker-dealers and other intermediaries. Certain underwriters intend to allocate a limited number of shares for sale to their online brokerage customers. An electronic prospectus is available on Internet websites maintained by Friedman, Billings, Ramsey & Co., Inc. and Harris Nesbitt Corp., respectively. Any allocation for Internet distributions will be made by the underwriters on the same basis as other allocations. In addition, shares of common stock may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

Affiliates of Harris Nesbitt Corp. have engaged in various general financing and commercial banking transactions with us and our affiliates. In particular, Harris N.A., an affiliate of Harris Nesbitt Corp., is our lender under our North American credit facility. See “Use of Proceeds.” The underwriters may also, from time to time, engage in transactions with and perform services for us and our subsidiaries and affiliates in the ordinary course of business.

Other than the prospectus in electronic format, information contained on any other website maintained by an underwriter is not part of this prospectus, has not been endorsed by us or the selling security holders and should not be relied on by investors in deciding whether to purchase any shares in this offering. The underwriters are not responsible for information contained in websites that they do not maintain.

 

70


Table of Contents

LEGAL MATTERS

The validity of the shares offered hereby will be passed upon for us by O’Melveny & Myers LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by Mayer, Brown, Rowe & Maw LLP, Chicago, Illinois.

EXPERTS

The combined consolidated financial statements included in this prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the SEC relating to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance we refer you to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information with respect to our company and the common stock offered by this prospectus, we refer you to the registration statement, exhibits, and schedules.

Anyone may inspect a copy of the registration statement without charge at the public reference facility maintained by the SEC in Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Copies of all or any part of the registration statement may be obtained from that facility upon payment of the prescribed fees. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC.

 

71


Table of Contents

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

 

FINANCIAL STATEMENTS:    Page

Report of Independent Registered Public Accounting Firm

   F-2

Combined Consolidated Balance Sheets as of December 31, 2005 and 2004

   F-3

Combined Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003

   F-4

Combined Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003

   F-5

Combined Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003

   F-6

Notes to Combined Consolidated Financial Statements

   F-7

FINANCIAL STATEMENT SCHEDULE:

  

Report of Independent Registered Public Accounting Firm

   S-1

Schedule II – Valuation and Qualifying Accounts

   S-2

 

F-1


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Hyco International, Inc. and

Hyco Hidrover Oleodinámica Indústria e Comércio LTDA:

We have audited the accompanying combined consolidated balance sheets of Hyco International, Inc. and subsidiaries and Hyco Hidrover Oleodinámica Indústria e Comércio LTDA (“Hyco Hidrover LTDA”) (an affiliated corporation), both of which are under common ownership and common management, as of December 31, 2005 and 2004, and the related combined consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. These combined consolidated financial statements are the responsibility of the companies’ management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The companies are not required to have, nor were we engaged to perform, an audit of their internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the companies’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such combined consolidated financial statements present fairly, in all material respects, the combined financial position of Hyco International, Inc. and Hyco Hidrover LTDA as of December 31, 2005 and 2004, and the combined results of their operations and cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/    Deloitte & Touche LLP

Atlanta, Georgia

April 18, 2006

 

F-2


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

COMBINED CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004

(All amounts in thousands, except shares)

 

     2005     2004  
ASSETS     

CURRENT ASSETS:

    

Cash

   $ 8,368     $ 4,678  

Accounts receivable, net of allowance for doubtful accounts of $368 and $610 in 2005 and 2004, respectively

     21,764       25,461  

Other receivables

     2,420       2,395  

Inventories

     25,567       28,935  

Prepaid expenses

     936       952  

Deferred income taxes—net

     1,000       —    

Assets held for sale

     —         209  
                

Total current assets

     60,055       62,630  

PROPERTY, PLANT, AND EQUIPMENT—Net

     28,058       25,933  

GOODWILL

     3,830       3,706  

INTANGIBLES—net of amortization

     757       1,014  

DEFERRED INCOME TAXES—Net

     2,139       —    

OTHER NONCURRENT ASSETS

     798       834  
                

TOTAL

   $ 95,637     $ 94,117  
                
LIABILITIES AND SHAREHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 13,581     $ 16,083  

Accrued payroll

     5,216       6,022  

Other accrued expenses

     5,454       6,929  

Dividends payable

     1,974       —    

Income taxes payable

     788       1,528  

Current maturities of long-term debt and capital lease obligations

     2,442       3,900  
                

Total current liabilities

     29,455       34,462  
                

LONG-TERM DEBT

     27,762       28,770  
                

DEFERRED TAX LIABILITY—Net

     564       —    
                

OTHER LONG-TERM LIABILITIES

     3,027       2,608  
                

SHAREHOLDER LOAN

     —         950  
                

COMMITMENTS AND CONTINGENCIES

    

SHAREHOLDERS’ EQUITY:

    

Hyco redeemable preferred stock, $0.001 par value, authorized 100,000 shares; issued and outstanding, 17,662 shares in 2005 and 2004, liquidation preference—$20,577

     17,662       17,662  

Hyco common stock, $0.001 par value, authorized 40,000,000 shares: issued and outstanding, 12,383,555 shares in 2005 and 2004

     12       12  

Hidrover share quotas, $R1.00 par value, issued and outstanding, 6,001,190 share quotas in 2005 and 2004

     2,034       2,034  

Additional paid-in capital

     43,686       43,686  

Other comprehensive income

     2,652       2,425  

Retained deficit

     (31,217 )     (38,492 )
                

Total shareholders’ equity

     34,829       27,327  
                

TOTAL

   $ 95,637     $ 94,117  
                

See notes to combined consolidated financial statements.

