<PAGE>
Filed with the Securities and Exchange Commission on September 21, 2000
Registration No.________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
PINNACLE DATA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Ohio 7371 31-1263732
(state or other jurisdiction of (primary standard industrial (IRS employer identifica-
incorporation or organization) classification number) tion number)
</TABLE>
6600 Port Road
Groveport, Ohio 43125
(614) 748-1150
(address and telephone number of
principal place of business and executive offices)
John D. Bair, Chairman, President and
Chief Executive Officer
Pinnacle Data Systems, Inc.
6600 Port Road
Groveport, Ohio 43125
(614) 748-1150
(name, address and telephone number, including
area code, of agent for service)
_______________________________
Copy to:
Robert K. Rupp, Esq.
Baker & Hostetler LLP
65 East State Street, Suite 2100
Columbus, Ohio 43215
Approximate Date of Commencement of Proposed Sale to the Public:
As soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
Registration Statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering. [_]
<PAGE>
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box: [_]
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CALCULATION OF REGISTRATION FEE
================================================================================================================
Proposed Proposed
Maximum Maximum
Dollar Offering Aggregate Amount of
Title of securities Amount Price Per Offering Registration
to be registered to be Registered Share* Price Fee
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<S> <C> <C> <C> <C>
Common Shares, without $137,500 $2.75 $137,500 $36.30
par value
================================================================================================================
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________________________
* The price per share is the per share exercise price set forth in a Warrant
Agreement pursuant to which the common shares are to be issued (adjusted to
give effect to the 2-for-1 stock split effective March 31, 2000).
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that the registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PINNACLE DATA SYSTEMS, INC.
an Ohio corporation
50,000 Common Shares
without par value
$2.75 per share
Pinnacle is offering 50,000 common shares for sale. Pinnacle will issue
these shares upon the exercise of 50,000 warrants issued to Corna Securities,
Inc. on April 23, 1996, at an exercise price of $2.75 per share. Corna
Securities served as the underwriter of Pinnacle's 1996 public offering. The
50,000 warrants are part of the compensation paid to Corna Securities for its
services in connection with Pinnacle's initial public offering.
The warrants may be exercised at any time before 5:00 p.m., April 23, 2001,
by:
. completing and signing the Notice of Exercise that is on the back of
the warrant;
. delivering the Notice of Exercise to Pinnacle; and
. delivering to Pinnacle cash or a certified or official bank check in
an amount equal to the exercise price of $2.75 per share.
If you exercise your warrant in this manner, Pinnacle will deliver shares
to you. The number of shares will depend upon whether you exercise all or part
of your warrant. If you exercise only part of your warrant, Pinnacle will
deliver shares to you along with a new warrant for the number of shares that
were not covered by your exercise.
From April, 1996 until September 7, 2000, Pinnacle's common shares were
traded in the over-the-counter market and quoted on the OTC Bulletin Board under
the symbol PNDS. On September 7, 2000, Pinnacle's common shares began trading on
the American Stock Exchange under the symbol PNS.
This offering involves certain risks (see "RISK FACTORS" at Page 3).
_______________________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
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Underwriting
Discounts and Proceeds
Price/(1)/ Commissions/(2)/ to Pinnacle/(3)/
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Per Share $ 2.75 - 0 - $ 2.75
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Total $137,500 - 0 - $137,500
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______________________
/(1)/The price that Pinnacle will receive for each share is the amount set forth
in the warrant issued to Corna Securities as of April 23, 1996 (adjusted to
give effect to the 2-for-1 stock split effective March 31, 2000).
/(2)/Pinnacle will not pay any underwriting discounts or commissions in
connection with its sale of shares upon the exercise of the warrants.
/(3)/Before deduction of the expenses of this offering, which are estimated at
$25,000. Under the terms of the warrants, the holder of the warrants has
agreed to pay any offering expenses in excess of $25,000.
September 21, 2000
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus. It does not
contain all of the information that may be important to you. You should
carefully read this entire prospectus for a complete description of this
securities offering.
PINNACLE DATA SYSTEMS, INC.
