-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UJbg71EDVmmMZHu640vcChoQjPG/rN/36QLp72lhXyiPi/okbZIFX5yImzf4Gtfj psRKXLguuEYJcRFkq85AmA== 0000912057-97-010978.txt : 19970401 0000912057-97-010978.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-010978 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALVEY SYSTEMS INC CENTRAL INDEX KEY: 0001011066 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 430157210 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-02600 FILM NUMBER: 97568602 BUSINESS ADDRESS: STREET 1: 101 S HANLEY ST STREET 2: STE 1300 CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148635776 MAIL ADDRESS: STREET 1: 101 S HANLEY RD STREET 2: STE 1300 CITY: ST LOUIS STATE: MO ZIP: 63105 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ----------- ------------- Commission file number 333-2600 ALVEY SYSTEMS, INC. (Exact name of Registrant as specified in its charter) Delaware 43-0157210 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 101 S. Hanley Street, Suite 1300 St. Louis, Missouri 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (314) 863-5776 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X The aggregate market value of the voting stock held by non-affiliates of the Registrant is zero as all of the outstanding shares of the Company's Common Stock, $0.01 par value per share (the "Common Stock"), are held by Pinnacle Automation, Inc., a Delaware corporation. The number of shares of Common Stock outstanding on March 25, 1997 was 1,000 shares. DOCUMENTS INCORPORATED BY REFERENCE See Exhibit Index. PART 1.................................................................... 1 ITEM 1. BUSINESS........................................................ 1 ITEM 2. PROPERTIES...................................................... 11 ITEM 3. LEGAL PROCEEDINGS............................................... 12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 12 PART II................................................................... 12 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............................................. 12 ITEM 6. SELECTED FINANCIAL DATA.......................................... 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 25 ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 25 PART III.................................................................. 25 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 25 ITEM 11. EXECUTIVE COMPENSATION........................................... 28 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................... 30 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 30 PART IV................................................................... 33 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................................... 33 SIGNATURES i PART I ITEM 1. BUSINESS OVERVIEW Alvey Systems, Inc., a Delaware corporation ("Alvey", or the "Company") and a wholly-owned subsidiary of Pinnacle Automation, Inc., a Delaware corporation ("Pinnacle"), together with its six operating subsidiaries, is a materials handling and information systems company which produces equipment and related software and controls that enable manufacturers, wholesalers, distributors and retailers to operate their manufacturing plants, distribution centers and warehouses more efficiently. In connection with providing equipment and software, the Company's engineers and sales force work closely with its customers to analyze their specific manufacturing, distribution and warehousing needs and to design customized systems that improve efficiency and reduce costs. As a full-service provider of materials and information handling products and information services, the Company is uniquely positioned to offer to its customers integrated systems comprised of combinations of equipment, software and controls. The Company believes that its ability to offer both engineering design services as well as the equipment and related software necessary to implement integrated solutions to materials handling needs provides a distinct competitive advantage. The Company manufactures a broad range of materials handling equipment such as palletizers, depalletizers, conveyors, carousels and sorters which automate the physical acts of loading, unloading, sorting and transporting raw materials and finished products. In addition to moving materials, the Company's integrated systems incorporate advanced software and controls developed by the Company to collect data, process information and provide real-time feedback with respect to equipment performance and materials processing. While a significant portion of the Company's revenues are attributable to the manufacture and sale of equipment, approximately 53% of total revenues result from product support functions and non-manufactured products delivered in connection with sales of the Company's equipment. Such revenues are generated from engineering, software license fees, computer support services, systems and equipment maintenance, computer hardware and peripheral equipment, and the integration and installation of these products. For customers applying materials handling and information solutions to manufacturing applications, the Company offers products designed to (i) automate and accelerate the input of materials into a manufacturing line, (ii) track and transport finished products within a manufacturing facility, distribution center or warehouse and (iii) automate the palletizing of finished goods. The Company's customers, in large part, use the Company's products to sort (as used herein, the term "sort" and sortation mean the segregation of packages destined for different locations), transport and palletize large quantities of relatively small-sized products, such as beverages, canned and bottled goods and personal consumer goods. For warehousing and distribution applications, the Company offers conveyor and carousel systems to sort, track and transport goods, and advanced software systems which monitor and optimize the movement and shipment of products. The Company's sales have increased from $72.3 million in 1989 to $331.2 million for the year ended December 31, 1996. The principal factors contributing to the Company's rapid growth in sales and operating performance include, in their order of importance, new product offerings and management initiatives, and acquisitions of complementary businesses. EBITDA (See Item 6. "Selected Financial Data" for definition) has increased from $4.2 million in 1989 to $13.1 million for the year ended December 31, 1996. As of December 31, 1996, the Company's backlog was $136.1 million. PRODUCTS The Company believes that each of its operating entities is a leading supplier in its principal markets. The Company operates through the entities described below. (Insignificant entities have not been included in discussions throughout this document.) ALVEY SYSTEMS, INC.: Alvey manufactures and sells case palletizers and depalletizers, case and pallet conveyors, related custom products and software and controls which are sold to end users by a nationwide network of direct sales personnel and independent representatives. Palletizers are large machines, 1 operated by programmable controls, that receive packaged products (typically case goods) from a conveyor delivery system and deliver them to a pallet conveyor take away system. The palletizer sequentially arranges individual packages and groups them into rows and layers to form predetermined patterns which are stacked onto a pallet or into a unit load, producing a stable cube for efficient handling and shipping. Depalletizers unload palletized products for further handling in the distribution process. Conveyor systems are used to move products from one location to another and can be designed to sort, feed or perform a number of different applications. Alvey primarily serves the consumer products segment of the materials handling market that focuses on manufacturers of food, beverages, paper, soap and other consumer products. Alvey's annual net sales have increased 201% since its acquisition by Pinnacle in August 1988 and currently represent approximately 38% of the Company's total net sales. The Company believes that this increased revenue is principally attributable to management's initiatives which include the development and introduction of new or improved products. Management's primary initiative to increase revenues at Alvey was to assemble experienced and highly qualified sales and marketing personnel and develop the necessary products to support their efforts. Management believed this would provide Alvey the means to further penetrate its traditional manufacturing market and provide the sales and consulting expertise to become a significant competitor in the more rapidly growing warehousing and distribution segment of the materials handling market. To fully support marketing efforts, Alvey found it necessary to re-engineer many of its conveyor products and develop new equipment such as the case depalletizer used primarily in warehouse applications. In addition, the engineering and manufacturing managers recruited subsequent to 1988 brought new ideas and processes which have resulted in a complete redesign of Alvey's entire palletizer and pallet conveyor product lines. With the acquisition of Buschman in 1992, responsibility for marketing major systems to the warehouse and distribution market segments was shifted from Alvey to Buschman, and a number of senior marketing managers were transferred to Buschman. This shift of responsibilities and transfer of personnel has resulted in lower sales growth at Alvey, while increasing Buschman's sales growth for 1993 and each subsequent year. EBITDA (as defined in Item 6. "Selected Financial Data"), at Alvey has increased by approximately 186% since 1988. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." BUSSE BROS., INC.: Busse Bros., Inc. ("Busse") manufactures bulk palletizing and depalletizing systems which are sold through its direct sales force and in conjunction with Alvey's sales force. Busse's bulk palletizers accumulate and arrange empty containers, such as cans and bottles, for shipment to consumer product manufacturers, by building layers of containers separated by plastic or paperboard sheets. The pallet load of containers will then be strapped down to secure and stabilize the load. When a pallet of containers arrives at the filling location, containers must be removed from the pallet and fed into a production line where they will be washed, filled and then capped or seamed. Busse's bulk depalletizers accept the pallet of containers and systematically sweep each layer of containers off the pallet and onto conveyors that take the containers into the production line. Busse's products serve the manufacturing phase of the industry segments to which Alvey serves the distribution phase, and Busse also serves the container manufacturers that supply these industries. Busse's annual net sales have increased 99% since its acquisition in April 1992 and currently represent approximately 5% of the Company's total net sales. The Company believes that this significant sales growth is primarily attributable to the recruitment of experienced marketing personnel at Busse and utilizing Alvey's much larger sales force to offer Busse products to existing customers of Alvey. Another factor contributing to this increase in sales was the availability since 1993 of Busse's redesigned bulk depalletizers which has accounted for 40-60% of Busse's sales in recent years. Nineteen ninety-six was a year of transition at Busse. During the first half of 1996, Busse operated three separate manufacturing and two separate administrative facilities which, in combination with Busse's development and introduction of a new generation palletizer and significant customer demands, resulted in production and engineering requirements that exceeded Busse's practical capabilities. In response to such requirements, management at Busse authorized construction of a 62,000 square foot plant addition, completed in October 1996, that has allowed management to consolidate Busse's facilities. In addition, management at Busse retained independent consultants to reduce cycle times and lower costs. While the 2 operational issues described above resulted in a $427,000 EBITDA loss during 1996, management believes the corrective actions implemented during 1996 should produce positive results in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Furthermore, as part of a reassignment of corporate personnel and a realignment of corporate responsibilities during 1996, the Company established the Consumer Products Group ("CPG") which combines the operations and management of Alvey and Busse under one group of senior managers. The formation of this group is intended to (i) focus marketing efforts in order to better realize the synergy potential associated with marketing to a common customer base, (ii) transfer the equipment design successes of Alvey to Busse processes and (iii) reduce overall costs through elimination of redundant support services. The president of Alvey is also president of the CPG. THE BUSCHMAN COMPANY: The Buschman Company ("Buschman") manufactures and sells a broad range of case conveyors, controls, related products and software which are sold to end users through its direct sales force, through a national network of independent distributors and systems integrators and through the sales forces of Alvey and White. Buschman sells standard conveyor and sortation products and modified conveyor equipment as well as high-speed sortation systems, controls, outside-purchased subsystems (such as bar code scanners), engineering and/or installation services. In addition, Buschman sells materials flow systems for warehouses and distribution centers which are more complex in design and include high-speed sortation, sophisticated control software and involve engineering, project management and installation services. These systems are designed to customer and/or consultant specifications through Buschman's "design and build" process. Buschman primarily serves the warehouse and distribution systems markets that perform the logistics operations required to deliver a finished product from a warehouse or distribution center to a retail store. Buschman also provides case conveyors used in systems sold by White and provides case conveyors for systems sold by Alvey to the extent the conveyors used in such systems are not directly manufactured by Alvey. Buschman's annual net sales have increased approximately 108% since its acquisition in October 1992 and currently represent approximately 29% of the Company's total net sales. The Company believes that this increase in net revenues has resulted primarily from management's initiative to reposition the Company as a premier supplier of material handling solutions to the warehouse and distribution market segment. This repositioning has been accomplished by an aggressive marketing effort targeted at those customers requiring complex solutions and ongoing services. Buschman's marketing efforts have benefited from the transfer of senior managers from Alvey in 1992 and the recruitment of additional highly qualified personnel. To support these marketing efforts and provide superior solutions capabilities, Buschman redesigned its product line, including products previously manufactured by Alvey, and introduced what it believes to be state-of-the-art sortation equipment and systems software. Buschman's EBITDA was depressed in 1993 and 1994 primarily due to the costs associated with (i) consolidating the manufacture of Alvey's conveyor products in Buschman's expanded facility, (ii) redesigning and standardizing the product lines, (iii) recruiting additional marketing personnel, (iv) recruiting and training approximately 200 additional production employees, net of turnover and (v) pursuing aggressive marketing efforts, particularly with strategic national accounts. However, in 1995, management's efforts produced significant results as Buschman recorded record earnings. As a percentage of gross sales, earnings increased to levels above those realized before its 1992 acquisition. In addition, 1996 results reflect an increase in EBITDA of 79% over 1995's record results and have further enhanced management's belief in its strategic plan. As a percentage of gross sales, EBITDA increased to levels well above those realized before its 1992 acquisition. This is particularly significant in that Buschman now supplies large quantities of hardware sold at negotiated lower margins, which supports Alvey's case conveyor requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." REAL TIME SOLUTIONS: Real Time Solutions, Inc. ("RTS"), which Alvey acquired in December 1996, manufactures and sells paperless inventory picking systems to end users through its direct sales force, through the sales forces of Buschman and White and through a national network of independent distributors. Paperless picking systems are used to facilitate the retrieval (picking) and storage (put) of inventory in warehouses and distribution centers. Inventory quantities and information are updated immediately upon input of completed transactions. RTS believes its systems eliminate the need for paper 3 picklists, increase the productivity of a customer's work force and improve a customer's control over its inventory. RTS markets its products under the trade names EASYpick-Registered Trademark-, EASYput, EASYpick-DMS, and SORTpro. Easypick-Registered Trademark-, RTS' order-filling system and software (known as a "pick-to-light system"), is currently installed in over 100 sites and is RTS' leading product. RTS' EASYput product addresses the growing market for put-to-light systems and EASYpick-DMS, a warehouse control software, enables customers without sophisticated warehouse management systems to more easily install automated systems, such as pick-to-light. Many of RTS' current customers, including Auto Zone, Avon, Family Dollar Stores, Sears and Wal-Mart, are also customers of White and Buschman. WHITE SYSTEMS, INC.: White Systems, Inc. ("White") manufactures and sells a broad line of horizontal and vertical carousels, power columns, movable aisle systems and related software and controls which are sold to end users through its direct sales force and through a national dealer network. Horizontal carousels are rotating storage devices which store and move parts to the point of need, whether an operator workstation, an automated inserter/extractor or another robotic interface device. Vertical carousels are similar to horizontal carousels except that the carousel travels in a vertical plane, like a ferris wheel. The power column is a modular automated vertical lift device within which an inserter/extractor retrieves trays from internal shelving and delivers them to an accessible location. Movable aisle storage systems double the storage density of an area by enabling existing fixed shelving to move on rollers, allowing an operator to open an aisle between any two rows of shelves. White also manufactures a heavy duty pallet moveable aisle system for warehousing applications which utilizes a customer's existing pallets or racking. White serves the warehouse and distribution systems markets, and, in addition, its storage and retrieval products are used in a broad range of manufacturing and office applications. White's net sales have decreased 21% since its acquisition in December 1993 and currently represent approximately 16% of the Company's total net sales. Prior to its acquisition by the Company, White purchased equipment for resale to its customers and included the sales price of such purchased equipment in its annual net sales. Subsequent to its acquisition by the Company, various product and customer responsibilities have been realigned. This has resulted in certain products previously purchased and resold by White to be produced or otherwise furnished by other operating units of the Company. Accordingly, the net annual sales of these products are now reflected at the respective operating unit rather than White. The effect of this change in product and customer responsibility accounts for the majority of the reduction in White's annual net sales since its acquisition by the Company. Since its acquisition in December 1993, earnings at White have decreased primarily as a result of lower sales volumes as discussed above, the investments in additional resources and information systems undertaken during this period and an over-commitment of resources in 1996. During 1996, White experienced a further deterioration of its earnings resulting primarily from operating difficulties due to an overcommitment of limited resources. Pinnacle management responded by reorganizing and restructuring the management of White. As a result, nine senior executives and managers were assigned to or recruited and the operating and reporting structure was realigned in a manner consistent with that of the Company's other material handling companies. Additionally, as part of an overall corporate reorganization, White became part of the Company's Distribution Logistics Group ("DLG"). This group includes White, Buschman, RTS and Distribution Logistics Systems (a group formed from White and Buschman personnel focused on marketing, designing and selling major systems to the distribution market). The president of DLG is the former president of Buschman. Although no assurances can be given, management believes the initiatives introduced since the acquisition of White, particularly those initiatives implemented in 1996, will ultimately produce a favorable earnings trend similar to those realized from the Company's other acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MCHUGH, FREEMAN & ASSOCIATES, INC.: McHugh, Freeman & Associates, Inc. ("MFA") develops, markets and supports warehouse management software systems ("WMS") which incorporate radio frequency equipment and computers. Warehouse management systems manage the location and movement of goods within a warehouse to facilitate the eventual shipment of such goods. These systems track inventory on an interactive, real-time basis from the point of receiving through shipping. The systems communicate with a central computer to obtain and provide strategic data. Systems employ barcoded "license plates" which identify 4 and allow the tracking of items, lot or model, storage locations, employees and picking containers. The license plates are read by a bar code scanner and transmitted by a radio frequency terminal. MFA provided custom systems until late 1994, when it introduced its DMPLUS "standard product". DMPLUS is a real-time, comprehensive software solution for businesses with large-scale, high-volume warehouses and distribution centers. DMPLUS tracks and manages inventory on an interactive real-time basis, from the point of receiving to shipping, through the use of bar coding scanners and radio frequency transmitters, providing users with real-time and precise information as to the location of people, inventory and material handling equipment. DMPLUS improves customer service by reducing fulfillment times and increasing fulfillment accuracy and increases operational efficiencies by reducing downtime and increasing human resource productivity throughout the warehouse. Additionally, DMPLUS improves capital utilization through improved inventory management, thereby reducing unnecessary overhead and improving space utilization. For the twelve months ended December 31, 1996, custom and "standard product" warehouse management systems represented 45% and 55%, respectively, of MFA's total net sales. The Company anticipates that "standard product" sales will represent an even larger percentage of MFA's total net sales in the future. MFA has traditionally designed and installed warehouse management software systems primarily for the distribution marketplace; however, the broad acceptance of its product has created new and significant opportunities in additional market niches. MFA's annual net sales have increased more than fifteen times since its acquisition in May 1989 and currently represent approximately 12% of the Company's total net sales. The Company believes that this significant increase in revenues was originally attributable to management's efforts to position MFA as a provider of high quality, functional software to Fortune 500 customers requiring systems at a number of locations. This strategy has allowed MFA to create customer-specific systems which can be implemented throughout an organization while requiring less customization, thus leveraging MFA's resources. More recently, the development of DMPLUS (a standardized product requiring little customization) has allowed MFA to reduce the cost to deliver a system which opens additional markets and improves MFA's competitive position. Since the acquisition of MFA in 1989, EBITDA has grown at a rate higher than sales. In the years immediately following its acquisition, the growth in EBITDA was suppressed by significant costs incurred in connection with the development of additional software offerings, the aggressive pursuit of multi-site accounts and the training of new employees, as employment was increasing at a rate of approximately 50% per year. From 1993 through 1995, EBITDA, as a percentage of sales, significantly exceeded that of any of the other manufacturing companies in the Pinnacle family. In 1996 EBITDA, as a percentage of sales, at MFA was within 0.1 percentage point of the highest of the Pinnacle companies. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." WESELEY SOFTWARE DEVELOPMENT CORP.: Weseley Software Development Corp. ("Weseley") became a wholly-owned subsidiary of MFA on January 29, 1996. MFA paid $15.0 million in cash for the outstanding capital stock of Weseley on the date of acquisition. Weseley develops, markets and supports transportation management products and services which enable manufacturers, distributors, wholesalers and third-party logistics companies to more effectively and efficiently manage all aspects of the shipping process, from shipment planning to operational execution and post-shipment administration. Weseley's transportation management software ("TMS"), TRACS*, is an open-systems, real-time client/server solution that enables businesses to better manage all aspects of their shipping processes, from shipment planning to operational execution and post-shipment administration. The Company believes that TRACS* is the only suite of TMS products that offers comprehensive, end-to-end transportation planning and management functionality, employing sophisticated modeling and an architecture specifically designed for the dynamic transportation execution environment. TRACS* evaluates orders in real-time and determines the optimal way to consolidate, rate and route orders, considering all available carriers and modes, enabling businesses to significantly lower freight costs, gain greater control over shipping operations, enhance customer service and improve overall transportation efficiency. For the three years ended December 31, 1996, revenues at Weseley grew significantly. Earnings at Weseley prior to the date of its acquisition are not considered meaningful as Weseley generally followed a policy of paying employee bonuses and making profit-sharing contributions based upon available cash rather than earnings. Accordingly, in 1995, these significant payments exceeded earnings, which resulted 5 in an operating loss. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company recently integrated its WMS and TMS technologies to create a software solution that enables users to both manage and execute the storage and movement of goods in warehouses with the subsequent shipment of such goods. The Company believes that its ability to offer an integrated DMPLUS/TRACS* solution provides it with a significant competitive advantage as customers increasingly demand a uniform logistics solution to warehouse and transportation management. Consistent with the integration of its software products, the Company established the Software Logistics Group ("SLG"), which is comprised of MFA and Weseley, to combine marketing, product development and management under one group of senior managers. The formation of this group is intended to advance the best practices of each Company so as to (i) focus and leverage marketing efforts within the common customer base, (ii) market and present an integrated, single solution, (iii) transfer and integrate the specific technology strengths of each Company and (iv) create the basis for establishing and advancing common SLG strategic objectives. INTEGRATED SYSTEMS: For integrated systems, where the products and expertise of Alvey's subsidiaries are combined, a conveyor is typically the "linkage" that permits the movement of products through the manufacturing line or distribution system and software is the "enabler" that drives the entire system and provides needed information. The Company's systems typically include significant design and engineering work and turnkey installation services. Examples of some of the most common integrated systems sold by Alvey include: CONSUMER PRODUCT MANUFACTURING LINES: Systems used by beverage manufacturers including Coca-Cola and food manufacturers such as Kellogg. These systems could include Alvey case palletizers, AEC robotic palletizers, Busse bulk depalletizers, Buschman conveyors and related software designed by MFA, Weseley, Alvey or Buschman. Revenues from such systems typically exceed $2 million and may reach $10 million. WAREHOUSE AND DISTRIBUTION SYSTEMS: Systems used by retailers including Sears and Target, by independent wholesalers or by manufacturers in conjunction with a consumer product manufacturing line. A typical system could include Buschman and/or Alvey conveyors, White carousels and related software designed by MFA, Weseley, Alvey, Buschman or White. Revenues from such systems typically exceed $2 million and may reach $10 million. CONTAINER MANUFACTURING SYSTEMS: Systems used by can manufacturers including Metal Container Corporation (an Anheuser-Busch subsidiary), or bottle manufacturers including Ball Corporation. These systems could include Busse bulk palletizers and Alvey conveyors and related software. Such systems typically range in price from $300,000 to $1 million. MEAT PRODUCTION SYSTEMS: Systems used by each of the four industry leaders in meat production. These specialized distribution systems could include Alvey case palletizers, Buschman conveyors, White carousels and related software designed by MFA, Alvey or White. Such systems typically range in price from $8 million to $12 million. The Company's successful installation of a revolutionary frozen meat distribution system for ConAgra's Monfort Beef division in 1994 is an example of the opportunities available in integrated systems. After the development and implementation of the integrated system for ConAgra, the Company has received orders for approximately $47 million of similar systems from ConAgra and other industry participants. ENGINEERING AND SUPPORT SERVICES While a significant portion of the Company's revenues is attributable to the manufacture and sale of equipment, approximately 53% of total revenues result from product support functions and non-manufactured products delivered in connection with sales of the Company's equipment. Such revenues are generated from engineering, software license fees, computer support services, systems and equipment maintenance, computer hardware and peripheral equipment, and the integration and installation of these 6 products. The Company's sales process generally starts with a consultation between Company engineers and a customer during which the Company assesses the customer's specific materials handling needs and designs a system consisting of the Company's equipment, including related software and controls, specifically tailored to meet such needs. The Company installs the system and works with the customer to insure that the system performs to the customer's expectations. After the system is operational, the Company continues to provide ongoing support and maintenance for the system and works with the customer in response to changes in the customer's materials handling needs. These services are regularly provided to the Company's customers, including through the "value-added" partnerships the Company has formed with certain large customers. See "Customers." Through its Company-wide Customer One Protection ("COP") program, the Company provides aggressive ongoing support and maintenance for its installed base of equipment and integrated systems. COP provides the Company's customers with comprehensive service and support including 24-hour assistance by phone, on-site service, user training, replacement parts, maintenance programs and equipment and systems upgrades. The COP program generated approximately $27.8 million of revenues during the year ended December 31, 1996. BUSINESS STRATEGY The Company's business objective is to build on its position as a full-service provider of materials handling and information management products and services tailored to meet the individual needs of its customers. To achieve this objective, the Company intends to implement the following strategies: - Continue to build upon the Company's integrated project capabilities. Each of the Company's operating companies was previously a stand-alone enterprise, and management continually modifies the ways in which the subsidiaries work together to design, market and implement solutions. By combining the expertise of its subsidiaries, the Company is able to provide manufacturers and distributors with equipment and systems which represent the next step in materials handling and information systems applications. Integrated solutions exhibit a high degree of creativity and represent a partnership with the customer, incorporating flexibility in design and solution and a thorough understanding of the customer's business. These integrated solutions are also designed to meet the increasing information needs of the Company's customers. - Continue margin enhancement measures. While the margins of the Company's early acquisitions have increased over time, the margins of White are generally lower than those of the other operating companies. The Company believes that as White is further integrated into the Company through its inclusion in the DLG, White's margins should improve, resulting in higher margins for the Company as a whole. In order to further improve margins, the Company has sought the services of a leading industry consultant to assist in implementing margin-enhancing improvements at Alvey, Busse and White. - Exploit the Company's strategic opportunity to expand its information systems expertise and significantly increase the Company's ability to provide integrated solutions to warehousing, transportation and related demand-planning problems. - Exploit new and emerging market opportunities. The manufacturing and distribution markets are constantly changing. The Company intends to exploit new market opportunities through its ability to create new and revised custom and standard products that provide solutions to market changes. In particular, the Company provides products that respond to third-party warehousing, point-of-sale ordering, mixed-load requirements, mail order purchasing, improved occupational safety measures and other customer needs. 7 - Build upon the Company's success in supplying integrated systems to the meat production industry. The Company intends to build upon its success in developing meat production systems by aggressively pursuing the potentially large meat production market. - Continue to seek product line expansions including non-roller conveyor products, systems to automate distribution centers and new software products. - Expand the Company's international business. The Company has significant opportunities for such expansion through its U.S.-based international customers, as well as through new international customers. The Company believes that the international markets present significant opportunities for Alvey and Busse palletizer/depalletizer systems, for MFA and Weseley software systems and for White storage and retrieval systems. The Company intends to focus initially on Latin America, Asia and Europe, and intends to add additional marketing personnel to support expanded geographical areas as new order bookings and sales increase. Through its subsidiary MFA, the Company established a marketing and software engineering site in Europe during 1996. Costs associated with this start-up were minimized by "boot strapping" the operation and providing services in Europe to MFA's existing U.S.-based customers while marketing to new European customers. INDUSTRY OVERVIEW Constant changes in consumer demands and buying trends offer new opportunities for materials handling and information systems applications as the need for a quick response to supply consumer needs is heightened. Trends such as third-party distribution, point-of-sale ordering, mixed-load shipments and more frequent, smaller quantity deliveries create new opportunities while enhancing the need for advanced software and integrated systems. Similarly, changes in packaging shapes and the elimination of secondary packaging create new challenges for manufacturers and distributors alike. The Company believes that the need to increase employee productivity, improve worker safety, improve margins and meet customer demands are factors which lead manufacturers and distributors to upgrade and replace their existing materials handling equipment. The materials handling industry is highly fragmented with many small, single-product companies providing storage, transportation, software and other products and services. Customers increasingly seek to satisfy their materials handling requirements through fully integrated solutions consisting of the equipment necessary to load, unload, sort and transport raw materials and finished products, as well as related software and controls to monitor, optimize and execute the movement and shipment of products. Customers are also seeking systems to manage manufacturing, warehousing and distribution logistics. Companies that are able to provide complex, integrated systems to satisfy materials handling and logistics management requirements, such as the Company, are experiencing new growth opportunities, and the Company believes that its broad range of products and services provides it with a distinct competitive position. CUSTOMERS The Company's product leadership has resulted in sales to a diverse customer base which includes many of the largest corporations in the United States. In addition, the Company has successfully forged important "value-added partnerships" with customers such as Anheuser-Busch, ConAgra, Gerber, Kellogg, Quaker Oats and Target. Many of the Company's customers have reduced their engineering staffs and consequently look to the Company for design and engineering services with respect to their materials handling requirements. The Company has a large installed base of equipment and systems with these customers which provides reference sites that are critical for attracting potential new customers. The Company believes that these value-added partnerships are a significant competitive advantage, as they serve as sources of new product ideas, generate ongoing, relatively high-margin sales and demonstrate proven systems capabilities to potential new customers. Each of the customers listed below was one of the top 20 customers of one of the Company's operating subsidiaries during the last three years. The customers on the list accounted for 44.9% and 38.3% of the Company's sales in 1996 and 1995, respectively. While certain of the customers listed below may not be current customers, the Company has no reason to believe that all customers listed below will not continue to be customers in the future. 8 The following table sets forth a list of selected customers of the Company by industry group: BREWING CONSUMER PRODUCTS Anheuser-Busch Black & Decker Coors Char-Broil Labatts General Electric Miller Brewing Motorola Russell Corp SOFT DRINKS Sunbeam-Oster Coca-Cola TOBACCO Pepsi-Cola Royal Crown Brown and Williamson Philip Morris FOOD THIRD PARTY DISTRIBUTION Campbell Farmland Conrail Hershey Foods Federal Express Kellogg TNT Distribution M&M Mars Nestle WINE AND DISTILLED SPIRITS Quaker Oats Tropicana Gallo Vlasic Foods United Distillers INDUSTRIAL GENERAL DISTRIBUTION/RETAIL DISTRIBUTION/MANUFACTURING AAFES Alcon BJ's Stores Canadian Tire Corp. Consolidated Stores Chrysler Chanel Crown, Cork and Seal Dollar General DEC Famous Footwear DuPont J.C. Penney Intel Liz Claiborne Libbey Glass Meijer LTV Steel Meldisco Reynolds Metal Michaels Stores Schering Plough Nike The Ball Corporation Ross Stores Thomas & Betts Sears Warner Lambert Spiegel/Eddie Bauer Whirlpool Staples Tandy CONSUMER GOODS Target Stores United Stationers Boise Cascade Wal-Mart Johnson & Johnson Kimberly Clark Corp. Lever Bros. Procter & Gamble 9 During the year ended December 31, 1996, the Company's largest customer was Target Stores, which accounted for 5.5% of the Company's total sales. For the year ended December 31, 1995, the Company's largest customer was Procter & Gamble, which accounted for 3.5% of the Company's total sales. The Company's ten largest customers represented 27.5% of total sales in 1996, up from 23.6% in 1995. The Company focuses its research and development efforts on key customers and applications. These customers serve as significant funding sources for such research and development efforts, with most of the cost paid for through contracts which focus on solving specific problems or technical requirements. These contracts also provide the Company with opportunities to enhance its competitive position without additional capital investments. The Company expects to create additional value-added relationships as it extends its product offerings and installs new, integrated systems which can serve as additional reference sites. The Company believes that it has excellent working relationships with its customers. These relationships include proprietary accounts where projects are generally awarded without a competitive bid process and non-proprietary accounts where projects are typically awarded through a bid process among two or three potential suppliers. SALES AND DISTRIBUTION The Company has developed strong domestic sales channels, including approximately 100 direct salespeople and approximately 290 independent distributors and independent manufacturer's representatives. This sales force covers the entire United States, with especially strong coverage in the major industrial centers. Management believes that the Company has the strongest combination of direct and independent sales networks in the materials handling industry. International sales accounted for approximately $25.8 million or 8% of the Company's sales for the year ended December 31, 1996, a 21% increase from $21.3 million in international sales for the year ended December 31, 1995. The Company is pursuing a strategy to significantly increase international sales as a percentage of the Company's total net sales. An international division has been established within the Company to develop and implement strategies to achieve this goal. The Company expects to leverage its existing relationships with major multinational corporations in the United States in order to support their activities throughout the global market. BACKLOG The Company's backlog is based upon firm customer orders that are supported by purchase orders, other contractual documents and cash payments. As of December 31, 1996, the Company's backlog was $136.1 million. While the level of backlog at any particular time may be an indication of future sales, it is not necessarily indicative of the future operating performance of the Company. Additionally, certain backlog orders may be subject to cancellation in certain circumstances. The Company believes that virtually all of its orders in backlog at December 31, 1996 will be recorded as revenue within one year. RESEARCH AND DEVELOPMENT Strong research and development efforts are the basis of the Company's product and market leadership. In the fiscal years ended December 31, 1996, 1995 and 1994, the Company incurred $4.8 million, $2.1 million and $2.5 million, respectively, in research and development expenses. By utilizing customer inputs, research with respect to competitors and research with respect to externally available engineering to establish future product needs, the Company focuses its research and development on key customers and applications. Based on such data and subsequent analysis, the Company establishes product plans that are continually reviewed and updated. To facilitate an integrated solutions approach, the Company's research and development activities address three engineering disciplines: mechanical, controls and computer software. 10 In addition to the Company's research and development expenses identified above, customers serve as a significant funding source for other research and development efforts, with much of such costs funded through customer contracts that focus on solving specific problems or technical requirements. These contracts also provide the Company with opportunities to enhance its competitive position without additional capital investments. The Company holds 31 active U.S. patents, 16 active foreign patents, 21 U.S. registered trademarks, four active foreign trademarks and 14 pending patent applications, and has 16 trademark applications pending. In addition to its extensive patent and trademark portfolio, the Company also licenses certain intellectual property rights from third parties and owns a wide array of unpatented proprietary engineering. The Company's U.S. patents have remaining terms ranging from one to 16 years. RAW MATERIALS AND COMPONENTS The Company's principal raw materials and components purchased from third parties are steel and electric motors and reducers. The Company avoids some of the price volatility of these products by purchasing most of its requirements through annual contracts. The Company does not rely on any single supplier for these materials and believes it has the ability to quickly switch sources for any of these materials should the need arise. ENVIRONMENTAL MATTERS The Company's operations are subject to a variety of federal, state and local environmental laws and regulations which have become increasingly stringent. The Company believes its current operations are in material compliance with current environmental laws and regulations. However, the scope of environmental laws is very broad and is subject to change. COMPETITION The materials handling and related information systems industry is highly fragmented and very competitive. The industry includes numerous small to medium size suppliers who focus on specific market niches and/or singular applications. The suppliers in this group generally do not offer systems or integrated solutions, but instead offer individual kits, machines and applications. Certain other competitors are larger, with significant financial and marketing resources, and offer materials handling systems and integrated solutions. Although the Company believes it is one of the leading suppliers of integrated materials handling systems, many of the Company's competitors are large and have significant financial, marketing and technical resources. In addition, the Company may encounter competition from new market entrants. EMPLOYEES As of December 31, 1996, the Company had over 2,300 employees, approximately 950 of whom are engineers and other professional staff. The Company operates through a decentralized organizational structure, interconnected by a corporate staff of 11 professionals located at Pinnacle's headquarters in St. Louis, Missouri. The Company is subject to collective bargaining agreements at all of its manufacturing facilities except the Busse facility. The Company has not experienced any work stoppages related to labor matters for more than 20 years. The Company considers its employee relations to be good. ITEM 2. PROPERTIES The Company occupies over 1,000,000 square feet of manufacturing, assembly and office space. Its primary production facilities are located in St. Louis, Missouri; Cincinnati, Ohio; Randolph, Wisconsin; and Kenilworth, New Jersey. The Company's software development facilities are located in Waukesha, Wisconsin; San Diego, California; Grand Rapids, Michigan; Shelton, Connecticut; and Berkeley, California. 11 In order to meet customer demand and improve manufacturing efficiencies, the Company completed two new manufacturing facilities in 1996: a 62,000 square foot addition to the Busse facility in Randolph, Wisconsin and an 82,000 square foot facility for Alvey in St. Louis, Missouri. The location and size of each of the Company's significant facilities is summarized below:
OPERATING COMPANY LOCATION SIZE (SQ. FT.) OWNED/LEASED LEASE EXPIRATION ----------------- -------- -------------- ------------ ---------------- Alvey Olivette, MO 250,000 Owned -- Alvey St. Peters, MO 82,000 Owned -- Busse Randolph, WI 122,000 Owned -- Buschman Cincinnati, OH 286,000 Owned -- RTS Napa, CA 21,000 Leased July 2003 White Kenilworth, NJ 263,000 Leased December 2006 White San Diego, CA 19,000 Leased May 1999 MFA Waukesha, WI 45,000 Leased October 2005 Weseley Shelton, CT 29,000 Leased December 2002