 

F-3


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(All amounts in thousands, except share and per share data)

 

     2005     2004     2003  

NET SALES

   $ 189,058     $ 166,834     $ 133,759  

COST OF GOODS SOLD

     162,187       140,863       117,603  
                        

GROSS PROFIT

     26,871       25,971       16,156  

SELLING, GENERAL, AND ADMINISTRATIVE

     14,573       13,149       13,088  

INTEREST EXPENSE

     1,646       2,371       2,116  

OTHER EXPENSES—Net

     1,465       317       1,496  
                        

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     9,187       10,134       (544 )

INCOME TAX (BENEFIT) EXPENSE

     (1,295 )     2,057       906  
                        

INCOME (LOSS) FROM CONTINUING OPERATIONS

     10,482       8,077       (1,450 )

LOSS FROM DISCONTINUED OPERATIONS—Net of tax

     (103 )     (371 )     (2,095 )
                        

NET INCOME (LOSS)

     10,379       7,706       (3,545 )

OTHER COMPREHENSIVE INCOME:

      

Foreign currency translation adjustment

     325       2,569       3,940  

Minimum pension liability adjustment

     (98 )     (51 )     —    
                        

Total other comprehensive income

     227       2,518       3,940  
                        

COMPREHENSIVE INCOME

   $ 10,606     $ 10,224     $ 395  
                        

PROFORMA BASIC EARNINGS (LOSS)

      

Income from continuing operations

     10,482       8,077       (1,450 )

Net income

     10,379       7,706       (3,545 )

PROFORMA BASIC WEIGHTED AVERAGE SHARES OUTSTANDING

     14,318,118       14,318,118       14,318,118  

PROFORMA BASIC EARNINGS (LOSS) PER SHARE

      

Continuing operations

   $ 0.73     $ 0.56     $ (0.10 )

Discontinued operations

   $ (0.01 )   $ (0.02 )   $ (0.15 )

Net income (loss)

   $ 0.72     $ 0.54     $ (0.25 )

PROFORMA DILUTED EARNINGS (LOSS)

      

Income (loss) from Continued Operations

     10,482       8,077       (1,450 )

Loss from Discontinued Operations

     (103 )     (371 )     (2,095 )
                        

Net Income (loss)

     10,379       7,706       (3,545 )
                        

PROFORMA DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING:

     14,318,118       33,854,858       33,854,858  

PROFORMA DILUTED EARNINGS (LOSS) PER SHARE:

      

Continuing Operations

   $ (0.10 )   $ 0.24     $ 0.31  

Discontinued Operations

   $ (0.15 )   $ (0.01 )   $ (0.00 )

Net Income (loss)

   $ (0.25 )   $ 0.23     $ 0.31  

See notes to combined consolidated financial statements.

 

F-4


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

COMBINED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

(All amounts in thousands, except shares)

 

    Hyco Common Stock   Hyco
Redeemable
Preferred Stock
  Hidrover
Share Quotas
  Additional
Paid-In
Capital
  Shareholder
Receivable
    Retained
(Deficit)
Surplus
    Other
Comprehensive
Income
    Total
Shareholders’
Equity
 
    Shares   Amount   Shares   Amount   Shares   Amount          

BALANCE—December 31, 2002

  12,383,555   $ 12   13,263   $ 13,263   6,001,190   $ 2,034   $ 37,685   $ —       $ (42,184 )   $ (4,033 )   $ 6,777  

Issuance of preferred stock and warrants

      4,399     4,399                 4,399  

Capital contribution

                6,001           6,001  

Shareholder receivable

                  (1,200 )         (1,200 )

Net loss

                    (3,545 )       (3,545 )

Dividend declared

                    (469 )       (469 )

Other comprehensive income

                      3,940       3,940  
                                                                   

BALANCE—December 31, 2003

  12,383,555     12   17,662     17,662   6,001,190     2,034     43,686     (1,200 )     (46,198 )     (93 )     15,903  

Receipt of shareholder receivable

                  1,200           1,200  

Net income

                    7,706         7,706  

Other comprehensive income

                      2,518       2,518  
                                                                   

BALANCE—December 31, 2004

  12,383,555     12   17,662     17,662   6,001,190     2,034     43,686     —         (38,492 )     2,425       27,327  

Net income

                    10,379         10,379  

Dividend declared

                    (3,104 )       (3,104 )

Other comprehensive income

                      227       227  
                                                                   

BALANCE—December 31, 2005

  12,383,555   $ 12   17,662   $ 17,662   6,001,190   $ 2,034   $ 43,686   $ —       $ (31,217 )   $ 2,652     $ 34,829  
                                                                   

See notes to combined consolidated financial statements.

 

F-5


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2004, AND 2003

(All amounts in thousands)

 

     2005     2004     2003  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income (loss)

   $ 10,379     $ 7,706     $ (3,545 )

Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:

      

Loss on discontinued operations

     103       371       2,095  

Depreciation of property, plant, and equipment

     3,773       3,518       3,546  

Amortization of trademarks and other noncurrent assets

     389       565       513  

Deferred income taxes

     (2,575 )     —         —    

Changes in assets and liabilities:

      

Decrease (increase) in assets:

      

Accounts receivable

     3,697       (5,201 )     (1,787 )

Other receivables

     180       (1,483 )     672  

Inventories

     3,368       (10,196 )     (1,832 )

Prepaid expenses

     16       (343 )     444  

Other noncurrent assets

     36       670       (2,033 )

Increase (decrease) in liabilities:

      

Accounts payable

     (2,502 )     2,861       1,228  

Accrued payroll

     (806 )     (1,393)       521  

Other accrued expenses

     (1,573 )     1,744       247  

Income tax payable

     (740 )     1,403       41  

Other long-term liabilities

     419       1,597       (857 )

Net cash provided by operating activities of discontinued operations

     268       —         1,271  
                        

Net cash provided by operating activities

     14,432       1,819       524  
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Purchases of property, plant, and equipment

     (5,727 )     (2,618 )     (2,084 )

Sales of property, plant, and equipment

     114       79       889  

Net cash provided by investing activities of discontinued operations

     —         581       302  
                        

Net cash used in investing activities

     (5,613 )     (1,958 )     (893 )
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Dividends paid

     (1,130 )     (469 )     —    

Proceeds from (payments on) revolver—net

     (2,571 )     2,343       (350 )

Advances of long-term debt

     4,166       4800       200  

Payments of long-term debt

     (5,600 )     (7,376 )     (3,541 )

Capital contributions

     —         1,200       4,801  

Proceeds from shareholder advances

     —         —         1,499  
                        

Net cash (used in) provided by financing activities

     (5,135 )     498       2,609  
                        

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     6       350       (334 )
                        

NET INCREASE IN CASH AND CASH EQUIVALENTS

     3,690       709       1,906  

CASH—Beginning of year

     4,678       3,969       2,063  
                        

CASH—End of year

   $ 8,368     $ 4,678     $ 3,969  
                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

      

Interest paid

   $ 1,362     $ 1,979     $ 1,814  
                        

Income taxes paid

   $ 1,749     $ 1,049     $ 934  
                        

NONCASH FINANCING AND INVESTING ACTIVITIES:

      

Shareholder deposits/advances exchanged for preferred stock

   $ —       $ —       $ 4,399  
                        

Purchases of equipment through capital lease

   $ 589     $ —       $ 300  
                        

Dividends declared and unpaid

   $ 1,974     $ —       $ 469  
                        

See notes to combined consolidated financial statements.