Pinnacle designs, assembles and sells computer products. Pinnacle also
provides computer repair and other related services primarily to Original
Equipment Manufacturers (OEMs) in industries such as telecommunications, medical
systems, process control, and government. During 1999, Pinnacle reported
revenue of approximately $12.2 million, net income of approximately $351,000 and
total assets of approximately $6.3 million. Approximately 75% of Pinnacle's
revenue is generated from product sales, and approximately 25% is generated from
services. However, the gross profit from both segments of the business is
approximately equal.
Pinnacle's products are custom designed to meet the needs of its customers.
Often Pinnacle's customers have special computer system requirements that cannot
be met by off-the-shelf products alone. Pinnacle helps its customers by
engineering, designing, assembling and modifying computer equipment to meet
their particular needs. Pinnacle starts with circuit board type products
manufactured by Sun Microsystems, Inc., one of the world's largest producers of
computer systems. Pinnacle combines these products with technology that it has
engineered and developed, such as customized circuit boards, enclosures, power
supplies and other engineered computer components that its customers have
requested. Pinnacle then assembles these products along with other off-the-
shelf computer peripherals into finished products for its customers. See
"Business - Products."
Pinnacle also offers end-of-life management and complete service and
support to OEMs. Many manufacturers will include Sun Microsystems' boards and
components in their own products. If Sun Microsystems stops manufacturing that
board or component, then the equipment manufacturer is left without a source to
supply it with the parts needed to build its own products. Pinnacle's end-of-
life management allows its customers to maximize their investment in technology
by providing continued support for products no longer supported by the
manufacturer.
Pinnacle also provides repair services for advanced technology systems and
printed circuit board assemblies. Pinnacle's repair services are all depot
repair, which means that the malfunctioning part is sent to Pinnacle for repair.
Pinnacle does not provide any repairs outside of its facilities. Pinnacle's
repair services are focused on UNIX computer equipment and currently are limited
predominantly to equipment manufactured by Sun Microsystems.
Pinnacle's offices are located at 6600 Port Road, Groveport, Ohio 43125;
its telephone number is (614) 748-1150.
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Shares Offered............................... 50,000 Shares issuable upon
exercise of Warrants.
Shares to be Outstanding after
the Offering as of August 10, 2000........... 2,583,602 Shares (assuming no
other options to purchase Shares,
which are held by employees and
directors of Pinnacle, are
exercised).
Use of Proceeds.............................. For purchases of inventory. See
"Use of Proceeds".
Trading Symbol............................... PNS
SUMMARY FINANCIAL INFORMATION
-----------------------------
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Income Statement Data: Twenty-six Weeks Twenty-six Weeks
---------------------
Ended 6/30/00 Ended 7/02/99 Year Year
(Unaudited) (Unaudited) Ended 12/31/99 Ended 12/31/98
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Product Sales $ 9,909,949 $ 3,630,961 $ 9,058,296 $6,199,772
Service Sales 1,856,650 1,442,284 3,144,405 2,832,560
Total Sales 11,766,599 5,073,245 12,202,701 9,032,332
Gross Profit 2,917,618 1,314,587 3,121,049 1,840,098
Operating expenses 2,036,254 1,095,828 2,555,657 1,751,213
Net income 479,849 153,862 351,166 588
Net income per common
share $ 0.17 $ 0.06 $ 0.14 $ 0.00
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Balance Sheet Data: June 30, December 31,
-------------------
2000 1999
----
(Unaudited)
-----------
Working capital $2,275,997 $1,684,416
Total assets 8,767,778 6,324,027
Due on line of credit 2,031,100 1,300,000
Long-term debt (including
current maturities) 375,078 195,079
Shareholders' equity 2,996,449 2,414,188
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. If any of the following risks actually occurs, Pinnacle's
business, financial condition, or results of operations could be materially
adversely affected, the value of Pinnacle's stock could decline, and you may
lose all or part of your investment.
1. Pinnacle's products are based solely upon Sun Microsystems, Inc.'s
------------------------------------------------------------------
technology. Pinnacle's repair and other services and the products that it
----------
engineers and manufactures are all based upon products manufactured by Sun
Microsystems, Inc. If for any reason Sun or its products begin to
experience significant difficulties in the marketplace or in operations or
otherwise, Pinnacle's business could be materially and adversely affected.