ITEM 3. LEGAL PROCEEDINGS From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. None of the matters in which the Company is currently involved, either individually or in the aggregate, is expected to have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1996. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public market for the Company's Common Stock. All of the Company's Common Stock is held by Pinnacle. 12 ITEM 6. SELECTED FINANCIAL DATA The selected historical consolidated financial data presented below at and for the five years ended December 31, 1996 have been derived from the historical Consolidated Financial Statements of Alvey which have been audited by Price Waterhouse LLP, independent accountants. Alvey's historical consolidated financial statements as of and for each of the three years ended December 31, 1996, 1995 and 1994 are included elsewhere in this Form 10-K. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and related Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ---------- ----------- --------- (DOLLARS IN THOUSANDS) RESULTS OF OPERATIONS (1): Net sales....................................... $ 331,247 $ 288,018 $ 248,177 $ 164,022 $ 106,579 Cost of goods sold.............................. 256,218 217,297 189,007 123,033 75,343 ---------- ---------- ---------- ---------- --------- Gross profit.................................. 75,029 70,721 59,170 40,989 31,236 Selling, general and administrative expenses...................................... 61,471 51,630 43,402 30,421 22,467 Write-off of purchased in-process research and development costs (2)......................... 12,700 -- -- -- -- Research and development expenses............... 4,797 2,051 2,538 1,436 930 Write-off of goodwill (3)....................... 11,491 Amortization expense............................ 1,703 1,737 1,836 1,479 1,095 Other expense (income), net (4)................. 1,378 (108) 2,279 (11) (335) Restructuring and plant consolidation expense (5)................................... -- -- -- -- 1,801 ---------- ---------- ---------- ---------- ---------- Operating income (loss)....................... (18,511) 15,411 9,115 7,664 5,278 Interest expense................................ 12,301 6,896 5,921 4,053 2,690 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and extraordinary losses......................... (30,812) 8,515 3,194 3,611 2,588 Income tax expense (benefit).................... (1,909) 4,109 1,516 1,560 1,126 ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary losses..... (28,903) 4,406 1,678 2,051 1,462 Extraordinary losses, net (6) 1,993 -- -- 6,203 614 ---------- ---------- ---------- ---------- ---------- Net income (loss)............................. $ (30,896) $ 4,406 $ 1,678 $ (4,152) $ 848 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Earnings per share (7)............................ -- -- -- -- -- AT DECEMBER 31, ------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ----------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA(1): Working capital (deficit).................... $ 604 $ (401) $7,152 $8,155 $ (928) Total assets................................. 181,851 150,285 138,536 129,658 83,021 Long-term debt, less current maturities...... 100,493 42,460 54,754 59,341 35,508 Redeemable preferred stock (8)............... - 27,322 23,435 20,034 16,902 Net investment of Parent (9)................. (41,129) (15,719) (16,332) (15,015) (9,729)
13
SELECTED CONSOLIDATED FINANCIAL DATA OF ALVEY YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) OTHER CONSOLIDATED FINANCIAL DATA (1): Depreciation expense (10).................... $ 4,259 $ 2,952 $ 2,752 $ 2,583 $ 1,724 Capital expenditures, net (10)............... 11,633 4,496 5,091 3,471 1,920 OTHER PERFORMANCE MEASURES (NON-GAAP) (11): EBITDA (12).................................. 13,087 20,100 15,877 11,726 8,097 Ratio of EBITDA to cash interest expense (13) 1.16 3.27 2.77 3.17 3.30 Ratio of long-term debt to EBITDA............ 7.68 2.11 3.45 5.06 4.33
(1) Results include various acquisitions from the date of such acquisition, including Busse and Buschman in 1992, White in 1993 and Weseley and RTS in 1996. (2) Amount relates to $11.7 million and $1.0 million of the purchase price of Weseley and RTS, respectively, which were allocated to purchased in-process research and development and immediately expensed in the first and fourth quarters of 1996, respectively. (3) Amount represents the write-off of the remaining goodwill balance at one subsidiary, which is considered to be impaired due to historical losses and uncertainty regarding future income and cash flows. (4) Amount in fiscal 1996 includes a $1.4 million one-time charge for the termination of a management agreement. Amount in fiscal 1994 includes the payment of a one-time stay bonus in the amount of $2.2 million to an executive of White in connection with the acquisition of White. (5) Amount reflects non-recurring restructuring and plant consolidation expenses associated with the closure of a Company-owned manufacturing plant. (6) Amount reflects the write-off of unamortized deferred financing fees, net of applicable income tax benefits, resulting from the early extinguishment of debt during 1996, 1993 and 1992. Amount in 1993 also includes approximately $5.4 million, net of applicable income tax benefits, for the accrual of operating losses and other related costs associated with the disposal of a carousel manufacturing plant in Lewiston, Maine pursuant to a Federal Trade Commission order in 1993 (See Note 4 to the Consolidated Financial Statements of Alvey). (7) Given the historical organization and capital structure of Alvey, earnings per share information is not considered meaningful or relevant and therefore has not been presented. (8) Amount represents redeemable preferred stock of Pinnacle. Due to the exchangeable feature of the preferred stock which allows the holder to exchange the preferred stock for subordinated notes of Alvey, the preferred stock has been pushed down to the financial statements of Alvey at December 31, 1995. Outstanding redeemable preferred stock of Pinnacle at December 31, 1996 has not been pushed down to the financial statements of Alvey as it is not exchangeable into debt of Alvey. (9) Net investment of Pinnacle represents the basis of Pinnacle's investment in Alvey, which has been pushed down to the financial statements of Alvey, and includes cumulative contributions of capital and cumulative losses before extraordinary losses, extraordinary losses and aggregate accreted/paid preferred stock dividends. The historical amount at December 31, 1996 consists of cumulative contributions of capital to Alvey by Pinnacle of $8.8 million, cumulative losses of $35.5 million, including extraordinary losses of $9.5 million and an aggregate accretion/payment of $14.4 million of paid-in-kind dividends on preferred stock. (10) Capital expenditures and related depreciation expense include amounts related to investments in fixed assets and costs of software development. In 1996, this includes $659,000 related to the write-off of capitalized software costs (See Note 2 to the Consolidated Financial Statements of Alvey). (11) Other performance measures such as EBITDA (discussed further below) should not be construed as an alternative to operating income or net income calculated in accordance with generally accepted accounting principles ("GAAP") or as an indicator of operating performance or liquidity. However, the Company believes such non-GAAP performance measures are commonly used to evaluate a company's ability to service debt. (12) EBITDA consists of earnings before interest, income taxes, extraordinary items and depreciation and amortization expense. In 1996, EBITDA excluded a $12.7 million one-time write-off of purchased in-process research and development costs, an $11.5 million write-off of goodwill and a $1.4 million one-time charge for the termination of a management agreement. In 1994, EBITDA excluded a $2.2 million one- time payment of a stay bonus in connection with the acquisition of White which is included in "Other expense (income), net" above. Management fees reduced EBITDA by $502,000, $606,000, $502,000, $665,000 and $500,000 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. (13) For purposes of this computation, interest expense consists of interest on indebtedness and does not include amortization of deferred financing fees and other noncash charges to interest. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS When used in the following discussion, the words "believes", "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL OVERVIEW The following discussion summarizes the significant factors affecting the consolidated operating results and financial condition of the Company for the three fiscal years ended December 31, 1996. Subsequent to the acquisition of Alvey by Pinnacle in August 1988, Alvey and Pinnacle completed a succession of six complementary acquisitions which has resulted in expanded product lines and an ability to provide integrated solutions in a wide range of manufacturing and distribution applications. Set forth below is certain information with respect to the Company's acquisitions: ACQUISITION ACQUISITION DATE McHugh, Freeman & Associates, Inc................... May 1989 Busse Bros., Inc.................................... April 1992 The Buschman Company................................ October 1992 White Systems, Inc.................................. December 1993 Weseley Software Development Corp................... January 1996 Real Time Solutions, Inc............................ December 1996 The Company believes that its emphasis on complementary acquisitions of companies serving either targeted markets or providing niche products has enabled it to provide customers a single source for complete integrated materials handling and information flow systems. Further, the Company believes that it benefits from productivity and integration gains resulting from its succession of complementary acquisitions combined with a strategy of integrating the operations of each newly-acquired company with the operations of Alvey and its other operating subsidiaries, which strategy is more fully described in the next succeeding paragraph. Shortly after acquiring each of its operating subsidiaries, management reviewed each newly-acquired subsidiary with respect to the possible integration of operations with Alvey and its other operating subsidiaries in order to improve operating efficiencies. As a result of such previous reviews, the Company initiated changes in each operating subsidiary's production processes that were targeted at the improvement of manufacturing efficiencies, the increase in facility capacity and ultimately the reduction of product cost. Additionally, in recent years, management has undertaken a number of programs targeted at reducing the cost to produce a specific product by simplifying and standardizing components and assemblies, thereby improving the productivity of the manufacturing process. The following is a brief summary of some of the actions taken and programs initiated in order to improve operating efficiencies: - Each of the manufacturing facilities of Alvey, Busse and Buschman have been reorganized to modify the flow of product and raw materials through the manufacturing process. Within three to 12 months after completing these changes, each of Alvey, Busse and Buschman recorded meaningful improvements in labor productivity and facility capacity. - In 1993, Alvey began production of the series 920 palletizer, which was designed to be manufactured in modules rather than a single unit, thus reducing the labor requirements. As with most new products, the manufacture of the initial units 15 resulted in cost overruns; however, by early 1994, Alvey produced these units more efficiently than originally estimated. The result of this engineering process was to produce a state-of-the-art machine that could be sold at a price 15-25% below the machine it replaced, yet generate a gross margin percentage significantly higher than that of its predecessor. - Alvey also began production of the series 880 palletizer in late 1994. This machine was redesigned to incorporate many of the same assemblies used on the 920 series, resulting in labor efficiencies and reduced inventories. While not as significant as those realized in the production of the 920 palletizer, the redesign of the series 880 has resulted in meaningful cost improvements and efficiency trends. - Busse introduced the "Turbo" series depalletizer in 1993. Busse has realized similar results on the production of the Turbo series depalletizers as Alvey experienced with the series 920 palletizer. Furthermore, the production changes initiated in 1993 enabled Busse to increase sales by approximately 300% over 1992 results (the year that Busse was acquired by Alvey), with the number of employees increasing by approximately 200%. - The Company has completed the process of combining the conveyor product line of Alvey with that of Buschman. The best products from each company were selected and then re-engineered to incorporate current technologies and manufacturing capabilities. The effect of this program was to greatly reduce the number of parts required to support two separate products and to simplify the manufacture of the new enhanced product. As a result of this undertaking, and other programs targeted at specific issues, productivity at Buschman began increasing in the last half of 1994 and has continued to do so throughout 1996. Buschman increased 1996 sales by 26% over 1994 with only a minimal increase in factory employment. - During the last half of 1995 and throughout 1996, the Company has increased spending on state-of-the-art computer and manufacturing equipment and technology targeted at improving its production capabilities and reducing product costs. In addition, during this period, the Company has spent $7.3 million to expand, construct and equip new manufacturing and engineering facilities at Alvey and Busse. The Company believes these new facilities and equipment will allow the Company to expand capacity and improve processes, thereby eliminating duplicate costs and increasing productivity. The Company expects that the implementation of these processes and acquisition of equipment will continue through 1998 and ultimately encompass the entire Company. - The Company recently integrated its WMS and TMS technologies to create a software solution that enables users to both manage and execute the storage and movement of goods in warehouses with the subsequent shipment of such goods. The Company believes that its ability to offer an integrated DMPLUS/TRACS* solution provides it with a significant competitive advantage as customers increasingly demand a uniform logistics solution to warehouse and transportation management. While no assurance may be given with respect to future productivity performance, management believes additional efficiencies will be realized from these programs. Each of the Company's acquisitions was accounted for under the purchase method of accounting, with the purchase prices allocated to the estimated fair market value of the assets acquired and liabilities assumed. In each acquisition, the excess of the purchase price paid over the estimated fair value of the net assets acquired was allocated to goodwill. The Company has allocated an aggregate of $43.0 million to 16 goodwill since 1988, $26.5 million of which is recorded on Alvey's balance sheet at December 31, 1996. See Note 6 to the Consolidated Financial Statements for a discussion of the $11.5 million of goodwill that was written-off in 1996. Goodwill is generally amortized over a period of 40 years; however, the Company is amortizing the goodwill associated with the acquisitions of Weseley and RTS over ten years. Goodwill amortization will result in future annual expense of approximately $1.3 million per year. The Company financed the acquisitions primarily through borrowings, resulting in increases in the Company's debt and interest expense. Results of operations of each acquired company have been included in the Company's consolidated statement of operations from the dates of the respective acquisition. The Company's parent, Pinnacle, is considering a series of transactions pursuant to which it would spin-off the material handling businesses presently conducted by the Company, Buschman, White, Busse and RTS (together, the "Equipment Business") to the stockholders of Pinnacle (the "Spin-off") and immediately thereafter effect an initial public offering of the common stock of Pinnacle (the "IPO") which, following the Spin-Off, would continue to own and operate the businesses currently operated by MFA and Weseley (together, the "Software Business"). The proposed Spin-Off of the Equipment Business and the contemporaneous IPO of the Software Business would be conditioned on a number of factors, including the Company's ability to restructure the terms of its outstanding Senior Subordinated Notes and Pinnacle's outstanding Preferred Stock on acceptable terms, the receipt of a private letter ruling from the IRS confirming the "tax-free" nature of the Spin-Off and certain other contingencies. In addition, the IPO would only occur if and to the extent the Company deems it advisable, in its sole discretion. It is currently contemplated that the Company would offer to exchange its outstanding Senior Subordinated Notes in one or more steps for a combination of cash (which would be provided by the proceeds from the IPO) and Senior Subordinated Notes of the Equipment Business. As a result of these contingencies, no assurances can be given that either the Spin-Off or the IPO will be consummated. No offer in connection with the IPO or related restructuring of the Senior Subordinated Notes is made hereby. 17 RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, net sales and categories of expenses, in thousands of dollars and as a percentage of net sales.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------ 1996 1995 1994 ------------------------- ------------------------- ------------------------ Net sales.......................... $331,247 100.0% $288,018 100.0% $248,177 100.0% Cost of goods sold................. 256,218 77.3 217,297 75.4 189,007 76.2 -------- -------- -------- Gross profit....................... 75,029 22.7 70,721 24.6 59,170 23.8 Selling, general & administrative expenses......................... 61,471 18.6 51,630 17.9 43,402 17.5 Write-off of purchased in-process research & development costs..... 12,700 3.8 0 0.0 0 0.0 Research & development expenses......................... 4,797 1.5 2,051 0.7 2,538 1.0 Write-off of goodwill.............. 11,491 3.5 0 0.0 0 0.0 Amortization expense............... 1,703 0.5 1,737 0.6 1,836 0.7 Other expense (income), net........ 1,378 0.4 (108) (0.0) 2,279 0.9 -------- -------- -------- Operating income (loss)............ (18,511) (5.6) 15,411 5.4 9,115 3.7 Interest expense................... 12,301 3.7 6,896 2.4 5,921 2.4 -------- -------- -------- Income (loss) before income taxes and extraordinary loss......... (30,812) (9.3) 8,515 3.0 3,194 1.3 Income tax expense (benefit)....... (1,909) (0.6) 4,109 1.5 1,516 0.6 -------- -------- -------- Income (loss) before extraordinary loss............. (28,903) (8.7) 4,406 1.5 1,678 0.7 Extraordinary loss, net............ 1,993 0.6 0 0.0 0 0.0 -------- -------- -------- Net income (loss) $(30,896) (9.3)% $4,406 1.5% $ 1,678 0.7% -------- -------- -------- -------- -------- --------
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31, 1995 NET SALES were $331.2 million for the year ended December 31, 1996, representing an increase of $43.2 million, or 15.0%, over net sales of $288.0 million for the year ended December 31, 1995. Excluding Weseley and RTS, "same store" sales increased $37.2 million or 12.9% over 1995 as sales increases were realized at each of the Company's operating groups. The most significant growth was produced by the CPG where sales increased $22.1 million or 18.1% over 1995. This strong growth resulted from the delivery of large in-process production and storage systems and the continuing market demand for the Company's mid-range and high-speed palletizing systems. Revenues from the Company's DLG increased $9.1 million or 6.2% over 1995 despite a revenue decrease in the Company's storage and retrieval products from the prior year. Within the DLG, the demand for integrated and major warehouse systems continued as revenues from these products increased $11.0 million or 12.8% over 1995. Revenues from the Company's SLG increased $6.7 million or 16.7% over 1995, attributable primarily to the inclusion of Weseley and its TRACS product line. However, the Company believes the overall revenue growth of this group was adversely affected during 1996 as the Company was presented with significant strategic opportunities that involved enhancing the functionality of DMPLUS to address the needs of the retail apparel segment of the WMS market. Accordingly, the Company deployed certain of its marketing, development and implementation efforts to enter this significant market segment. While the Company believes it has and will continue to realize the benefits from these efforts, such efforts involved revising certain marketing processes and devoting significant time to designing additional functionality, which activities resulted in a delay in the recognition of license revenues during this period with the results for the fourth quarter of 1996 being adversely affected. Also during 1996, the Company substantially completed the migration of TRACS* from a DOS-based application system to an open-systems, client/server solution. The Company believes that some potential TRACS* customers may have deferred licensing TRACS* during the first half of 1996 in anticipation of the open systems, client/server release that became available in the second half of 1996. The Company further believes that many customers that deferred licensing TRACS* in the first half of 1996 subsequently licensed TRACS* prior to year-end; however, certain of these potential customers may have opted instead to purchase competing TMS products rather than waiting for the completion of the 18 migration of TRACS* to an open systems, client/server system, thereby adversely affecting TRACS* license fees in 1996. In addition, hardware revenues within the SLG decreased $4.9 million from 1995 as a significant one-time purchase by a single customer in 1995 did not repeat in 1996. Furthermore, one strategy of the SLG is to grow license and maintenance revenues through the increased usage of third party implementation services. To the extent these efforts are successful, hardware revenues will continue to decline as a percentage of revenues. New order bookings were $316.3 million for 1996, a decrease of $2.6 million or 0.8% from record levels in 1995. This decrease is primarily attributable to the CPG and, in particular, to Alvey where new order bookings decreased $20.2 million from 1995 record bookings of $125.5 million. This decrease generally reflects a reduction in the amount of major in-process production and storage systems booked in 1995 but not repeated in 1996. The lack of new orders is attributable to customer-driven delays on new projects with existing customers and the loss of a potential new customer to competition. The Company believes that firm contracts for these previously delayed projects will be awarded during 1997. Despite the decrease in year-over-year bookings at Alvey and on a consolidated basis, 1996 bookings were 14.4% and 17.8% above 1994 levels, respectively. The slight year-over-year decrease in bookings, combined with the significant increase in sales, has resulted in a $7.7 million decrease in the consolidated backlog at year-end 1996 compared to year-end 1995. This decrease is entirely attributable to the CPG as backlog for the other groups increased approximately $16.1 million. The decrease in the backlog of the CPG can be explained by the shortfall in new orders and the significant increase in sales. Portions of the CPG sales increase and resulting decrease in backlog are attributable to management initiatives undertaken during 1996 to improve engineering productivity and reduce project cycle times. The Company believes that the successful implementation of these initiatives should result in a reduction in backlog relative to historical measures. GROSS PROFIT was $75.0 million in 1996, an increase of $4.3 million, or 6.1% over the $70.7 million in 1995. The gross profit margin, as a percentage of sales, decreased to 22.7% from 24.6% in 1995. Excluding the effects of the first-time inclusion of Weseley, gross profit decreased $683,000, or 1.0% and, as a percentage of sales, was 21.5% or 3.1 points below 1995 levels. Gross profit, in both dollars and as a percentage of sales, was adversely affected at three of the Company's manufacturing operations, as project overruns were incurred due to (i) the cost of outsourcing production, the use of temporary facilities, overtime premiums and production inefficiencies, all due to a lack of capacity and over-committed resources, (ii) the implementation of first-time product applications and (iii) significant increases in start-up and commissioning efforts resulting from the preceding items (i) and (ii). These overruns were partially offset by continuing engineering and manufacturing productivity gains at Buschman where gross profit increased $5.3 million and 3.3 percentage points over 1995 and 10.0 percentage points over 1994 results. Management believes that the recent completion of two new production facilities, the addition of new equipment and resources, the integration of various systems and processes, the management reorganization at White, the operational focus to result from the creation of distinct operating groups and the productivity and engineering programs initiated during 1996 should produce manufacturing efficiencies, productivity gains and eliminate or greatly reduce the project overruns incurred during 1996. Gross profit from the SLG increased $5.3 million or 42.5% over 1995. Although the first-time inclusion of Weseley accounted for the largest portion of this increase, gross profit margins also increased at MFA despite the reduction in hardware revenues discussed above. These margin gains were achieved through engineering productivity improvements and volume increases in higher-margin license fees and services. Additional growth in 1996 gross margins was sacrificed for long-term gains as the Company deployed a number of its product implementation teams to perform pre-contract services related to changes in the marketing programs and the development efforts associated with pursuing and acquiring license agreements in the retail apparel market, as discussed above. As a result, license fee revenues resulting from these efforts have not been fully recognized. As costs were incurred without the full benefit of matching revenues, management estimates that gross profit in 1996 was adversely affected by approximately $1.0 million. Also during 1996, the Company installed the first release of its TRACS* client/server software product as it migrated TRACS* from its earlier DOS-based version. Initial installations of this new version of TRACS* required greater implementation resources and costs than previously associated with the sale and implementation of 19 earlier versions of TRACS*. Furthermore, the significant increase in the number of DMPLUS and TRACS* installations has resulted in, and the Company believes will continue to result in, an increasing demand for software maintenance and support contracts. To meet this demand, the Company has invested significantly in staffing and equipping dedicated product support groups. As revenue from these services grow, management believes that gross profit margins will increase accordingly. While no assurance may be made with respect to future productivity performance, the Company believes the recent productivity gains at Buschman are sustainable and may be further improved. The ability of the Company to increase productivity performance depends primarily upon (i) the ability of White to realize the benefits of new systems and organizational changes, (ii) the utilization of the addition of capacity at Alvey and Busse and (iii) the implementation and success of additional programs aimed at reducing project cycle times and engineering productivity. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $61.5 million in 1996, representing an increase of $9.8 million, or 19.1% over the $51.6 million in 1995. As a percentage of sales, selling, general and administrative (SG&A) expenses increased to 18.6% in 1996 compared to 17.9% in 1995. Excluding Weseley, where due to the nature of its business SG&A is significantly higher as a percentage of sales, the "same store" increase in SG&A was $5.7 million or a 11.1% increase over 1995. As a percentage of sales, "same store" SG&A was 17.6% or 0.3 points lower than 1995. The most significant year-over-year increase, in both dollars and as a percentage of sales, was at MFA and is attributable to the addition of sales and marketing personnel and professional staff to support current product demand and to generate future growth in licensee fee revenue and the international marketing of the SLG DMPLUS and TRACS* products. SG&A expenses of the DLG increased $2.3 million or 10.9% over 1995 expenses which is the result of the Company's investment to further develop its "Design and Build" capabilities, improve its project concepting and estimating resources and open a direct sales office to replace an independent distributor. WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT was $12.7 million in 1996 compared to $0 in 1995. In connection with the acquisitions of Weseley and RTS during 1996, $11.7 million and $1.0 million, respectively, of the related purchase price was allocated to purchased in-process research and development costs at the dates of acquisition and immediately expensed as write-offs of purchased research and development costs. (See Note 3 to the Consolidated Financial Statements for further discussion.) RESEARCH AND DEVELOPMENT EXPENSES were $4.8 million for 1996, representing an increase of $2.7 million, or 134%, compared to $2.1 million in 1995. Of this increase, $976,000 is attributable to the inclusion of Weseley in 1996. In addition, substantial increases were recorded (i) at MFA as it continues to develop and broaden the functionality of its DMPLUS software product and improve the interface between DMPLUS and TRACS*, (ii) at Buschman as it develops new conveyor products and applications and (iii) at Busse for the development of enhanced palletizer and depalletizer offerings. WRITE-OFF OF GOODWILL was $11.5 million in 1996 compared to $0 in 1995. In 1996, remaining goodwill of one of the Company's subsidiaries was written-off as it was considered to be impaired due to historical losses and uncertainty regarding future income and cash flows. (See Note 6 to the Consolidated Financial Statements for further discussion.) OTHER EXPENSE (INCOME), NET was $1.4 million of expense in 1996, representing an increase of $1.5 million over 1995. This increase is almost entirely attributable to the $1.4 million charge associated with the first quarter termination of a consulting agreement in connection with the refinancing and recapitalization transactions, described below in the section entitled "Liquidity and Capital Resources". OPERATING INCOME (LOSS) decreased to a loss of $18.5 million in 1996 from income of $15.4 million in 1995. As a percentage of net sales, operating income decreased to (5.6%) in 1996 from 5.4% in 1995. However, excluding non-recurring charges of $26.3 million resulting from the $12.7 million write-off of purchased in-process research and development costs associated with the acquisitions of Weseley and RTS, an $11.5 million write-off of goodwill, the $1.4 million expense associated with the termination of a consulting agreement and the $0.7 million related to the write-off of capitalized software costs (See Note 2 to the Consolidated Financial Statements for further discussion), operating income would have been $7.8 million, 20 representing a decrease of $7.6 million compared to 1995 operating income. As a percentage of sales, and excluding the non-recurring charges described above, operating income decreased to 2.3% in 1996 compared to 5.4% for 1995. This decrease is a result of the increases in SG&A and R&D exceeding the growth in gross profit, as described above. INTEREST EXPENSE increased to $12.3 million in 1996, representing an increase of $5.4 million, or 78.4%, from $6.9 million in 1995. This increase reflects the higher level of borrowings resulting from the issuance of the $100 million of 11.375% Senior Subordinated Notes (the "Debt Offering") in January 1996, the higher interest rate on these notes and the $836,000 increase in non-cash amortization charges relating to the debt issuance costs associated with the Debt Offering. INCOME TAX EXPENSE (BENEFIT) was a benefit of $1.9 million in 1996, representing a change of $6.0 million from an expense of $4.1 million in 1995. The related effective income tax rate decreased to 6.2% in 1996 from 48.3% in 1995, primarily as a result of the $25.5 million of nondeductible expenses related to the amortization and write-off of goodwill and the write-off of purchased in-process research and development. EXTRAORDINARY LOSS, NET was $2.0 million in 1996 and there was no extraordinary loss in 1995. This extraordinary loss represents the write-off of debt issuance cost and related debt prepayment penalties, net of tax, resulting from the early extinguishment of the Company's debt as part of the recapitalization. (See the "Liquidity and Capital Resources" section.) COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31, 1994 NET SALES were $288.0 million in 1995, representing an increase of $39.8 million, or 16.1%, over net sales of $248.2 million in 1994. As the Company did not complete any acquisitions during 1994, this increase in net sales is due to sales growth at each of the Company's operating subsidiaries. In particular, the strong demand for Alvey's redesigned mid-range and high-speed palletizers and its success in providing integrated systems resulted in record shipments and sales and produced an increase of $17.1 million, or 19.3%, in net sales over 1994. At MFA, continued strong demand for warehouse management systems caused sales to grow by $11.9 million, or 42.6%, compared to 1994. Buschman also realized significant revenue gains from integrated and systems projects as sales of these systems increased $6.0 million, or 16.6%. On a consolidated basis, new order bookings were $318.9 million for 1995, representing an increase of $50.3 million, or 18.7%, over bookings for 1994. Increases in 1995 new order bookings were realized by each of the Company's operating subsidiaries other than White, with new order bookings at Alvey and Buschman increasing by $33.5 million and $9.5 million, or 36.4% and 13.7%, respectively. This significant increase in customer demand created a record year-end sales backlog of $143.9 million at December 31, 1995, which represents an increase of $29.4 million, or 25.7%, over the backlog at December 31, 1994. The most significant increases in year-end backlog were at Alvey, which recorded an increase of $20.2 million, or 46.3%, and Buschman, which recorded an increase of $8.6 million, or 31.1%. Alvey's backlog is driven by the increasing number and size of integrated and palletizing systems while Buschman's success has resulted from significant bookings increases in major warehouse systems. GROSS PROFIT was $70.7 million for 1995, an increase of $11.6 million, or 19.5%, over 1994. This increase was primarily the result of increased sales volume offset by a slightly less favorable mix of products resulting in additional margins of approximately $9.5 million. In addition, improved operating efficiencies at each manufacturing entity (other than White) offset somewhat by project cost overruns, produced additional margins of $1.7 million. The gross profit margin as a percent of sales increased to 24.6% for 1995 from 23.8% for 1994 due to operating efficiencies and the effects of re-engineering certain major products. These gains were partially offset by product and project overruns caused by over-committed manufacturing and engineering resources at Alvey and, to a lesser degree, at Busse, during portions of 1995. However, management believes the expansion of its facilities, the integration of the Company's systems and the productivity enhancement and engineering programs initiated in recent years have resulted in manufacturing efficiency and productivity gains. Specifically, the gross margin percentage at Buschman increased 6.7 percentage points in 1995 compared to 1994. This increase is primarily a result of the efficiency and productivity gains and targeted marketing programs attributable to the efforts of the new management team 21 that was put in place during the second and third quarters of 1994. Since the second half of 1994, "as sold" margins (the estimated gross margin on a specific project at the time the contract is executed) on new orders have improved, resulting in an increase in Buschman's gross profit of approximately $800,000 during 1995. More importantly, the standardization of Buschman's product line and manufacturing engineering programs have generated substantial changes in the manufacturing process and have resulted in significant improvements in labor efficiencies, product deliveries and inventory levels. These improvements increased gross profit in 1995 by approximately $2.5 million over 1994 results. Gross profit at White decreased 21.6% from 1994. This decrease is primarily attributable to an under-utilization of the manufacturing and engineering resources in the first half of 1995, and an over-utilization of the same resources during the last four months of 1995 as sales significantly increased. This significant deviation in the demand for these resources caused an under-absorption of overhead costs during the first half of 1995 and inefficiencies during the fourth quarter and resulted in various product and project cost overruns. In response to the difficulties encountered at White during 1995, the Company has hired or transferred three senior executives and realigned certain management functions at White to conform to policies and structures in place and proven to be successful at other operating companies of the Company. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $51.6 million for 1995, representing an increase of $8.2 million, or 19.0%, over 1994. This increase is primarily attributable to expenses associated with increased sales, the creation of two new marketing and sales support teams responsible for integrated systems and international sales and approximately $1.7 million of performance-based incentive compensation and profit sharing distributions. As a percentage of sales, selling, general and administrative expenses increased to 17.9% for 1995 from 17.5% for 1994. This increase reflects the cost of increased marketing staff to secure the record bookings and the higher levels of incentive compensation and profit sharing. RESEARCH AND DEVELOPMENT EXPENSES were $2.1 million for 1995, a decrease of $487,000, or 19.2%, compared to $2.5 million for 1994. Research and development expenses were higher for 1994 as compared to 1995 as a result of expenses incurred prior to the establishment of technological feasibility related to the development of a standard warehouse management software system at MFA. OTHER EXPENSE (INCOME), NET was income of $108,000 for 1995, representing a difference of $2.4 million, as compared to $2.3 million in expense in 1994. The difference is primarily attributable to the one-time payment of stay bonus to an executive at White during 1994 in connection with the acquisition of that entity. OPERATING INCOME increased to $15.4 million for 1995, representing an increase of $6.3 million, or 69.1%, as compared to $9.1 million for 1994. As a percentage of net sales, operating income increased to 5.4% for 1995 from 3.7% in 1994. This increase is due primarily to the increase in gross profit margin in 1995 and the payment of the one-time stay bonus in 1994 as described above. INTEREST EXPENSE increased to $6.9 million for 1995, representing an increase of $1.0 million or 16.5%, as compared to $5.9 million for 1994. This increase is due primarily to an increase in the base borrowing rate under the Company's credit facilities, interest incurred with respect to the 11.95% Notes which were issued in January 1995 and bank fees incurred in the first quarter of 1995 in connection with an amendment of the Company's credit facility. INCOME TAX EXPENSE (BENEFIT) was $4.1 million of expense for 1995, representing an increase of $2.6 million from $1.5 million of expense for 1994. The effective income tax rate of 48.3% in 1995 increased from an effective rate of 47.5% experienced in 1994 due to the absence of foreign tax credits in 1995, offset by somewhat lesser effects of (i) state income taxes, (ii) nondeductible goodwill amortization and (iii) certain nondeductible meals and entertainment expenses. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL. During the three years ended December 31, 1996, the Company generated approximately $42.1 million of cash from operations, which has been sufficient to fund the Company's 22 ongoing working capital, capital expenditures and debt service requirements. As the Company's business has expanded internally and through acquisitions during this period, increases in working capital requirements (primarily related to accounts receivable and inventory) were significantly offset by funds the Company received from its customers in the form of deposits and progress billings. CASH PROVIDED BY OPERATIONS. Cash flows from operations were $11.3 million, $18.9 million and $11.8 million for the years ended December 31, 1996, 1995 and 1994, respectively. LEWISTON OPERATION. In connection with the acquisition of Buschman in 1992, the Company made a decision to close Buschman's carousel manufacturing plant in Lewiston, Maine. In connection with the acquisition of White in December 1993, the Company was ordered by the Federal Trade Commission to hold Buschman's Lewiston operation separate and to find a suitable buyer for the business. In the course of pursuing a buyer and pursuant to the FTC order, the Company was required to fund the Lewiston operation and, as a result, has incurred expenditures of $588,000, $2.3 million and $2.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Lewiston operation was divested on July 31, 1995, at which time the Company agreed to assist in funding the operation through July 31, 1997. A third party currently operates the plant. As of December 31, 1996, the remaining expenditures to assist in the funding are expected to approximate an aggregate of $531,000. Upon its initial decision to close the Lewiston plant, the Company accrued losses of $1.4 million at December 31, 1992, net of applicable tax benefits, with respect to plant closure costs and the write-off of related assets, with an offsetting charge to goodwill. As a result of the Federal Trade Commission intervention, all subsequent losses, including those anticipated through ultimate disposal of the facility, were charged to earnings as an extraordinary loss, net of tax benefits, in 1993. CAPITAL EXPENDITURES. Capital expenditures, including capitalized software development costs, for the years ended December 31, 1996, 1995 and 1994 were approximately $11.6 million, $4.5 million and $5.1 million, respectively. These expenditures were used primarily to finance a new facility for Alvey (1995 and 1996), plant expansion at Busse (1995 and 1996), the acquisition of computer and powder paint equipment and the administrative restructuring at White (1994), plant expansion and reorganization at Buschman (1994), software development, computer systems and equipment at MFA (1994 and 1995) and normal recurring replacements of machinery and equipment. RESEARCH AND DEVELOPMENT COSTS. As described in Note 3 to the Company's Consolidated Financial Statements, approximately $11.7 million of the Weseley purchase price was allocated to purchased in-process research and development and charged to expense in the quarter ended March 31, 1996. The purchased research and development relates to the TRACS* Version 3.0 product of Weseley. Additionally, $1.0 million of the RTS purchase price was allocated to purchased in-process research and development and charged to expense in the quarter ended December 31, 1996. ACQUISITIONS AND DIVESTITURES. The Company expended $19.0 million of cash for the acquisitions of Weseley and RTS in 1996. These acquisitions were financed primarily with proceeds from the Debt Offering. The Company received $0.7 million of proceeds in 1994 from the sale of its closed facility in Cassville, Missouri. DEBT AND EQUITY INFUSIONS. On January 3, 1995, the Company issued $2.0 million principal amount of 11.95% Unsecured Subordinated Notes to certain shareholders of Pinnacle. The 11.95% Unsecured Subordinated Notes were repaid in January 1996 with a portion of the proceeds received in the Debt Offering discussed below. DEBT OFFERING AND RECAPITALIZATION OF PINNACLE. Concurrently with the Debt Offering in January 1996, the Company entered into a senior bank credit agreement with NationsBank, N.A. consisting of a $30 million revolving credit facility which matures in 2001 (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at a rate based upon, at Alvey's option, the Base Rate (as defined in the Revolving Credit Facility) plus 1.50% or the Euro-dollar Rate (as defined in the Revolving Credit Facility) plus 2.50%, with a step down in rates based upon achieving predefined earnings objectives. Borrowings under the Revolving Credit Facility are guaranteed by Pinnacle and subsidiaries of Alvey and 23 secured by substantially all of the assets of Alvey and its subsidiaries. At December 31, 1996, there were no borrowings outstanding under the Revolving Credit Facility. In the Debt Offering, Alvey issued $100 million of 11.375% Senior Subordinated Notes which are due in January 2003. In accordance with the terms of the Debt Offering, Alvey filed a registration statement with the Securities and Exchange Commission with respect to an offer to exchange the 11.375% Senior Subordinated Notes for a new issue of debt securities of Alvey registered under the Securities Act of 1933, as amended, with terms substantially identical to those of the 11.375% Senior Subordinated Notes. Such registration statement was declared effective on May 9, 1996 and the exchange of $100 million in principal amount of the original notes for $100 million in principal amount of registered notes was completed on June 11, 1996. Interest payments on such notes, which are payable semiannually, commenced in July 1996. Concurrent with the Debt Offering, Pinnacle sold $23 million of Pinnacle Series A Preferred Stock, $7.0 million of Pinnacle Series C Preferred Stock and approximately $11.3 million of Pinnacle Series B Preferred Stock, together with warrants to purchase up to 256,075 shares of Pinnacle Common Stock (the "Preferred Stock Offering"). Dividends on the Pinnacle Series A, B and C Preferred Stock are payable quarterly. While Alvey has not guaranteed nor is it contingently obligated with respect to any such series of Preferred Stock, Pinnacle has no financial resources, other than from Alvey and Alvey's operating subsidiaries, to satisfy cash requirements relative to these preferred shares. USE OF PROCEEDS. The Company applied the net proceeds of the Debt Offering in the following manner: (i) approximately $46.2 million was used to repay the Company's outstanding senior indebtedness; (ii) approximately $2.3 million was used to repay the Company's outstanding 11.95% subordinated debt; (iii) approximately $21.6 million was distributed as a dividend from Alvey to Pinnacle which, together with the net proceeds from the Pinnacle Preferred Stock Offering, was used by Pinnacle to fund, in part, the cash necessary to buy back certain shares of Pinnacle's outstanding common stock ($23.8 million) and to redeem certain shares of Pinnacle's outstanding preferred stock ($25.3 million); (iv) approximately $7.5 million was used to pay transaction costs; and (v) approximately $8.9 million was used for general corporate purposes (including capital expenditures) in 1996. Prepayment penalties of $371,000 were incurred in connection with the repayment of the subordinated debt. In addition, the Company used $15.0 million of the proceeds of the Debt Offering to consummate the Weseley acquisition in January 1996. ONGOING CASH FLOWS FROM OPERATIONS. Based on its ability to generate funds from operations, the Company believes that it will have sufficient funds available to meet its currently anticipated operating, debt service and capital expenditure requirements with minimal additional borrowings. In addition, the Company expects to continue to evaluate and consider business acquisition candidates, although no acquisitions are pending or contemplated. The Company believes that its funds from operations will be sufficient to meet its short-term capital requirements and that such funds, together with available funds under the Revolving Credit Facility, will be sufficient to meet its capital requirements for the forseeable future. The Company's belief regarding its capital requirements is forward-looking and involves risks and uncertainties that could significantly impact the Company's expected liquidity requirements in the short and long term. 24 BACKLOG. As of December 31, 1996, the Company had a backlog of $136.1 million, as compared to $143.9 million as of December 31, 1995. The Company's backlog is based upon firm customer commitments that are supported by purchase orders, other contractual documents and cash payments. While the level of backlog at any particular time may be an indication of future sales, it is not necessarily indicative of the future operating performance of the Company. Additionally, certain backlog orders may be subject to cancellation in certain circumstances. The Company believes that virtually all orders in backlog at December 31, 1996 will be converted to revenue within one year. SEASONALITY AND QUARTERLY RESULTS The price of certain of the Company's systems can exceed several million dollars, and therefore a relatively small number of orders can constitute a significant percentage of the Company's revenues in any one period. Similarly, a relatively small reduction in the number of large orders can have a material impact on the Company's revenues in any one quarter or year. The timing of shipments and product revenue recognition could affect the Company's operating results for a particular period. In addition, most of the Company's revenues come from fixed price contracts. To the extent that the original cost estimates prove to be inaccurate, profitability from a particular contract may be adversely affected. As a result, the Company's operating results can vary significantly from quarter to quarter, and the financial results for any particular quarter are not necessarily indicative of results in any subsequent quarter or fiscal year. EFFECT OF INFLATION Fluctuations in commodity prices may periodically affect the results of the Company's operations. However, inflation has not had a material effect on the Company's business or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements required in response to this item are included on pages F-1 through F-24 hereof. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning Alvey's directors and executive officers. YEARS IN NAME AGE INDUSTRY POSITION WITH ALVEY ---- --- -------- ------------------- William R. Michaels (1) 62 22 Chairman of the Board, Chief Executive Officer and Director Stephen J. O'Neill 55 26 President Michael J. Tilton 47 17 Senior Vice President and Secretary James A. Sharp 49 13 Senior Vice President, Chief Financial Officer, Assistant Treasurer and Assistant Secretary Frederick R. Ulrich, Jr. (1) 53 -- Director Prakash A. Melwani (1) 38 -- Director Daniel S. O'Connell (2) 43 -- Director Charles A. Dill (2) 57 -- Director 25 The following table sets forth certain information concerning certain executive officers and directors of Pinnacle and the Company. Each of Alvey and its seven subsidiaries are managed by Pinnacle.