 

F-6


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005 AND 2004 AND FOR THE YEARS

ENDED DECEMBER 31, 2005, 2004, AND 2003

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESSES

Hyco International, Inc.—Hyco International, Inc. ( “Hyco”) and its wholly owned subsidiary Hyco Holdings LLC (“Holdings”) were formed in 1998 and later in June 1998 acquired Dana Corporation’s global hydraulic cylinder businesses located in Arab, Alabama; Lancaster, Texas; St. Wenceslas, Quebec, Canada; and Hausach, Germany (the “Acquisitions”).

Since that time, Hyco has made several additional acquisitions and started operations at a leased facility in Mexico, which was closed in 2003. Through its global operations, Hyco offers a broad range of hydraulic cylinder products primarily serving the mobile equipment markets.

Hidrover or Hyco Hidrover LTDA—In May 2001, Hyco purchased the stock of Hidrover Equipamentos Oleodinamicos, S.A. of Casias do Sul, Brazil (“Hyco Hidrover LTDA”), whose name was later changed to Hyco Oleodinamica Industria e Comercio LTDA on March 9, 2006. The Company believes Hidrover is the largest South American producer of hydraulic cylinders, primarily for the mobile equipment markets.

In December 2002, Hyco entered into a letter agreement to sell Hidrover to the Centre Entities. In August 2003, the Company completed the sale of 82.8% of the shares of Hidrover for $4.8 million to the Centre Entities. In December 2003, the Company sold its remaining shares in Hidrover to the Centre Entities for $1.2 million.

 

2. DISCONTINUED OPERATIONS

The accompanying financial statements reflect the assets and operations of the Mexico facility as discontinued operations in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

In 2001, the Company started operations in Mexico. This facility incurred operating losses from inception totaling $6.7 million through 2003. In 2003, the Company ceased operations at this facility and began to liquidate its assets. The loss from discontinued operations in 2005, 2004, and 2003 related to the Mexico facility were $0.1 million, $0.4 million, and $2.1 million, respectively. Sales at the Mexico facility were $0 million in both 2005 and 2004 and $4.3 million in 2003. As of December 31, 2004, the Mexico facility had net assets held for sale of $181 thousand that were written off in 2005.

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—Hyco International Inc. is majority owned by the Centre Entities. Hidrover is 99.99% owned by the Centre Entities. The Hyco management team continues to manage both entities and as such the financial performance for Hyco International Inc. and its subsidiaries are being combined with the financial performance of Hidrover into a single audited report (the “Company”).

The accompanying combined consolidated financial statements (Hyco and Hidrover) include the accounts of the Company and wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in combination and consolidation.

Cash and Cash Equivalents—Cash and cash equivalents include cash on hand and highly liquid investments with a maturity at date of purchase of three months or less.

Revenue RecognitionThe Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the selling price to the buyer is fixed, and collectibility is reasonably assured.

 

F-7


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Revenue from product sales is recognized upon shipment to customers once risk of loss and title has transferred to the customer. Provisions for discounts and rebates to customers and returns are provided for in the same period the related sales are recorded.

Inventories—Inventories, consisting primarily of hydraulic cylinders, component parts, rods, and tubing are stated at the lower of cost or market. Cost includes materials, labor, and manufacturing overhead determined using the first-in, first-out (“FIFO”) method. The Company reserves for slow-moving inventory based on historical and anticipated usage.

Accounts ReceivableThe Company provides an allowance for estimated uncollectible accounts based on age of receivables and management judgment based on historical experience. Bad debt expense was approximately $87 thousand, $80 thousand, and $657 thousand in 2005, 2004 and 2003, respectively. Write-offs against the allowance for doubtful accounts were approximately $299 thousand, $265 thousand and $392 thousand in 2005, 2004, and 2003, respectively.

Shipping Costs—The costs of delivering finished goods to the Company’s customers are recorded in cost of goods sold and totaled approximately $2.5 million per year in 2005, 2004, and 2003. Those costs include the amounts paid to a third party to deliver the finished goods or the Company’s cost of using its own delivery trucks and drivers. Any freight costs billed to and paid by a customer are included in revenue.

Property, Plant, and Equipment—Property, plant, and equipment related to acquisitions are stated at the allocated purchase price based on appraisals or estimated fair value of the property as of the acquisition date and is generally depreciated using the straight-line method over its useful life for all facilities. Other property, plant, and equipment purchased by the Company are stated at cost. Major additions and improvements are charged to the property accounts, while replacements, maintenance, and repairs, which do not improve or extend the lives of the respective assets are expensed as incurred. Property held under capital leases is amortized on a straight-line basis over the lesser of estimated useful lives or the lease term.

The estimated useful lives of property, as of December 31, 2005 and 2004, are as follows:

 

Buildings and property improvements

   20 – 45 years

Machinery and equipment

   8 – 12 years

Office furniture, machines, and software

   3 – 10 years

Vehicles

   3 – 5 years

Goodwill—Goodwill represents the excess of the purchase price over the net tangible and identifiable intangible assets of acquired businesses and, in accordance with SFAS No. 142, is not amortized. The Company has goodwill recorded for only its North American reporting segment at December 31, 2005 and 2004. The Company has elected to make the annual impairment assessment on January 1 of each year. The annual impairment assessments made at January 1, 2006, 2005, and 2004 did not result in any impairment charges.