2. Dependence Upon Contracts with Sun Microsystems, Inc. Pinnacle has two
-----------------------------------------------------
material license agreements with Sun under which it was given the right to
design new products based upon technology owned by Sun. For the year ended
1999, Pinnacle generated approximately 59% of its product revenue from
products sold to customers under these licenses. Additionally, Pinnacle
has entered into a Repair Services Agreement with Sun. Under this
agreement, Pinnacle repairs components and parts for Sun or its customers.
For 1999, Pinnacle generated approximately 77% of its service revenue and
19% of total revenue from services provided under this agreement. If
either or both of these agreements were terminated by Sun it would
materially and adversely affect Pinnacle's business.
3. Concentration of Revenues. A significant portion of Pinnacle's revenues
-------------------------
have been derived from substantial orders placed by a small number of
customers. As a result, Pinnacle's revenues have been concentrated among a
relatively smaller number of customers. In 1997, Pinnacle's revenues from
its three largest customers amounted to 49% of sales. In 1998, revenues
from Pinnacle's three largest customers amounted to 59% of sales, and in
1999, revenues from Pinnacle's three largest customers amounted to 56% of
sales. Pinnacle's largest customer for 1999 was Sun, which accounted for
approximately 19% of sales. Pinnacle expects that it will continue to be
dependent upon a limited number of customers for significant portions of
its revenues in the future. The loss of any of its major customers would
have a material adverse effect on its business.
4. Need for Additional Financing. As Pinnacle's business has grown it has
-----------------------------
been in need of financing primarily to increase its inventory levels. In
the past, this financing was provided from proceeds from a public offering
in 1995, and since then through bank financing. Currently, Pinnacle has an
arrangement with a bank under which it has a $7,000,000 line of credit.
This should be sufficient to provide Pinnacle with its requirements over
the next 12 months, assuming Pinnacle grows at a steady pace. However, in
the past, Pinnacle has entered into large contracts, which required it to
expend significant funds to purchase large amounts of inventory needed to
service the contracts. If Pinnacle obtains one or more large contracts in
the future, it may need to find additional debt or equity financing to
enable it to finance its inventory requirements. Pinnacle may attempt to
arrange single project financing from its bank or it may attempt to arrange
vendor financing in connection with such a project. It is uncertain
whether Pinnacle could arrange such financing or that it could arrange
financing on favorable terms. If it is unable to, it may need to forego
some large contract opportunities.
5. Dependence Upon Key Employee. Pinnacle is highly dependent upon the
----------------------------
services of John D. Bair, its president, principal shareholder and one of
the co-founders of Pinnacle. The loss of his
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<PAGE>
services to Pinnacle would have a serious adverse affect on Pinnacle's
business operations. Pinnacle owns a life insurance policy on his life in
the face amount of $2,000,000.
6. Management of Growth. Pinnacle's rapid growth in business in the last two
--------------------
years has placed and may continue to place a significant strain on
Pinnacle, particularly as it searches for methods to finance additional
capital and inventory costs and to increase its staff, including management
personnel. Pinnacle's future operating results will depend on its ability
to expand its organization and infrastructure commensurate with its
expanding base of customers and customer contracts and on its ability to
attract, hire and retain skilled employees. There can be no assurance that
Pinnacle will be able to effectively manage any future growth.
8. Ability to Respond to Technological Changes. Pinnacle's future success
-------------------------------------------
will depend significantly on its ability to develop and market new products
which keep pace with technological developments and evolving industry
standards as well as to respond to the changes in customer needs. There
can be no assurance that Pinnacle will be successful in developing or
acquiring product enhancements to address changing technologies and
customer requirements adequately. Pinnacle's delay or failure to develop
or acquire technological improvements or adapt its products to
technological changes would have a material adverse effect on its business,
results of operations and financial condition.