YEARS IN NAME AGE INDUSTRY PRINCIPAL POSITION IN PINNACLE ORGANIZATION - ---- --- -------- ------------------------------------------- William R. Michaels (1) 62 22 Chairman of the Board, President, Chief Executive Officer and Director of Pinnacle Michael J. Tilton 47 17 Executive Vice President-Operations & Finance and Secretary of Pinnacle James A. Sharp 49 13 Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Pinnacle Christopher C. Cole 41 7 Executive Vice President of Pinnacle and Chief Executive Officer and Director of Buschman Ritch J. Durheim 49 25 Executive Vice President of Pinnacle and Chief Executive Officer and Director of MFA Stephen J. O'Neill 55 26 Executive Vice President of Pinnacle and President of Alvey Frederick R. Ulrich, Jr. (1) 53 -- Director of Alvey and Pinnacle Prakash A. Melwani (1) 38 -- Director of Alvey and Pinnacle Daniel S. O'Connell (2) 43 -- Director of Alvey and Pinnacle Charles A. Dill (2) 57 -- Director of Alvey and Pinnacle
- ------------------ (1) Member of the Compensation Committee. (2) Member of the Audit Committee. WILLIAM R. MICHAELS has served as Chairman of the Board, Chief Executive Officer and Director of Alvey since September 1988; as Chairman of the Board, President, Chief Executive Officer and Director of Pinnacle since September 1988; and as Chairman of the Board and Director of each of Alvey's subsidiaries. From 1984 to 1988, Mr. Michaels served as the President and Chief Executive Officer of Rapistan Corp., a manufacturer of distribution conveyor systems. Mr. Michaels is Vice Chairman of the Board of Governors of the Material Handling Institute of America, the materials handling industry's trade association. In addition to his Pinnacle duties, from July 1989 to January 1992 Mr. Michaels was the Chairman of the Board of Holophane Company, Inc., a Columbus, Ohio company in the lighting industry. Mr. Michaels continues as a director of Holophane. Mr. Michaels is a graduate of the State University of New York. STEPHEN J. O'NEILL has served as President of Alvey since November 1992, as Executive Vice President of Pinnacle since September 1988, as Vice President and Director of MFA since May 1989, as Director of Weseley since January 1996 and as Director of Busse since May 1996. Previously, Mr. O'Neill served as Senior Vice President of Alvey from September 1988 to November 1992. Prior to joining Alvey, Mr. O'Neill served as a Vice President of Rapistan Corp. from April 1986 to September 1988. Mr. O'Neill earned a B.S. degree in Electrical Engineering from Rose Polytechnic Institute. Mr. O'Neill currently serves on the board of directors of AAIM, a Quality Institute and Education Center in Missouri. MICHAEL J. TILTON has served as Senior Vice President and Secretary of Alvey and as Executive Vice President of Operations & Finance and Secretary of Pinnacle since April 1994 and as Vice President and Director of each of Alvey's subsidiaries. On an operating basis, Alvey and its subsidiaries historically have reported to Mr. Tilton in his position as Executive Vice President of Pinnacle. Previously, Mr. Tilton served as Senior Vice President and Chief Financial Officer from September 1988 to April 1994. Mr. Tilton served as a Vice President of Rapistan Corp. from 1985 to 1988. Mr. Tilton graduated from the University of Iowa with a B.B.A. degree in Finance and earned a M.B.A. degree from Drake University. 26 JAMES A. SHARP has served as Vice President, Chief Financial Officer, Assistant Treasurer and Assistant Secretary of Alvey since April 1994; as Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of Pinnacle since April 1994; and as Chief Financial Officer of each of Alvey's subsidiaries. Previously, Mr. Sharp held various accounting and financial positions with Pinnacle and its subsidiaries, including Controller and Treasurer of Alvey, since 1983. Mr. Sharp graduated from Southern Illinois University with a B.S. degree in Accounting and is a Certified Public Accountant in the state of Missouri. FREDERICK R. ULRICH, JR. has been a Director of Alvey and Pinnacle since August 1988. Mr. Ulrich has served as Chief Executive Officer of Buttonwood Capital, Inc. since 1992 and as Chief Executive Officer of Mammoth Capital, Inc. since 1996. Previously, Mr. Ulrich served as Chairman of the Board and Chief Executive Officer of Raebarn Corporation from 1988 to 1995. Mr. Ulrich is a director of Paul Sebastian, Incorporated and RC Distribution, Inc. Mr. Ulrich is a graduate of the United States Military Academy and holds a M.B.A. degree from Harvard University. PRAKASH A. MELWANI has served as a director of Alvey and Pinnacle since January 1996. He is a Managing Director of Vestar Capital Partners ("Vestar"), an affiliate of which is a significant stockholder of Pinnacle and with whom Mr. Melwani has been associated since its founding in 1988. Mr. Melwani is a director of Argo-Tech Corporation and International AirParts Corporation. Mr. Melwani graduated from Cambridge University with a B.A. degree and received a M.B.A. degree from Harvard University. DANIEL S. O'CONNELL has served as a director of Alvey and Pinnacle since January 1996. Mr. O'Connell has served as the Chief Executive Officer of Vestar since its founding in 1988. Mr. O'Connell also serves as a Director of Aearo Corporation, Anvil Knitwear, Inc., Clark-Schwebel, Inc., Prestone Products Corporation, Remington Products Corporation, L.L.C., and Russell-Stanley Corporation. Mr. O'Connell graduated from Brown University with an A.B. degree and Yale University School of Management with an M.P.P.M. degree. CHARLES A. DILL became a director of Alvey and Pinnacle on February 28, 1996. Mr. Dill is currently a General Partner in Gateway Associates, L.P., a leading St. Louis-based equity management partnership. Previously, from April 1991 through April 1995, Mr. Dill was President and, from October 1992 through April 1995, Chief Executive Officer of Bridge Information Systems, Inc. (a leading provider of on-line financial information and databases to institutional securities markets). From February 1988 to September 1990, he was President and a Director of AVX Corporation (a ceramic electronic devices manufacturer). Mr. Dill serves as a director of Stifel Financial, a securities brokerage and investment banking firm, of Zoltec, a specialty producer of carbon fiber composite materials, of Transact Technologies, a manufacturer of transaction-based printers for point-of-sale terminals and of Kennedy Capital Management, a private money manager. Mr. Dill graduated from Yale University with a B.S. degree in mechanical engineering and received a M.B.A. degree from Harvard University. CHRISTOPHER C. COLE has served as Chief Executive Officer and Executive Vice President of Buschman since March 1994, as Director of Buschman since February 1996, as Executive Vice President and Director of White since October 1996, as Executive Vice President of Pinnacle since 1994 and as Chief Executive Officer and Director of RTS since its acquisition. Previously, Mr. Cole served as President of Buschman from March 1994 to January 1997. Prior to joining Buschman, Mr. Cole served in a variety of executive positions at Cincinnati Milacron, Inc. since 1979 and was Vice President since 1987. Mr. Cole graduated from Wesleyan University with a B.A. degree and received a M.B.A. degree from Harvard University. Mr. Cole has served on the board of directors of the Cincinnati chapter of the American Red Cross since 1989 and is currently a member of the executive committee of such board. RITCH J. DURHEIM has served as Chief Executive Officer of MFA since May 1995, as Director of MFA since May 1989, as Executive Vice President of Pinnacle since May 1995 and as Senior Vice President and Director of Weseley since January 1996. Previously, Mr. Durheim served as President of MFA from May 27 1995 to December 1996. From April 1994 to May 1995 Mr. Durheim served as President and Chief Operating Officer of MFA. Prior to 1994, Mr. Durheim held various positions with MFA since 1977. Mr. Durheim graduated from Marquette University with a B.S. degree. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth, for the years ended December 31, 1996 and 1995, the earned compensation of the Chief Executive Officer and the next four highly compensated executive officers of Alvey (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE ------------------------------------------------------------------------ ANNUAL COMPENSATION ---------------------------------------------------- COMPENSATION AWARDS - STOCK OTHER ANNUAL OPTIONS (# OF NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (A) COMPENSATION (B) SHARES) (C) - -------------------------------------------------------------------------------------------------------------------------------- WILLIAM R. MICHAELS Chairman and Chief Executive Officer of Pinnacle 1996 $317,650 $ - $ - - and Alvey 1995 302,500 301,200 - - RITCH J. DURHEIM Chief Executive Officer of MFA 1996 194,500 202,353 - 15,000 1995 173,750 185,905 - - STEPHEN J. O'NEILL President of Alvey 1996 210,000 100,000 - - 1995 191,750 187,040 - - CHRISTOPHER C. COLE Chief Executive Officer of Buschman 1996 194,250 112,000 - - 1995 185,000 216,800 - - MICHAEL J. TILTON Executive Vice President of Pinnacle and 1996 210,000 - - - Senior Vice President and Secretary of Alvey 1995 191,750 205,500 - - - ------------------
(a) Reflects amount earned in 1996 and 1995, respectively, of which amount portions have been paid in 1997 and 1996, respectively. (b) Perquisites or other personal benefits which in the aggregate were less than the lesser of $50,000 and 10% of an officer's annual salary and bonus in 1996 and 1995, respectively, have been omitted. (c) The figures set forth in this column represent the number of options granted in 1996 and 1995, respectively, to purchase the Common Stock of the Company's parent, Pinnacle. PENSION PLAN The Company maintains 401(k) savings plans for virtually all employees who meet certain eligibility requirements, except certain union employees who participate in multi-employer pension plans. Under the plans, the employees may defer receipt of a portion of their eligible compensation, with the Company matching a defined percentage of the employees' deferral. The Company's matching contributions were $701,000, $614,000 and $429,000 for the years ended 1996, 1995 and 1994, respectively. The Company 28 may also elect to make discretionary profit sharing contributions for virtually all employees, except those union employees who participate in multi-employer pension plans. EMPLOYMENT AGREEMENTS On May 31, 1995, Alvey, Pinnacle and William R. Michaels entered into an amended and restated employment agreement pursuant to which Mr. Michaels will serve as Chairman of the Board and Chief Executive Officer of Alvey and Chairman of the Board, President and Chief Executive Officer of Pinnacle at a base annual salary of $302,500. Mr. Michaels' base salary will be reviewed annually to consider an upward adjustment for each subsequent year during the term of the agreement. The agreement entitles Mr. Michaels to an automobile, club membership, an annual bonus, disability and health insurance and to other benefit plans provided by Alvey and Pinnacle to their employees. The agreement also provides for deferred compensation, whereby following termination of Mr. Michaels' employment with Pinnacle and Alvey because of death, disability or retirement or upon Mr. Michaels having attained age 65, or for any other reason excluding voluntary resignation to accept a comparable position before Mr. Michaels attains age 65, Pinnacle and Alvey will pay to Mr. Michaels, for at least 10 years and during the remainder of his life, an annual amount calculated by (a) dividing Mr. Michaels' total compensation from Alvey and Pinnacle over the thirty-six (36) month period prior to the termination of his employment by three and (b) multiplying the result by twenty percent (20%) plus an additional two percent (2%) for each year between September 1988 (the date of the original employment agreement) and the termination of his employment. In addition, the agreement requires Pinnacle and Alvey to provide to Mr. Michaels a $3,000,000 life insurance policy for the remainder of his lifetime, unless he voluntarily terminates his employment with Pinnacle and Alvey to accept a comparable position, at which time Pinnacle and Alvey's obligation to pay premiums will cease. On May 10, 1989, MFA entered into an employment agreement with Ritch Durheim. Pursuant to the agreement, Mr. Durheim serves as President and, subsequently, Chief Executive Officer of MFA for an annual base salary of $172,250. The base salary will be reviewed annually to consider an upward adjustment for each subsequent year. The agreement entitles Mr. Durheim to an automobile allowance, club membership, an annual bonus, life, disability and health insurance and to other benefit plans provided by MFA to its other employees. The agreement contains a non-disclosure and non-competition provision which is effective for the term of Mr. Durheim's employment with MFA. On June 27, 1995, Alvey and Pinnacle entered into an amended and restated employment agreement with Michael J. Tilton and Alvey entered into an amended and restated employment agreement with Stephen J. O'Neill. Pursuant to the agreements, Mr. Tilton will continue to serve as Senior Vice President and Secretary of Alvey and Executive Vice President - Operations and Finance of Pinnacle at a base salary of $191,750 and Mr. O'Neill will continue to serve as President of Alvey at a base salary of $191,750. The base salaries of each will be reviewed annually to consider an upward adjustment for each subsequent year. Each of the agreements entitles Messrs. Tilton and O'Neill to an automobile, club membership, an annual bonus, life, disability and health insurance and to other benefit plans provided by Alvey and Pinnacle to their other employees. In addition, Pinnacle and Alvey are obliged to provide a $1,000,000 life insurance policy for each of Messrs. Tilton and O'Neill for the remainder of their lifetimes, unless they voluntarily terminate their employment with Alvey and Pinnacle to accept a comparable position, at which time Alvey and Pinnacle's obligation to pay such premiums will cease. On March 9, 1994, Buschman entered into an employment agreement with Christopher C. Cole, pursuant to which Mr. Cole agreed to serve as President and Chief Executive Officer of Buschman and Executive Vice President of Pinnacle at a base annual salary of $175,000. Mr. Cole's base salary will be reviewed annually to consider an upward adjustment for each subsequent year during the term of the agreement. The agreement entitles Mr. Cole to an automobile, club membership, an annual bonus, life, disability and health insurance, reimbursement of legal and accounting services and to other benefit plans provided by Buschman to its other employees. The agreement with Mr. Cole contains a non-disclosure and non-competition provision which is effective for the term of his employment with Buschman. Upon execution 29 of the agreement, Mr. Cole was granted an option to purchase 18,700 shares of Pinnacle Common Stock at an exercise price of $31.28 per share. BOARD OF DIRECTORS COMMITTEES AND COMPENSATION Alvey and Pinnacle each have a Compensation Committee and an Audit Committee. During 1996, Alvey and Pinnacle paid to non-employee directors, except directors elected or nominated by certain significant investors in Pinnacle, an annual fee of $25,000, and reimbursed each of its directors for their out-of-pocket expenses incurred in connection with serving as a director. Directors who are employed by Pinnacle or the Company do not receive a fee for serving as directors. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pinnacle owns 100% of the outstanding capital stock of Alvey. The following table sets forth certain information regarding the beneficial ownership of Pinnacle Common Stock as of March 25, 1997 (i) by each person who is known by the Company to own beneficially more than 5% of Pinnacle Common Stock, (ii) by each of the directors of Alvey and Pinnacle, (iii) by each Named Executive Officer and (iv) by all directors and executive officers as a group.
PINNACLE COMMON STOCK FULLY-DILUTED NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) SHARES OWNED PERCENTAGE (3) PERCENTAGE (4) - ------------------------------------------ ------------ ------------- -------------- EXECUTIVE OFFICERS AND DIRECTORS Prakash A. Melwani (5)(6).................. 179,252 27.0% 22.4% Daniel S. O'Connell (5)(6)................. 179,252 27.0 22.4 William R. Michaels (7).................... 72,187 14.8 9.0 Frederick R. Ulrich, Jr. (8)............... 27,517 5.7 3.4 Charles A. Dill............................ 0 0 0 Christopher C. Cole (9).................... 20,000 4.0 2.5 Ritch J. Durheim (10)...................... 5,407 1.1 0.7 Stephen J. O'Neill (11).................... 48,902 10.1 6.1 Michael J. Tilton (12)..................... 47,170 9.7 5.9 OTHER BENEFICIAL OWNERS Vestar Equity Partners, L.P. (6)(13)....... 179,252 27.0 22.4 Chase Equity Associates, A California Limited Partnership (13)(14).............. 57,617 10.6 7.2 Mark R. Allison (15)....................... 33,678 6.9 4.2 All Executive Officers and Directors as a Group (10 Persons)...................... 407,795(16) 57.8 51.0
_________________ (1) Unless otherwise noted, the address of each of the foregoing is c/o Pinnacle at 101 S. Hanley, Suite 1300, St. Louis, Missouri 63105. (2) Unless otherwise noted, sole voting and dispositive power are possessed with respect to all shares shown. (3) The percentages under the heading "Percentages" are based upon 485,516 shares of Pinnacle Common Stock outstanding and takes into account all derivative securities held by such Beneficial Owner that are exercisable for shares of Pinnacle Common Stock within 60 days. (4) The percentages under the heading "Fully-Diluted Percentages" are based upon 798,853 shares of Pinnacle Common Stock outstanding, which gives effect to the exercise of outstanding (i) options exercisable within 60 days to purchase 42,446 shares of Pinnacle Common Stock and (ii) warrants exercisable within 60 days to purchase 270,891 shares of Pinnacle Common Stock. (5) Includes 179,252 shares issuable upon exercise of warrants held by Vestar Equity Partners, L.P., as to which Messrs. Melwani and O'Connell disclaim beneficial ownership. (6) Address is c/o Vestar Capital Partners, 245 Park Avenue, 41st Floor, New York, New York 10167-4098. (7) Includes 601 shares of Pinnacle Common Stock issuable upon exercise of outstanding warrants. (8) Includes 401 shares of Pinnacle Common Stock issuable upon exercise of outstanding warrants. Includes the following number of shares held by or in trust for Mr. Ulrich's children: 505 shares of Pinnacle Common Stock; 705 shares of Pinnacle Common Stock held by the Lauren T. Ulrich Trust '89; 706 shares of Pinnacle Common Stock held by the Farrell Ulrich Trust '89; 700 shares of Pinnacle Common Stock held by the Frederick Ulrich III Trust '92; and 505 shares of Pinnacle Common Stock held by Amy C. Ulrich. (9) Includes 18,700 shares of Pinnacle Common Stock issuable upon exercise of outstanding options. (10) Includes 235 shares of Pinnacle Common Stock issuable upon exercise of outstanding warrants. (11) Includes 902 shares of Pinnacle Common Stock issuable upon exercise of outstanding warrants. (12) Includes 2,800 shares held by the Julie C. Tilton Trust and 2,800 shares held by the Tracy L. Tilton Trust. (13) All of such shares are issuable upon exercise of warrants. (14) c/o Chase Venture Partners, 270 Park Avenue, New York, New York 10017. (15) Includes 501 shares of Pinnacle Common Stock issuable upon exercise of outstanding warrants. (16) The 179,252 shares of Pinnacle Common Stock issuable upon exercise of warrants held by Vestar Equity Partners, L.P., as to which Messrs. Melwani and O'Connell disclaim beneficial ownership, are counted once in this total. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS In connection with the 1988 acquisition of Alvey by Pinnacle (the "1988 Acquisition"), entities affiliated with Acadia (the "Acadia Stockholders"), individuals affiliated with Raebarn Corporation (the "Raebarn Stockholders"), certain management stockholders and Pinnacle entered into a Stock Purchase and Stockholders Agreement which has been amended and restated several times through the date hereof (the "Initial Stockholders Agreement"). In January 1996, the Initial Stockholder Agreement was amended and restated again pursuant to the Amended and Restated Stockholders Agreement by and among Pinnacle, the Management Stockholders (as defined therein), the Raebarn Stockholders (as defined therein) and the Investors (the "Amended and Restated Stockholders Agreement"). The following is a summary of the Amended and Restated Stockholders Agreement (certain terms used herein are defined therein): VESTING OF MANAGEMENT STOCKHOLDER SHARES. Shares of Pinnacle Common Stock issued to Management Stockholders (as defined in the Amended and Restated Stockholders Agreement) vest in equal installments over a period generally ranging between three and five years (depending on the terms set by the Board of Directors at the time of issuance). Any shares of Pinnacle Common Stock held by a Management Stockholder that are unvested at the time of death, permanent disability, resignation or termination (for whatever reason) of such Management Stockholder will remain unvested and will not vest; provided, however, that in the event of the death or permanent disability of the holder, 50% of the shares which are unvested at that time will become vested. In addition, all unvested shares will become vested upon the acquisition of all of the outstanding shares of Pinnacle by any third party or upon the sale of all of the assets of Pinnacle. REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES. In the event of the termination of any Management Stockholder's employment with Pinnacle, whether by reason of death, permanent disability, termination for cause or without cause, retirement or for any other reason, Pinnacle will have the right to repurchase all or any portion of the unvested shares. To the extent that Pinnacle elects not to repurchase all of 30 the unvested shares held by a terminated Management Stockholder, the other stockholders will have the right to purchase the remaining shares on a PRO RATA basis. RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL. Unvested shares may not be transferred under any circumstances. With respect to vested shares, Pinnacle and, to the extent that Pinnacle fails to exercise its first refusal right in full, the other Management Stockholders and Raebarn Stockholders, have a right of first refusal if any Management Stockholder or Raebarn Stockholder receives a bona fide offer from an independent unrelated third party that such stockholder wishes to accept. Despite the general restrictions on transfers by Management Stockholders and Raebarn Stockholders, transfers to affiliates, officers, directors, certain family members or family trusts and pledges of the shares to a bank as security for a loan used to buy the shares are expressly permitted. TAG-ALONG RIGHTS. The Amended and Restated Stockholders Agreement provides that stockholders have a right to "tag along" upon the sale of Pinnacle Common Stock or Pinnacle Warrants by any stockholder or holder of Pinnacle Warrants prior to an initial public offering by Pinnacle and provides the stockholders with "tag-along" rights with respect to a sale of a significant amount of Pinnacle Common Stock or Pinnacle Warrants after an initial public offering by Pinnacle. In addition, in the event any such sales would result in a change of control of Pinnacle, the holders of the Pinnacle Investor Preferred Stock and the Pinnacle Series B Preferred Stock have the right to cause any such stock which is not redeemed by Pinnacle in accordance with its terms to be purchased by the purchaser of such Pinnacle Common Stock or Pinnacle Warrants. PRIORITY SUBSCRIPTION RIGHTS. If Pinnacle decides to effect a private placement of shares of Pinnacle Common Stock or securities convertible into Pinnacle Common Stock for less than Fair Market Value (as defined in the Amended and Restated Stockholders Agreement) at any time prior to its initial public offering, the stockholders will have a right, subject to certain exceptions including the issuance of financing warrants to institutional lenders), to purchase their respective pro rata portions of the shares to be sold by Pinnacle. VOTING AGREEMENT. The Amended and Restated Stockholders Agreement provides that the Board of Directors of Pinnacle shall initially consist of seven members, subject to increase or decrease upon certain specified events. The stockholders are required to vote their shares to elect specified nominees to the Board of Directors. On and after the eighth anniversary of the date of issuance of the Pinnacle Investor Preferred Stock and Pinnacle Warrants, if any shares of Pinnacle Series A Preferred Stock and any Pinnacle Warrants are outstanding, the number of directors of Pinnacle shall be increased by the Control Number (as defined below), with such additional directors to be nominated by the holders of the Pinnacle Warrants. In addition, if such directors are required to be elected, from and after such date, each stockholder party to the Amended and Restated Stockholders Agreement has agreed to (i) vote all shares held by such stockholder to ratify, approve and adopt all actions adopted or approved by the Board of Directors of Pinnacle and (ii) subject to certain conditions, be "dragged along" in the event that the holders of the Pinnacle Warrants desire to accept a third party offer for all of the outstanding shares of Pinnacle Common Stock. REGISTRATION RIGHTS. Management Stockholders shall be entitled to a single "demand" and certain "piggyback" registration rights, subject to customary conditions. TERMINATION AGREEMENT WITH LAFARICK Alvey, Pinnacle and Raebarn terminated a consulting agreement with Raebarn Corporation or a predecessor entity ("Raebarn"), each of which is or was beneficially owned by Mr. Ulrich and a former director of Pinnacle, in its entirety in January 1996. In connection with such termination, Pinnacle and Alvey agreed to make termination payments to Raebarn or its designees in the amount of $250,000 per year through January 2004. In April 1995, Raebarn changed its name to Lafarick, Inc. Pinnacle and Alvey expensed the 31 payments of $2.0 million ($1.2 million net of tax), less $555,000 already accrued at December 31, 1995, in the first quarter of 1996. CONSULTING AGREEMENT WITH MAMMOTH CAPITAL INC. On December 31, 1995, Pinnacle and Alvey entered into a consulting agreement with Mammoth Capital Inc., a corporation owned by Mr. Ulrich, pursuant to which Pinnacle and Alvey agreed to pay an annual fee of $200,000, subject to an annual increase at a rate of 3%, in addition to the reimbursement for its out-of-pocket expenses (the "Mammoth Agreement"). The Mammoth Agreement also provides for the payment of a transaction fee in the amount of 1% of the aggregate consideration paid or received in connection with specified merger and acquisition transactions (the "M&A Fee") and 1/2 of 1% of the gross proceeds received in connection with financing transactions involving the public or private offering of debt or equity securities of Pinnacle and Alvey or the incurrence of bank debt, other than financing transactions solely involving amendments, modifications or extensions of the Credit Agreement or the Notes (the "Financing Fee"); provided, however, that the Financing Fee shall not exceed $250,000. Pinnacle and Alvey are not obliged to pay duplicate M&A Fees and Financing Fees in connection with any single transaction or series of related transactions. The Mammoth Agreement will terminate on the earlier to occur of (i) January 24, 2004, (ii) the sale of all or substantially all of the capital stock or assets of either Pinnacle or Alvey or (iii) the death or retirement of Mr. Ulrich. In addition, the Mammoth Agreement will be terminable by Pinnacle and Alvey in the event that Mr. Ulrich fails, or is otherwise unwilling, to perform the services required by such agreement in a manner reasonably acceptable to Pinnacle and Alvey and consistent with past practices. CONSULTING AGREEMENT WITH VESTAR On January 24, 1996, Pinnacle and Alvey entered into a consulting agreement with Vestar Capital Partners ("Vestar Capital"), an affiliate of Vestar, pursuant to which Pinnacle and Alvey agreed to pay an annual fee of $150,000 to Vestar Capital (the "Vestar Agreement"). The Vestar Agreement terminates on the earlier to occur of (i) the completion of an initial public offering by Pinnacle of the Pinnacle Common Stock, (ii) the occurrence of a change of control (as defined) or (iii) the date on which the Investors or certain specified transferees cease to meet a certain minimum investment level. In addition, upon consummation of the Pinnacle Preferred Stock and Warrants Offering, Pinnacle paid to Vestar Capital a one-time fee of $750,000 and reimbursed the Investors for all reasonable out-of-pocket costs and expenses (including reasonable attorneys' fees and related expenses) incurred by the Investors in connection with the Pinnacle Preferred Stock and Warrants Offering. LEASE OF WHITE FACILITIES The Company leases the manufacturing facility used by White in Kenilworth, New Jersey from a partnership controlled by Donald J. Weiss, formerly a director of Pinnacle and Alvey. Pursuant to the terms of the lease, the Company paid rent in the amount of $900,000 in 1996. The term of the lease extends through December 2006. The Company believes that the terms of the lease are substantially similar to terms that would have been obtained from a third party in an arms'-length negotiation. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT ON FORM 10-K 1. FINANCIAL STATEMENTS. The consolidated financial statements identified on the index to consolidated financial statements and schedules on page F-1 hereof are filed as part of this Annual Report on Form 10-K. 2. FINANCIAL STATEMENT SCHEDULES. Rule 12-09 Valuation and Qualifying Accounts and Reserves of Registrant. See the Report of Independent Accountants on Financial Statement Schedules. All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. 3. EXHIBITS. The following are filed as exhibits to this Annual Report on Form 10-K: Exhibit Number Description - ------- ----------- *3.1 Certificate of Incorporation of Alvey Systems, Inc. *3.2 Bylaws of Alvey Systems, Inc. *10.1 Recapitalization Agreement, dated as of September 28, 1995, by and among Pinnacle Automation, Inc., Alvey Systems, Inc. and the Selling Stockholders listed on Schedule A thereto *10.2 Equity Purchase and Sale Agreement, dated as of December 13, 1995, by and among Pinnacle Automation, Inc., Alvey Systems, Inc., James M. Schloeman and each of the other persons or entities listed on Schedule A thereto *10.3 Equity Purchase and Sale Agreement, dated as of January 24, 1996, by and among Pinnacle Automation, Inc., Alvey Systems, Inc. and Atlantic Equity Corporation *10.4 Amended and Restated Stockholders Agreement, dated as of January 11, 1996, by and among Pinnacle Automation, Inc., each of the Management Stockholders (as defined therein), the Raebarn Stockholders (as defined therein), the Series C Holders (as defined therein) and the Warrantholders (as defined therein) *10.5 Consulting Agreement, dated as of December 31, 1995, by and among Pinnacle Automation, Inc., Alvey Systems, Inc. and Mammoth Capital Inc. *10.6 Termination Agreement, dated as of December 31, 1995, by and among Pinnacle Automation, Inc., Alvey Systems, Inc., and Lafarick, Inc. *10.7 Investment Agreement, dated as of December 12, 1995, by and among Pinnacle Automation, Inc., Vestar Equity Partners, L.P., Chemical Equity Associates and Hancock Venture Partners IV--Direct Fund, L.P., as amended *10.8 Registration Rights Agreement, dated as of January 24, 1996, by and among Pinnacle Automation, Inc., Vestar Equity Partners, L.P., Chemical Equity Associates, Hancock Venture Partners IV--Direct Fund, L.P., and the other persons listed on the schedules thereto *10.9 Consulting Agreement, dated as of January 24, 1996, by and among Pinnacle Automation, Inc., Alvey Systems, Inc. and Vestar Capital Partners *10.10 Purchase Agreement, dated January 19, 1996, by and among Alvey Systems, Inc., Pinnacle Automation, Inc. and NationsBanc Capital Markets, Inc. *10.11 Indenture, dated as of January 24, 1996, by and between Alvey Systems, Inc. and The Bank of New York 33 Exhibit Number Description - ------- ----------- *10.12 Registration Rights Agreement, dated as of January 24, 1996 by and among Alvey Systems, Inc., Pinnacle Automation, Inc. and NationsBanc Capital Markets, Inc. *10.13 Credit Agreement, dated as of January 24, 1996, among Alvey Systems, Inc., the lenders named therein and NationsBank N.A. 10.14 Amendment No. 1 dated May 15, 1996 to the Credit Agreement, dated as of January 24, 1996, among Alvey Systems, Inc., the lenders named therein and NationsBank N.A. 10.15 Amendment No. 2 dated March 14, 1997 to the Credit Agreement, dated as of January 24, 1996, among Alvey Systems, Inc., the lenders named therein and NationsBank N.A. *10.16 Pledge and Security Agreement, dated as of January 24, 1996, by Alvey Systems, Inc., as pledgor, in favor of NationsBank, N.A. *10.17 Pledge and Security Agreement, dated as of January 24, 1996, by Pinnacle Automation, Inc., as pledgor, in favor of NationsBank, N.A. *10.18 Security Agreement, dated as of January 24, 1996, by Alvey Systems, Inc., and its subsidiaries, in favor of NationsBank, N.A. *10.19 Non-Competition, Working Capital Guarantee and Security Agreement, dated April 15, 1992, by and among the Company, Busse Bros, Inc., Eugene H. Busse and First Wisconsin Trust Company *10.20 Non-Competition, Working Capital Guarantee and Security Agreement, dated April 15, 1992, by and among the Company, Busse Bros, Inc., Sheldon C. Busse and First Wisconsin Trust Company *10.21 Non-Competition, Working Capital Guarantee and Security Agreement, dated April 15, 1992, by and among the Company, Busse Bros, Inc., Lois B. Biel and First Wisconsin Trust Company *10.22 Stock Purchase Agreement by and among Pinnacle Automation, Inc., Alvey Systems, Inc., McHugh, Freeman & Associates, Inc., Weseley Software Development Corp. and the other signatories thereto, dated December 20, 1995 as amended by Amendment No. 1 thereto dated January 29, 1996. 10.23 Stock Purchase Agreement dated as of December 16, 1996 by and between Alvey Systems, Inc. and UNR Industries, Inc. *10.24 Asset Purchase Agreement dated as of May 9, 1995 by and among Pinnacle Automation, Inc., Alvey Systems, Inc., The Buschman Company, Diamond Machine Co. and IMH of Lynchburg, Inc. *10.25 Lease Agreement, dated December 31, 1986, by and among Boright Realty and White Storage & Retrieval Systems, Inc. *10.26 Amended and Restated Employment Agreement, dated May 31, 1995, by and among Pinnacle Automation, Inc. and William R. Michaels *10.27 Amended and Restated Employment Agreement, dated June 27, 1995, by and among Pinnacle Automation, Inc. and Michael J. Tilton *10.28 Amended and Restated Employment Agreement, dated June 27, 1995, by and among Pinnacle Automation, Inc. and Stephen J. O'Neill *10.29 Employment Agreement, dated March 9, 1994, by and among The Buschman Company and Christopher C. Cole *10.30 Employment Agreement, dated December 14, 1993, by and among White Storage & Retrieval Systems, Inc. and Donald J. Weiss 21 List of Subsidiaries 27 Financial Data Schedule - ----------------- * Filed as an exhibit to the Company's Registration Statement on Form S-4 (No. 333-2600) and incorporated herein by reference. 34 (b) REPORTS ON FORM 8-K. The Company did not file any Reports on Form 8-K during 1996. (c) Refer to (a)(3) above. (d) Refer to (a)(2) above. 35 INDEX TO ALVEY SYSTEMS, INC. CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Accountants F-2 Consolidated Balance Sheet as of December 31, 1996 and 1995 F-3 Consolidated Statement of Operations for the fiscal years ended December 31, 1996, 1995 and 1994 F-4 Consolidated Statement of Cash Flows for the fiscal years ended December 31, 1996, 1995 and 1994 F-5 Consolidated Statement of Net Investment of Parent for the fiscal years ended December 31, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements F-8 F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholder and Board of Directors of Alvey Systems, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of net investment of parent present fairly, in all material respects, the financial position of Alvey Systems, Inc. and its subsidiaries at December 31, 1996 and 1995 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP St. Louis, Missouri February 7, 1997, except for Note 7 which is as of March 19, 1997 F-2 ALVEY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 31, ---------------------------- 1996 1995 ------------ ------------ ASSETS: Current assets: Cash and cash equivalents $ 5,025 $ 3,405 Receivables: Trade (less allowance for doubtful accounts of $1,206 and $824, respectively) 53,189 42,567 Unbilled and other 7,909 6,211 Accumulated costs and earnings in excess of billings ($47,194 and $54,279, respectively) on uncompleted contracts 15,647 8,317 Inventories: Raw materials 14,634 13,966 Work in process 3,909 5,720 Deferred income taxes 8,509 4,699 Prepaid expenses and other assets 3,189 1,665 ---------- ---------- Total current assets 112,011 86,550 Property, plant and equipment, net 34,367 25,675 Other assets 8,963 6,031 Goodwill (net of amortization of $4,946 and $3,613 respectively) 26,510 32,029 ---------- ---------- $ 181,851 $ 150,285 ---------- ---------- ---------- ---------- LIABILITIES, REEDEEMABLE PREFERRED STOCK, AND NET INVESTMENT OF PARENT: Current liabilities: Current portion of long-term debt $ 280 $ 6,915 Accounts payable 34,405 24,368 Accrued expenses 40,377 27,764 Customer deposits 11,232 12,107 Billings in excess of accumulated costs and earnings ($91,902 and $21,233, respectively) on uncompleted contracts 20,426 13,904 Deferred revenues 4,379 899 Taxes payable 308 994 ---------- ---------- Total current liabilities 111,407 86,951 Long-term debt 100,493 42,460 Other long-term liabilities 9,125 5,075 Deferred income taxes 1,955 4,196 Commitments and contingencies (Notes 3, 4 and 12) Redeemable preferred stock: Redeemable preferred stock of $.01 par value per share, authorized 500,000 shares: Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc., 0 and 250,000 shares designated, 0 and 210,770 shares issued, 0 and 210,697 shares outstanding, respectively 21,077 Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc., 0 and 100,000 shares designated, 0 and 62,524 shares issued and outstanding, respectively 6,252 Preferred stock in treasury, 0 and 73 shares of Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc. (7) ---------- ---------- Total redeemable preferred stock 0 27,322 ---------- ---------- Net investment of Parent (41,129) (15,719) ---------- ---------- $ 181,851 $ 150,285 ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 ALVEY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- Net sales $ 331,247 $ 288,018 $ 248,177 Cost of goods sold 256,218 217,297 189,007 ---------- ---------- ---------- Gross profit 75,029 70,721 59,170 Selling, general and administrative expenses 61,471 51,630 43,402 Write-off of purchased in-process research and development costs 12,700 Research and development expenses 4,797 2,051 2,538 Write-off of goodwill 11,491 Amortization expense 1,703 1,737 1,836 Other expense (income), net 1,378 (108) 2,279 ---------- ---------- ---------- Operating income (loss) (18,511) 15,411 9,115 Interest expense 12,301 6,896 5,921 ---------- ---------- ---------- Income (loss) before income taxes and extraordinary loss (30,812) 8,515 3,194 Income tax expense (benefit) (1,909) 4,109 1,516 ---------- ---------- ---------- Income (loss) before extraordinary loss (28,903) 4,406 1,678 Extraordinary loss, net of income tax benefit of $1,328 (Note 7) 1,993 ---------- ---------- ---------- Net income (loss) $ (30,896) $ 4,406 $ 1,678 ---------- ---------- ---------- ---------- ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 ALVEY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ------------ ---------- ---------- OPERATING ACTIVITIES: Net income (loss) $ (30,896) $ 4,406 $ 1,678 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 4,259 2,952 2,752 Amortization 1,703 1,737 1,836 Other (173) Write-off of purchased in-process research and development costs 12,700 Write-off of goodwill 11,491 Deferred taxes, net of effect of acquisitions (2,616) 2,660 571 Write-off of unamortized debt issue costs included in extraordinary loss 2,963 (Increase) decrease in current assets, excluding effect of acquisitions: Receivables (10,745) (5,979) (6,483) Accumulated costs and earnings in excess of billings on uncompleted contracts (7,330) (1,732) (1,070) Inventories 2,146 (5,636) 1,134 Other assets (384) (259) 1,409 (Decrease) increase in current liabilities, excluding effect of acquisitions: Accounts payable 9,447 4,983 3,773 Accrued expenses 10,912 5,201 3,429 Customer deposits (929) 5,469 8 Billings in excess of accumulated costs and earnings on uncompleted contracts 6,522 4,911 2,837 Deferred revenues 1,641 (681) 108 Taxes payable (1,773) 452 (201) Other liabilities 2,178 455 217 ------------ ---------- ---------- Net cash provided by operating activities 11,289 18,939 11,825 ------------ ---------- ---------- INVESTING ACTIVITIES: Acquisition of subsidiaries, net of cash acquired of $61 and $106, respectively (18,997) (101) Cash proceeds on sale of Cassville plant 698 Payments for agreements not to compete (300) (300) (300) Cash payments to dispose of Lewiston (588) (2,347) (2,683) Software development costs (237) (582) (1,106) Additions to property, plant and equipment, net (11,396) (3,914) (3,985) ------------ ---------- ---------- Net cash used for investing activities (31,518) (7,143) (7,477) ------------ ---------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 ALVEY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ------------ ---------- ---------- FINANCING ACTIVITIES: Proceeds of borrowings $ 132,319 $ 27,728 $ 42,600 Payments of debt and capital leases (80,921) (38,538) (46,317) Redemption of preferred stock (27,593) Investment of Parent 5,757 59 309 Treasury preferred stock issuances (purchases) 35 (1) Payments of debt issuance costs (7,713) (255) (89) --------- -------- -------- Net cash provided by (used for) financing activities 21,849 (10,971) (3,498) --------- -------- -------- Net increase in cash and cash equivalants 1,620 825 850 Cash and cash equivalents, beginning of year 3,405 2,580 1,730 --------- -------- -------- Cash and cash equivalents, end of year $ 5,025 $ 3,405 $ 2,580 --------- -------- -------- --------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest on financings $ 6,777 $ 6,851 $ 5,534 Income taxes 1,281 997 1,161 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Alvey Systems, Inc. purchased Automation Equipment Corporation in 1994 and Weseley Software Development Corp. and Real Time Solutions, Inc. in 1996. In conjunction with the acquisitions, liabilites were assumed as follows: Fair value of assets acquired $ 17,359 $ 215 Fair value assigned to goodwill 7,329 810 Cash paid concurrent with acquisitions, including payments of debt of acquired companies and excluding cash acquired (18,997) (101) --------- -------- Liabilities assumed $ 5,691 $ 924 --------- -------- --------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 ALVEY SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT (DOLLARS IN THOUSANDS) NET INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 OF PARENT --------- Balance December 31, 1993 $ (15,015) Net income 1,678 Net investment of Parent 309 Preferred stock dividend declared (Note 8) (3,304) ------------ Balance December 31, 1994 (16,332) Net income 4,406 Net investment of Parent 59 Preferred stock dividend declared (Note 8) (3,852) ------------ Balance December 31, 1995 (15,719) Net loss (30,896) Net investment of Parent 5,757 Preferred stock dividend declared (Note 8) (271) ------------ Balance December 31, 1996 $ (41,129) ------------ ------------ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7 ALVEY SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Alvey Systems, Inc. ("Alvey") is a wholly-owned subsidiary of Pinnacle Automation, Inc. ("Pinnacle" or "Parent"). Pinnacle has no operations and no assets other than its investment in Alvey. Alvey, with its subsidiaries (the "Company"), is a leading materials handling and information systems company which provides integrated solutions to a wide range of manufacturing and distribution applications. The Company develops software and controls for materials handling systems and manufactures a broad range of industrial equipment such as conveyors, pelletizers, depelletizers, carousels, sorters and robotics which carry out the physical acts of loading and unloading, sorting and transporting raw materials and finished products. The accompanying financial statements of the Company include the accounts of Alvey and its six operating subsidiaries which include: McHugh Freeman & Associates, Inc. ("MFA"), located in Waukesha, Wisconsin, which was acquired in May 1989; Busse Bros., Inc. ("Busse"), located in Randolph, Wisconsin, which was acquired in April 1992; The Buschman Company ("Buschman"), located in Cincinnati, Ohio, which was acquired in October 1992; White Systems, Inc. ("White") located in Kenilworth, New Jersey, which was acquired in December 1993; Weseley Software Development Corp. ("Weseley"), located in Shelton, Connecticut, which was acquired in January 1996 and Real Time Solutions, Inc. ("RTS"), located in Napa, California, which was acquired in December 1996. See Note 3 for additional information on the Weseley and RTS acquisitions. All of the above transactions were accounted for under the purchase method of accounting. Effective January 16, 1996, Alvey reincorporated in the State of Delaware under the name Alvey Systems, Inc. The Company historically conducted business as a Missouri corporation under the name Alvey, Inc. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The policies utilized by the Company in the preparation of the consolidated financial statements conform to generally accepted accounting principles, and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from these estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Alvey and Alvey's wholly-owned subsidiaries: MFA, Busse, Buschman, White, Weseley and RTS. All significant intercompany transactions, which primarily consist of sales, have been eliminated. NET INVESTMENT OF PARENT Net investment of Parent represents the net capital contributed by Pinnacle as a result of the sales of its common stock, options and warrants or awards of its common stock and options to certain employees of the Company as well as cumulative results of operations and payment of preferred stock dividends. The basis of Pinnacle's investment in Alvey has been pushed down to the accompanying consolidated financial statements of Alvey. The redeemable preferred stock of Pinnacle was pushed down to the accompanying consolidated financial statements of Alvey at December 31, 1995 as it was exchangeable for debt of Alvey. Subsequent to the January 1996 recapitalization described in Note 8, the outstanding preferred stock of Pinnacle is no longer exchangeable into debt of Alvey and is not pushed down to the accompanying financial statements of Alvey. F-8 At December 31, 1996, the net investment of Parent consists of cumulative contributions of capital to Alvey by Pinnacle of $8.8 million, cumulative losses before extraordinary losses of $26.0 million, extraordinary losses of $9.5 million and an aggregate accretion/payment of $14.4 million of paid-in-kind dividends on preferred stock. At December 31, 1995, the net investment of Parent consists of cumulative contributions of capital to Alvey by Pinnacle of $3.0 million plus cumulative income before extraordinary losses of $2.9 million, offset by extraordinary losses of $7.5 million and an aggregate accretion/payment of $14.1 million of paid-in-kind dividends on preferred stock. FAIR VALUE OF FINANCIAL INSTRUMENTS For purposes of financial reporting, the Company has determined that the fair value of financial instruments approximates book value at December 31, 1996 and 1995, based on terms available to the Company in financial markets. REVENUE RECOGNITION The Company utilizes the percentage-of-completion method of accounting to recognize revenue and profits on virtually all customer contracts. For certain contracts related to equipment sales, the percentage of completion is determined based on the ratio of the cost of equipment shipped to date to the total estimated cost of the equipment to be shipped under the contract. For other equipment contracts and all consulting contracts, typically for larger machines and integrated systems, as well as the installation phase of contracts, the percentage of completion is determined based on the ratio of total costs incurred to date to the estimated total costs to be incurred under the contracts. Any revisions in the estimated total costs of the contracts during the course of the work are reflected when the facts that require the revisions become known. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Revenues from maintenance and support contracts are deferred and recognized ratably over the life of the related contract. The Company recognizes software license fee revenue upon the later to occur of (i) the execution of a software license agreement and (ii) delivery of the standardized software to the customer. The Company licenses its software to customers on a perpetual, non-exclusive basis. Implementation, training and consulting revenues are recognized as the services are rendered (fixed-fee revenues are recognized on a percentage-of-completion basis). Annual maintenance and support revenues consist of ongoing support and product updates and are recognized ratably over the term of the particular maintenance agreement in place with a customer. Revenues for the Company's hardware and peripheral sales are recognized upon shipment. SOFTWARE DEVELOPMENT COSTS Certain costs incurred in developing software products are capitalized and amortized on a product-by-product basis using the greater of the ratio that current gross revenues for a product bear to the current and anticipated future gross revenues for that product or the straight line method over the estimated five year economic life of the product. The costs consist of salaries, computer expenses and other overhead costs directly related to the development and/or major enhancement of software products. Such costs are capitalized, to the extent they are recoverable through future sales, from the time the product's technological feasibility is established up to its general release to customers. Costs incurred before or after this period are expensed as incurred except for major product improvements, which are capitalized as described above. Net unamortized capitalized software costs were $603,000 and $1,419,000 at December 31, 1996 and 1995, respectively. Amortization of capitalized software development costs totaled $1,053,000, $257,000 and $12,000 in 1996, 1995 and 1994, respectively, and is included in cost of goods sold in the accompanying financial statements. In 1996, the amortization of software costs includes the write-off of $659,000 of capitalized software development costs that are not expected to be recoverable through future sales. F-9 RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. CASH AND CASH EQUIVALENTS Cash and cash equivalents include demand deposit accounts, cash on hand and time deposits with original maturities of less than 90 days. Such amounts are carried at cost, which approximates market. INVENTORY VALUATION Work-in-process inventories consist principally of in-process palletizing and depalletizing machines, conveyor and carousel systems, other materials handling equipment and parts manufactured by the Company for use in these products. Raw materials include steel, purchased parts and other materials used in the manufacturing process. These inventories are valued at the lower of cost (first-in, first-out) or market. Obsolete or unsalable inventories are reflected at their estimated realizable values. PROGRESS BILLINGS The Company bills its customers based on the terms set forth in a sales contract. The billing schedule does not necessarily match the stage of completion of a customer's order for installation. As such, costs, earnings and billings are accumulated for jobs in progress at period end and the extent to which costs and earnings exceed billings and billings exceed costs and earnings for such jobs, an asset or liability is recorded. Unbilled receivables are those amounts recognized in revenues for completed portions of manufacturing contracts and software license fees which have not been billed to the customer under the specific billing terms of the contract or license agreement. Customer deposits represent cash received from customers in payment of billings for equipment for which no associated revenue or cost has been recognized. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost. Costs assigned to property, plant and equipment are based on estimated fair value at the date of acquisition. Upon sale, retirement or other disposition, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in income. Depreciation of property, plant and equipment, including equipment under capital lease agreements, is charged to expense over the estimated useful lives of the related assets using the straight-line method. Useful lives by major asset category are as follows: Building and improvements..................... 7 to 25 years Machinery and equipment....................... 3 to 12 years Office furniture and equipment................ 3 to 7 years F-10 GOODWILL AND OTHER INTANGIBLE ASSETS The excess of cost over the fair market value of net assets acquired in purchase business transactions has been recorded as goodwill to be amortized over a period of 40 years, except for goodwill related to RTS and Weseley which is amortized over 10 years. The carrying value of goodwill is assessed for recoverability by management based on an analysis of future expected undiscounted cash flows from the underlying operations. At December 31, 1996 the Company recorded a charge of $11.5 million for the write-off of goodwill at one of its subsidiaries. This write-off represents the entire amount of remaining goodwill at December 31, 1996 recorded by that subsidiary which is considered to be impaired due to historical losses and uncertainty regarding future income and cash flows. See Note 6 for further discussion. In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 specifies than an impairment review be performed, using undiscounted cash flows resulting from the use of long-lived assets, whenever events or changes in circumstances indicate that the amount of a long-lived asset may not be recoverable. SFAS 121 was adopted by the Company in 1996 and had no material effect on the Company's financial position or results of operations because the Company's prior impairment recognition practice was consistent with the major provisions of the Statement. Debt issuance costs and agreements not to compete are amortized over the life of the related agreements. All intangible assets are amortized using the straight-line method. INCOME TAXES As a subsidiary of Pinnacle, the Company's results of operations are included in consolidated federal income tax returns which include the Company and its subsidiaries; the Company could be considered jointly and severally liable for assessments of additional tax on the consolidated group. The Company's provision for income taxes has been presented based on income taxes the Company would have provided on a separate company basis which approximate those of Pinnacle as a consolidated entity. Income taxes are based upon income for financial reporting purposes. Deferred income taxes are provided for the temporary differences between the financial reporting bases and the income tax bases of the Company's assets and liabilities. The tax rates expected to be in effect when such differences are reflected in the Company's income tax returns are used in calculating the deferred tax asset or liability. The major temporary differences that give rise to deferred taxes include retainage, depreciation, warranty and inventory costs, deferred compensation, plant closing and various other reserves. See Note 9 for additional information. CONCENTRATIONS OF CREDIT RISK The Company sells its products to a wide range of companies in the food, beverage, national retailing and distribution industries, as well as certain government entities. The Company performs ongoing credit evaluations of its customers and generally does not require collateral, although many customers pay deposits to the Company prior to commencement of production in accordance with terms of the sales contract. The Company maintains reserves for potential credit losses based upon factors surrounding the credit risk of specific customers, historical trends and other information; historically, such losses have been within management's expectations. EARNINGS PER SHARE INFORMATION Given the historical organization and capital structure of the Company, earnings per share information is not considered meaningful or relevant and has not been presented in the accompanying consolidated financial statements or the notes thereto. F-11 3. ACQUISITIONS WESELEY ACQUISITION In January 1996, Pinnacle, Alvey and MFA purchased all of the outstanding capital stock of Weseley for a purchase price of $15 million in cash. The acquisition, which was recorded pursuant to the purchase method of accounting, was financed with a portion of the proceeds of the Debt Offering as described in Note 7. The excess of the cost of the acquisition over the fair value of net assets acquired (including purchased in-process research and development, as further described below) of $5.1 million was recorded as goodwill and is being amortized over a period of 10 years. The consolidated financial statements of the Company include the results of operations and cash flows of Weseley from its date of acquisition. Based on the results of an independent appraisal, $11.7 million of the Weseley purchase price was allocated to in-process research and development costs at the date of acquisition and was recorded as a write-off of purchased in-process research and development in the Company's consolidated statement of operations during the first quarter of 1996. Such amount has been excluded from the pro forma information below as it represents a non-recurring charge to income which resulted directly from the Weseley acquisition. Under the terms of the purchase agreement, subject to the continued employment of the former principal shareholder of Weseley and certain other conditions, certain employees of Weseley have an opportunity to earn stay bonuses in the aggregate of $625,000 per year for each of eight years immediately following the acquisition of Weseley which will be charged to income in the year earned and employee incentive compensation up to an aggregate maximum of $13 million, based on Weseley's achievement of defined levels of earnings before interest, income tax, depreciation, amortization, management fees and extraordinary losses, which will be charged to income when such amounts are estimable and payment thereof is deemed probable. Amounts charged to income in 1996 under the stay bonus agreements totaled $625,000; no expense was recognized related to the employee incentive compensation agreement. In the quarter ended December 31, 1995 (prior to the purchase of Weseley by the Company), Weseley received and recorded as deferred revenue $2.5 million in fees in connection with a distribution contract with a large manufacturing company; $2.1 million remains deferred at December 31, 1996. On December 31, 1995 (prior to the purchase of Weseley by the Company), Weseley paid and charged to income an aggregate of $3.0 million in bonuses for certain of its employees, which are included in selling, general and administrative expenses in the pro forma information presented below. F-12 The following table sets forth pro forma information for the Company as if the Weseley acquisition had taken place on January 1, 1995. This information is unaudited and does not purport to represent actual operating results had the acquisition actually occurred on January 1, 1995. The pro forma results of operations for 1996 would not have been materially different from reported results had the Weseley acquisition taken place on January 1, 1996. Pro forma information for the twelve months ended December 31, 1995 (in thousands) (unaudited) is as follows: Net sales $ 291,415 Cost of goods sold 218,232 -------------- Gross profit 73,183 Selling, general and administrative expenses 56,793 Research and development expenses 2,666 Amortization expense 2,253 Other expenses (income), net (108) -------------- Operating income 11,579 Interest expense 8,583 -------------- Income before income taxes and extraordinary loss 2,996 Income tax expense 2,072 -------------- Income (loss) before extraordinary loss $ 924 -------------- -------------- RTS ACQUISITION In December 1996, Pinnacle and Alvey purchased all of the outstanding capital stock of RTS for a purchase price of $4.1 million in cash. The acquisition, which was recorded pursuant to the purchase method of accounting, was financed through borrowings under the Credit Agreement (as defined in Note 7). The excess of the cost of the acquisition over the fair value of net assets acquired (including purchased in-process research and development, as further described below) of $2.2 million was recorded as goodwill and is being amortized over a period of 10 years. The consolidated financial statements of the Company include the results of operations and cash flows of RTS from its date of acquisition. Based on the results of an independent appraisal, $1.0 million of the RTS purchase price was allocated to in-process research and development costs at the date of acquisition and was recorded as a write-off of purchased in-process research and development in the Company's consolidated statement of operations during the fourth quarter of 1996. The pro forma results of the Company for 1996 and 1995 would not have been materially different had the RTS acquisition taken place on January 1, 1996 or 1995, respectively. Accordingly, pro forma financial information for the RTS acquisition is not presented. F-13 4. FTC ORDER TO DISPOSE OF THE LEWISTON, MAINE MANUFACTURING PLANT As a result of Alvey's acquisition of Buschman in 1992, the Company made a decision to close Buschman's carousel manufacturing plant in Lewiston, Maine ("Lewiston"). Alvey was subsequently ordered by the Federal Trade Commission ("FTC"), beginning December 6, 1993, to hold the Lewiston operation separate from operations of the Company and to ultimately dispose of the facility. Until such time as a buyer suitable to Alvey and the FTC could be found for Lewiston, Alvey was required to fund all cash requirements of Lewiston. However, pursuant to the FTC order, the Company had no authority to make operating decisions for Lewiston. Since its determination to close the Lewiston plant and through December 31, 1996, Alvey has contributed approximately $7.4 million in cash to fund the operation. Upon its initial decision to close the Lewiston plant, the Company accrued $1.4 million, net of applicable income taxes, for closing costs and the write-off of assets; such amount was recorded under purchase accounting as goodwill during 1992. Operating losses and other costs of closure incurred subsequent to FTC intervention ($5.4 million, net of income tax benefits) were accrued and charged to income as an extraordinary loss in fiscal 1993, including estimates of amounts expected to be incurred through fiscal 1996 and in future periods, as discussed below. The sale of this operation was finalized on July 31, 1995. During 1996 and 1995, $588,000 and $2.3 million, respectively, was paid and charged against the balance sheet accrual for the operations of Lewiston and related sale agreement obligations. In addition, in 1995, $780,000 of related asset write-offs were also charged against the balance sheet accrual. At December 31, 1996, $531,000 is accrued to fund obligations resulting from the sale agreement which extend through May 1, 1997. Management believes that the remaining accrual is sufficient to cover future anticipated charges. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands): DECEMBER 31, --------------------------- 1996 1995 ---------- ---------- Land $ 3,148 $ 3,140 Buildings and improvements 21,420 15,783 Machinery and equipment 7,417 6,083 Office and other equipment 16,597 12,029 Construction in progress 178 Property held under capital lease 1,327 1,277 ---------- ---------- 49,909 38,490 Less: Accumulated depreciation and amortization, including $657 and $666, respectively, related to property held under capital lease 15,542 12,815 ---------- ---------- $ 34,367 $ 25,675 ---------- ---------- ---------- ---------- F-14 Depreciation expense for leased equipment was $114,000, $103,000 and $143,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under the capital leases and the present value of the net minimum lease payments at December 31, 1996 are as follows (in thousands): 1997 $ 223 1998 209 1999 95 2000 187 --------- Total minimum lease payments 714 Less: Amount representing interest 96 --------- Present value of minimum lease payments at December 31, 1996, including current portion of $178 $ 618 --------- --------- Certain other office equipment, automobiles and office space are utilized by the Company under operating leases which resulted in rental expense of $3.9 million, $3.4 million and $2.7 million in 1996, 1995 and 1994, respectively. Commitments under these leases total $4.7 million in 1997, $4.5 million in 1998, $3.8 million in 1999, $3.3 million in 2000, $3.2 million in 2001 and $10.6 million in the aggregate in years thereafter. 6. GOODWILL Goodwill is summarized as follows (in thousands): DECEMBER 31, ------------------------ 1996 1995 --------- --------- Goodwill $ 42,947 $ 35,642 Less: Write-off of goodwill (11,491) Less: Accumulated amortization (4,946) (3,613) --------- --------- $ 26,510 $ 32,029 --------- --------- --------- --------- The write-off of $11.5 million in 1996 represents the full amount of remaining goodwill at one subsidiary which is considered to be impaired due to historical losses, uncertainty regarding future income and uncertainty regarding future cash flows. This impairment was determined by analyzing future expected undiscounted cash flows from the underlying operations. The amount of the write-off was determined using future expected discounted cash flows from the underlying operations. F-15 7. LONG-TERM DEBT The detail of long-term debt follows (in thousands):
DECEMBER 31, 1996 1995 ----------- ----------- 11 3/8% Senior Subordinated Notes due January 31, 2003 $ 100,000 $ Term A Facility - weighted average rate of 9.2%, scheduled quarterly principal payments through March 31, 1999; repaid in 1996 24,817 Term C Facility - 13%, quarterly principal payments beginning March 31, 1999 through September 30, 2000; repaid in 1996 12,382 Working Capital Facility - weighted average rate of 9.2%, balance due on March 31, 1999; repaid in 1996 9,000 Unsecured Subordinated Debt Agreement - 11.95%, balance due December 31, 2001; repaid in 1996 2,253 Capital lease obligations and other 773 923 ---------- ---------- 100,773 49,375 Less: Current portion 280 6,915 ---------- ---------- $ 100,493 $ 42,460 ---------- ---------- ---------- ----------
On January 24, 1996, Alvey issued and sold $100 million of 11 3/8% Senior Subordinated Notes due 2003 (the "Debt Offering"). The proceeds of the Debt Offering were used to repay all of the Company's outstanding senior indebtedness and certain other indebtedness, fund the acquisition of Weseley, pay transaction fees, fund a dividend to Pinnacle of $21.6 million and provide working capital for ongoing operations. As a result of the repayment of the outstanding senior indebtedness, the Company recorded an extraordinary loss of approximately $2 million representing the write-off of related debt issuance costs and debt repayment penalties, net of tax. In accordance with the terms of the Debt Offering, Alvey filed a registration statement with the Securities and Exchange Commission with respect to an offer to exchange the 11 3/8% Senior Subordinated Notes for a new issue of debt securities of Alvey registered under the Securities Act of 1933 with terms substantially identical to those of the 11 3/8% Senior Subordinated Notes. Such registration statement was declared effective on May 9, 1996 and the exchange of $100 million in principal amount of the original notes for $100 million in principal amount of registered notes was completed on June 11, 1996. Concurrent with the consummation of the Debt Offering, Alvey entered into a credit agreement (the "Credit Agreement") for a $30 million revolving credit facility (the "Revolving Credit Facility") which is guaranteed by Pinnacle and each direct and indirect subsidiary of Alvey. Indebtedness of Alvey under the Credit Agreement is secured by substantially all of the personal property of Alvey and its subsidiaries, all capital stock of Alvey and 100% of the capital stock of its domestic subsidiaries (other than the portion of the shares of capital stock of Busse which are pledged to secure certain non-compete payments). Indebtedness under the Revolving Credit Facility bears interest at a rate based upon, at Alvey's option, (i) the Base Rate (as defined in the Revolving Credit Facility) plus 1.5% or (ii) the Euro-dollar Rate (as defined in the Revolving Credit Facility) for one, two, three, six or, if available, nine or twelve months, plus 2.5%; provided, however, the interest rate margins are subject to 0.25% reductions in the event Alvey meets certain performance targets. Commitment fees accrue on the average daily unused portion of the Revolving Credit Facility at 0.5% per annum and are payable quarterly. The Revolving Credit Facility expires January 24, 2001. No borrowings were outstanding under the Revolving Credit Facility at December 31, 1996. F-16 Debt issuance costs totaling $7.5 million were incurred in establishing the $100 million Senior Subordinated Notes and the Revolving Credit Facility on January 24, 1996 and are being amortized over the weighted-average life of the facilities. Under the Credit Agreement, the Company has provided standby letters of credit at December 31, 1996 in the amount of $2.3 million as security for payment of the Company's workers' compensation claims. Outstanding letters of credit bear a 2.5% per annum fee which is payable quarterly. Virtually all of the tangible assets of the Company are pledged as collateral under the Credit Agreement. Restrictive covenants of outstanding debt instruments include the maintenance of certain key ratios as well as limitations on capital expenditures, incurrence of additional debt, stock issuances and the payment of cash dividends. The Company was in compliance with such financial covenants, as amended, at December 31, 1996. Under a credit agreement among Alvey, Citibank N.A. ("Citibank"), NationsBank of Texas, N.A. ("NationsBank"), Equitable Capital Private Income and Equity Partnership II, L.P. ("Equitable") and others (the "Old Credit Agreement"), Alvey's Working Capital Facility provided for up to $29.9 million in revolving advances and letters of credit. In addition, the Working Capital Facility allowed additional borrowings from the Company's principal owners of $3 million. Of such additional debt, $2 million was funded on January 3, 1995 through an Unsecured Subordinated Debt Agreement with certain shareholders of Pinnacle at a rate of 11.95% for which all interest and principal was due on December 31, 2001. Under the Old Credit Agreement, the Term A Facility, through which Alvey had borrowings of $34.5 million at December 31, 1995, and Working Capital Facility were provided and held equally by Citibank and NationsBank. The Term C Facility, through which Alvey had borrowings of $12.4 million at December 31, 1995, was provided by Equitable. Virtually all of the tangible assets of Alvey and its subsidiaries were pledged as collateral under the Old Credit Agreement. As discussed above, amounts outstanding under the Term A Facility, Term C Facility, Working Capital Facility and the Unsecured Subordinated Debt Agreement were repaid on January 24, 1996. 8. REDEEMABLE PREFERRED STOCK AND RECAPITALIZATION OF PINNACLE Concurrent with the consummation of the Debt Offering (see Note 7), Pinnacle sold redeemable preferred stock and warrants to purchase its common stock to an investor group for $30 million in cash proceeds (the "Preferred Stock Offering"). The proceeds of the Preferred Stock Offering, together with a dividend from Alvey to Pinnacle, were used to repurchase certain shares of Pinnacle's outstanding common stock and to redeem Pinnacle's Series A Senior Cumulative Exchangeable Preferred Stock ("Series A Preferred") and Cumulative Exchangeable Preferred Stock ("Cumulative Preferred"). While Alvey has not guaranteed, nor is it contingently obligated with respect to the redeemable preferred stock and warrants issued in the Preferred Stock Offering, Pinnacle has no financial resources, other than from its subsidiaries' operations, to satisfy cash requirements relative to these shares. The redeemable preferred stock and warrants from the Preferred Stock Offering have not been pushed down to Alvey's consolidated financial statements as such redeemable preferred stock and warrants are not exchangeable into securities of Alvey. At December 31, 1996, accumulated dividends on the redeemable preferred stock totaled $5.3 million. Pinnacle's Series A Preferred and Cumulative Preferred were redeemable by Pinnacle at a liquidation value of $100 per share. At the option of the holder, the preferred stock could have been exchanged for $100 of senior subordinated notes to be issued by Alvey. As the redeemable preferred stock was exchangeable for debt issued by Alvey (under which virtually all of the assets of Alvey were pledged as collateral), such stock has been allocated to the financial statements of Alvey. On any dividend payment date or at any time after October 31, 2000, Pinnacle could redeem, at its option, in whole or in part, preferred stock at 100% of its liquidation value plus any accrued and unpaid dividends. The preferred stock was only exchangeable or redeemable at such time as it would not cause a default under any of the debt instruments of Alvey. F-17 Under terms of the related stockholder agreements, Pinnacle was required to pay dividends quarterly on the Series A Preferred and the Cumulative Preferred and could pay such dividends in cash (at 13%) or stock (at 15.5%) at its option through December 31, 1996. Dividends declared in 1996, 1995 and 1994 were paid in the form of stock. Pinnacle declared stock dividends of $271,000, $3.9 million and $3.3 million in 1996, 1995 and 1994, respectively (2,705, 38,522 and 33,045 shares, respectively, at a liquidating value of $100), all of which served to decrease the net investment of Parent of the Company. The following table sets forth the changes in redeemable preferred stock for the years ended December 31, 1994, 1995 and 1996 (dollars in thousands):
SERIES A CUMULATIVE PREPAID TOTAL PREFERRED STOCK PREFERRED STOCK COMPENSATION REDEEMABLE ------------------------- ------------------------ FOR PEREFERRED PREFERRED SHARES AMOUNT SHARES AMOUNT STOCK STOCK ---------- ---------- ---------- ----------- -------------- ----------- Balance December 31, 1993 155,183 $ 15,519 46,128 $ 4,613 $ (98) $ 20,034 Compensation expense 98 98 Treasury stock purchases (7) (1) (1) Stock dividend declared 25,469 2,547 7,576 757 3,304 --------- --------- --------- --------- --------- --------- Balance December 31, 1994 180,645 18,065 53,704 5,370 0 23,435 Treasury stock sales 350 35 35 Stock dividend declared 29,702 2,970 8,820 882 3,852 --------- --------- --------- --------- --------- --------- Balance December 31, 1995 210,697 21,070 62,524 6,252 0 27,322 Stock dividend declared 2,086 209 619 62 271 Redemption of stock (212,783) (21,279) (63,143) (6,314) (27,593) --------- --------- --------- --------- --------- --------- Balance December 31, 1996 0 $ 0 0 $ 0 $ 0 $ 0 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
9. INCOME TAXES Income tax expense (benefit) relative to income (loss) from continuing operations (before extraordinary loss) is comprised of (in thousands): 1996 1995 1994 ---------- --------- ---------- Current Federal $ 211 $ 1,001 $ 86 State 496 448 14 --------- --------- --------- 707 1,449 100 Deferred, principally federal (2,616) 2,660 1,416 --------- --------- --------- $ (1,909) $ 4,109 $ 1,516 --------- --------- --------- --------- --------- --------- F-18 A reconciliation of the income tax expense (benefit) per the statutory federal income tax rate to the reported income tax expense (benefit) on income before extraordinary loss is as follows (in thousands):
1996 1995 1994 ----------- ----------- ----------- Income tax expense (benefit) at statutory rate $ (10,476) $ 2,896 $ 1,086 Expense (benefit) resulting from: Write-off of nondeductible purchased in-process research and development 4,318 Write-off of nondeductible goodwill 3,907 State taxes (net of federal tax benefit) (226) 366 258 Nondeductible goodwill amortization 448 282 361 Foreign tax credit utilization (453) Meals and entertainment 197 216 176 Other (77) 349 88 ---------- ---------- ---------- $ (1,909) $ 4,109 $ 1,516 ---------- ---------- ---------- ---------- ---------- ----------