A summary of the changes to goodwill for the years ended December 31, 2005 and 2004, is presented below (in thousands):

 

Balance—December 31, 2003

   $  3,451

Effect of foreign currency translation

     255
      

Balance—December 31, 2004

     3,706

Effect of foreign currency translation

     124
      

Balance—December 31, 2005

   $ 3,830

 

F-8


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Valuation of Long-Lived Assets—Pursuant to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically evaluates long-lived assets, including property, plant and equipment and definite lived intangible assets whenever events or changes in conditions may indicate that the carrying value may not be recoverable. A long-lived asset is considered impaired when its fair value is less that its carrying value. The Company believes that long-lived assets in the accompanying combined consolidated balance sheets are appropriately valued.

Fair Value of Financial Instruments—The carrying amounts of cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts payable and short-term debt approximate fair value because of the short maturity of these instruments. The carrying amount of long-term debt also approximates fair value, as the interest rate on the term note approximates market.

Fair value estimates are made at a specific point in time based on the relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Intangibles—Intangibles consist of (i) trademarks and (ii) customer list. Trademarks represent the identifiable intangible value of certain trade names associated with the Company’s products and are being amortized on a straight-line basis over an estimated useful life of ten years. The customer list represents the identifiable intangible value of customer information acquired as part of the acquisition of Hidrover and is being amortized on a straight-line basis over an estimated useful life of five years. The Company continually evaluates whether events and circumstances have occurred that indicate a change in the estimated useful life or recoverability of the trademarks and customer list. As of December 31, 2005, the Company believes that no impairment has occurred.

A summary of the changes to other intangible assets for the years ended December 31, 2005 and 2004, is presented below (in thousands):

 

Balance—December 31, 2003

   $  1,259  

Less: Amortization of other intangibles

     (245 )
        

Balance—December 31, 2004

     1,014  

Less: Amortization of other intangibles

     (257 )
        

Balance—December 31, 2005

   $ 757  

Scheduled amortization of intangible assets for the next five years, as of December 31, 2005, is as follows (in thousands):

 

Years Ending December 31

    

2006

   $ 374

2007

     374

2008

     9

2009

     —  

2010

     —  
      

Total

   $ 757
      

Other Noncurrent Assets—Other noncurrent assets consist primarily of deferred financing costs, which are amortized over the life of the related debt using the effective interest method.

 

F-9


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Income TaxesThe Company provides for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset- and liability-based approach in accounting for income taxes.

Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenue and expense items for financial statement and income tax purposes. Valuation allowances are provided against assets not likely to be realized. In assessing the realizability of the deferred tax assets, management considers the scheduled reversals of deferred tax liabilities, projected future taxable income, and tax-planning strategies.

Concentration of Credit Risk—Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. To reduce the risk, the Company performs ongoing credit evaluations of its customers’ financial conditions but does not generally require collateral.

The Company’s three major customers represented approximately 30% and 42% of the accounts receivable before allowance for doubtful accounts at December 31, 2005 and 2004, respectively. These top three customers represented 32%, 34%, and 35% of net sales for the years ended December 31, 2005, 2004, and 2003 respectively. Our largest customer, Caterpillar Inc., generated approximately 19% of our net sales in 2005 and 2004 and 16% of our net sales in 2003 . The loss of these customers could have a material adverse effect on the financial condition and results of operations.

Geographic InformationThe Company has significant operations outside the United States of America and, therefore, is subject to the unique risks associated with the countries where it operates. Long-lived assets by country, as of December 31, 2005 and 2004 (in U.S. dollars, in thousands), and sales by country for the years ended December 31, 2005, 2004, and 2003 are as follows:

 

     Long-lived Assets    Sales

Country

   2005    2004    2005    2004    2003

United States

   $ 7,323    $ 4,617    $ 33,660    $ 31,479    $ 24,213

Germany

     12,785      14,926      95,620      89,677      75,859

Canada

     7,961      7,544      38,780      25,393      20,200

Brazil

     5,374      4,400      20,998      20,285      13,487
                                  

Total

   $ 33,443    $ 31,487    $ 189,058    $ 166,834    $ 133,759
                                  

Sales are classified based on where the products were manufactured. The German operations ship their products to customers throughout Europe and the United States of America. The Canadian operations ship their products to Canadian and U.S. customers. The Brazilian operation ships their products throughout Brazil and into South America.

Foreign Currency Translation—Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and a weighted-average exchange rate for the year for revenues, expenses, gains, and losses. Foreign currency transaction adjustments are recorded in income. These amounts were not material to the financial statements in 2005, 2004 or 2003.

Other Comprehensive IncomeThe Company reports comprehensive income or losses in the combined consolidated statements of operations and comprehensive income. The foreign currency translation adjustment and minimum pension liability are the only components of other comprehensive income.

Use of Estimates—The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that

 

F-10


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

affect the reported amounts of assets and liabilities, the 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.

New Accounting Pronouncements—In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The FASB issued SFAS No. 151 in order to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This statement requires that those items be recognized as current-period charges regardless of whether they meet the “so abnormal” criterion outlined in ARB No. 43. SFAS No. 151 also requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. Unallocated overheads must be recognized as an expense in the period in which they are incurred. This statement is effective for inventory costs incurred during the fiscal years beginning after June 15, 2005. The Company has not assessed the impact of adoption of this statement on its financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, which replaced SFAS No. 123, Accounting for Stock-Based Compensation, and superseded APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the measurement of all share-based payments to employees and directors, including grants of employee stock options, using a fair-value-based method, and the recording of such expense in our statements of operations. SFAS No. 123R applies to reporting periods beginning after December 15, 2005. The Company is evaluating SFAS No. 123R and, to the extent that the Company decides to issue share-based payments, the Company expects the adoption of SFAS No. 123R to have an impact on its results of operations, net income (loss) and net income (loss) per share.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived nonfinancial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date SFAS No. 154 is issued. The Company is required to adopt the provisions of SFAS No. 154, as applicable, beginning in fiscal 2006.