9. Competition. Pinnacle faces competition for specially designed products
-----------
from other design-build firms, and more of them are beginning to target the
telecommunications industry. Since Pinnacle's business is based on Sun
products, Pinnacle also faces competition from products that compete with
Sun products, primarily those manufactured by Intel. For repair services,
Pinnacle competes with in-house repair departments and with other outside
repair companies. Many of Pinnacle's competitors are bigger than Pinnacle
and have substantially more financial and other resources.
10. Volatility of Stock Price. Historically, the price of Pinnacle's common
-------------------------
Shares have been subject to significant fluctuation. Management believes
that this has been a result of thin capitalization, lack of following by
market analysts, thin trading in only the over-the-counter market and lack
of registration as a 1934 Act Reporting company. Pinnacle has taken steps
to help improve this situation, including registering under the Securities
Exchange Act of 1934 and, effecting a 2-for-1 stock split which took effect
on March 31, 2000. However, the market price of Pinnacle's stock could
continue to be subject to significant fluctuations in response to
variations in actual and anticipated quarterly operating results, changes
in earnings estimates, announcements of new products or technological
innovations by Pinnacle or its competitors and other events or factors. In
addition, the stocks of many technology companies have experienced extreme
price and volume fluctuations, which have often been unrelated to operating
performance.
USE OF PROCEEDS
The anticipated net proceeds from the sale of the shares (after deduction for
anticipated offering expenses in the amount of $25,000) are expected to be
$112,500. It is anticipated that 100% of the proceeds will be used for
purchases of inventory.
PRICE RANGE OF COMMON SHARES AND
DIVIDEND POLICY
Since September 7, 2000, Pinnacle's Shares have been traded on the American
Stock Exchange under the trading symbol PNS. Prior to September 7, 2000 and
after April 1996, Pinnacle's Shares had been traded on the over-the-counter
market and had been included on the OTC Bulletin Board under the trading
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<PAGE>
symbol PNDS. Prior to April 1996, there was no established trading market in the
Shares. Set forth below is the range of high and low bid prices for the Shares
for each quarterly period during the last two fiscal years and the first two
quarters of 2000, as reported by National Quotation Bureau and as adjusted to
give effect to a 2-for-1 stock split, which became effective March 31, 2000, as
if it occurred prior to the periods reported. These quotations reflect
interdealer prices, without retail markup, markdown or commission and may not
necessarily represent actual transactions.
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Bid Prices
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High Low
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<S> <C> <C>
Fiscal Year 2000
First quarter (ended March 31)......................................... $7.500 $3.250
Second quarter (ended June 30)......................................... 7.688 3.750
Fiscal Year 1999
First quarter (ended March 31) $2.750 $1.125
Second quarter (ended June 30)......................................... 2.688 1.375
Third quarter (ended September 30)..................................... 2.625 1.500
Fourth quarter (ended December 31)..................................... 2.188 1.813
Fiscal Year 1998
First quarter (ended March 31)......................................... $2.625 $1.875
Second quarter (ended June 30)......................................... 2.625 1.688
Third quarter (ended September 30)..................................... 1.875 0.438
Fourth quarter (ended December 31)..................................... 1.375 0.438
</TABLE>
On August 10, 2000, there were 55 holders of record of the Shares. Most of the
Shares not held by officers and directors of Pinnacle are held in street name.
During the past three years, Pinnacle has not paid any cash dividends. Payments
of dividends are within the discretion of Pinnacle's Board of Directors and
depend upon the earnings, capital requirements, and operating and financial
condition of Pinnacle, among other factors. Pinnacle currently expects to
retain its earnings to finance the growth and development of its business and
does not expect to pay cash dividends in the foreseeable future. In addition,
under the terms of a loan agreement with a bank, Pinnacle is prohibited from
declaring or paying dividends to common shareholders and from redeeming stock
from shareholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes contained herein.