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): 1996 1995 ---------- ---------- Accrued insurance claims $ 2,437 $ 2,093 Inventory reserves 2,662 2,045 Warranty reserves 2,587 1,021 Employee cost accruals 3,637 2,513 Revenue timing differences 2,511 333 Other 2,214 813 --------- --------- Total deferred tax assets 16,048 8,818 --------- --------- Revenue timing differences 3,190 2,993 Property related items 5,402 5,250 Other 902 72 --------- --------- Total deferred tax liabilities 9,494 8,315 --------- --------- Net deferred tax asset $ 6,554 $ 503 --------- --------- --------- --------- In accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", management has determined that based on expected future operating plans and tax planning strategies available to the Company, the net deferred tax assets at December 31, 1996 will be utilized to offset future taxes. Therefore, no valuation reserve related to such deferred tax assets has been recorded at December 31, 1996 and 1995, respectively. F-19 10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS The Company maintains 401(k) savings plans for virtually all employees who meet certain eligibility requirements, except those certain union employees who participate in multi-employer pension plans. Under the plans, the employees may defer receipt of a portion of their eligible compensation with the Company matching a defined percentage of the employees' deferral. The Company's matching contributions were $701,000, $614,000 and $429,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company may also elect to make discretionary profit sharing contributions for virtually all employees, except those union employees who participate in multi-employer pension plans, for which a provision of $2.7 million, $2.2 million and $1.4 million is included in the consolidated financial statements in 1996, 1995 and 1994, respectively. Contributions under the multi-employer pension plans are based on amounts per employee as defined in the union labor agreement. Pension expense for the union employees' pension plans was $593,000, $629,000 and $675,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company may be obligated, under the Multi-Employer Pension Plan Amendment Act of 1980, for a part of these plans' unfunded vested benefits if there is a withdrawal or partial withdrawal from a plan, as defined within the Act. There is no intention on the part of management to withdraw their participation from a plan. Alvey also provides a deferred compensation plan for its Chief Executive Officer. Under the plan, upon his termination of employment for any reason, except voluntary resignation to accept a comparable position, Alvey will pay a formula-based annual benefit for the remainder of his life or for at least 10 years. At December 31, 1996, an amount of $1.8 million is accrued for such benefits and expense of $260,000, $299,000 and $93,000 was recorded in 1996, 1995 and 1994, respectively. During 1995, certain employees of the Company purchased shares of Pinnacle common stock at estimated fair value totaling $409,000; these purchases were effected with cash of $30,000 and employee notes receivable of $379,000. During 1994, certain employees of the Company purchased and were issued shares of Pinnacle common stock at the estimated fair value totaling $316,000; these purchases were effected with cash of $43,000, employee notes receivable of $185,000 and funding by the Company of $88,000; amounts funded by the Company are being expensed over the vesting period of the related shares. Employee notes receivable outstanding to Pinnacle at December 31, 1996 and 1995 totaled $1,423,000 and $955,000, respectively, and are reflected as a reduction of the net investment of Parent. F-20 Management employees of the Company have received options to purchase Pinnacle common stock which were granted at exercise prices which approximated fair market value of the shares at the dates of grant. Certain of these shares vest based on performance while others vest over a period of employment (generally over a period of three years). The option terms expire eight to ten years subsequent to the grant date. At December 31, 1996, exercise prices of options outstanding generally ranged between $20 and $40 per share with 11,991 options at $1.20 per share which approximated estimated fair value at the dates of grant. The weighted average remaining life to expiration at December 31, 1996 of options exercisable between $20 and $40 is seven years and for those at $1.20 is six years. At December 31, 1996, 11,991 of the outstanding options have vested. Compensation expense in relation to these options is not material to the consolidated financial statements. These options are summarized as follows: WEIGHTED AVERAGE SHARES EXERCISE SUBJECT PRICE TO OPTION -------- --------- Outstanding at January 1, 1994 $ 1.20 14,000 Options granted in 1994 31.28 21,700 Options expired in 1994 1.20 (2,009) -------- Outstanding at December 31, 1994 22.06 33,691 Options granted in 1995 20.00 3,000 -------- Outstanding at December 31, 1995 21.02 36,691 Options granted in 1996 30.73 79,825 Options forfeited in 1996 20.00 (5,000) -------- Outstanding at December 31, 1996 $ 28.02 111,516 -------- -------- In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which addresses accounting for stock option, purchase and award plans. SFAS 123 specifies that companies utilize either the "fair value based method" or the "intrinsic value based method" for valuing stock options granted. The Company adopted FAS 123 in 1996, and is continuing to utilize the "intrinsic value based method" for valuing stock options granted. Had the Company utilized the "fair value based method" to value stock options granted , the Company's net income (loss) for 1996 and 1995 would not have been materially different from reported net income (loss) for those years. The weighted average fair value of option granted is estimated on the date of grant using the Black Scholes option-pricing model with the following assumptions: 1996 1995 --------- --------- ASSUMPTIONS Weighted average risk-free interest rate 6.2% 6.2% Weighted average expected life of option 7 years 7 years F-21 The Company also has agreed to provide life insurance policies, in amounts ranging from $1 million to $3 million, for the remainder of the lives of five of its executive officers or until such officers voluntarily resign to accept a comparable position. Costs relative thereto are not material to the Company's consolidated financial statements. 11. SIGNIFICANT CUSTOMERS In 1996, 1995 and 1994, no single customer comprised more than 10% of sales. 12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS The Company is involved in various litigation consisting almost entirely of product and general liability claims arising in the normal course of its business. After deduction of a per occurrence self-insured retention, the Company is insured at December 31, 1996 for losses up to $27 million per year for product and general liability claims. The Company has provided reserves for the estimated cost of the self-insured retention; accordingly, these actions, when ultimately concluded, are not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company. As of January 24, 1996, the Company established consulting agreements with two related parties whereby the Company is obligated to make annual payments of $350,000 plus expenses, with one contract providing for annual increases of up to 3%. Additionally, the Company is obligated to compensate one related party for certain merger, acquisition and financing transactions. At December 31, 1995, the Company had two agreements with related parties under which the Company received investment banking and other consulting services. These agreements were to terminate in the years 2000 and 2002, respectively, however, the agreements were terminated in January 1996, concurrent with the Debt Offering (see Note 7), at a cost of $1.4 million. The agreements required annual payments by the Company totaling $500,000 plus expenses. In addition, the Company was required to pay an aggregate 2% investment banking fee on the total amount of consideration paid or received through a merger, consolidation or sale of more than 10% of Alvey's assets or outstanding securities, or the acquisition of assets or stock of another company. Costs of these agreements, including the termination fee, are included in other expense (income), net in the accompanying consolidated financial statements. In conjunction with the acquisition of Busse, a covenant not to compete was signed by the former owners of Busse. The covenant requires the Company to make twelve semi-annual payments of $150,000 to the former owners commencing October 1992 and continuing through April 1998. A portion of the Busse shares acquired by Alvey are pledged to secure payments under the covenant not-to-compete. White leases its manufacturing facility located in Kenilworth, New Jersey from a partnership controlled by Donald J. Weiss, who was a director of the Company until his resignation in April 1996. Pursuant to the terms of the operating lease, the Company paid $0.9 million, $0.9 million and $1.1 million in 1996, 1995 and 1994, respectively. The Company has entered into employment agreements with several members of executive management. The agreements require the Company to pay the executive's salary for a period lasting from one to two years should the executive's employment be terminated. In addition, the agreements provide for annual bonuses of up to 117% to 189% of the executive's annual salary based upon the achievement of pre-established performance targets. F-22 13. SUPPLEMENTAL BALANCE SHEET INFORMATION Accrued expenses include the following (in thousands): DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- Project expenses $ 8,476 $ 4,013 Bonuses, incentives and profit sharing 10,642 7,507 Wages and salaries 2,147 2,407 Vacation and other employee costs 8,171 7,064 Interest expense 4,927 431 Plant disposal costs 531 1,119 Other expenses 5,483 5,223 ---------- ---------- $ 40,377 $ 27,764 ---------- ---------- ---------- ---------- 14. QUARTERLY FINANCIAL DATA (UNAUDITED) The following quarterly financial information for the two years ended December 31, 1996 is unaudited. However, in the opinion of management, such information has been prepared on the same basis as the audited financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The quarterly results however, are not necessarily indicative of results for any future period. Summarized quarterly financial data for fiscal 1996 and 1995 appear below (in thousands): NET INCOME NET SALES GROSS PROFIT (LOSS) --------- ------------ ------ 1996 First quarter $ 80,717 $ 19,482 $ (14,548) Second quarter 83,338 20,229 474 Third quarter 79,347 20,009 (217) Fourth quarter 87,845 15,309 (16,605) ---------- ---------- --------- $ 331,247 $ 75,029 $ (30,896) ---------- ---------- --------- ---------- ---------- --------- NET INCOME NET SALES GROSS PROFIT (LOSS) --------- ------------ ------ 1995 First quarter $ 67,008 $ 15,523 $ 326 Second quarter 72,026 17,479 1,137 Third quarter 68,271 17,610 1,370 Fourth quarter 80,713 20,109 1,573 ---------- ---------- ---------- $ 288,018 $ 70,721 $ 4,406 ---------- ---------- ---------- ---------- ---------- ---------- F-23 The first quarter net loss includes one-time non-cash charges of $11.7 million for the write-off of purchased in-process research and development related to the acquisition of Weseley (see Note 3) and $2.0 million for the write-off of unamortized deferred financing fees, net of applicable income tax benefits, resulting from the early extinguishment of debt during January 1996 (see Note 7), as well as a one-time charge of $840,000, net of applicable income tax benefits, for the termination of a management agreement (see Note 12). The fourth quarter net loss includes one-time non-cash charges of $1.0 million for the write-off of purchased in-process research and development related to the acquisition of RTS (see Note 3), $11.5 million for the write-off of goodwill (see Note 6) and $400,000, net of applicable income tax benefits, for the write-off of capitalized software (see Note 2). F-24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on March 25, 1997. ALVEY SYSTEMS, INC. By: /s/ WILLIAM R. MICHAELS ------------------------------- William R. Michaels, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM R. MICHAELS Chairman of the Board and Chief Executive March 25, 1997 - ------------------------------- Officer (Principal Executive Officer) William R. Michaels /s/ JAMES A. SHARP Vice President, Chief Financial Officer, - ------------------------------- Treasurer and Assistant Secretary (Principal March 25, 1997 James A. Sharp Financial and Accounting Officer) /s/ FREDERICK R. ULRICH, JR. - ------------------------------- Director March 25, 1997 Frederick R. Ulrich, Jr. /s/ PRAKASH A. MELWANI - ------------------------------- Director March 25, 1997 Prakash A. Melwani /s/ DANIEL S. O'CONNELL - ------------------------------- Director March 25, 1997 Daniel S. O'Connell /s/ CHARLES A. DILL - ------------------------------- Director March 25, 1997 Charles A. Dill
RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS)
Column A Column B Column C Column D Column E Column F --------- --------- -------- -------- --------- -------- Valuation Balance at Charged to Charged to Balance at and Reserve Beginning Costs and Other End of Accounts of Period Expenses Accounts Deductions Period FOR THE YEAR ENDED DECEMBER 31, 1994 Accounts Receivable Reserve $1,275 $88 $(486)(1) ($282) $595 (1) Reflects decrease to Accounts Receivable Reserves due to purchase accounting adjustments related to the acquisition of White. Inventory Reserve $1,672 $626 $0 ($824) $1,474 FOR THE YEAR ENDED DECEMBER 31, 1995 Accounts Receivable Reserve $595 $546 $0 ($317) $824 Inventory Reserve $1,474 $1,362 $0 ($784) $2,052 FOR THE YEAR ENDED DECEMBER 31, 1996 Accounts Receivable Reserve $824 $743 $242(1) ($603) $1,206 (1) Reflects increase to Accounts Receivable Reserves due to acquisitions of Weseley and RTS. Inventory Reserve $2,052 $557 $176(1) ($386) $2,399 (1) Reflects increase to Inventory Reserves due to acquisition of RTS.
S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Stockholder and Board of Directors of Alvey Systems, Inc. Our audits of the consolidated financial statements of Alvey Systems, Inc. and its subsidiaries, referred to in our report dated February 7, 1997, appearing on page F-2 of this Annual Report on Form 10-K, also included an audit of the Financial Statement Schedule of Alvey Systems, Inc. listed at item 14(2) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP St. Louis, Missouri February 7, 1997 S-2 EX-10.14 2 EXHIBIT 10.14 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "FIRST AMENDMENT") dated as of May 15,1996, is to that Credit Agreement dated as of January 23, 1996 (as amended and modified hereby and as further amended and modified from time to time hereafter, the "CREDIT AGREEMENT"; terms used but not otherwise defined herein shall have the meanings assigned in the Credit Agreement), by and among ALVEY SYSTEMS, INC., a Delaware corporation (the "BORROWER"), THOSE SUBSIDIARIES AND CREDIT PARTIES party thereto and identified on the signature pages hereof (together with the Borrower sometimes being referred to as the "CREDIT PARTIES"), as Guarantors and Credit Parties, the Lenders party thereto, and NATIONSBANK, N.A., as Agent (the "AGENT"). W I T N E S S E T H ------------------- WHEREAS, the Lenders have, pursuant to the terms of the Credit Agreement, made available to the Borrower a $30,000,000 credit facility; WHEREAS, the Borrower has requested a modification to the Credit Agreement relating to the purchase of certain promissory notes; and WHEREAS, the Required Lenders for and on behalf of the Lenders have agreed to the requested changes on the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: A. The Credit Agreement is amended in the following respects: 1. The definition of the term "Permitted Investments in Section 1,.01 is amended and restated to read as follows: "PERMITTED INVESTMENTS" means Investments which are either (i) cash and Cash Equivalents; (ii) accounts receivable created, acquired or made by any Credit Party in the ordinary course of business; (iii) Investments consisting of stock, obligations, securities or other property received by any Credit Party in settlement of accounts receivable (created in the ordinary course of business) from bankrupt obligors; (iv) Investments existing as of the Closing Date and set forth in SCHEDULE 1.1A; (v) Guaranty Obligations permitted by Section 8.1; (vi) acquisitions permitted by Section 8.4 (c); (vii) transactions permitted by Section 8.8; (viii) loans made in the ordinary course of business to directors, officers, employees, agents, customers or suppliers that do not exceed an aggregate principal amount of $1,000,000 at any one time outstanding; (ix) advances to directors, officers and employees for the purpose of acquiring capital stock of the Parent that do not exceed $1,000,000; provided, however, that no more than $500,000 in new advances for such purpose shall be made after the Closing Date; (x) in connection with the purchase of promissory notes from Donald J. Weiss in an aggregate principal amount not to exceed $240,000; (xi) Investments in and to a Domestic Credit Party or (xii) Intercompany Indebtedness incurred in the ordinary course of business and consistent with the past practices of the Credit Parties or for cash management purposes. B. The Borrower hereby represents and warrants that: (i) any and all representations and warranties made by the Borrower and contained in the Credit Agreement (other than those which expressly relate to a prior period) are true and correct in all material respects as of the date of this First Amendment; and (ii) No Default or Event of Default currently exists and is continuing under the Credit Agreement as of the date of this First Amendment. C. The Borrower will execute such additional documents as are reasonably requested by the Agent to reflect the terms and conditions of this First Amendment. D. Except as modified hereby, all of the terms and provisions of the Credit Agreement (and Exhibits) remain in full force and effect. E. The Borrower agrees to pay all reasonable costs and expenses in connection with the preparation, execution and delivery of this First Amendment, including without limitation the reasonable fees and expenses of the Agent's legal counsel. F. This First Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this First Amendment to produce or account for more than one such counterpart. G. This First Amendment and the Credit Agreement, as amended hereby, shall be deemed to be contracts made under, and for all purposes shall be construed in accordance with the laws of the State of New York. [Remainder of Page Intentionally Left Blank] -2- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this First Amendment to Credit Agreement to be duly executed under seal and delivered as of the date and year first above written. BORROWER: ALVEY SYSTEMS, INC., a Delaware corporation By /s/ W. R. MICHAELS ----------------------------- Title CEO & Chairman ------------------------- GUARANTORS: PINNACLE AUTOMATION, INC., a Delaware corporation By /s/ W. R. MICHAELS ----------------------------- Title President, CEO & Chairman ------------------------- M&E INSTALLERS, INC., a Delaware corporation By /s/ MICHELE GIBBONS ----------------------------- Title Secretary ------------------------- MCHUGH, FREEMAN & ASSOCIATES, INC., a Wisconsin corporation By /s/ W. R. MICHAELS ----------------------------- Title V.P. & Asst. Treasurer ------------------------- NEWALV, INC., a Delaware corporation By /s/ W. R. MICHAELS ----------------------------- Title President ------------------------- BUSSE BROS., INC., a Wisconsin corporation By /s/ W. R. MICHAELS ----------------------------- Title Chairman, CEO & Treasurer ------------------------- -3- THE BUSCHMAN COMPANY, an Ohio corporation By /s/ W. R. MICHAELS ----------------------------- Title Exec. V.P. ------------------------- WHITE STORAGE AND RETRIEVAL SYSTEMS, INC., a New Jersey corporation By /s/ W. R. MICHAELS ----------------------------- Title Exec. V. P. ------------------------- WESELEY SOFTWARE DEVELOPMENT CORP., a Connecticut corporation By /s/ W. R. MICHAELS ----------------------------- Title Chairman ------------------------- -4- Signature Pages to Alvey Systems, Inc. First Amendment BANKS: NATIONSBANK, N.A., individually in its capacity as a Lender and in its capacity as Agent By /s/ MIKE PALM ----------------------------- Title Corporate Finance Officer ------------------------- BANK OF SCOTLAND By /s/ CATHERINE M. ONIFFREY ----------------------------- Title Vice President ------------------------- HARRIS TRUST AND SAVINGS BANK By /s/ EMILY L. BURT ----------------------------- Title Vice President ------------------------- -5- EX-10.15 3 EXHIBIT 10.15 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "SECOND AMENDMENT") dated as of March 14, 1997, is to that Credit Agreement dated as of January 23, 1996 as amended by that First Amendment to Credit Agreement dated as of May 15, 1996 (as amended and modified hereby and as further amended and modified from time to time hereafter, the "CREDIT AGREEMENT"; terms used but not otherwise defined herein shall have the meanings assigned in the Credit Agreement), by and among ALVEY SYSTEMS, INC., a Delaware corporation (the "BORROWER"), THOSE SUBSIDIARIES AND CREDIT PARTIES party thereto and identified on the signature pages hereof (together with the Borrower sometimes being referred to as the "CREDIT PARTIES"), as Guarantors and Credit Parties, the Lenders party thereto, and NATIONSBANK, N.A., as Agent (the "AGENT"). W I T N E S S E T H WHEREAS, the Lenders have, pursuant to the terms of the Credit Agreement, made available to the Borrower a $30,000,000 credit facility; WHEREAS, the Borrower has requested modifications to the Credit Agreement relating to the financial covenants set forth therein; and WHEREAS, the Required Lenders for and on behalf of the Lenders have agreed to the requested changes on the terms and conditions hereinafter set forth; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: A. The Credit Agreement is amended in the following respects: 1. Section 7.11 of the Credit Agreement is hereby deleted in its entirety and replaced with the following: "7.11 FINANCIAL COVENANTS. (a) CONSOLIDATED FUNDED INDEBTEDNESS RATIO. There shall be maintained as of the end of each fiscal quarter a Consolidated Funded Indebtedness Ratio of not greater than the amount set forth below for the period indicated: CONSOLIDATED DATE FUNDED INDEBTEDNESS RATIO From October 1, 1996 through December 31, 1996 7.60 to 1.0 CONSOLIDATED DATE FUNDED INDEBTEDNESS RATIO From January 1, 1997 through March 31, 1997 9.25 to 1.0 From April 1, 1997 through June 30, 1997 9.00 to 1.0 From July 1, 1997 through September 30, 1997 8.00 to 1.0 From October 1,1997 through December 31, 1997 5.00 to 1.0 From January 1, 1998 through June 30, 1998 4.67 to 1.0 From July 1, 1998 through December 31, 1998 4.25 to 1.0 From January 1, 1999 through June 30, 1999 3.87 to 1.0 From July 1, 1999 and thereafter 3.50 to 1.0 (b) CONSOLIDATED INTEREST COVERAGE RATIO. There shall be maintained as of the end of each fiscal quarter a Consolidated Interest Coverage Ratio of not less than the amount set forth below for the period indicated: CONSOLIDATED DATE INTEREST COVERAGE RATIO From October 1, 1996 through December 31, 1996 1.10 to 1.0 From January 1, 1997 through March 31, 1997 1.00 to 1.0 From April 1, 1997 through June 30, 1997 1.05 to 1.0 From July 1, 1997 through September 30, 1997 1.10 to 1.0 From October 1, 1997 through December 31, 1997 1.60 to 1.0 From January 1, 1998 through June 30, 1998 1.75 to 1.0 From July 1, 1998 through December 31, 1998 1.90 to 1.0 From January 1, 1999 through June 30, 1999 2.05 to 1.0 CONSOLIDATED DATE FUNDED INDEBTEDNESS RATIO From July 1, 1999 and thereafter 2.20 to 1.0 (c) CONSOLIDATED EBITDA. Consolidated EBITDA of the Borrower shall be not less than (i) $13,000,000 during fiscal year 1996 and (ii) $17,000,000 during all fiscal years occurring thereafter, in all cases as shown on the audited financial statements of the Borrower delivered pursuant to Section 7.1(a). B. In connection with the execution of this Second Amendment, the Borrower agrees to pay an amendment fee at closing in the amount of $30,000 (representing 10.0 basis points on the total Revolving Committed Amount) for the ratable benefit of the Lenders. C. The Borrower hereby represents and warrants that: (i) any and all representations and warranties made by the Borrower and contained in the Credit Agreement (other than those which expressly relate to a prior period) are true and correct in all material aspects as of the date of this Second Amendment; and (ii) No Default or Event of Default currently exists and is continuing under the Credit Agreement as of the date of this Second Amendment. D. The Borrower will execute such additional documents as are reasonably requested by the Agent to reflect the terms and conditions of this Second Amendment. E. Except as modified hereby, all of the terms and provisions of the Credit Agreement (and Exhibits) remain in full force and effect. F. The Borrower agrees to pay all reasonable costs and expenses in connection with the preparation, execution and delivery of this Second Amendment, including without limitation the reasonable fees and expenses of the Agent's legal counsel. G. This Second Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Second Amendment to produce or account for more than one such counterpart. H. This Second Amendment and the Credit Agreement, as amended hereby, shall be deemed to be contracts made under, and for all purposes shall be construed in accordance with the laws of the State of New York. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Second Amendment to Credit Agreement to be duly executed under seal and delivered as of the date and year first above written. BORROWER: ALVEY SYSTEMS, INC., a Delaware corporation By /s/ J. A. SHARP ---------------------------- Title Sr. V.P./CFO ------------------------ GUARANTORS: PINNACLE AUTOMATION, INC., a Delaware corporation By /s/ J.A. SHARP ---------------------------- Title V.P./C.F.O. ------------------------ M&E INSTALLERS, INC., a Delaware corporation By /s/ MICHELE GIBBONS ---------------------------- Title Secretary ------------------------ McHUGH, FREEMAN & ASSOCIATES, INC., a Wisconsin corporation By /s/ J. A. SHARP ---------------------------- Title C.F.O. ------------------------ NEWALV, INC., a Delaware corporation By /s/ J. A. SHARP ---------------------------- Title Secretary ------------------------ BUSSE BROS., INC., a Wisconsin corporation By /s/ J. A. SHARP ---------------------------- Title C.F.O. ------------------------ THE BUSCHMAN COMPANY, an Ohio corporation By /s/ J. A. SHARP ---------------------------- Title C.F.O. ------------------------ WHITE SYSTEMS, INC., a New Jersey corporation By /s/ J. A. SHARP ---------------------------- Title C.F.O. ------------------------ WESELEY SOFTWARE DEVELOPMENT CORP., a Connecticut corporation By /s/ J. A. SHARP ---------------------------- Title C.F.O. ------------------------ REAL TIME SOLUTIONS, INC., a Delaware corporation By /s/ J. A. SHARP ---------------------------- Title C.F.O./V.P. ---------------------------- Signature Pages to Alvey Systems, Inc. Second Amendment BANKS: NATIONSBANK, N.A., individually in its capacity as a Lender and in its capacity as Agent By /s/ LISA S. DONAGHUE ---------------------------- Title Vice President ------------------------ BANK OF SCOTLAND By /s/ CATHERINE M. DUFFY ---------------------------- Title Vice President ------------------------ HARRIS TRUST AND SAVINGS BANK By /s/ EMILY L. BURT ---------------------------- Title Vice President ------------------------ EX-10.23 4 EXHIBIT 10.23 STOCK PURCHASE AGREEMENT BETWEEN ALVEY SYSTEMS, INC. AND UNR INDUSTRIES, INC. DECEMBER 16, 1996 TABLE OF CONTENTS Page ---- ARTICLE I TERMS OF PURCHASE AND SALE. . . . . . . . . . . . . . . . . . . . 1 1.01. Sale of the Shares. . . . . . . . . . . . . . . . . . . . . 1 1.02. The Closing . . . . . . . . . . . . . . . . . . . . . . . . 1 1.03. Purchase Price and Payment. . . . . . . . . . . . . . . . . 3 1.04. Purchase Price Adjustment . . . . . . . . . . . . . . . . . 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER . . . . . . . . . . . . 5 2.01. Organization. . . . . . . . . . . . . . . . . . . . . . . . 5 2.02. Corporate Power and Authority; Effect of Agreement. . . . . 5 2.03. Capitalization. . . . . . . . . . . . . . . . . . . . . . . 6 2.04. Title to Shares . . . . . . . . . . . . . . . . . . . . . . 6 2.05. Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 6 2.06. Financial Statements. . . . . . . . . . . . . . . . . . . . 6 2.07. Absence of Certain Changes or Events. . . . . . . . . . . . 7 2.08. No Undisclosed Liabilities. . . . . . . . . . . . . . . . . 7 2.09. Accounts Receivable . . . . . . . . . . . . . . . . . . . . 7 2.10. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.11. Compliance with Laws. . . . . . . . . . . . . . . . . . . .10 2.12. Employee Benefit Plans. . . . . . . . . . . . . . . . . . .12 2.13. Title to Assets . . . . . . . . . . . . . . . . . . . . . .15 2.14. Inventory and Supplies. . . . . . . . . . . . . . . . . . .16 2.15. Intellectual Property . . . . . . . . . . . . . . . . . . .16 2.16. Commitments . . . . . . . . . . . . . . . . . . . . . . . .18 i Page ---- 2.17. Litigation. . . . . . . . . . . . . . . . . . . . . . . . .19 2.18. Consents. . . . . . . . . . . . . . . . . . . . . . . . . .20 2.19. Insurance . . . . . . . . . . . . . . . . . . . . . . . . .20 2.20. Labor Practices . . . . . . . . . . . . . . . . . . . . . .20 2.21. Absence of Certain Commercial Practices . . . . . . . . . .21 2.22. Customers and Suppliers . . . . . . . . . . . . . . . . . .21 2.23. Adequacy of Assets. . . . . . . . . . . . . . . . . . . . .21 2.24. Product Recalls . . . . . . . . . . . . . . . . . . . . . .21 2.25. Product Liability . . . . . . . . . . . . . . . . . . . . .22 2.26. Intercompany Transactions . . . . . . . . . . . . . . . . .22 2.27. Bank Accounts . . . . . . . . . . . . . . . . . . . . . . .22 2.28. Books and Records . . . . . . . . . . . . . . . . . . . . .22 2.29. No Brokers. . . . . . . . . . . . . . . . . . . . . . . . .22 2.30. Backlog . . . . . . . . . . . . . . . . . . . . . . . . . .22 2.31. No Misrepresentations . . . . . . . . . . . . . . . . . . .22 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER . . . . . . . . . . . .23 3.01. Organization. . . . . . . . . . . . . . . . . . . . . . . .23 3.02. Corporate Power and Authority; Effect of Agreement. . . . .23 3.03. Consents. . . . . . . . . . . . . . . . . . . . . . . . . .23 3.04. No Brokers. . . . . . . . . . . . . . . . . . . . . . . . .23 3.05. Status of Buyer . . . . . . . . . . . . . . . . . . . . . .24 ARTICLE IV COVENANTS OF SELLER AND THE COMPANY. . . . . . . . . . . . . . .24 4.01. Cooperation by Seller . . . . . . . . . . . . . . . . . . .24 4.02. Conduct of Business . . . . . . . . . . . . . . . . . . . .24 4.03. Access. . . . . . . . . . . . . . . . . . . . . . . . . . .26 ii Page ---- 4.04. Further Assurances. . . . . . . . . . . . . . . . . . . . .27 4.05. No Solicitation . . . . . . . . . . . . . . . . . . . . . .27 4.06. Financial Reports . . . . . . . . . . . . . . . . . . . . .27 ARTICLE V COVENANTS OF BUYER. . . . . . . . . . . . . . . . . . . . . . . .27 5.01. Cooperation by Buyer. . . . . . . . . . . . . . . . . . . .27 5.02. Books and Records; Personnel. . . . . . . . . . . . . . . .28 5.03. Collection of Aged Receivables. . . . . . . . . . . . . . .28 5.04. Further Assurances. . . . . . . . . . . . . . . . . . . . .28 ARTICLE VI ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . .28 6.01. Termination of Commitments of Company with Seller or Seller's Affiliates . . . . . . . . . . . . . . . . . . . .28 6.02. Transition. . . . . . . . . . . . . . . . . . . . . . . . .29 6.03. Excluded Liabilities. . . . . . . . . . . . . . . . . . . .29 6.04. Diligence in Pursuit of Conditions Precedent. . . . . . . .29 6.05. Employment. . . . . . . . . . . . . . . . . . . . . . . . .29 6.06. Severance . . . . . . . . . . . . . . . . . . . . . . . . .30 6.07. Change of Control Payments. . . . . . . . . . . . . . . . .30 6.08. Special Bonus . . . . . . . . . . . . . . . . . . . . . . .31 6.09. Section 338(h)(10) Election . . . . . . . . . . . . . . . .31 6.10. Confidentiality . . . . . . . . . . . . . . . . . . . . . .31 ARTICLE VII CONDITIONS TO CLOSING . . . . . . . . . . . . . . . . . . . . .32 7.01. Conditions to Buyer's Obligations . . . . . . . . . . . . .32 7.02. Conditions to Seller's Obligations. . . . . . . . . . . . .33 ARTICLE VIII TERMINATION PRIOR TO CLOSING . . . . . . . . . . . . . . . . .33 8.01. Termination . . . . . . . . . . . . . . . . . . . . . . . .33 iii Page ---- 8.02. Effect on Obligations . . . . . . . . . . . . . . . . . . .33 ARTICLE IX INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . .34 9.01. Survival of Representations, Warranties and Covenants . . .34 9.02. Indemnification . . . . . . . . . . . . . . . . . . . . . .34 9.03. Limitations on Indemnification. . . . . . . . . . . . . . .35 9.04. Indemnification Procedure . . . . . . . . . . . . . . . . .35 9.05. Indemnification For Taxes . . . . . . . . . . . . . . . . .37 ARTICLE X TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 10.01. Tax Indemnity. . . . . . . . . . . . . . . . . . . . . . .37 10.02. Purchase Price Adjustment. . . . . . . . . . . . . . . . .39 ARTICLE XI MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . .40 11.01. Interpretive Provisions. . . . . . . . . . . . . . . . . .40 11.02. Entire Agreement . . . . . . . . . . . . . . . . . . . . .40 11.03. Successors and Assigns . . . . . . . . . . . . . . . . . .40 11.04. Headings . . . . . . . . . . . . . . . . . . . . . . . . .40 11.05. Modification and Waiver. . . . . . . . . . . . . . . . . .40 11.06. Expenses . . . . . . . . . . . . . . . . . . . . . . . . .40 11.07. Notices. . . . . . . . . . . . . . . . . . . . . . . . . .41 11.08. Governing Law. . . . . . . . . . . . . . . . . . . . . . .42 11.09. Public Announcements . . . . . . . . . . . . . . . . . . .42 11.10. Third Party Beneficiaries. . . . . . . . . . . . . . . . .42 11.11. Severability . . . . . . . . . . . . . . . . . . . . . . .42 11.12. Knowledge. . . . . . . . . . . . . . . . . . . . . . . . .42 11.13. Dispute Resolution . . . . . . . . . . . . . . . . . . . .42 11.14. Counterparts . . . . . . . . . . . . . . . . . . . . . . .43 iv SCHEDULES Schedule 1.03 Checks and Bank Overdrafts Schedule 2.01 Qualification to do Business as a Foreign Corporation Schedule 2.02 Violations, Breaches or Defaults under Material Commitments Schedule 2.07 Absence of Certain Changes or Events Schedule 2.09 Schedule of Accounts Receivable Schedule 2.10(d) Pending Audits and Examinations of Tax Returns Schedule 2.10(e) Tax Examinations Schedule 2.10(f) Tax Deficiencies or Assessments Schedule 2.10(j) Affiliated Corporations and Dividend Election Schedule 2.10(o) Foreign Income Schedule 2.11(a) Hazardous Materials Schedule 2.12(a) Employee Plans and Benefit Arrangements Schedule 2.13 Leased Real Property Schedule 2.15 Intellectual Property Schedule 2.16(a) Commitments Schedule 2.17 Litigation Schedule 2.19 Certificates of Insurance Schedule 2.20(a) Ten Most Highly Compensated Employees Schedule 2.20(b) Employment Contracts Schedule 2.22 Customers and Suppliers Schedule 2.25 Product Liability Schedule 2.26 Intercompany Transactions Schedule 2.27 List of Bank Accounts Schedule 2.30 Backlog Schedule 6.07 Change of Control Liabilities Schedule 11.12 Persons with Knowledge EXHIBITS Exhibit A Opinion of Seller's counsel, Bell, Boyd & Lloyd Exhibit B Opinion of Buyer's counsel, Gibson, Dunn & Crutcher LLP v STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (this "Agreement") is made and entered into as of December 16, 1996 between Alvey Systems, Inc., a Delaware corporation ("Buyer") and UNR Industries, Inc., a Delaware corporation ("Seller"). RECITALS WHEREAS, Seller is the owner of all of the issued and outstanding shares of capital stock of Real Time Solutions, Inc., a Delaware corporation and wholly- owned subsidiary of Seller (the "Company"), consisting of 1,000 shares of common stock, par value $.01 per share (collectively, the "Shares"); and WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Shares. AGREEMENT NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements, and upon the terms and subject to the conditions, hereinafter set forth, the parties hereby agree as follows: ARTICLE I TERMS OF PURCHASE AND SALE 1.01. SALE OF THE SHARES. At the Closing (as defined in Section 1.02), upon the terms and subject to the conditions set forth herein, Seller shall sell to Buyer, and Buyer shall purchase from Seller, all of the issued and outstanding capital stock of the Company. 1.02. THE CLOSING. (a) The closing of the transactions contemplated hereby (the "Closing") shall take place at the offices of Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, California, commencing at 10:00 a.m. local time, on December 19, 1996, or at such other time and/or place, as the parties may mutually agree (the "Closing Date"). (b) On the business day immediately preceding the Closing Date, the parties shall conduct a pre-closing at the offices of Gibson, Dunn & Crutcher LLP, commencing at 10:00 a.m. at which each party shall present for review by the other parties copies, in execution form, of all documents required to be delivered by such party at the Closing. (c) At the Closing, upon the terms and subject to the conditions set forth herein, Seller shall deliver or cause to be delivered to Buyer: (i) certificates representing the Shares, duly endorsed in blank for transfer or accompanied by duly executed stock powers assigning the Shares in blank, which certificates shall not bear any legend restricting the transfer of the Shares; (ii) a long-form certificate of good standing and a certificate of tax good standing for the Company issued by the Secretary of State of the State of Delaware, certifying that the Company is in good standing upon the records of its offices, together with certificate(s) to transact business as a foreign corporation in each state in which the Company is so qualified, each as of a date reasonably close to the Closing Date; (iii) copies of the Certificate of Incorporation and Bylaws of the Company, in each case as amended to date, certified by the secretary or an assistant secretary of the Company; (iv) the written opinion of special counsel to Seller, Bell, Boyd & Lloyd, substantially in the form attached hereto as Exhibit A which shall expressly state that Buyer (and Buyer's senior lenders) is entitled to rely on such opinion; (v) resignations, or removals by Seller, of the directors of the Company; (vi) the official stock register and minute books of the Company, certified by the secretary or an assistant secretary of the Company; (vii) the certificate required by Section 7. 01 (a) hereof; (viii) true and correct copies of real property leases, specified material contracts, licenses, permits, governmental decrees, and patent, copyright and trademark licenses, to the extent not previously delivered; (ix) any consents, approvals or other authorizations necessary to effect the transactions contemplated hereby; (x) such other documents and instruments as Buyer or its counsel deems reasonably necessary or desirable to effectuate the transactions contemplated by this Agreement. (d) At the Closing, upon the terms and subject to the conditions of this Agreement, Buyer shall deliver to Seller: (i) a long-form certificate of good standing for Buyer issued by the Secretary of State of Delaware, as of a date reasonably close to the Closing Date, certifying that Buyer is in good standing upon the records of its office; (ii) a certified copy of resolutions of the Board of Directors of Buyer authorizing all actions necessary to consummate the transactions contemplated by this Agreement; 2 (iii) the Purchase Price (as defined in Section 1.03); (iv) the certificate required by Section 7.02(a) hereof-, (v) the written opinion of Gibson, Dunn & Crutcher LLP, special counsel to Pinnacle and Buyer, substantially in the form attached hereto as EXHIBIT B; and (vi) such other documents and instruments as Seller or its counsel deem reasonably necessary or desirable to effectuate the transactions contemplated hereby. 1.03. PURCHASE PRICE AND PAYMENT. The aggregate purchase price to be paid by Buyer to Seller for the Shares shall be equal to $5,333,582 in cash (giving effect to the contribution to capital of the Intercompany Debt) minus the sum of the dollar amount associated with (a) Excess Inventory (as defined in Section 1.04(c)), (b) Obsolete Inventory (as defined in Section 1.04(c)), (c) Book-to- Physical Inventory Adjustment (as defined in Section 1.04(c)), (d) Aged Accounts Receivable Adjustment (as defined in Section 1.04(c)) and (e) any Company checks or bank overdrafts which have not been cleared as of the Closing Date, as set forth on Schedule 1.03 (the "Purchase Price"). If the Book-to-Physical Inventory Adjustment is negative (as defined in Section 1.04(c)) and is a number greater than the sum of Excess Inventory, Obsolete Inventory and Aged Accounts Receivables, such excess shall be added to the Purchase Price and paid promptly to Seller by Buyer. Payment to Seller of the Purchase Price shall be made on the Closing Date by wire transfer of immediately available funds to an account or accounts of Seller at a bank or banks specified by Seller no later than three business days prior to the Closing Date. 1.04. PURCHASE PRICE ADJUSTMENT. (a) As of a mutually agreed-upon date not to exceed 5 business days prior to the Closing Date, Seller will cause a physical count of the inventory to be taken, at which Buyer and its representatives and accountants may be present and participate. The quantities of inventory per this physical count will be valued at the lower of average cost (which approximates first-in, first- out) or market (where market does not exceed net realizable value) and inventory is to be considered on a part number basis in reaching such determinations regarding the lower of cost or market. Following such physical inventory, Seller shall prepare and present to Buyer a Purchase Price Adjustment Statement (the "Purchase Price Adjustment Statement") by 8:00 AM Central Standard Time on the day immediately preceding the Closing Date which will reflect the dollar value of the Company's Excess Inventory, Obsolete Inventory, if available, Book- to-Physical Inventory Adjustment, as of the date of the physical inventory, and Aged Accounts Receivable Adjustment, as of the day immediately preceding the presentation of the Purchase Price Adjustment Statement. The Purchase Price Adjustment Statement shall also include footnotes which provide detailed descriptions and calculations regarding the amount of Excess Inventory, Obsolete Inventory, Book-to-Physical Inventory Adjustment and Aged Accounts Receivable Adjustment. If the values for Excess Inventory and Obsolete Inventory are not available on the day immediately preceeding the Closing Date, a supplemental Purchase Price Adjustment Statement containing Excess Inventory and Obsolete Inventory values shall be submitted by Seller to Buyer within 10 business days after the Closing Date, together with Seller's 3 wire transfer to Buyer of immediately available funds in the amount of Excess Inventory and Obsolete Inventory values reflected thereon. (b) Buyer and its representatives and accountants shall have the right to review the workpapers of Seller and its accountants used in preparing and auditing the Purchase Price Adjustment Statement referred to in Section 1.04(a) hereof, and shall have full access to the books, records, working papers and personnel of Seller and Seller's accountants for purposes of reviewing the accuracy and fairness of presentation of the Purchase Price Adjustment Statement. The Purchase Price Adjustment Statement shall be binding upon each of Buyer and Seller for all purposes unless Buyer and its representative and independent accountants gives written notice of disagreement with any of said values or amounts within thirty (30) days after the receipt by Buyer of such Purchase Price Adjustment Statement specifying in reasonable detail, insofar as possible, the nature and extent of such disagreement. If Buyer and Seller are unable to resolve any such disagreement within thirty (30) days after Buyer gives Seller notice thereof, the disagreement shall be referred for final determination to Deloitte & Touche LLP or, if such firm declines to act, to any other accounting firm of national reputation as may be reasonably acceptable to Buyer and Seller. Buyer and Seller may submit to such accounting firm any facts which they deem relevant to the determination, and the determination of such accounting firm shall be conclusive, non-appealable and binding upon Buyer and Seller for all purposes. Such accounting firm shall resolve any disputes in an informal proceeding with rules to be established by such firm. Buyer and Seller agree that judgment may be entered upon the determination of such accounting firm in any court having jurisdiction over the party against which such determination is to be enforced. Seller and Buyer shall each pay the fees and disbursements of their respective internal and independent accountants and other personnel incurred in the initial preparation, review and final determination of the Purchase Price Adjustment Statement. The fees and disbursements of the accounting firm to which any disagreement is referred to above shall be borne equally by Seller and Buyer. (c) As used in this Agreement, "Excess Inventory" means the sum of (i) to the extent the Stated Inventory Amount (as defined below) is between 100% and 200% of the Normal Usage Amount (as defined below), 50% of the amount that the Stated Inventory Amount exceeds the Normal Usage Amount and (ii) 100% of the amount, if any, by which the Stated Inventory Amount exceeds 200% of the Normal Usage Amount, in each case determined on the basis of the physical count of the inventory to be taken in accordance with Section 1.04(a) hereof. "Stated Inventory Amount" means the dollar value of the Company's inventory on a part number basis as of the date of completion of the physical count of inventory to be taken pursuant to Section 1.04(a) hereof, prior to adjustment for Excess Inventory or Obsolete Inventory. "Normal Usage Amount" means the quantity of inventory valued at the lower of average cost (which approximates first-in, first-out) or market considered on a part number basis, used by the Company in the ordinary course of business for the twelve months ended November 30, 1996, PROVIDED, HOWEVER, that Normal Usage Amount for a new product that was first sold less than twelve months prior to Closing shall be the reasonably anticipated usage for the twelve months after Closing. "Obsolete Inventory" means 100% of any portion of the Stated Inventory Amount as may be determined to be obsolete, unmerchantable or otherwise below standard quality. "Book-to- Physical Inventory Adjustment" means the amount by which the dollar value of the Company's inventory reflected on the Company's inventory records as of the date of the physical inventory, taken pursuant to Section 1.04(a) hereof, exceeds or is less than the aggregate Stated 4 Inventory Amount, prior to adjustment for Excess Inventory or Obsolete Inventory. If the dollar value of the Company's inventory reflected on the November 30, 1996 financial statements is greater than the Stated Inventory Amount, the Book-to-Physical Inventory Adjustment is a positive number. If the Stated Inventory Amount exceeds the dollar value of the Company's inventory reflected on the November 30, 1996 financial statements, the Book-to-Physical Inventory Adjustment is a negative number. "Aged Accounts Receivable Adjustment" means any accounts receivable of the Company which are carried on the books and records of the Company and which have been outstanding 60 days on the day immediately preceding the delivery of the Purchase Price Adjustment Statement (each such receivable being herein referred to as an "Aged Receivable"). ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: 2.01. ORGANIZATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to own its properties and carry on its business as it is now being conducted. The Company is duly qualified to do business and is in good standing as a foreign corporation in all jurisdictions where the nature of the business conducted by it makes such qualification necessary and the absence of such qualification could, individually or in the aggregate, have a material adverse effect on the financial condition, business, results of operations, prospects or properties, whether or not arising in the ordinary course of business, of the Company (a "Material Adverse Effect"). Schedule 2.01 lists (i) each state in which the Company is qualified to do business as a foreign corporation and (ii) each state in which the Company has (A) any sales office or (B) any distributor. True, correct and complete copies of the Certificate of Incorporation and Bylaws of the Company, in each case as amended to date, have been previously delivered to Buyer. 2.02. CORPORATE POWER AND AUTHORITY; EFFECT OF AGREEMENT. Each of the Seller and the Company has all requisite power and authority to execute, deliver and perform this Agreement and the agreements, certificates, instruments or other documents to be executed and delivered in connection herewith (collectively, the "Ancillary Documents") by each of the Seller and the Company and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly and validly executed and delivered by each of the Seller and the Company and constitutes the valid and binding obligation of each of the Seller and the Company, and such Ancillary Documents, upon execution and delivery by each of the Seller and the Company, will constitute valid and binding obligations of each of the Seller and the Company, in each case enforceable against each of the Seller and the Company in accordance with its terms, except to the extent that such enforceability (i) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and (ii) is subject to general principles of equity. The execution, delivery and performance by each of the Seller and the Company of this Agreement and such Ancillary Documents and the consummation by each of the Seller and the Company of the transactions contemplated hereby and thereby will 5 not, with or without the giving of notice or the lapse of time, or both, (A) violate or conflict with any provision of law, rule or regulation to which Seller or the Company is subject or by which any of the property of Seller or the Company is bound or (B) violate or conflict with any order, judgment or decree applicable to Seller or the Company (C) violate or conflict with any provision of the Certificate of Incorporation or the Bylaws of the Seller or the Company or (D) except as set forth on Schedule 2.02, result in a violation or breach of, or permit any third party to modify, terminate or rescind any term or provision of, or constitute a default under, any material Commitment (as defined in Section 2.15), including, without limitation, any indenture, mortgage, deed of trust, promissory note or industrial revenue bond, if any, to which the Company is a party or by which any of the property of the Company is bound, or result in the creation of an Encumbrance on any of the assets of the Company. 2.03. CAPITALIZATION. The authorized capital stock of the Company consists solely of 1,000 shares of common stock, $.01 par value per share, of which 1,000 Shares are issued and outstanding and owned of record and beneficially by Seller. All of the Shares have been duly authorized and are validly issued, fully paid and non-assessable. There are outstanding no securities convertible into, exchangeable for, or carrying the right to acquire, equity securities of the Company, or subscriptions, warrants, options, rights, calls, agreements, demands or other arrangements or commitments of any character obligating the Company to issue or dispose of any of its equity securities or any ownership interest therein or otherwise relating to the capital stock of the Company. 2.04. TITLE TO SHARES. The sale and delivery of the Shares to Buyer pursuant to Article I hereof will vest in Buyer legal and valid title to such Shares, free and clear of any and all liens, security interests, pledges, mortgages, charges, limitation, claims, restrictions, rights of first refusal, rights of first offer, rights of first negotiation or other encumbrances of any kind or nature whatsoever (collectively, "Encumbrances"), other than Encumbrances created by Buyer. 2.05. SUBSIDIARIES. The Company does not hold a direct, indirect or beneficial interest in any entity (corporation, partnership, joint venture, association or other business enterprise). 2.06. FINANCIAL STATEMENTS. (a) Seller has heretofore delivered to Buyer unaudited balance sheets of the Company as of December 31, 1994 and 1995 (collectively, the "Balance Sheets;" the balance sheet as of December 31, 1995 is referred to as the " 1995 Balance Sheet") and the related unaudited consolidated income statements for the fiscal years then ended (collectively, the "Income Statements"). The Balance Sheets and the Income Statements (collectively, the "Financial Statements") were prepared in accordance with the books and records of the Company and incorporated in the Seller's consolidated financial reports to stockholders. Seller has provided Buyer and Buyer's auditors, Price Waterhouse LLP ("Buyer's Auditor's") with full access to, and true and correct copies of, the Company's financial books and records. (b) Seller has heretofore delivered to Buyer an unaudited balance sheet of the Company as of September 30, 1996 (the "Interim Balance Sheet") and the related unaudited 6 income statement for the nine months then ended (together, the "Interim Financial Statements"), copies of which are included on Schedule 2.06. The Interim Financial Statements were prepared in accordance with the books and records of the Company and incorporated in the Seller's consolidated financial reports to stockholders. 2.07. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as expressly permitted by this Agreement or as disclosed on Schedule 2.07, since the date of the Interim Balance Sheet, the Company has not (a) suffered any damage, destruction or casualty loss, whether or not covered by insurance, adversely affecting the Company's business, (b) incurred or discharged, in whole or in part, any obligation or liability or entered into any other transaction except in the ordinary course of business, (c) suffered any change having a Material Adverse Effect, (d) increased the rate or terms of compensation payable or to become payable by the Company to its directors, officers or key employees or increased the rate or terms of any bonus, pension or other employee benefit plan covering any of its directors, officers or key employees, except in each case increases occurring in the ordinary course of business in accordance with the Company's customary practices (including normal periodic performance reviews and related compensation and benefit increases) and except as contemplated by Section 6.07 hereof, (e) paid or declared any distribution of cash or any other asset, in the nature of a dividend, in redemption or as the purchase price of any of its capital stock or in discharge or cancellation, in whole or in part, of any indebtedness owing to its shareholders, or made any purchase, redemption, retirement, sale, issuance or other acquisition of any stock, notes or other securities, (f) sold or transferred any asset of the Company except in the ordinary course of business, (g) created or permitted to arise any Encumbrance upon any of the assets of the Company, except for Encumbrances for Taxes (as defined in Section 2.10) not due, purchase money security interests and mechanics' liens being disputed by the Company in good faith and by appropriate proceedings, (h) altered the manner of keeping the Company's books, accounts or records or the accounting practices reflected therein, (i) changed the nature of customer contracts, licensing arrangements or billing practices or (j) reduced the amount of any reserve or accrued liability balance, except to the extent of cash payments related thereto. The Company has no knowledge of any threat or intention on the part of any significant customer, supplier or distributor to reduce materially the volume of its purchases from or sales to the Company or otherwise materially modify its business relationship with the Company. 2.08. NO UNDISCLOSED LIABILITIES. Except as reflected on the Schedules hereto and except for potential losses on certain contracts to supply DMS projects, the Company has no liabilities or obligations of any nature (absolute, accrued, contingent or otherwise), and whether due or to become due (including, without limitation, any liability for taxes and interest, penalties or other charges payable with respect to any such liability or obligation), that were not fully reflected or reserved against in the Interim Balance Sheet (whether or not required to be so reserved by generally accepted accounting principles ("GAAP")), except for liabilities and obligations incurred in the ordinary course of business since the date thereof. 2.09. ACCOUNTS RECEIVABLE. The accounts receivable of the Company as shown on the Interim Financial Statements and all accounts receivables which have arisen subsequent to September 30, 1996 have been collected or are collectible in the ordinary course of business net of reserves specifically identified on the Interim Financial Statements or the notes thereto, except 7 for the Aged Accounts Receivable. Schedule 2.09 includes a complete and accurate aging schedule of all accounts receivable reflected on the Interim Balance Sheet. 2.10. TAXES. (a) For purposes of this Agreement: (i) the term "Taxes" means (A) all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto, (B) any liability for payment of amounts described in clause (A) whether as a result of transferee liability, of being a member of an affiliated, consolidated, combined or unitary group for any period, or otherwise through operation of law and (C) any liability for the payment of amounts described in clauses (A) or (B) as a result of any tax sharing, tax indemnity or tax allocation agreement or any other express or implied agreement to indemnify any other person; and the term "Tax" means any one of the foregoing Taxes; (ii) the term "Returns" means all returns, declarations, reports, statements and other documents required to be filed in respect of Taxes, and the term "Return" means any one of the foregoing Returns; and (iii) the term "Tax Affiliate" means each member of a consolidated, combined, unitary, or other similar group for Tax purposes (for the period during which the Company and such member were included in that group). (b) The Company and Tax Affiliates have accurately prepared and timely filed all Returns required to be filed on or prior to the date hereof. The Returns are accurate and correct in all material respects and do not contain a disclosure statement under Section 6662 of the Internal Revenue Code of 1986, as amended (the "Code") (or any predecessor provision or comparable provision of state, local or foreign law). (c) The Company and Tax Affiliates have paid all Taxes required to have been paid by them before the date hereof. (d) Except as set forth in Schedule 2.10(d): (i) There is no pending claim for refund made by the Company with respect to Taxes previously paid; (ii) no claim has been made by any taxing authority in any jurisdiction where the Company does not file Returns that any of them is or may be subject to Tax by that jurisdiction; and 8 (iii) no extensions or waivers of statutes of limitations with respect to the Returns have been given by or requested from the Company or any Tax Affiliate. (e) Schedule 2.10(e) sets forth a complete list of all pending audits, proceedings and examinations with respect to Taxes that involve the Company or for which the Company could be liable. To the best knowledge of the Seller and the Company, no other such audits, proceedings or examinations are threatened or contemplated. (f) Except to the extent indicated in Schedule 2.10(f), all deficiencies asserted or assessments made as a result of any examinations by any taxing authority have been fully paid or are fully reflected as a liability in the Interim Balance Sheet. (g) There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the assets of the Company. (h) The Company is not a party to or bound by any tax indemnity, tax sharing or tax allocation agreement. (i) The Company is not a party to or bound by any closing agreement or offer in compromise with any taxing authority, other than the closing agreement between the Seller and the Internal Revenue Service with respect to the federal income tax audit of the Seller and its subsidiaries for the taxable year ended December 31, 1993. (j) Except to the extent indicated in Schedule 2.10(j): (i) the Company has never been a member of an affiliated group of corporations, within the meaning of Section 1504 of the Code, or a member of combined, consolidated or unitary group for state, local or foreign Tax purposes (other than the group the common parent of which is Seller); (ii) the Company has not filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state, local or foreign income Tax law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state, local or foreign income Tax law) apply to any disposition of any asset owned by it; (iii) the Company has not made a consent dividend election under Section 565 of the Code; and (iv) the Company has not been a personal holding company under Section 542 of the Code. (k) None of the assets of the Company is property that the Company is required to treat as being owned by any other person pursuant to the so-called "safe harbor lease" provisions of former Section 168(f)(8) of the Internal Revenue Code of 1954, as amended- none of the assets of the Company directly or indirectly secures any debt the interest on which is tax 9 exempt under Section 103(a) of the Code; none of the assets of the Company is "tax-exempt use property" within the meaning of Section 168(h) of the Code. (l) The Company has neither agreed to make, nor is it required to make, any adjustment under Sections 48 1 (a) or 263A of the Code or any comparable provision of state or foreign tax laws by reason of a change in accounting method or otherwise. The Company has not taken action which is not in accordance with past practice that could defer a liability for Taxes of the Company from any taxable period ending on or before the date hereof to any taxable period ending after such date. (m) The Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in connection with this Agreement or any change of control of the Company, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code. (n) The Company is not, and has not been, a United States real property holding corporation (as defined in Section 897(c)(2) of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. (o) The Company does not have and has not had a permanent establishment in any foreign country, as defined in any applicable Tax treaty or convention between the United States and such foreign country and, except as set forth on Schedule 2.10(o), the Company has not engaged in a trade or business within, or derived any income from, any foreign country. (p) The Company is not party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes. (q) The provisions for Taxes currently payable on the Interim Balance Sheet are at least equal, as of the date thereof, to all unpaid Taxes of the Company, whether or not disputed (other than income Taxes that are provided for by the Seller). (r) None of the income recognized, for federal, state, local or foreign income tax purposes, by the Company during the period commencing on the date hereof and ending on the Closing Date will be derived other than in the ordinary course of business. (s) There are no deferred intercompany gains or losses, or intercompany items, as such terms are defined in the Treasury Regulations, or other similar amounts that will be required to be recognized or otherwise taken into account by the Company as a result of the acquisition of the Shares pursuant to this Agreement. 2.11. COMPLIANCE WITH LAWS. (a) The Company is in compliance, in all material respects, with all federal, state and local laws, ordinances, rules and regulations applicable to its business or properties (including, without limitation, Environmental Laws (as defined in Section 2.11(d)) currently in effect. Neither Seller nor the Company has received any notification of any asserted present or past failure by the Company to comply with any such law, rule or regulation. The Company has 10 at all times possessed, has been, and is in compliance with, all governmental permits, licenses and authorizations (including all Environmental Permits (as defined in Section 2.11(d)) necessary for the conduct of its business on and prior to the Closing Date and the failure to possess, or be in compliance with, which would have a Material Adverse Effect. All of such permits, licenses and authorizations are, and on the Closing Date will be, valid and in full force and effect. The Company is in compliance, in all material respects, with all limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder. Except as disclosed on Schedule 2.11(a), no Hazardous Material (as defined in Section 2.11(d)) has been treated, stored, released, disposed of, or discharged into the environment, on or from the current or any prior premises of the Company nor has any Hazardous Material been released on or from any locations at which the Company arranged, by contract, agreement or otherwise, for disposal, treatment, transport for disposal or treatment, of any Hazardous Material. There is no (i) Environmental Condition (as defined in Section 2.11(d)), (ii) asbestos- containing material installed at any premises leased by the Company (a "Company Facility") or (iii) polychlorinated biphenyls deposited or contained in any existing equipment or otherwise located at any Company Facility. The Company is not aware of any liability to any third party for any Personal Injury (as defined in Section 2.11(d)) of any person, including, without limitation, any employee or former employee of the Company (A) in any way arising out of any exposure prior to the Closing to any Hazardous Material present at or generated by any Company Facility at or prior to the Closing or (B) in any way arising out of any exposure after the Closing to any Hazardous Material that was present at or generated by any Company Facility at or prior to the Closing. The Company has received all regulatory and other Federal, state or local licenses, approvals, permits and authorizations necessary in connection with the manufacture, storage or sale of its products prior to the Closing Date. All such permits, licenses and approvals are, and on the Closing Date will be, in full force and effect, the Company is in compliance with their requirements and no proceeding is pending or, to the best knowledge of the Seller and the Company, threatened to revoke or amend any of them. None of such licenses, approvals, permits and authorizations are or will be impaired or in any way affected by the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (b) True, correct and complete copies of all environmental reports in the possession of Seller or the Company, if any, relating to any real property leased by the Company have been delivered concurrently herewith to Buyer. (c) There are no off-site locations to which or at which the Company or any agent of the Company, including any employee or former employee of the Company, has ever generated or disposed of any Hazardous Material. (d) As used in this Agreement, the following terms shall have the following meanings: "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601 ET SEQ.). 11 "ENVIRONMENTAL CONDITION" means (i) any condition arising out of any release or threatened release of Hazardous Materials from or onto any Company Facility, (ii) any condition at any location arising out of any release or threatened release of Hazardous Materials that the Company generated, (iii) any violation by the Company of any Environmental Permit or of any Environmental Law or (iv) any condition at any Company Facility requiring remediation under any Environmental Law. "ENVIRONMENTAL LAWS" means, in each case as in effect on the applicable date prior to the Closing Date, 42 U.S.C. Section 9607 and 9613(f) of CERCLA, the Hazardous Material Transportation Act (49 U.S.C. Section 1801 ET SEQ.), the Clean Water Act (33 U. S. C. Section 1251 ET SEQ.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 ET SEQ.), the Clean Air Act (42 U.S.C. Section 7401 ET SEQ.), the Toxic Substances Control Act, as amended (15 U. S. C. Section 2601 ET SEQ.) the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 ET SEQ.), the Occupational Safety and Health Act (29 U.S.C. Section 651 ET SEQ.) and any other federal, state or local law relating to Environmental Matters, the rules and regulations promulgated under any thereof, and any provisions of common law providing for any remedy or right of recovery with respect to Environmental Matters. "ENVIRONMENTAL MATTERS" means any matter arising out of or relating to the production, storage, handling, use, emission, disposal, discharge, transportation, or release of any contaminant, waste, or hazardous or toxic material, or other substance or material regulated by law, or otherwise arising out of or relating to safety, health, sanitation or the environment, and shall include, without limitation, the costs of investigating and remediating the same, any fines and penalties arising in connection therewith, and any claim in respect thereof for damages or injunctive relief for alleged Personal Injury, property damage or damage to natural resources under common law or Environmental Law. "ENVIRONMENTAL PERMIT" means each permit, license, order, variance, registration or other authorization of any federal, state or local governmental agency issued, approved or required to be obtained under any Environmental Law. "HAZARDOUS MATERIAL" means (i) any pollutant, contaminant, petroleum, crude oil or any fraction thereof or hazardous waste or hazardous substance, within the meaning of such terms under CERCLA or any other Environmental Law and (ii) any other hazardous or toxic substance or material, or any material requiring remediation, within the meaning of any Environmental Law applicable to the Company or to which its properties or other assets are subject. "PERSONAL INJURY" means any illness, disability, injury or death. 2.12. EMPLOYEE BENEFIT PLANS. (a) COMPANY EMPLOYEE PLANS AND BENEFIT ARRANGEMENTS. Schedule 2.12(a) lists each Company Employee Plan and Company Benefit Arrangement. The Company has made available to Buyer with respect to each Company Employee Plan and Company Benefit Arrangement true and complete copies of (i) all written documents comprising such plans and arrangements (including trust agreements, annuity contracts, funding instruments, amendments 12 and individual agreements relating thereto), (ii) the three most recently filed IRS Form 5500 series (including all schedules thereto) with respect to each Company Employee Plan required to file such Form, (iii) the most recent financial statements, if any, pertaining to such plans and arrangements, (iv) if applicable, the summary plan description currently in effect and all material modifications thereto, if any, for each Company Employee Plan and (v) if applicable, the most recent IRS letter as to the qualification of each plan listed in Schedule 2.12(a). Schedule 2.12(a) shall categorize whether each plan is a Pension Plan or a Welfare Plan, and whether each plan covers employees or former employees other than employees or former employees of the Company. (b) MULTIEMPLOYER WELFARE FUNDS. The Company has never contributed to a multiemployer welfare benefit fund maintained pursuant to any Welfare Plan. (c) RETIREE WELFARE PLANS. Except pursuant to the provisions of COBRA, the Company maintains no Company Employee Plan that provides, or has otherwise promised to provide, benefits described in Section 3(l) of ERISA to any former employees or retirees of the Company. The Company does not have any liability, absolute, contingent, matured or unmatured, in respect of retiree medical, life insurance or other benefits which is not reflected on the Financial Statements. (d) PENSION PLANS. The IRS has issued favorable opinion letters with respect to all Company Employee Plans that are Pension Plans intended to be qualified under Code Section 401. To the knowledge of the Company, no condition exists and no event has occurred since the date of any such opinion letters which could reasonably be expected to result in revocation of any such opinion letters, and true and correct copies of such opinion letters have been made available to Buyer. No reportable event as defined in Section 4043(b) of ERISA, whether or not the reporting requirements have been waived by the Pension Benefit Guaranty Corporation ("PBGC"), has occurred or is continuing with respect to any Company Employee Plans that are Pension Plans, other than events which have been reported on the Company's IRS Form 5500 series, (including all schedules thereto) with respect to each Company Employee Plan required to file such form. (e) PROHIBITED TRANSACTIONS AND FIDUCIARY RESPONSIBILITY. On and after January 1, 1990, neither the Company nor any ERISA Affiliate, nor to the Company's knowledge, any fiduciary of any Company Employee Plan has engaged in or been a party to any Prohibited Transaction with respect to any Company Employee Plan that could reasonably be expected to result in the imposition on the Company of a material penalty pursuant to Section 502(i) of ERISA, material damages pursuant to Section 409 of ERISA or a material tax pursuant to Section 4975(a) of the Code. No officer, director or employee of the Company has committed a material breach of any responsibility or obligation imposed upon fiduciaries by Title I of ERISA with respect to any Company Employee Plan. (f) LIENS AND PENALTIES. The Company has no liability with respect to any Company Employee Plan and no event has occurred which could lead to liability (i) for any lien imposed under Section 302(f) of ERISA or Section 412(n) of the Code, (ii) for any interest payments required under Section 302(e) of ERISA or Section 412(m) of the Code, (iii) for any 13 excise tax imposed by Chapter 43 of Subtitle D of the Internal Revenue Code or (iv) for any failure to make any minimum funding contributions under Section 302(c)(11) of ERISA or Section 412(c)(11) of the Code. (g) LIABILITY OF ERISA AFFILIATES. No ERISA Affiliate has any liability, and no event has occurred which could result in any liability of an ERISA Affiliate, under Title I, II or IV of ERISA or Section 4980B of the Code to any pension plan or to the PBGC or the IRS for which the Company could be liable or which could be a lien on the Company's assets. (h) COBRA. The Company has complied in all material respects with the provisions of COBRA with respect to all Company Employee Plans that are Group Health Plans, and the Company has no liability pursuant to Section 4980B of the Code, including, but not limited to, liability for any Tax under Section 4980B(a) of the Code. (i) ADDITIONAL BENEFITS. Except as set forth in Schedule 2.12(j), no individual shall accrue or receive additional benefit or service credit or accelerated rights to payments of benefits under any Company Plan, including the right to receive any parachute payment, as defined in Section 28OG of the Code, or become entitled to severance, termination allowance or similar payments as a direct result of the transactions contemplated by this Agreement. (j) CLAIMS. Other than claims for benefits in the ordinary course, there is no material action, suit or claim pending or to the knowledge of the Company threatened, involving any Company Employee Plan or the assets of any Company Employee Plan by any person against such plan or the Company or any ERISA Affiliate. There is no pending or threatened proceeding involving any Company Employee Plan before the Internal Revenue Service, the United States Department of Labor or any other governmental or quasigovernmental authority. (k) COMPLIANCE WITH LAWS, CONTRIBUTIONS. Each Company Plan has at all times prior hereto been maintained in all material respects in accordance with its terms and in substantial compliance with all applicable laws, including, but not limited to, all material reporting or disclosure requirements applicable to any such plans. The Company has made full and timely payment of all amounts required to be contributed under the terms of, and applicable law, of each Company Plan that is a Pension Plan or required to be paid as expenses under such Company Plan, and the Company shall continue to do so through the Closing Date. (1) WARN LIABILITY. The Company has complied in all respects with the requirements of the Workers Adjustment and Retraining Notification Act ("WARN") and no claim under WARN is pending against the Company or overtly threatened, nor is there any reasonable basis to anticipate any such claim. (m) DEFINITIONS. (i) "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, as set forth in Section 4980B of the Code and Part 6 of Title I of ERISA. (ii) "CODE" shall have the meaning given to it in Section 2. 10 above. 14 (iii) "COMPANY BENEFIT ARRANGEMENT" means any material benefit arrangement that is not an Employee Benefit Plan, including but not limited to (A) each employment or consulting agreement, (B) each incentive bonus or deferred bonus arrangement, (C) each arrangement providing termination allowance, severance or similar benefits, (D) each equity compensation plan, (E) each deferred compensation plan and (F) each compensation policy and practice currently maintained, or previously maintained, by the Company covering the employees, former employees, directors or former directors of the Company, or the beneficiaries of such persons. (iv) "COMPANY EMPLOYEE PLAN" means any material Employee Benefit Plan that is sponsored or contributed, or has in the past been sponsored or contributed to, by the Company covering employees or former employees of the Company. (v) "COMPANY PLAN" means any Company Employee Plan or Company Benefit Arrangement. (vi) "EMPLOYEE BENEFIT PLAN" means any employee benefit plan, as defined in Section 3(3) of ERISA. (vii) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any regulations thereunder. (viii) "ERISA AFFILIATE" means any person (as defined in Section 3(9) of ERISA) that, together with the Company as of the relevant measuring date under ERISA, was or is required to be treated as a single employer under Section 414(b) or (c) of the Code. (ix) "GROUP HEALTH PLAN" means any group health plan, as defined in Section 5000(b)(1) of the Code. (x) "IRS" shall have the meaning given to it in Section 2.10 above. (xi) "PENSION PLAN" means any employee pension benefit plan, as defined in Section 3(2) of ERISA. (xii) "PROHIBITED TRANSACTION" means a "prohibited transaction" as defined under Section 4975 of the Code or a transaction in violation of Section 406 of ERISA for which no exemption is available under Section 4975 of the Code or Section 408 of ERISA, respectively. (xiii) "WELFARE PLAN" means any employee welfare benefit plan, as defined in Section 3(1) of ERISA. 2.13. TITLE TO ASSETS. (a) Except with respect to the Intellectual Property which is covered in Section 2.15 below, the Company has good and valid title to, or a valid leasehold in, all of the assets and 15 properties that are used in the business or otherwise material to the financial condition of the Company, free and clear of any and all Encumbrances, except (i) liens for Taxes not yet due or being contested in good faith by appropriate proceedings. and (ii) such encumbrances as are not substantial in amount, character or extent and do not detract from the value or interfere with the use of assets or impair the operations of the Company in any material respect ("Permitted Encumbrances"). The assets and properties (whether owned or leased) of the Company, in the aggregate, are in good operating condition, ordinary wear and tear excepted. The Interim Balance Sheet reflects all tangible assets and properties, real or personal, utilized by the Company in the conduct of its business, except to the extent such assets and properties have been sold or transferred in the ordinary course of business since the date of the Interim Balance Sheet. (b) The Company does not own any real property. Schedule 2.13 sets forth a list of all real properties in which the Company holds a leasehold interest (the "Real Property"). For purposes of this Agreement, the agreements under which the Company is occupying Real Property are collectively referred to as the "Leases." The Company has previously delivered to Buyer a true, correct and complete copy of each of the Leases, as amended to date. Each of the Leases is in full force and effect. No Lease has been modified or amended since the Interim Balance Sheet. No party to any Lease has given the Company written or, to the Company's knowledge, oral notice of or made any claim with respect to any breach or default with respect to any such Lease. The Company has not entered into any sublease, license or other agreement granting to any person or entity any right to the use, occupancy or enjoyment of the Real Property or any portion thereof, or the right to purchase the Real Property or any portion thereof All material certificates of occupancy, permits and licenses of all governmental authorities having jurisdiction over the Real Property required to have been issued to the Company, to enable the Real Property to be lawfully occupied and used for all of the purposes for which the Real Property is currently occupied and used have been lawfully issued and are in full force and effect. Neither Seller nor the Company has received any notification of any pending, threatened or contemplated condemnation proceeding affecting the Real Property or any portion thereof 2.14. INVENTORY AND SUPPLIES. The inventory and supplies of the Company consist of items of a quality and quantity usable and saleable in the normal course of the Company's business at values at least equal to the values at which such items are carried on its books. The values of obsolete or slow-moving inventory and inventory of below standard quality, if any, have been written down to the lower of cost or realizable market value or have been written off. The value at which such obsolete or slow-moving inventory is carried on the Interim Balance Sheet reflects the normal inventory valuation policies of the Company, stating inventory at the lower of market or average cost, which approximates a first-in first-out basis, all determined in accordance with GAAP. 2.15. INTELLECTUAL PROPERTY. (a) Schedule 2.15 sets forth a list of all United States and foreign patents, patent applications, registered and unregistered trademarks, trade names, logos, registered copyrights, and applications therefor, material unregistered copyrights, algorithms, not embodied in software, and models, not embodied in software, in which the Company has any colorable claim of ownership, including, without limitation, all copyrights in software programs (except for mass- 16 marketed third party PC software), owned or used by the Company in the conduct of its business (the "Intellectual Property Rights"), together with a listing of all licenses, franchises, licensing agreements (whether as licensor or licensee) to which the Company is a party, and any other arrangement with respect to such Intellectual Property Rights. Except as disclosed to Buyer in Schedule 2.15, the Company has full title and ownership of or rights to use all Intellectual Property Rights, trade secrets, technology and know-how without any infringement of the rights of others. All of the Intellectual Property Rights, trade secrets, technology and know-how owned by the Company are free and clear of any and all Encumbrances except as set forth on Schedule 2.15. (b) To the best of the Company's knowledge, all Intellectual Property Rights, trade secrets, technology and know-how are valid, subsisting, unexpired and enforceable and have not been abandoned. All licenses, if any, of the Company's Intellectual Property Rights are in force and, to the best knowledge of the Company, not in default. (c) No proceedings have been instituted or are pending or, to the best knowledge of Seller and the Company, threatened, that challenge the rights of the Company to use or register, or maintain any registration of, any of the Intellectual Property Rights, trade secrets and technology. None of the products, processes, software (except for third party software), machines or services made, used or furnished by the Company infringes any valid patent, copyright, registered trademark or other legally recognized intellectual property rights owned by others. No holding, decision or judgment has been rendered by any governmental authority which would limit, cancel or question the validity of any Intellectual Property Right, trade secret or the Company's technology or business know-how. The Company has used and uses its commercially reasonable efforts to prevent any infringement by third parties of its Intellectual Property Rights, trade secrets and technology. Neither Seller nor the Company has received a notice of conflict with the asserted rights of others with regard to any Intellectual Property, trade secret or technology within the last three years. (d) Neither Seller nor the Company is making or has made use of any confidential information of third parties (except for such confidential information as may be embodied in third party software which Seller and/or the Company is or was, as the case may be, lawfully entitled to use and for which Seller and/or the Company is paying or has paid all licensing or other fees necessary in connection with the use of such third party software) nor any confidential information in which any of its present or past employees or other service providers has claimed a proprietary interest, other than information which Seller or the Company is authorized to use, and Seller and the Company are not aware of any facts that would give rise to such a claim. (e) To the best knowledge of Seller and the Company, with respect to each material published work distributed, the Company has used on every copy such notice as may be required under the copyright laws. The Company has not done any act, or omitted to do any act, which would cause any material copyright used or owned by the Company to become injected into the public domain. 