 

4. INVENTORIES

Inventories at December 31, 2005 and 2004, consisted of the following (in thousands):

 

     2005     2004  

Raw materials

   $ 12,396     $ 12,731  

Work in progress

     8,917       12,549  

Finished cylinders

     7,247       7,037  
                

Gross inventories

     28,560       32,317  

Less: Excess obsolescence reserve

     (2,993 )     (3,382 )
                

Net inventories

   $ 25,567     $ 28,935  
                

 

F-11


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5. PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at December 31, 2005 and 2004, consisted of the following (in thousands):

 

     2005     2004  

Land

   $ 2,354     $ 2,480  

Buildings and property improvements

     11,532       12,032  

Machinery and equipment

     29,555       25,833  

Office furniture, machines, and software

     7,223       6,694  

Tooling

     2,918       2,687  

Vehicles

     207       165  

Construction in progress

     661       114  
                

Property, plant, and equipment—gross

     54,450       50,005  

Less: accumulated depreciation

     (26,392 )     (24,072 )
                

Property, plant, and equipment net

   $ 28,058     $ 25,933  
                

 

6. OTHER ACCRUED EXPENSES

Other accrued expenses at December 31, 2005 and 2004, consisted of the following (in thousands):

 

     2005    2004

Warranty reserves

   $ 2,350    $ 3,031

Other reserves and accruals

     2,955      3,847
             

Other accrued expenses

   $ 5,305    $ 6,878
             

The Company warrants its products against defects in design and manufacturing if the products were properly installed and maintained by the customer. Warranty policies differ by location and customer but are generally 12 to 24 months and cover the cost of the part returned, freight, and labor. Certain customers have longer warranty periods. The majority of the Company’s warranty expense arises from a five-year warranty provided to one of the Company’s major customers.

A summary rollforward of the warranty reserve for the years ended December 31, 2005 and 2004, is as follows (in thousands):

 

Balance—December 31, 2003

   $  3,450  

Amounts expensed

     1,284  

Claims paid

     (1,703 )
        

Balance—December 31, 2004

     3,031  

Amounts expensed

     1,525  

Claims paid

     (2,206 )
        

Balance—December 31, 2005

   $ 2,350  
        

 

F-12


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

7. LONG-TERM DEBT

Long-term debt at December 31, 2005 and 2004, was comprised as follows (in thousands):

 

    Rate     12/31/2005    Rate     12/31/2004

Holdings revolving loan with final maturity on December 29, 2009; interest payable at London InterBank Offered Rate (“LIBOR”) plus 3%, (rate at December 31 as shown)

  7.53 %   $ 7,500    5.56 %   $ 6,000
  7.38 %     1,600    5.56 %     2,000

Holdings revolving loan with final maturity on December 29, 2009; interest payable at Prime plus 0.5% (rate at December 31 as shown)

  7.75 %     790    5.75 %     1,283
                
      9,890        9,283
                

Holdings term loan with final maturity on December 29, 2009, interest payable at LIBOR plus 3.50% (rate at December 31 as shown)

  7.89 %     3,600    6.06 %     3,800
  7.91 %     500    5.92 %     900

Holdings term loan with final maturity on December 29, 2009, interest payable at Prime plus 1% (rate at December 31 as shown)

  8.25 %     16    6.25 %     100
                
      4,116        4,800
                

Pacoma revolving loan with final maturity on June 21, 2008, interest payable at EURIBOR plus 2% (rate at December 31, 2005, as shown)

  4.20 %     6,724        —  

Pacoma revolving loan which was repaid on June 21, 2005; interest payable at EURIBOR plus 3.25% (rate at December 31, 2004, as shown)

      —      5.59 %     10,950
                
      6,724        10,950
                

Pacoma term loan with final maturity on June 21, 2008, interest payable at EURIBOR plus 2% (rate at December 31, 2005, as shown)

  4.20 %     3,839        —  

Pacoma term loan which was repaid on June 21, 2005; interest payable at EURIBOR plus 3.25% (rate at December 31, 2004, as shown)

      —      4.99 %     3,177
                
      3,839        3,177
                

Hengstler revolving loan with final maturity on September 21, 2008; interest payable at EURIBOR plus 2% (rate at December 31, 2005, as shown)

  4.60 %     1,048        —  

Industrial revenue bonds with final maturity on September 1, 2015, payable interest at average seven-day rate for A+/A1 bonds (rate at December 31 as shown)

  4.53 %     1,920    2.61 %     2,340
  3.61 %     850    2.13 %     900

Note payable to Dana Corporation

      600        692

Capital lease obligations

      890        528

Other various loans

      327        —  
                
      30,204        32,670

Less current maturities

      2,442        3,900
                

Total long-term debt

    $ 27,762      $ 28,770
                

 

F-13


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The scheduled maturities of the long-term debt, at December 31, 2005, are as follows (in thousands):

 

Years Ending December 31

    

2006

   $ 2,442

2007

     2,389

2008

     11,939

2009

     12,320

2010

     293

Thereafter

     821
      
   $ 30,204
      

Holdings Credit Agreement

On December 29, 2004, Holdings entered into agreements for a revolving loan and term loans (collectively, “Holdings North American Credit Agreement”) thus refinancing the Revolver and Term Loan that had been in place since 1998. The total credit line at closing under the revolving loan and term loans was $17.8 million. The collateral under the Holdings North American Credit Agreement includes substantially all of the Company’s assets located in Arab, Alabama; St. Wenceslas, Quebec; and Kitchener, Ontario. The assets located in Hausach, Germany are currently covered under the Hyco Hengstler Credit Agreement discussed below. The assets located at Hyco Pacoma GmbH (“Pacoma”) are covered under the Hyco Pacoma Credit Agreement discussed below.

The revolving loan under the refinanced Holdings North American Credit Agreement is available at LIBOR plus 3% or Prime plus 0.5% and limited to the sum of (i) 85% of the eligible accounts receivable and (ii) the lesser of $6 million or 55% of the eligible finished goods inventory plus 55% of all other inventory excluding WIP (“Borrowing Base”). Availability for each subsidiary is limited to its separate Borrowing Base with aggregate revolving loan availability limited to $13 million. This agreement provided for a term loan based on the value of plant, machinery, and real property in the amount of $4.8 million with interest at LIBOR plus 3.50% or Prime plus 1%.

The Holdings North American Credit Agreement contains certain financial covenants. The Company was in compliance with all financial covenants of the Holdings North American Credit Agreement as of December 31, 2005. As of December 31, 2005, Holdings had additional borrowing availability of $1.2 million under the revolving loan.

Pacoma Credit Agreements

In April 2001, Pacoma and related entities (the “Hyco Pacoma Entities”) refinanced their existing credit agreement. This credit agreement provided for a total borrowing capacity of 20.2 million Euro and was secured by substantially all the assets of those entities (the “Hyco Pacoma Credit Agreement”). This agreement provided for a term loan based on the value of plant, machinery, and real property in the amount of 7.4 million Euro with interest at 3.25% over EURIBOR. In addition, the Hyco Pacoma Entities had the option to borrow up to 12.8 million Euro at 3.25% over EURIBOR based on eligible accounts receivable and inventory. Advances under the Hyco Pacoma Credit Agreement were limited to the sum of (i) the lesser of 10.2 million Euro or 85% of the eligible accounts receivable and (ii) the lesser of 2.6 million Euro or 60% of eligible finished goods inventory.

On June 21, 2005, Pacoma and the Hyco Pacoma Entities refinanced their existing credit agreement. This credit agreement provides for a total borrowing capacity of 16.5 million Euro (or approximately $19.5 million at the U.S exchange rate as of December 31, 2005) and was secured by substantially all the assets of those entities

 

F-14


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(the “Hyco Pacoma 2005 Credit Agreement”). This agreement provided for a term loan based on the value of plant, machinery, and real property in the amount of 3.3 million Euro with interest at 2% over EURIBOR. In addition, the Hyco Pacoma Entities had the option to borrow up to 13.2 million Euro at 2% over EURIBOR based on eligible accounts receivable and inventory. Advances under the revolving line of credit were limited to the sum of (i) the lesser of 12 million Euro or 85% of the eligible accounts receivable and (ii) the lesser of 1.2 million Euro or 60% of eligible inventory, less preferential creditors, valued at the lower of FIFO cost or market.

The Hyco Pacoma 2005 Credit Agreement contains certain financial covenants. The Company was in compliance with all financial covenants of the Hyco Pacoma 2005 Credit Agreement as of December 31, 2005. As of December 31, 2005, Pacoma had additional borrowing availability of 1.4 million Euro under the revolving loan.

Hengstler Credit Agreement

On September 23, 2005, Hyco Hengstler Hydraulik GmbH (“Hengstler”) entered into a credit agreement to finance their accounts receivable. This credit agreement provides for a total borrowing capacity of 2.3 million Euro (or approximately $2.7 million at the U.S exchange rate as of December 31, 2005) and is secured by the accounts receivable of Hyco Hengstler (the “Hyco Hengstler Credit Agreement”). Hyco Hengstler has the option to borrow up to 2.3 million Euro at 2% over EURIBOR based on eligible accounts receivable. Advances under the Hyco Hengstler Credit Agreement are limited to the lesser of 2.3 million Euro or 85% of the eligible accounts receivable.

The Hyco Hengstler Credit Agreement contains certain financial covenants. The Company was in compliance with all financial covenants of the Hyco Hengstler Credit Agreement as of December 31, 2005. As of December 31, 2005, Hengstler had additional borrowing availability of 1.4 million Euro under the revolving loan.

Industrial Revenue Bond Agreements

On June 4, 2003, the Company amended its Industrial Revenue Bond Agreements. The significant items in the amendment included resetting the financial covenant, which requires the Company to maintain a certain level of earnings before interest, taxes, depreciation and amortization as defined. The September 1, 2004 Industrial Revenue Bond principal payments were deferred, as is the right of the Company as stated in the Industrial Revenue Bond Agreement. This principal payment was deferred until 2008.

Dana Note

On February 14, 2003, the Company settled a dispute with Dana Corporation regarding certain aspects of the Acquisitions. As part of the settlement, the Company restructured its note payable to Dana Corporation by extending the due date from March 2005 to January 2011, reducing the quarterly principal payments and eliminating interest obligations. As a result of restructuring the note from interest-bearing to noninterest-bearing, the Company discounted the note by $323 thousand to reflect interest imputed at 7%.

Shareholder Loan—During 2002, the Centre Entities loaned $950 thousand directly to Pacoma; this loan bore interest at a rate of 6%. In 2005, this loan with related interest was repaid from Pacoma back to the Centre Entities.

 

F-15


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

8. SHAREHOLDERS’ EQUITY

Hyco Common Stock—Concurrent with the closing of the initial acquisitions in June 1998, 5 million shares of common stock were sold to the Centre Entities. Throughout 1999–2001 in connection with a series of acquisitions and investments in Hyco an additional 7,383,555 shares were issued to the Centre Entities, management and a Director. As of December 31, 2005, the Centre Entities own 96.5% of the common shares outstanding and 98.9% of the common shares on a fully diluted-basis accounting for the warrants discussed below.

Hyco has a registration rights agreement with the Centre Entities that allows the Centre Entities to require the corporation to register its common stock under the Securities Act of 1933. The Centre Entities can request up to five “demand” registrations. As part of the agreement, Hyco is required to pay all registration expenses associated with the sale of these securities.

Hyco Preferred Stock—On December 30, 2002, Hyco amended its Certificate of Incorporation to add one class of 100,000 shares of preferred stock, $0.001 par value per share. Hyco also authorized a Certificate of Designations, Preferences, and Rights to Series A preferred stock (the “Certificate”). Hyco designated 20,000 shares of which 13,263 were initially issued. Holders of the preferred shares are entitled to receive cumulative dividends accruing at the annual rate of 6% payable quarterly in arrears, when and if declared by the Board of Directors. The Certificate also provided for Hyco to redeem all preferred shares at $1,000 per share, plus an amount equal to all dividends accrued but unpaid, plus dividends declared on exercised common stock warrants by December 31, 2009. In December 2003, the Centre Entities permanently waived their right to this mandatory redemption privilege. The preferred shares rank senior as to dividends and upon liquidation to the common stock. The preferred shares have a liquidation preference of $1,000 per share plus all undeclared and unpaid dividends. In connection with the issuance of the Series A preferred stock, Hyco also issued warrants to purchase 18,947,167 shares of common stock. In December 2003, Hyco issued to the Centre Entities an additional 4,399 shares of Series A preferred stock and warrants to purchase 6,284,288 shares of common stock. Hyco has allocated $0 to the value of all the warrants issued representing management’s estimate of their fair value at the date of issuance.