17 (f) Each software program published or distributed by the Company in the conduct of its business is a "work made for hire," as defined by the Copyright Act of 1976, as amended, or is subject to a copyright which has been assigned exclusively to the Company by an instrument in writing. Each past and present employee or any independent consultant, participating in the development of any such software is bound by a confidentiality and nondisclosure agreement executed by such employee or independent consultant and the Company, which agreement prohibits the disclosure of any confidential information of the Company. (g) All past and present employees who have been engaged in research and development for the Company have executed an instrument assigning to the Company all of their right, title and interest in and to any inventions created or developed during, and within the scope of, their employment by the Company, and obligating them to disclose to the Company all such inventions. 2.16. COMMITMENTS. (a) Schedule 2.16(a) contains a true, correct and complete list of each of the following contracts or agreements, whether written or oral (including any and all amendments thereto), to which the Company is a party (collectively, the "Commitments"): (i) any software or other license or cross-license agreement for more than $5,000; (ii) any distributorship, agency or manufacturer's representative agreement; (iii) any open sales order or contract for more than $25,000; (iv) any purchase order or contract for more than $25,000; (v) any equipment lease requiring annual expenditures of more than $10,000; (vi) any vehicle lease requiring annual expenditures of more than $10,000; (vii) any long-term supply or requirements contract for more than $10,000; (viii) any bond (bid, performance or other), letter of credit, agreement of guarantee, surety or indemnification (other than in favor of the Company), or any commitment to issue any such bond, letter of credit, agreement of guarantee, surety or indemnification; (ix) any maintenance agreement or obligation associated with software for more than $5,000; 18 (x) any agreement or contract that restricts the Company from competing, directly or indirectly, in any line of business with any other person or entity anywhere in the world; (xi) any management, employment, consulting, change of control or severance contract with any officer, consultant, director, employee or other person or entity; (xii) any contract or agreement that involves capital expenditures of more than $10,000; and (xiii) any contract or agreement, whether written or oral, that is material to the business or financial condition of the Company and is not of the type included in any of the foregoing clauses (i) through (xiv), including, without limitation, any contract or agreement, whether written or oral, that obligates the Company to make payments aggregating in excess of $25,000 in any one year. (b) Each Commitment is in full force and effect, valid and binding and enforceable against the Company and, to the best knowledge of Seller and the Company, each other party thereto, in accordance with its terms. Neither the Company nor any other party to any of the Commitments, is in material breach or default with respect to any term or condition thereof, and the Company has not received any notice that any event has occurred that, with the passage of time or the giving of notice, or both, would constitute such a material breach or default thereunder. (c) No Commitment obligates the Company to (i) purchase goods or services in excess of reasonably anticipated needs after the Closing Date or on terms that are materially less favorable than those obtainable from other suppliers of similar goods or services or (ii) sell goods or services after the Closing Date that cannot be produced or delivered pursuant to existing manufacturing or working conditions of the Company at a profit, except certain contracts to supply DMS projects. (d) There are no executory contracts under which the Company is obligated to provide indemnification or to pay consequential or incidental damages in excess of amounts that would be covered by insurance which have not been previously provided to Buyer. During the preceding three years, there have been no claims asserted against the Company for workers' compensation expenses incurred by an employer other than the Company. 2.17. LITIGATION. Schedule 2.17 sets forth every action, suit, arbitration, workers' compensation claim or other proceeding in any court or before any governmental authority ("Litigation") pending or, to the Seller or the Company's knowledge, threatened, against the Company or any of its assets or properties, or initiated, as of the date hereof, by the Company against third parties. No Litigation by any governmental authority or by any entity or person questions or challenges the validity of this Agreement or any Ancillary Document or any action taken or to be taken pursuant to this Agreement or any Ancillary Document or in connection with the transactions contemplated hereby or thereby. The Company is not subject to any outstanding 19 orders, rulings, judgments or decrees issued by any federal, state, local or foreign judicial or administrative authority. 2.18. CONSENTS. No consent, approval or authorization of, or exemption by, or filing with, any governmental department, bureau or agency or other public board or authority or any other third party is required in connection with the execution, delivery and performance by Seller of this Agreement or the Ancillary Documents or the taking of any other action contemplated hereby or thereby, excluding, however, consents, approvals, authorizations, exemptions and filings, if any, that Buyer is required to obtain or make. 2.19. INSURANCE. Seller carries insurance, which is adequate in character and amount, with reputable insurers, covering all assets, properties and business of the Company, and it has provided all required performance and other surety bonds. Schedule 2.19 contains certificates of insurance for all insurance policies presently covering the Company, including policies held by Seller or the Company and policies held by third parties under which the Company is a named insured. All such policies are in full force and effect, all premiums with respect thereto covering all periods up to and including the date hereof have been paid, and no notice of cancellation or termination has been received with respect to any such policy or bond. Seller has not received any notification that material changes are required in the conduct of the Company's business as a condition to the continuation of coverage or renewal of any such policy. The Company has not received notification from any insurer, agent or broker denying or disputing any claim made by the Company or denying or disputing any coverage for any such claim or the amount of any claim. The Company has no claim against any of its insurers under any of such policies pending or anticipated and there has been no occurrence of any kind which would give rise to any such claim. Seller has heretofore made available to Buyer true and complete copies of all such policy summaries. 2.20. LABOR PRACTICES. (a) Schedule 2.20(a) contains a true and correct list of the ten most highly compensated employees of the Company (based on annual salary and historical bonus). The Company is not a party to or otherwise bound by any collective bargaining agreement. There are no claims for unfair labor practices pending or, to the best knowledge of Seller and the Company, threatened, between the Company and any of its employees. No strikes, work stoppages or other labor disputes involving the Company's employees are pending or, to the knowledge of the Company, threatened. There is not pending any grievance procedure or arbitration proceeding under any collective bargaining agreement covering the Company's employees or former employees. There is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of Seller and the Company, threatened against the Company. The Company has not experienced any work stoppage or other similar type of labor difficulty. (b) Except as set forth on Schedule 2.20(b), none of the employees of the Company is covered by employment contracts except customary written and nonwritten understandings concerning employment terminable at will without cost or other liability nor are any of the employees of the Company members of any union or covered by union contracts. 20 (c) The Company is in compliance with the Immigration Reform and Control Act of 1986, as amended, and the Company has complied with all applicable federal, state and local laws relating to the employment of labor, including without limitation, the provisions thereof relating to wages, non- discriminatory hiring, promotional and employment practices and procedures, collective bargaining and payment of Social Security, unemployment compensation, worker's compensation and similar taxes, and the Company is not presently liable to any person or governmental agency for any arrears of wages or subject to any liabilities or penalties for failure to comply with any of the foregoing laws. There are no charges, audits, investigations, complaints or claims against the Company or any of its officers, directors, agents or employees pending before any federal, state or local agency responsible for the prevention of unlawful employment practices nor, has there been any threat of any such claim or charge. 2.21. ABSENCE OF CERTAIN COMMERCIAL PRACTICES. The Company has not, and no director, officer or, to the best knowledge of Seller and the Company, any agent, employee or other person acting on behalf of the Company has, (i) given or agreed to give any gift or similar benefit or more than nominal value to any customer, supplier or governmental employee or official or any other person who is in a position to help or hinder the Company or assist the Company in connection with any proposed transaction, which gift or similar benefit, if not continued in the future, might have a Material Adverse Effect or (ii) used any corporate or other funds for unlawful contributions, payments, gifts or entertainment, or made any unlawful expenditures relating to political activity to governmental officials or others or established or maintained any unlawful or unrecorded funds in violation of Section 3 OA of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has not, and no director or officer, and to the best knowledge of Seller and the Company, no agent, employee or other person acting on behalf of the Company has accepted or received any unlawful contributions, payments, gifts or expenditures. 2.22. CUSTOMERS AND SUPPLIERS. Schedule 2.22 sets forth: (a) a list of the five largest customers of the Company in terms of sales during the fiscal year ended December 31, 1995, showing the approximate total sales by the Company to each such customer during such fiscal year; and (b) a list of the five largest suppliers of the Company in terms of purchases during the fiscal year ended December 31, 1995, showing the approximate total purchases by the Company from each such supplier during such fiscal year. Except for the customers named on Schedule 2.22, the Company had no customer who accounted for more than 5% of the Company's sales during the period from January 1, 1995 to September 30, 1996. Except for the suppliers named on Schedule 2.22, there is no supplier from whom the Company purchased more than 5% of the goods or services that it purchased during the period January 1, 1995 to September 30, 1996. No significant customer of the Company has notified the Company of any intention to change its current business relationship with the Company. 2.23. ADEQUACY OF ASSETS. The assets and properties of the Company constitute, in the aggregate, all of the property necessary for the conduct of the Company's business in the manner in which and to the extent to which it is currently being conducted. 2.24. PRODUCT RECALLS. Since April 1993, there has not been any product recall, or post-sale warning or similar action (collectively, "Recalls") conducted with respect to any 21 product manufactured, shipped, delivered or sold by the Company, or any investigation or consideration of whether or not to undertake any Recalls. 2.25. PRODUCT LIABILITY. Except as set forth on Schedule 2.25, there is no action, suit, inquiry, proceeding or, to the knowledge of Seller or the Company, investigation by or before any court or governmental body pending or, to the best knowledge of the Company, threatened against or involving the Company relating to any product alleged to have been manufactured or sold by the Company and alleged to have been defective, or improperly designed or manufactured (including actions, proceedings or investigations based on negligence, breach of implied or express warranty, strict liability, defective product or product in an unreasonably dangerous condition, failure to warn or inadequate warning, careless, reckless, willful, wanton, gross and/or intentional conduct substantially certain to result in personal injury or damage), nor is there any valid basis for any such action, proceeding or investigation. 2.26. INTERCOMPANY TRANSACTIONS. Schedule 2.26 contains a list of all transactions between Seller or any person or entity related to or directly or indirectly controlling, controlled by or under common control with, Seller (a "Seller Affiliate"), on the one hand, and the Company, on the other hand, that remain executory on the date hereof and all liabilities or obligations of Seller or any Seller Affiliate to the Company, and all liabilities and obligations of the Company to Seller or any Seller Affiliate. 2.27. BANK ACCOUNTS. Schedule 2.27 contains a list of all bank accounts maintained by the Company, including each account number and the name and address of each bank and the name of each person who has signature power with respect to each such account. 2.28. BOOKS AND RECORDS. To the extent prepared since April 1, 1993, the minute books and stock records of the Company, which have been or will be made available to Buyer, Buyer's counsel and Buyer's auditors are complete and correct. At the Closing, all of those books and records will be in the possession of the Company. 2.29. NO BROKERS. Neither Seller nor the Company has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement or any of the Ancillary Documents, except for J.P. Morgan Securities Inc., whose fees shall be paid solely by Seller. 2.30. BACKLOG. Schedule 2.30 lists the Company's backlog prepared as of the most recent practicable date. Such backlog consists of orders by the Company's customers and has been calculated in a manner consistent with the Company's past practices. Neither Seller nor the Company has reason to believe that the backlog is not firm or will otherwise fail to result in completed sales as contemplated. 2.31. NO MISREPRESENTATIONS. No representation, warranty or statement made, or information provided, by Seller or the Company in this Agreement or in any other document furnished or to be furnished by or on behalf of Seller or the Company pursuant hereto or as contemplated hereby, including, without limitation, the Prospect List (as defined in Section 4.03), 22 contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: 3.01. ORGANIZATION. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, and has all requisite corporate power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby, and is duly qualified to transact business as a foreign corporation and is in good standing in the State of California. 3.02. CORPORATE POWER AND AUTHORITY; EFFECT OF AGREEMENT. The execution, delivery and performance by Buyer of this Agreement and the Ancillary Documents and the consummation by Buyer of the transactions contemplated hereby and thereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly and validly executed and delivered by Buyer and constitutes a valid and binding obligation of Buyer, and the Ancillary Documents, upon execution and delivery by Buyer, will constitute valid and binding obligations of Buyer, in each case enforceable against Buyer, as the case may be, in accordance with its terms, except to the extent that such enforceability (i) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and (ii) is subject to general principles of equity. The execution, delivery and performance by Buyer of this Agreement and the Ancillary Documents and the consummation by Buyer of the transactions contemplated hereby and thereby will not, with or without the giving of notice or the lapse of time, or both, (A) violate or conflict with any provision of law, rule or regulation to which Buyer is subject, (B) violate or conflict with any order, judgment or decree applicable to Buyer or (C) violate or conflict with any provision of the Certificate of Incorporation or the Bylaws of Buyer. 3.03. CONSENTS. No consent, approval or authorization of, or exemption by, or filing with, any governmental department, bureau or agency or other public board or authority is required in connection with the execution, delivery and performance by Buyer of this Agreement or the Ancillary Agreements, or the taking of any other action contemplated hereby, excluding, however, consents, approvals, authorizations, exemptions and filings, if any, that Seller or the Company is required to obtain or make. 3.04. NO BROKERS. Buyer has not employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement or the Ancillary Documents, except for Mammoth Capital, Inc., whose fees shall be paid solely by Buyer. 23 3.05. STATUS OF BUYER. Buyer is, and at the Closing will be (i) an "accredited investor" as defined in Rule 501 (a) promulgated under the Securities Act of 1933 and (ii) financially capable, without restriction, of purchasing the Shares pursuant hereto. ARTICLE IV COVENANTS OF SELLER AND THE COMPANY Seller and the Company hereby covenant and agree with Buyer as follows: 4.01. COOPERATION BY SELLER. From the date hereof and prior to the Closing, Seller and the Company will use all reasonable efforts, and will cooperate with Buyer, to secure all necessary consents, approvals, authorizations, exemptions and waivers from third parties as shall be required in order to effectuate the transactions contemplated hereby, and will otherwise use all reasonable efforts to cause the consummation of such transactions in accordance with the terms and conditions hereof 4.02. CONDUCT OF BUSINESS. Except as may be otherwise expressly permitted by this Agreement or with the prior written consent of Buyer, from the date hereof and prior to the Closing, Seller will cause the Company to, and the Company shall: (a) operate its business only in the ordinary course; (b) use all reasonable efforts to preserve intact its business organization; (c) continue in full force and effect all existing insurance policies (or comparable insurance) of or relating to the Company; (d) use all reasonable efforts to preserve its relationships with its lenders, suppliers, customers, licensors and licensees and others having business dealings with the Company. Without limiting the generality of the foregoing, and except as may be otherwise expressly permitted by this Agreement or with the prior written consent of Buyer, from the date hereof through the Closing, Seller shall not permit the Company to, and the Company shall not: (i) borrow any funds or otherwise become subject to, whether directly or by way of guaranty or otherwise, any indebtedness for borrowed money, including without limitation, any Inter-Company Debt, or be a party to any transfer of cash or cash equivalents by and between Seller and the Company, except for such transfers of cash or cash equivalents by and between Seller and the Company made in the ordinary course of the Company's business and which are reflected on the Daily Statements (as defined in Section 4.06); (ii) sell, lease, license or otherwise dispose of any of its properties or assets (including, but not limited to, rights with respect to Intellectual Property), except for sales of finished inventory in the ordinary course of business and consistent with past practice; (iii) create, or permit to be created, an Encumbrance upon any of the properties or assets of the Company, except (x) liens for Taxes not due, (y) mechanics' liens being disputed in good faith and (z) Permitted Encumbrances; 24 (iv) make any increase in, or any commitment to increase, the compensation payable to, any employee of the Company, other than salary increases for any such employee (which employee is not an officer or a management employee) of the Company resulting from promotions and routine pay raises in the ordinary course of business consistent with past practices; (v) alter (x) the manner of keeping its books, accounts or records or the accounting practices therein reflected or (y) the timing of the payment of its payables from the Company's past practices; (vi) create or modify any bonus, deferred compensations, pension, profit sharing, retirement, insurance, stock purchase, stock option or other fringe benefit plan, arrangement or practice or any other employee benefit plan (as defined in Section 3(3) of ERISA), whether formal or informal; (vii) post or provide any additional bid or performance bonds or letters of credit; (viii) issue, sell or otherwise dispose of any of its capital stock, or create, sell orotherwise dispose of any options, rights, conversion rights or other agreements or commitments of any kind relating to the issuance, sale or disposition of any of its capital stock; (ix) declare or pay any dividends in cash, securities or other property, make any other distribution with respect to its capital stock or acquire, directly or indirectly, by redemption or otherwise, any of its capital stock; (x) change its practices or policies from those in effect on September 30, 1996 with respect to the collection of receivables or the payment of payables or other debts or obligations, including any change that would have the effect of accelerating or delaying any such collection or payment; (xi) reclassify, split up or otherwise change any of its capital stock; (xii) be party to any merger, consolidation or other business combination; (xiii) organize any new subsidiary or acquire any capital stock of any person or any equity or ownership interest in any business; (xiv) prepay any obligation having a maturity of more than 90 days from the date it was issued and incurred; (xv) change the nature of customer contracts, licensing arrangements or billing practices (other than in the ordinary course of business); 25 (xvi) enter into or modify any employment agreement or similar commitment; (xvii) enter into or modify, or engage in any negotiations with respect to, any collective bargaining, union agreement or similar commitment; (xviii) enter into any agreement or commitment having a term in excess of one year; (xix) enter into any agreement or commitment that restricts the Company from carryingon its business anywhere in the world; (xx) pay, discharge or satisfy any claim, liability or obligation, absolute, accrued, contingent or otherwise, other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities or obligations reflected on the Interim Balance Sheet or incurred in the ordinary course of business and consistent with past practices since the date of the Interim Balance Sheet-, (xxi) cancel any debts or waive any claims or rights of substantial value; (xxii) provide, or commit to provide, any service or supplies to any customer who has an outstanding invoice from the Company unless such customer is charged for such additional service or supplies at the Company's standard rates; (xxiii) agree or otherwise commit, whether in writing or otherwise, to do any of the foregoing; or (xxiv) reduce the amount of any reserve or accrued liability balance except to the extent of cash payments made by the Company in its ordinary course of business related thereto. 4.03. ACCESS. From the date hereof and prior to the Closing, Seller and the Company shall (a) provide Buyer and its representatives with such information as Buyer or its representatives may from time to time reasonably request with respect to the Company and the transactions contemplated by this Agreement, (b) provide Buyer and its representatives reasonable access during regular business hours and upon reasonable notice to the properties, books and records of the Company as Buyer or its representatives may from time to time reasonably request, (c) cooperate in providing access to all information necessary or advisable in order to permit Buyer's Auditors to conduct an audit of the Financial Statements (if Buyer so elects) and (d) with the prior consent of Seller, permit Buyer and its representatives to discuss the business of the Company with the Company's officers, employees, distributors and suppliers; provided that Buyer will hold in confidence all documents and information concerning the Company so furnished, and, if the sale of the Shares pursuant hereto shall not be consummated, such confidence shall be maintained in accordance with the confidentiality agreement between Pinnacle Automation, Inc. ("Pinnacle") and J.P. Morgan Securities Inc. dated April 26, 1996 (the "Confidentiality Agreement"). Without limiting the generality of the foregoing, Seller and the Company shall provide to Buyer a list of the projects on which the Company has outstanding bids (including 26 expected revenues with respect thereto) and the Company's prospect list (all such information, collectively, the "Prospect List"). Seller and the Company will continue to advise Buyer of any changes to the Prospect List throughout the diligence process. 4.04. FURTHER ASSURANCES. At any time or from time to time after the Closing, Seller shall, at the request of Buyer or Buyer's counsel, execute and deliver any further instruments or documents and take all such further action as Buyer or Buyer's counsel may reasonably request in order to evidence or otherwise facilitate the consummation of the transactions contemplated hereby. 4.05. NO SOLICITATION. Between the date hereof and the earlier to occur of the Closing Date or the termination of this Agreement, neither Seller or any of its Affiliates, representatives or agents, nor the Company or any of its directors, officers, employees, representatives or agents, shall solicit, encourage (including by way of furnishing any nonpublic information concerning all or any portion of the Company's business) or consider any other Acquisition Proposal. As used in this Section 4.05, "Acquisition Proposal" shall mean a proposal (whether or not such proposal shall constitute a binding offer to purchase) for the acquisition of all or any portion of the Company or its business (whether by merger, stock purchase or otherwise) or all or a substantial portion of the assets of the Company or its business. 4.06. FINANCIAL REPORTS. Commencing with the month ended October 31, 1996, Seller shall cause the Company to, and the Company shall, prepare (i) monthly income statements and balance sheets for the Company and shall deliver such monthly financial statements to Buyer as promptly as practicable, but in no event later than five days after their normal completion date, (ii) monthly schedules showing the Company's outstanding payables (including a description of the nature of the goods or services giving rise to the payable and the anticipated payment date) and (iii) updates of the Company's Prospect List. Such monthly financial statements shall be prepared as mutually agreed upon with the Buyer. From December 3, 1996 up to and including the Closing Date, Seller shall prepare a daily statement of all cash receipts and disbursements ("Daily Statement") and shall deliver such Daily Statements to Buyer the day following their preparation no later than 12:00 P.M. EST. ARTICLE V COVENANTS OF BUYER Buyer hereby covenants and agrees with Seller as follows: 5.01. COOPERATION BY BUYER. From the date hereof and prior to the Closing, Buyer shall use its best efforts, and will cooperate with Seller and the Company, to secure all necessary consents, approvals, authorizations, exemptions and waivers from third parties as shall be required in order to effectuate the transactions contemplated hereby, and shall otherwise use all reasonable efforts to cause the consummation of such transactions in accordance with the terms and conditions hereof. 27 5.02. BOOKS AND RECORDS; PERSONNEL. For a period of seven years from the Closing Date, Buyer shall not, and shall cause the Company not to, dispose of or destroy any of the books and records of the Company relating to periods prior to the Closing ("Books and Records") without first offering to turn over possession thereof to Seller by written notice to Seller at least 30 days prior to the proposed date of such disposition or destruction. From and after the Closing, Buyer shall, and shall cause the Company to, allow Seller and its agents access to all Books and Records during normal working hours at Buyer's principal place of business or at any location where any Books and Records are stored, and Seller shall have the right, at their own expense, to make copies of any Books and Records; PROVIDED, HOWEVER, that any such access or copying shall be had or done in such a manner so as not to interfere with the normal conduct of Buyer's business. Buyer shall, and shall cause the Company to, make available to Seller upon written request (i) copies of any Books and Records, (ii) Buyer's and the Company's personnel to assist Seller in locating and obtaining any Books and Records and (iii) any of Buyer's and the Company's personnel whose assistance or participation is reasonably required by Seller or any of their Affiliates in anticipation of, or preparation for, existing or future Litigation, financial statements, tax returns or other matters in which Seller or any of their Affiliates are involved. Seller shall reimburse Buyer or the Company promptly, but in any event within 30 days of the receipt of an invoice from the Company, for the reasonable out-of-pocket expenses incurred by any of them in performing the covenants contained in this Section 5.02. 5.03. COLLECTION OF AGED RECEIVABLES. Buyer hereby covenants that subsequent to Closing, Buyer will use its reasonable best efforts to collect the Aged Receivables, which upon collection shall be applied toward satisfaction of the oldest Aged Receivable unless there is a dispute of any sort relating to the oldest Aged Receivable or the customer requests that its payment be attributed to a specific Aged Receivable. Promptly upon receipt of any payment of such outstanding Aged Receivables, whether in part or whole satisfaction of such balances owed, Buyer shall remit to Seller, on a monthly basis, any and all such money collected; PROVIDED, HOWEVER, if such payments received by Buyer exceed $50,000, Buyer shall remit any and all such money collected to Seller on a weekly basis. After the first anniversary of the Closing Date, Buyer may assign to Seller any and all Aged Receivables in complete satisfaction of this Section 5.03. 5.04. FURTHER ASSURANCES. At any time or from time to time after the Closing, Buyer shall, at the request of Seller or Seller's counsel, execute and deliver any further instruments or documents and take all such further action as Seller or Seller's counsel may reasonably request in order to evidence or otherwise facilitate the consummation of the transactions contemplated hereby. ARTICLE VI ADDITIONAL COVENANTS Buyer hereby covenants and agrees with Seller as follows: 6.01. TERMINATION OF COMMITMENTS OF COMPANY WITH SELLER OR SELLER'S AFFILIATES. Subject to Section 6.05, and except for the Company's employment 28 agreements and confidentiality agreements with Seller (copies of which have been provided to Buyer), on or prior to the Closing Date Seller shall cause all Commitments between the Company and Seller and/or any of Seller's Affiliates to be terminated, and neither the Company nor Buyer shall have any interest or right with respect to the subject matter of any such Commitment, except that, unless Buyer objects, those Commitments (if any) representing arm's-length purchase and sale agreements shall not be terminated. 6.02. TRANSITION. Prior to the Closing, Buyer, the Company and Seller shall use all reasonable efforts to identify and make appropriate arrangements for dealing with any transition problems that may be involved in the transfer of the Shares to Buyer and Buyer's commencement of operations of the Company's business. 6.03. EXCLUDED LIABILITIES. Notwithstanding anything herein to the contrary, Seller shallassume all liability and responsibility for any and all Litigation and other third party claims in the nature of Litigation or threatened Litigation against the Company or any of its Affiliates (whether or not listed on Schedule 2.17 or 2.25) arising out of events occurring at any time on or before the Closing Date, excluding claims arising solely by reason of Buyer's nonperformance of Commitments and including, without limitation, claims for Personal Injury or damage based on allegedly defective products including, without limitation, claims based on negligence, breach of implied or express warranty, strict liability, defective product or product in an unreasonably dangerous condition, failure to warn or inadequate warning, careless, reckless, willful, wanton, gross and/or intentional conduct substantially certain to result in Personal Injury or damage, and including any of the matters disclosed in any of the Schedules to this Agreement (collectively, the "Excluded Liabilities"), and Seller shall, in accordance with the provisions of Section 9.02(a), indemnify Buyer and the Company and their respective Affiliates, agents, representatives and employees and defend and hold each of them harmless from and against any liability, loss, damage, claim, judgment, fine, penalty, amount paid in settlement, cost or expense (including, without limitation, reasonable fees and expenses of counsel and outside accountants and other reasonable out-of-pocket expenses for investigation or defending any action or threatened action) (each a "Loss" and collectively "Losses") incurred or suffered by any of them in respect of or arising, directly or indirectly, out of any of the Excluded Liabilities. 6.04. DILIGENCE IN PURSUIT OF CONDITIONS PRECEDENT. Buyer, the Company and Seller shall each exercise all reasonable diligence to fulfill their respective obligations hereunder and shall cooperate fully with the other parties in regard to same to accomplish the Closing. Seller and the Company shall use all reasonable efforts to obtain all necessary third-party consents to the consummation of the transactions contemplated hereby, including, without limitation, any consents required under or in connection with any of the Commitments or any other documents by reason of the change in control of the Company effected by the sale of the Shares to Buyer, by operation of law or otherwise. 6.05. EMPLOYMENT. Buyer shall cause the Company to continue to employ a substantial number of current employees at substantially the same salaries and wages (including bonus, commission and sales incentive programs) and on terms and conditions (including Benefit Arrangements) that are in the aggregate substantially the same as those in effect immediately prior to the Closing Date. Nothing herein shall preclude Buyer from making changes following the 29 Closing as may be necessary, desirable or appropriate in light of the then- prevailing circumstances. Buyer shall cause the Company to perform all obligations of the Company under all agreements (including, but not limited to, employment and consulting and severance agreements listed in Schedule 2.20(b)) with any employee or former employee which relate to employment or compensation or benefits; PROVIDED, HOWEVER, all ongoing obligations of the Company with regard to payment to George C. King ("King"), Mark Hein ("Hein") and/or Pamela Louie ("Louie") of any and all severance or change of control payments shall be satisfied as provided in Sections 6.07, 6.06(b) and 6.06(c), respectively. 6.06. SEVERANCE. (a) Not later than five business days prior to the Closing Date, Buyer shall identify to Seller any employees, not to exceed five persons, whom Buyer does not wish to employ, and Seller shall cause the Company to terminate the employment of such employees prior to the Closing. Seller shall indemnify, defend and hold harmless Buyer, the Company, their Affiliates and their representatives, agents and employees in accordance with the provisions of Section 9.02 from and against any and all Losses arising, directly or indirectly, out of such terminations, including the costs of any severance payments, except for such payments made by Buyer to King, Hein and/or Louie pursuant to Sections 6.07, 6.06(b) and 6.06(c) hereof. (b) Buyer intends to offer a consulting agreement to Hein which shall supersede any and all prior oral or written agreements between Hein and the Company. In the event Hein enters into such consulting agreement with the Company any and all Losses relating to the costs of any severance payments made in the normal course to Hein shall be shared equally by Buyer and Seller. In the event Hein declines to enter into such consulting agreement with the Company, Seller covenants that Seller shall indemnify, defend and hold harmless Buyer, the Company, their Affiliates and their representatives, agents and employees in accordance with the provisions of Section 9.02 from any and all Losses relating to or arising from the costs of any severance payments made to Hein. (c) In the event Buyer shall fire Louie within six months of the Closing Date, Seller shall indemnify, defend and hold harmless Buyer, the Company, their Affiliates and their representatives, agents and employees in accordance with the provisions of Section 9.02 from and against any and all Losses arising, directly or indirectly, out of such termination, including the cost of any severance payments. 6.07. CHANGE OF CONTROL PAYMENTS. Seller has previously entered into certain Change of Control Agreements, dated February 6, 1996, as set forth in Schedule 2.20(b) hereto. These Change of Control Agreements obligate Seller to pay to King and Edward Capel ("Capel") severance pay in the aggregate amounts set forth on Schedule 6.07 upon the occurrence of certain conditions specified therein. Buyer shall offer a new employment agreement to King which shall supersede any and all prior oral or written agreements between King and the Company. In the event King declines to enter into such new employment agreement with the Company, but continues to work for the Company after the Closing Date, then Buyer shall share equally with Seller any Losses arising from, directly or indirectly, any claims made by King under either his Change of Control Agreement or current employment agreement with the Company; PROVIDED, 30 HOWEVER, that if King makes a claim under both his change of Control Agreement and his current employment agreement, Buyer shall share equally with Seller the payment under the agreement requiring the larger payment, but in no event payment under both agreements. If King declines to enter into such new employment agreement with the Company and ceases to work for the Company as of the Closing Date, Seller covenants that if any payment shall be owing under either or both of the King and Capel Change of Control Agreements, such payments shall be the sole obligation of Seller and any payments made by Buyer in satisfaction of any claims arising from or relating to either or both of these Change of Control Agreements are for the account of Seller and, without limitation, Seller shall fully indemnify, and hold Buyer and the Company harmless from and against, any liability or payments made in satisfaction of such claims. 6.08. SPECIAL BONUS. Seller intends to provide a special bonus pool in an amount not to exceed $200,000 for the benefit of the Company's employees following the Closing and final determination of the Purchase Price (as adjusted pursuant to Section 1.04 above). Seller shall determine the amount of such bonus pool and, in consultation with George C. King, shall determine the bonus amount to be allocated to individual Company employees, which bonus shall relate to services provided by the Company's employees for periods prior to the Closing Date. Seller shall provide to the Company sufficient funds to pay such bonuses, and any applicable withholding or other Taxes required to be paid with respect to such bonuses, and Buyer shall cause the Company to pay such bonuses (net of any and all applicable Taxes). 6.09. SECTION 338(H)(10) ELECTION. Buyer shall not make, or permit to be made, the election permitted by Section 338(h)(10) of the Code with respect to its acquisition of the Company. 6.10. CONFIDENTIALITY. Prior to and for a period of five years following the Closing, Seller shall keep confidential and not disclose (other than to its attorneys, accountants and advisers) or use (except in connection with preparing Tax Returns, conducting proceedings relating to Taxes and, prior to the Closing Date, as required in the conduct of the business of the Company in the ordinary course and consistent with past practice) any non-public information relating to the Company, whether or not obtained pursuant to or in connection with the transactions contemplated by this Agreement; PROVIDED, HOWEVER, that with respect to trade secrets of the Company (including, but not limited to, Intellectual Property, technology and know-how), the obligation of Seller under this sentence shall survive indefinitely from the date of this Agreement. This Section 6.10 shall not be violated by disclosure pursuant to court order or as otherwise required by law or in any other proceeding, on condition that notice of the requirement for such disclosure is given to Buyer prior to making any disclosure and Seller cooperates as Buyer may reasonably request in resisting it. Seller shall use all reasonable efforts to cause its respective representatives, employees, attorneys, accountants and advisers to whom information is disclosed pursuant to this Section 6.10 to comply with the provisions of this Section 6.10. 