Hidrover Share Quotas—In May 2001, Hyco purchased the 6,001,190 outstanding share quotas with par value of $R1.00 each ($2.034 million in U.S. dollars at the historical exchange rate). These share quotas were purchased from Hyco by the Centre Entities in 2003. Brazilian companies must register foreign capital with the Central Bank of Brazil in order to remit dividends on such capital or for the capital to be repatriated abroad. The capital register in the Central Bank of Brazil amount to U.S. $5 million.

 

9. COMPENSATION PLANS

Stock Option Plan—Hyco has a stock option plan (the “Plan”) under which nonqualified stock options may be granted to select officers, key employees, nonemployee directors, and other persons affiliated with Hyco. The Plan is administered by a committee (the “Committee”) designated by the Board of Directors. The Committee maintains sole discretion as to the price and period of exercisability of the individual grants.

Through December 31, 2005, no options were issued or outstanding under the Plan.

Employee Benefits—Hyco maintains a 401(k) retirement plan for all eligible U.S. employees; Hyco’s contributions under this plan are voluntary. Under this plan, Hyco may make discretionary matching contributions on behalf of its employees or alternatively make discretionary contributions to each eligible employee regardless of the employee’s contributions. In 2005, Hyco announced a voluntary matching contribution of $51 thousand, which was paid in March 2006. In 2004, Hyco announced a voluntary matching contribution of $51 thousand, which was paid in March 2005. No matching contributions were made in 2003.

 

F-16


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Hyco sponsors certain non-U.S. defined benefit pension plans (the “Plans”) at its German facilities and for salaried employees at the St. Wenceslas, Canada, facility. The German Plans are unfunded and were measured at December 31, 2005 and 2004. The Canadian Plan is funded and was also measured at December 31, 2005 and 2004. Pension benefits are fixed and paid at retirement or earlier on death or disability. Information regarding Hyco’s defined benefit pension plans as of and for the years ended December 31, 2005 and 2004, are as follows (dollars in thousands):

 

     2005     2004  

Change in projected benefit obligation:

    

Projected benefit obligation at beginning of year

   $ 1,608     $ 1,417  

Translation adjustment

     (125 )     —    

Service cost

     82       88  

Interest cost

     82       82  

Actuarial loss

     231       21  

Participant contributions

     15       19  

Gross benefits paid

     (26 )     (19 )
                

Projected benefit obligation at end of year

   $ 1,867     $ 1,608  
                

Change in plan assets:

    

Fair value of plan assets at beginning of year

   $ 393     $ 303  

Translation adjustment

     13       —    

Actual return on plan assets

     48       30  

Employer contributions

     44       42  

Participant contributions

     15       16  

Gross benefits paid

     (l )     2  
                

Fair value of plan assets at end of year

   $ 512     $ 393  
                

 

     2005     2004  

Unfunded status at end of year:

    

Unrecognized actuarial loss

   $ (1,155 )   $ (1,216 )

Translation adjustment

     (200 )     —    

Unrecognized prior service cost

     235       12  

Net transition obligation

     37       49  
                

Net accrued liability

   $ (1,083 )   $ (1,155 )
                

Amounts recognized in the balance sheets consist of:

    

Accrued liability

   $ (1,248 )   $ (1,271 )

Additional minimum liability

     —         —    

Accumulated other comprehensive income

     149       51  
                

Net liability recognized in the balance sheets:

   $ (1,099 )   $ (1,220 )
                

The projected and accumulated pension benefit obligations exceeded the fair value of pension plan assets for all defined benefit pension plans as of December 31, 2005 and 2004, as follows (dollars in thousands):

 

     2005    2004

Projected benefit obligation

   $ 1,867    $ 1,608

Accumulated benefit obligation

     1,867      1,608

Fair value of plan assets

     512      393

 

F-17


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Assumptions are used to determine our benefit obligations. The rate used to discount projected future benefit obligations back to a present value is called the discount rate. The discount rate fluctuates from year to year based on current market interest rates for high-quality fixed income investments. Hyco also evaluates the expected average duration of pension obligations in determining the discount rate. The weighted-average assumptions used to determine benefit obligations as of December 31, 2005 and 2004 were as follows:

 

     Pension Benefits  
     2005      2004  

Discount rate

   4.00% – 6.00 %    4.75% – 6.00 %

Rate of compensation increase (Canadian plan only)

   4.50 %    4.50 %

The components of net pension costs for the years ended December 31, 2005, 2004, and 2003 were as follows (dollars in thousands):

 

     2005     2004     2003  

Service cost

   $ 82     $ 88     $ 71  

Interest cost

     82       82       73  

Expected return on plan assets

     (28 )     (22 )     (18 )

Amortizations and other

     1       2       1  

Curtailment credit

     —         —         —    
                        

Net periodic benefit cost

   $ 137     $ 150     $ 127  
                        

Assumptions are used to determine net periodic benefit costs. In addition to the discount rate and rate of compensation increase, which are used to determine benefit obligations, an expected long-term rate of return on plan assets is also used to determine net periodic pension benefit costs. The weighted-average assumptions used to determine net periodic costs for the years ended December 31, 2005, 2004, and 2003 were as follows:

 

     2005     2004     2003  

Discount rate

   4.00% – 6.00 %   4.75% – 6.00 %   5.25% – 6.00 %

Expected long-term rate of return on plan

   —       —       —    

Expected long-term rate of return on assets (Canadian plan only)

   6.50 %   6.50 %   7.70 %

Rate of compensation increase (Canadian plan only)

   4.50 %   4.50 %   4.50 %

For fiscal year 2006, estimated combined benefits to be paid out of these three benefit pension plans are $24 thousand. Management does not expect the benefits paid out from 2007 through 2011 to be materially different than the payout estimated for 2006. For the St. Wenceslas fund, which does have an employer contribution, the estimated 2006 contribution is $50 thousand. Management does not expect the employer contribution from 2007 through 2011 to be materially different than the contribution estimated for 2006.

 

F-18


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In addition, the St. Wenceslas facility provides a plan for postretirement health care benefits covering all retired employees. This plan is unfunded. The unfunded status for this plan as of December 31, 2005 and 2004 was as follows:

 

     2005     2004  

Change in projected benefit obligation:

    

Projected benefit obligation at beginning of year

   $ 180     $ 163  

Translation adjustment

     (6 )     —    

Service cost

     8       9  

Interest cost

     7       10  

Actuarial (gain) loss

     —         —    

Participant contributions

     (22 )     (2 )

Gross benefits paid

     —         —    
                

Projected benefit obligation at end of year

   $ 167     $ (180 )
                

Unfunded status at end of year:

   $ (168 )   $ (180 )

Translation adjustment

     1       —    

Unrecognized actuarial loss (gain)

     (9 )     12  

Unrecognized prior service cost

     —         —    

Net transition obligation

     —         —    
                

Net accrued liability

   $ (176 )   $ (168 )
                

For purposes of measuring the postretirement healthcare benefit obligation, the following assumptions were used at December 31, 2005 and 2004:

 

     2005     2004  

Health Care cost trend rate assumed for next year

   9.50 %   10.00 %

Rate to which the cost trend rate is assumed to decline

   6.00 %   6.00 %

Year the rate reaches the ultimate rate

   2012     2012  

For measurement purposes, a 10% annual rate of increase in the per capita cost of covered drug benefits was assumed for 2004. The rate is assumed to decrease by 0.5% for the next 8 years to reach a 6% limit.

The components of the postretirement health care benefit costs for the years ended December 31, 2005, 2004, and 2003 were as follows (dollars in thousands):

 

     2005     2004    2003

Service cost

   $ 6     $ 6    $ 6

Interest cost

     5       7      6

Expected return on plan assets

     —         —        —  

Amortizations and other

     (1 )     —        —  
                     

Net periodic benefit cost

   $ 10     $ 13    $ 12
                     

Assumptions are used to determine net periodic benefit costs. The discount rate and rate of compensation increase used in determining these benefit costs are as follows:

 

     2005     2004     2003  

Discount rate

   6.00 %   6.00 %   6.00 %

Rate of compensation increase

   4.50 %   4.50 %   4.50 %

 

F-19


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The plan is unfunded; Hyco has recorded an accrued liability for its plan obligations (discounted at 6%) of $123 thousand and $124 thousand at December 31, 2005 and 2004, respectively. Hyco recorded an expense of approximately $6 thousand, $6 thousand, and $5 thousand for the health care plan in 2005, 2004 and 2003, respectively.

The St. Wenceslas facility also sponsors a defined contribution plan for hourly employees. The plan provides for Hyco contributions based on a percentage of the employee’s salary. Hyco’s contributions to this plan during 2005, 2004 and 2003 were approximately $97 thousand, $116 thousand and $62 thousand, respectively.

 

10. INCOME TAXES

At December 31, 2005, 2004, and 2003, provision (benefit) for income taxes consisted of the following (in thousands):

 

     2005     2004     2003  

Current:

      

Federal

   $ 39     $ 5     $ —    

Foreign

     1,496       2,052       906  

State

     —         —         —    
                        

Total current

     1,535       2,057       906  
                        

Deferred:

      

Federal

     1,251       596       (2,229 )

Foreign

     1,185       1,096       1,188  

State

     16       43       (203 )

Change in valuation allowance

     (5,282 )     (1,735 )     (1,244 )
                        

Total deferred

     (2,830 )     —         —    
                        

Total income tax provision (benefit)

   $ (1,295 )   $ 2,057     $ 906  
                        

At December 31, 2005, 2004, and 2003, reconciliation between expected income taxes computed at the federal rate and the provision for income taxes is as follows (in thousands):

 

     2005     2004     2003  

Income tax provision (benefit) at statutory rate of 34%

   $ 3,123     $ 3,446     $ (185 )

State income tax—net of federal benefit

     30       14       (36 )

Excess tax on Canadian earnings

     517       45       —    

Nondeductible expenses

     176       69       10  

Brazil presumed profits benefit

     —         (619 )     (113 )

German and Canadian tax audits

     —         598       —    

Foreign rate differential

     38       216       53  

Other

     103       23       (67 )

Change in valuation allowance

     (5,282 )     (1,735 )     1,244  
                        

Income tax provision (benefit)

   $ (1,295 )   $ 2,057     $ 906  
                        

 

F-20


Table of Contents

HYCO INTERNATIONAL, INC. AND HYCO HIDROVER LTDA

NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The components of deferred income taxes as of December 31, 2005 and 2004 are as follows (in thousands):

 

     2005     2004  

Deferred tax assets:

    

Warranty accrual

   $ 818     $ 1,010  

Compensation accrual

     288       398  

Bad debt accrual

     98       171  

Trademark amortization

     27       21  

Net operating loss carryforwards

     10,875       12,638  

AMT carryforward

     91       56  

Other accruals

     569       786  

Goodwill and intangibles

     3,334       3,934  

Inventory reserve

     1,465       1,484  

Foreign tax carryforward

     85       217  

Valuation allowance

     (13,426 )     (18,916 )
                

Total deferred tax assets

     4,224       1,799  
                

Deferred tax liabilities—property, plant, and equipment

     (1,649 )     (1,799 )
                

Net tax assets (liabilities)

   $ 2,575     $ —    
                

At December 31, 2005, the Company had U.S. federal net operating loss carryforwards aggregating approximately $27.2 million, U.S. state net operating loss carryforwards of approximately $16.4 million, and foreign net operating loss carryforwards of approximately $4.3 million, which expire at various times between 2015 and 2024.

In 2004 and prior years, the Company recorded a full valuation allowance against its net deferred tax assets (both domestic and foreign) due to the uncertainty of ultimate realization. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, management considers all available positive and negative evidence affecting specific deferred tax assets, including the Company’s past and anticipated future performance, the reversal of deferred tax liabilities, and the implementation of tax planning strategies.

In 2005, the Company determined that it is appropriate to release 100% of its valuation allowance against its foreign deferred tax assets. The most compelling form of positive evidence considered by management was cumulative book income (in foreign jurisdictions) in recent years and the Company’s ability to reasonably estimate future earnings. The Company continued to record a full valuation allowance against its domestic net deferred tax assets during 2005.

The Company has recorded a deferred tax asset of approximately $90 thousand related to alternative minimum tax (“AMT”) paid as of December 31, 2005. The AMT can be utilized as a credit to offset regular U.S. federal income tax in future years. The AMT credit carryforward is only utilizable by the Company in the event that regular U.S. federal income tax exceeds the AMT calculated for any particular year. The AMT credit carryforward will never expire.

At December 31, 2005, undistributed earnings of foreign