31 ARTICLE VII CONDITIONS TO CLOSING 7.01. CONDITIONS TO BUYER'S OBLIGATIONS. The obligations of Buyer to purchase the Shares shall be subject to the satisfaction (or waiver) on or prior to the Closing Date of all of the following conditions: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AND THE COMPANY. Seller and the Company shall have complied in all material respects with each of their agreements and covenants contained herein to be performed on or prior to the Closing Date, and all the representations and warranties of Seller and the Company contained herein shall be true in all material respects on and as of the Closing Date with the same effect as though made on and as of the Closing Date, except (i) as otherwise expressly contemplated hereby and (ii) to the extent such representations and warranties were made as of a specified date and as to such representations and warranties the same shall continue on the Closing Date to have been true, in all material respects, as of the specified date. Buyer shall have received a certificate of the Company, dated the Closing Date, certifying as to the fulfillment of the conditions set forth in this Section 7.01. (b) NO ORDER. No order of any court or administrative agency shall be in effect that temporarily, provisionally or permanently prohibits Buyer from consummating the transactions contemplated hereby. (c) CONSENTS. There shall have been obtained all necessary third- party consents (other than third party consents necessitated by reason of Buyer) to the consummation of the transactions contemplated hereby, including, without limitation, any consents required under or in connection with any of the Commitments or any other document by reason of the change in control of the Company effected by the sale of the Shares to Buyer, by operation of law or otherwise. (d) ABSENCE OF MATERIAL ADVERSE CHANGES. There shall not have occurred between the date hereof and the Closing Date any change having a Material Adverse Effect. (e) ENVIRONMENTAL DILIGENCE. Buyer shall have received, to its reasonable satisfaction, an environmental report from Montgomery Watson, Buyer's environmental consultant, relating to Montgomery Watson's Phase I site assessments of the Company's Napa and Berkeley facilities; PROVIDED, HOWEVER, that this condition shall be deemed satisfied unless Buyer notifies Seller no later than December 15, 1996 that Seller has received a report from Montgomery Watson which is not to Seller's reasonable satisfaction. (f) OPINION OF COUNSEL. Buyer shall have received an opinion dated the Closing Date from Bell, Boyd & Lloyd, special counsel for Seller, in form and substance as set forth in EXHIBIT A attached hereto. 32 7.02. CONDITIONS TO SELLER'S OBLIGATIONS. The obligations of Seller to sell the Shares shall be subject to the satisfaction (or waiver) on or prior to the Closing Date of all of the following conditions: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER. Buyer shall have complied in all material respects with each of its agreements and covenants contained herein to be performed on or prior to the Closing Date, and all of the representations and warranties of Buyer contained herein shall be true in all material respects on and as of the Closing Date with the same effect as though made on and as of the Closing Date, except (i) as otherwise expressly contemplated hereby and (ii) to the extent that such representations and warranties were made as of a specified date and as to such representations and warranties the same shall continue on the Closing Date to have been true as of the specified date. Seller shall have received a certificate of Buyer, dated the Closing Date, certifying as to the fulfillment of the conditions set forth in this Section 7.02. (b) NO ORDER. No order of any court or administrative agency shall be in effect that temporarily, provisionally or permanently prohibits Seller from consummating the transaction contemplated hereby. (c) OPINION OF COUNSEL. Seller shall have received an opinion dated the Closing Date from Gibson, Dunn & Crutcher LLP, special counsel for Buyer, in form and substance as set forth in EXHIBIT B attached hereto. ARTICLE VIII TERMINATION PRIOR TO CLOSING 8.01. TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) By the mutual written consent of Buyer and Seller; or (b) By either Seller or Buyer by written notice, without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in default or in breach of this Agreement), if the Closing shall not have occurred on or before December 31, 1996; or (c) By either Seller or Buyer by written notice, without liability to the terminating party on account of such termination (provided the terminating party is not other-wise in default or in breach of this Agreement), if there shall have been (i) a material breach by the other party of any of its representations, warranties, covenants or agreements contained herein or (ii) a breach by the other party of any of its representations, warranties, covenants or agreements contained herein, which breach results in a failure to satisfy a condition to the terminating party's obligation to consummate the transactions provided herein. 8.02. EFFECT ON OBLIGATIONS. Termination of this Agreement pursuant to this Article VIII shall terminate all obligations of the parties hereunder, except for their obligations 33 under Section 11.06 and 11.13; PROVIDED, HOWEVER, that termination pursuant to clause (b) or (c) of Section 8.01 shall not relieve the defaulting or breaching party from any liability to the other party hereto. ARTICLE IX INDEMNIFICATION 9.01. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The representations and warranties made in this Agreement or in any Ancillary Document shall survive the Closing for a period of two (2) years after the Closing Date (except for (i) the representations and warranties set forth in Sections 2.03 and 2.04, which representations and warranties shall survive indefinitely without limitation, (ii) the representations and warranties contained in section 2.1 1, which shall survive for a period of five (5) years and (iii) the representations and warranties with respect to Taxes, which representations and warranties shall survive until the applicable statute of limitation (including any extensions thereof) has expired and shall thereupon expire together with any right to indemnification for breach thereof (except to the extent a written notice asserting a claim for breach of any such representation or warranty shall have been given prior to such date to the party that made such representation or warranty, in which case such representation and warranty shall survive, to the extent of such claim only, until such claim is resolved). The covenants and agreements contained herein to be performed or complied with prior to the Closing shall expire at the Closing. The covenants and agreements contained herein to be performed or complied with at or after the Closing, other than the covenant and agreement to indemnify against breaches of representations and warranties, shall survive the Closing until the expiration of the applicable statute of limitations. The limitations set forth above regarding the survival of claims for breach of representation and warranty shall not apply to any claims arising out of fraud in the making of the representations and warranties set forth herein which shall survive until any applicable statute of limitations expires. 9.02. INDEMNIFICATION. (a) From and after the Closing Date, Seller shall severally indemnify, defend and hold harmless Buyer and its respective officers, directors, stockholders, employees, representatives and agents (collectively, "Affiliates") (including the Company) from and against all Losses that are incurred or suffered by any of them by reason of (i) the breach by Seller or the Company of any of the representations or warranties or (ii) the failure to comply with any covenants, made by Seller or the Company herein; PROVIDED, HOWEVER, in determining whether there has been a breach of Section 2.11 hereto, such determination shall be made without regard to any limitation or qualification regarding materiality. (b) From and after the Closing Date, Buyer shall indemnify, defend and hold harmless Seller from and against all Losses that are incurred or suffered by Seller by reason of (i) the breach by Buyer of any of the representations or warranties or (ii) the failure to comply with any covenants, made by Buyer herein. 34 (c) Any person or entity entitled to indemnification hereunder is referred to herein as an "Indemnitee" and any person or entity required to provide indemnification hereunder is referred to herein as an "Indemnitor." Buyer and its Affiliates are sometimes referred to as the "Buyer Indemnitee Group" and Seller is sometimes referred to as the "Seller Indemnitee Group." 9.03. LIMITATIONS ON INDEMNIFICATION. (a) Notwithstanding Section 9.02, the rights of the Indemnitees and the obligations of the Indemnitors are subject to the following: (1) an Indemnitee shall not be entitled to any recovery unless a claim for indemnification is made in accordance with of Section 9.04(a) and within the time period of survival set forth in Section 9.01 and the person seeking indemnification complies with the procedures set forth in Section 9.04(b) and(c); (2) the Buyer Indemnitee Group, on the one hand, and the Seller Indemnitee Group, on the other hand, shall not be entitled to any indemnification hereunder unless and until the Losses that the relevant group are entitled to recover hereunder exceed, in the aggregate, ($100,000) (the "Threshold"), in which event (subject to clause (3) below) the relevant group shall be entitled to recover the Losses in excess of $50,000; and (3) the maximum amount recoverable by the Buyer Indemnitee Group, on the one hand, and the Seller Indemnitee Group, on the other hand, for indemnification claims is $5,250,000 less the amount of the Purchase Price Adjustment (the "Cap"). Notwithstanding the provisions of clauses (2) and (3) of the preceding sentence, Losses arising from a breach of the representations and warranties set forth in Sections 2.03 and 2.04 or from a breach of covenants set forth in Article X shall be indemnifiable from the first dollar without regard to the Threshold or Cap. Notwithstanding anything herein to the contrary, the limitations set forth in this Section 9.03 shall not apply to any claims arising out of fraud or intentional misconduct in the making of representations and warranties set forth herein. (b) The indemnification provisions in this Article IX and Article X shall be the exclusive remedy for any breach of the representations and warranties set forth in this Agreement. 35 9.04. INDEMNIFICATION PROCEDURE. (a) An Indemnitee shall assert a claim for indemnification by written notice (a "Notice") to the Indemnitor(s) stating the nature and basis of such claim. In the case of Losses arising by reason of any third party claim, the Notice shall be given within 20 days of the filing of any such claim against the Indemnitee or the determination by the Indemnitee that a claim will ripen into a claim for which indemnification will be sought, but the failure of the Indemnitee to give the Notice within such time period shall not relieve the Indemnitor of any liability that the Indemnitor may have to the Indemnitee except to the extent that the Indemnitor is prejudiced thereby and then only to the extent of such prejudice. (b) The Indemnitee shall provide to the Indemnitor on request all information and documentation reasonably necessary to support and verify any Losses that the Indemnitee believes give rise to a claim for indemnification hereunder and shall give the Indemnitor reasonable access to all books, records and personnel in the possession or under the control of the Indemnitee that would have bearing on such claim. (c) In the case of third party claims for which indemnification is sought, the Indemnitor shall have the option (i) to conduct any proceedings or negotiations in connection therewith, (ii) to take all other steps to settle or defend any such claim (provided that the Indemnitor shall not, without the consent of the Indemnitee, settle any such claim on terms that provide for (A) a criminal sanction or fine, (B) injunctive relief or (C) monetary damages in excess of the amount that the Indemnitor is required to pay hereunder) and (iii) to employ counsel to contest any such claim or liability in the name of the Indemnitee or otherwise. In any event, the Indemnitee shall be entitled to participate at its own expense and by its own counsel in any proceedings relating to any third party claim; PROVIDED, however that if the defendants in any such action or claim include both the Indemnitee and the Indemnitor and the Indemnitee shall have reasonably concluded that there would be a conflict of interest under applicable federal or state law were the same counsel to represent the Indemnitee and the Indemnitor, the Indemnitee shall be entitled to be represented by separate counsel at the Indemnitor's expense; PROVIDED FURTHER, HOWEVER, that such action or claim shall not be settled without the Indemnitor's consent, which shall not be unreasonably withheld. The Indemnitor shall, within 30 days of receipt of the Notice, notify the Indemnitee of its intention to assume the defense of such claim. Until the Indemnitee has received notice of the Indemnitor's election whether to defend any claim, the Indemnitee shall take reasonable steps to defend (but may not settle) such claim. If the Indemnitor shall decline to assume the defense of any such claim, or shall fail to notify the Indemnitee within 30 days after receipt of the Notice of the Indemnitor's election to defend such claim, the Indemnitee shall defend against such claim (provided that the Indemnitee shall not settle such claim without the consent of the Indemnitor, which consent shall not be unreasonably withheld). The expenses of all proceedings, contests or lawsuits in respect of the claims described in the preceding sentence shall be borne by the Indemnitor but only if the Indemnitor is responsible pursuant hereto to indemnify the Indemnitee in respect of the third party claim. Regardless of which party shall assume the defense of the claim, the parties agree to cooperate fully with one another in connection therewith. (d) If (and to the extent) the Indemnitor is responsible pursuant hereto to indemnify the Indemnitee in respect of the third party claim, then within ten days after the occurrence of a final non-appealable determination with respect to such third party claim (or sooner if required by such determination), the Indemnitor shall pay the Indemnitee, in immediately available funds, the amount of any Losses (or such portion thereof as the Indemnitor shall be responsible for pursuant to the provisions hereof). In the event that any Losses incurred by the Indemnitee do not involve payment by the Indemnitee of a third party claim, then, if (and to the extent) the Indemnitor is responsible pursuant hereto to indemnify the Indemnitee against such Losses, the Indemnitor shall within ten days after agreement on the amount of Losses or the occurrence of a final non-appealable determination of 36 such amount pay to the Indemnitee, in immediately available funds, the amount of such Losses (or such portion thereof as the Indemnitor shall be responsible for pursuant to the provisions hereof). (e) In any action, suit or proceeding brought under this Agreement the prevailing party shall be entitled to recover the reasonable fees and expenses of its counsel. 9.05. INDEMNIFICATION FOR TAXES. Except to the extent otherwise provided in this Article IX, indemnification for Taxes shall be governed solely by Article X. ARTICLE X TAXES 10.01. TAX INDEMNITY. (a) For purposes of this Article X, the term "Tax Indemnitee" shall mean and include Buyer and any corporation or other entity that is, directly or indirectly, controlled by, or in control of, Buyer or any successor in interest to, or transferee of Buyer, as the case may be, as determined from time to time, including, without limitation, the Company and any successor in interest to, or transferee of, the Company. (b) Seller agrees to and shall indemnify and hold harmless each Tax Indemnitee on an after-Tax basis from and against: (1) any liability for Taxes resulting from the breach of any representation and warranty contained in Section 2.10; and (2) any Taxes of the Company, any predecessor in interest or any Tax Affiliate with respect to any period prior to the Closing Date (the "Pre-Closing Period"). Pre-Closing Period is any taxable year or period beginning prior to and ending on or before the Closing Date and, with respect to any taxable year or period beginning before and ending after the Closing Date, the portion of such taxable year or period ending on the Closing Date. For purposes of this subsection (b), Taxes shall be computed based on the closing of the books method as of the Closing Date; PROVIDED, HOWEVER, in the case of any Tax imposed upon the ownership or holding of real or personal property, such Taxes shall be prorated based on the percentage of the actual period to which such Taxes relate that precedes the Closing Date; and PROVIDED, HOWEVER, that the amount of the Company's income included in the consolidated combined or unitary Return of the Seller for the year that includes the Closing Date shall be determined in accordance with the applicable law and regulations. (c) Seller shall cause to be prepared all Returns that are in respect of Taxes of the Company or any predecessor in interest for taxable years or periods ending on or prior to the Closing Date but which are due to be filed (taking into account any applicable extensions of time for filing) after the Closing Date and (ii) all consolidated combined or unitary Returns for taxable years of periods including the Closing Date with respect to which the Company is includable for such years or periods. In preparing such Returns, Seller shall exercise its judgment relating to the 37 determination of the timing of items of income and deduction in good faith and in a means consistent with prior practice. All such Returns shall be submitted to Buyer no later than thirty (30) days prior to the due date and filing thereof (including extensions), and Buyer shall have the right to review and comment thereon (without reduction of Seller's obligation to indemnify under this Article X). In the case of any such Return, Seller shall timely file such Return and make payment of any Tax due. (d) Buyer shall cause the Company to promptly remit to Seller any amounts the Company receives for the pending refund claims identified on Schedule 2.10(d) to the extent such amounts are not accrued or otherwise reflected on the Interim Balance Sheet. The Tax Indemnitee shall prepare or cause to be prepared all Returns of the Company for any and all taxable years or periods which include and end after the Closing Date (other than consolidated, combined or similar Returns) (the "Overlap Period"). Any such Return shall be submitted to Seller not later than thirty (30) days prior to the due date thereof (including extensions), and Seller shall have the right to review and comment thereon. Tax Indemnitee, upon proper notification and satisfactory documentation and payment by Seller of the amount of Tax due with respect to the Return in question that is properly allocated to Seller pursuant to Section 10.01(b)(2) (but only to the extent it exceeds the amount specifically reserved for payment of such Tax on the Interim Balance Sheet), which payment shall be paid by Seller within three days of demand by the Tax Indemnitee, shall timely file such Return and make payment of any Tax due. (e) From and after the date hereof, Seller and its affiliates shall not file or cause to be filed any amended (other than consolidated, combined or similar Returns) Return with respect to the Company, and Seller and its affiliates shall not file a claim for refund of Taxes paid by or on behalf of the Company without the prior written consent of the Tax Indemnitee (not to be unreasonably withheld); PROVIDED, HOWEVER, that Seller shall pay promptly to Tax Indemnitee the amount of any refund claim recovered to the extent accrued or otherwise reflected in the reserves for Taxes on the Interim Balance Sheet, and PROVIDED, FURTHER that Seller shall pay promptly to Tax Indemnitee the amount of any Tax benefit realized by Seller or any Tax Affiliate with respect to any Pre- Closing Period as a result of the filing of any amended Return or claim for refund to the extent such Tax benefit is attributable to the Company's portion of any consolidated, combined, unitary or similar carryovers or carrybacks of net operating loss or net capital loss reflected in the Returns of the Company or its Tax Affiliates filed as of the date hereof. The determination of any such Tax benefit shall be made in good faith by the Seller and, if requested by the Tax Indemnitee, shall at the Seller's expense, be verified in writing by an independent certified public accounting firm selected by the Tax Indemnitee. Seller shall not make an election under Treasury Regulations Section 1.1502- 20(g) to reattribute to itself any portion of any net operating loss carryover or net capital loss carryover attributable to the Company. (f) Neither Seller nor the Company shall make any material election with respect to Taxes of the Company following the date hereof without the prior written approval of Buyer, nor shall Tax Indemnitee or the Company make any election on or after the Closing Date that would materially affect the amount of Tax allocated to Seller pursuant to Section 10.01(b)(2) without the prior written approval of Seller (such approval in either case not to be unreasonably withheld). 38 (g) The Tax Indemnitee and Seller shall cooperate with each other in the conduct of any audit or other proceedings involving the Company or any entity with which it is consolidated or combined for any Tax purposes. In the event a written claim shall be made by any governmental authority that, if successful, would result in an obligation on the part of Seller to indemnify any Tax Indemnitee pursuant to this section, the Tax Indemnitee shall within ten days of receipt of such claim give notice to Seller of the same in writing specifying in reasonable detail the basis of such claim, action or suit and the facts pertaining thereto, and shall not make payment of the Tax claimed for at least 30 days after the giving of such notice. If Seller wishes to contest such claim Seller shall promptly inform the Tax Indemnitee. Seller shall have the right to control and make all decisions regarding such audit or contest, including selection of a forum for contest, and the Tax Indemnitee agrees that in such event it shall execute, deliver and file a power of attorney naming Seller and its counsel or appropriate agent as attorneys-in-fact for such audit or contest and such other instruments or documents as may be reasonably requested by Seller to carry out the provisions of this paragraph. Neither the Tax Indemnitee nor any affiliate thereof (including the Company) nor the duly appointed representatives of any of the foregoing shall, without the prior written consent of Seller enter into any settlement of any contest or otherwise compromise any issue that affects or may affect the Tax liability of Seller or any of its affiliates (including the Company) for any Pre-Closing Period or the liability of Seller under this Article X. Seller shall not, without the prior written consent of Buyer, enter into any settlement of any contest or otherwise compromise any issue that affects or may affect the Tax liability of the Company if such settlement or compromise would have a Material Adverse Effect on the Company for any taxable year or period ending after the Closing Date. Any actions taken by Seller shall be binding on Seller. (h) Seller and the Tax Indemnitee shall cause the Company to provide the requesting party with such assistance as may be reasonably requested by such party in connection with the preparation of any Return, any audit, or any judicial or administrative proceeding or determination relating to liability for Taxes of the Company, including but not limited to, access to the books and records of the Company and the affiliates of the Company. The Tax Indemnitees shall cause the Company to retain all Returns, schedules, work papers and all material records or other documents relating to Tax matters of the Company for the first taxable year or other taxable period ending after the Closing Date and for all prior taxable years or other taxable periods until the later of (i) seven (7) years after the later of filing or the due date of such Return or (ii) the expiration of all applicable statutes of limitation (including any extensions), and provide the other party with any record or information (including making employees available to such other party for reasonable periods of time) which may be relevant to such Return, audit, proceeding or determination. (i) Seller shall bear any costs and expenses, including reasonable professional fees, associated with the defense of any claim for which any Tax Indemnitee is entitled to indemnification under this Article X. 10.02. PURCHASE PRICE ADJUSTMENT. Any indemnification payments made pursuant to this Agreement shall be treated by the parties, to the extent permitted by applicable law, as a purchase price adjustment unless determined otherwise in a final determination as defined in Section 1313 of the Code. 39 ARTICLE XI MISCELLANEOUS 11.01. INTERPRETIVE PROVISIONS. For purposes of this Agreement, the Company shall be deemed to be an Affiliate of Seller prior to the Closing and an Affiliate of Buyer after the Closing. The language in all parts of this Agreement shall in all cases be construed according to its fair meaning, and not strictly for or against any party hereto. 11.02. ENTIRE AGREEMENT. Except for the Confidentiality Agreement, this Agreement (including all of the Schedules and Exhibits hereto) constitutes the sole and entire understanding of the parties with respect to the subject matter hereof and supersedes all prior oral or written agreements and all contemporaneous oral agreements between the parties with respect to the subject matter hereof, including, without limitation, that certain letter of intent dated November 6, 1996 between Pinnacle and Seller. 11.03. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by any party hereto without the prior written consent of the other parties hereto; PROVIDED, HOWEVER, that Buyer may, at its election, (a) assign this Agreement to any direct or indirect, wholly-owned subsidiary; PROVIDED, HOWEVER, that any such assignment shall not relieve Buyer of its obligations hereunder and/or (b) assign, to its lenders, all or any portion of its rights under this Agreement (including, without limitation, its rights to indemnification hereunder) or otherwise appurtenant to the Shares. Any assignee pursuant to clause (a) of this Section 11.03 shall execute a counterpart of this Agreement agreeing to be bound by the provisions hereof as "Buyer," and, if there is more than one assignee, agreeing to be jointly and severally liable for all of the obligations of Buyer hereunder. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors, executors, beneficiaries and permitted assigns of the parties hereto. 11.04. HEADINGS. The headings of the articles, sections and paragraphs of this Agreement are inserted for convenience of reference only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof 11.05. MODIFICATION AND WAIVER. No amendment, modification, alterations or supplement of the terms or provisions of this Agreement shall be binding unless the same shall be in writing and duly executed by the parties hereto, except that any of the terms or provisions of this Agreement may be waived in writing at any time by the party that is entitled to the benefits of such waived terms or provisions. No waiver of any of the provisions of this Agreement shall be deemed to or shall constitute a waiver of any other provision hereof (whether or not similar). No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof 11.06. EXPENSES. Except as otherwise provided herein, Buyer shall pay all costs and expenses incurred by or on behalf of Buyer, and Seller shall pay all costs and expenses incurred by or on behalf of Seller or the Company, in connection with the negotiation of this Agreement and the performance of the transactions contemplated hereby, including, without 40 limiting the generality of the foregoing, fees and expenses of its and their financial consultants, accountants and legal counsel. Buyer and Seller shall split the cost of any and all documentary, stamp, sales, excise, transfer or other taxes payable in respect of the sale of the Shares. 11.07. NOTICES. Any notice, request, instruction or other document to be given hereunder by any party hereto to any other party shall be in writing and shall be given (and will be deemed to have been duly given upon receipt) by delivery in person, by electronic facsimile transmission, cable, telegram, telex or other standard forms of written telecommunications, by overnight courier or by registered or certified mail, postage prepaid, if to Seller or the Company, to: UNR Industries, Inc. 332 South Michigan Avenue Chicago, Illinois 60604 Attn: General Counsel Telephone No.: (312) 341-1258 Telecopier No.: (312) 341-0349 in each case, with a copy to: Bell, Boyd & Lloyd Three First National Plaza, Suite 3300 Chicago, Illinois 60602-4207 Attention: John H. Bitner, Esq. Telephone No.: (312) 807-4306 Telecopier No.: (312) 372-2098 if to Buyer, to: Pinnacle Automation, Inc. 101 South Hanley Road, Suite 1300 St. Louis, Missouri 63105 Attention: William R. Michaels Telephone No.: (314) 863-5776 Telecopier No.: (314) 863-5778 with a copy to: Gibson, Dunn & Crutcher LLP 333 South Grand Avenue Los Angeles, California 90071-3197 Attention: Kenneth M. Doran, Esq. Telephone No.: (213) 229-7000 Telecopier No.: (213) 229-7520 or at such other address for a party as shall be specified by like notice. 41 11.08. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware applicable to agreements made and to be performed wholly within such jurisdiction. 11.09. PUBLIC ANNOUNCEMENTS. Prior to the Closing, neither Seller nor Buyer shall make any public statements, including, without limitation, any press releases, with respect to this Agreement and the transactions contemplated hereby without the prior written consent of the other parties (which consent shall not be unreasonably withheld) except as may be required by law. If a public statement is required to be made by law, the parties shall consult with each other in advance as to the contents and timing thereof 11.10. THIRD PARTY BENEFICIARIES. Nothing herein expressed or implied is intended to or shall be construed to confer upon or give any person or entity, other than the parties hereto, and their respective successors, executors, beneficiaries, permitted assigns and Affiliates, any rights or remedies under or by reason of this Agreement 11.11. SEVERABILITY. If any portion of this Agreement is declared by a court of competent jurisdiction to be invalid or unenforceable after all appeals have either been exhausted or the time for any appeals to be taken has expired, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 11.12. KNOWLEDGE. For purposes of this Agreement, references to "knowledge" of Seller or the Company shall mean the actual knowledge of the individuals listed on Schedule 11.12 hereto, or knowledge such persons would have had had they made reasonable inquiry of the responsible officers or employees of the Company. 11.13. DISPUTE RESOLUTION. (a) To the fullest extent permitted by applicable law, any controversy, dispute or claim arising out of, in connection with, or in relation to the interpretation, performance or breach of this Agreement or any Ancillary Document (except as specifically provided otherwise in any such Ancillary Document) or otherwise arising out of the execution of any of the foregoing, including any claim based on contract, tort or statute, shall be determined, at the request of any party, by arbitration conducted in New York, New York in accordance with and to the extent permitted by the Rules for Commercial Arbitration of the American Arbitration Association (the "AAA"), as amended and in effect on the date the demand for such arbitration is filed with the AAA. The arbitrator shall set forth his determination in writing (which shall be sent to each party to such arbitration) and shall enumerate in reasonable detail the basis of his determination. To the fullest extent permitted by applicable law, any judgment or award rendered by the arbitrator will be final, conclusive and binding. Judgment may be entered on any final arbitration award by any federal or state court or any other court having jurisdiction thereof. The arbitrator shall have authority in his discretion to grant injunctive relief, award specific performance and impose sanctions upon any party to any such arbitration, but not to award punitive or exemplary damages. 42 (b) The pendency of any arbitration under this Section 11.13 shall not relieve any party of its obligations under this Agreement. To the fullest extent permitted by applicable law, any controversy concerning whether a dispute is an arbitrable dispute or as to the interpretation or enforceability of this Section 11.13 shall be determined by the arbitrator. To the fullest extent permitted by applicable law, if any party hereto shall resort to legal proceedings for injunctive or any other similar relief pending the outcome of any such arbitration proceeding or prior to the initiation thereof, such party shall not be deemed to have waived its rights to cause such matter or any other matter to be referred to arbitration pursuant to this Section 11.13. (c) The arbitrator shall be a retired or former judge of any appellate court or trial of the State of New York, any United States appellate court or the United States District Court for the applicable District around New York, New York, provided such individual has substantial professional experience with regard to corporate and transactional legal matters. (d) In his or her award, the arbitrator shall allocate, in his or her discretion, among the parties to the arbitration all costs of arbitration, including the fees and expenses of the arbitrator and reasonable attorneys' fees, costs and expert witness expenses of the parties. (e) It is intended that this agreement to arbitrate be valid, enforceable and irrevocable. 11.14. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall together constitute one and the same instrument. 43 IN WITNESS WHEREOF, each of the parties hereto has executed this Stock Purchase Agreement as of the date first above written. ALVEY SYSTEMS, INC. By: /s/ WILLIAM R. MICHAELS --------------------------------------- William R. Michaels, Chairman and Chief Executive Officer UNR INDUSTRIES, INC. By: /s/ THOMAS A. GILDEHAUS -------------------------------------- Thomas A. Gildehaus, President 44 EXHIBIT A FORM OF OPINION OF BELL, BOYD & LLOYD 1. The authorized capital stock of the Company consists solely of 1,000 shares of common stock, of which 1,000 Shares are issued and outstanding and owned of record by Seller. All of the Shares have been duly authorized and are validly issued, fully paid and non-assessable. To our knowledge, there are outstanding no securities convertible into, exchangeable for or carrying the right to acquire equity securities of the Company, or subscriptions, warrants, options, rights, calls, agreements, demands or other arrangements or commitments of any character obligating the Company to issue or dispose of any of its equity securities or any ownership interests therein or otherwise relating to the capital stock of the Company. 2. Assuming the Buyer is acquiring the Shares in good faith without notice of any adverse claim, the sale and delivery of the Shares to Buyer pursuant to Article I of the Agreement will vest in Buyer valid title to the Shares, free and clear of any adverse claim. 3. The Company does not hold a direct, indirect or beneficial interest in any entity (corporation, partnership, joint venture, association or other business enterprise). 4. No consent, approval or authorization of, or filing with any state or federal government department, bureau or agency or other governmental board or authority by the Company, or to our knowledge, Seller are required in connection with the execution, delivery and performance by Seller of the Agreement or the taking of any other action contemplated thereby. 5. The execution, delivery and performance by Seller of the Agreement and the consummation by Seller of the transactions contemplated thereby will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any provision of state or federal law, rule or regulation to which the Company or Seller is subject or by which any of the property of the Company or Seller is bound, including, to our knowledge, any order, judgment or decree of any court or other governmental authority applicable to or binding upon the Company or Seller, (ii) violate or conflict with any provision of the Certificate of Incorporation or the Bylaws of Seller or the Company or (iii) result in a violation or breach of, or permit any third party to modify, terminate or rescind any term or provision of, or constitute a default under, any material Commitment of which we are aware, including, without limitation, any indenture, mortgage, deed of trust, promissory note or industrial revenue bond, if any, to which Seller or the Company is a party or by which any of the property of the Company is bound, or result in the creation of an Encumbrance on any of the assets of the Company. 6. Seller has all requisite corporate power and authority (i) to execute and deliver the Agreement and the Ancillary Documents, (ii) to perform its obligations thereunder and (iii) to consummate the transactions contemplated thereunder. The Agreement has been duly and validly executed and delivered by Seller and constitutes the valid and binding obligation of Seller enforceable against Seller in accordance with its terms except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization and other similar laws affecting creditors' rights A-2-1 generally or by general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). A-2-2 EXHIBIT B FORM OF OPINION OF GIBSON, DUNN & CRUTCHER LLP 1. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, and has all requisite corporate power and authority to execute, deliver and perform the Agreement and to consummate the transactions contemplated thereunder. The execution, delivery and performance by Buyer of the Agreement and the consummation by Buyer of the transactions contemplated thereby have been duly authorized by all necessary corporate action on the part of Buyer. The Agreement has been duly and validly executed and delivered by Buyer constitutes the valid and binding obligations of Buyer, enforceable against Buyer in accordance with its terms. 2. The execution, delivery and performance by Buyer of the Agreement and the consummation by Buyer of the transactions contemplated thereby will not, with or without the giving of notice or the lapse of time, or both, (i) violate or conflict with any provision of state or federal law, rule or regulation to which Buyer is subject, (ii) to our knowledge, violate or conflict with any order, judgment or decree applicable to Buyer, (iii) violate or conflict with any provision of the Certificates or Articles of Incorporation or the Bylaws of Buyer or (iv) result in a violation or breach of, or constitute a default under, any material agreement of Buyer of which we are aware. 4. No consent, approval or authorization of, or exemption by, or filing with, any governmental department, bureau or agency or other governmental board or authority is required in connection with the execution, delivery and performance by Buyer of the Agreement or the taking of any other action contemplated thereby, excluding, however, consents, approvals, authorizations, exemptions and filings, if any, that Seller or the Company are required to obtain or make. - ---------------------- Note: The opinions in paragraphs (1) and (2) will be subject to customary exceptions to enforceability. B-1 EX-21 5 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES Busse Bros., Inc., a Wisconsin corporation The Buschman Company, an Ohio corporation White Systems, Inc., a New Jersey corporation McHugh, Freeman & Associates, Inc., a Wisconsin corporation Weseley Software Development Corp., a Connecticut corporation Real Time Solutions, Inc., a Delaware corporation Pinnacle Automation, Canada, Inc., located in Mississauga, Ontario, Canada EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 5025 0 62304 1206 18543 112011 49909 15542 181851 111407 0 0 0 0 (41129) 181851 331247 331247 256218 256218 92797 743 12301 (30812) (1909) (28903) 0 1993 0 (30896) 0 0
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