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below identify important factors that could cause actual results over the
next few quarters to differ materially from those predicted in any such forward-
looking statements. Such factors include, but are not limited to, adverse
changes in general economic conditions, including adverse changes in the
specific markets for Pinnacle's products and services, adverse business
conditions, decreased or lack of growth in the computing industry, adverse
changes in customer order patterns, including any decline or change in product
orders from any of the three customers that made up approximately 56% of
Pinnacle's revenue during 1999, increased competition, any adverse change in Sun
Microsystems' business or Pinnacle's relationship with Sun, around whose
operating systems
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<PAGE>
Pinnacle's business is based, lack of acceptance of new products, pricing
pressures, lack of adequate financing to take advantage of business
opportunities that may arise, lack of success in technological advancements,
risks associated with Pinnacle's new business practices, processes and
information systems, and those factors set forth under "Risk Factors".
On March 7, 2000, the Board of Directors of Pinnacle declared a 2-for-1 stock
split in the form of a 100 percent stock dividend, payable on March 31, 2000 to
shareholders of record on March 14, 2000. The effect of the stock split has
been recognized in all share and per share data in the following discussion of
Results of Operations.
Results of Operations
Twenty-six weeks ended June 30, 2000 (unaudited) compared to twenty-six weeks
ended July 2, 1999 (unaudited)
SALES
Pinnacle's sales were $11,766,599 for the twenty-six weeks ended June 30, 2000,
an increase of 132% over sales of $5,073,245 for the comparable period of 1999.
Pinnacle's product sales increased 173% in the first twenty-six weeks of 2000,
to $9,909,949. The increase in product sales was fully attributable to the
addition of new customers since July 2, 1999.
Pinnacle's service sales for the first twenty-six weeks of 2000 were $1,856,650,
which was 29% higher than the first twenty-six weeks in 1999. Pinnacle provides
repairs and logistics management services for a specific list of electronic
computer circuit boards and other computer components for one large and several
smaller Original Equipment Manufacturer (OEM) customers. During the first
quarter of 2000, Pinnacle began providing additional logistics and material
management services to its largest customer, resulting in higher revenue.
Pinnacle's relative levels of growth of product and service sales continued a
multi-year trend of an evolution in the mix of the two types of sales. Product
sales, as a percentage of total sales have grown from 56% in 1996, to 65% in
1997, to 68% in 1998, to 74% in 1999, to 84% through the first twenty-six weeks
of 2000. Service sales, as a percentage of total sales, have gone from 44%, to
35%, to 32%, to 26%, to 16% over the same period.
GROSS PROFIT
Pinnacle's gross profit increased from $1,314,587 in the first twenty-six weeks
of 1999 to $2,917,618 in the first twenty-six weeks of 2000, an increase of
122%. Most elements of cost of goods sold declined as a percentage of revenue
in 2000 compared to 1999, for both the product and service segments.
Overall, Pinnacle experienced some economies of scale in 2000. Direct labor
declined from 7% of sales to 6%. Overhead declined from 10% to 6%, despite a
significant increase in facility costs associated with a six-fold increase in
the size of Pinnacle's facility.
The gross margin on product sales was 23% for the first twenty-six weeks of
2000, compared to 20% for the first twenty-six weeks of 1999. The improvement
was attributable entirely to declines in labor and overhead as a percentage of
sales. Material costs as a percentage of sales increased approximately 1% in
2000 compared to 1999. The primary reason for the relative increase in material
costs was the fact that a few large product projects were in the prototype stage
during 2000, which usually involves component changes, resulting in some scrap
and higher material usage than typically is found in the production stage.
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<PAGE>
The gross margin on Pinnacle's service sales decreased to 36% for the first
twenty-six weeks of 2000, from 40% for the first twenty-six weeks of 1999. The
decline was due to the addition in 2000 of material and logistics management
services, which are more labor-intensive and space-intensive than repair
services, and have lower gross margins.
The decline in the gross margin on Pinnacle's service sales contributed to
Pinnacle's overall gross margin decreasing 1%, from 26% in the first twenty-six
weeks of 1999 to 25% in the comparable period in 2000. The overall decline in
gross margin was also partially due to the fact that the mix of sales changed
from 72% product and 28% service in 1999 to 84% product and 16% service in 2000.
OPERATING EXPENSES
Pinnacle's operating expenses totaled $2,036,254 for the first twenty-six weeks
of 2000, compared with $1,095,828 for the first twenty-six weeks of 1999. The
86% increase from 1999 to 2000 was less than both the 132% rate of growth of
sales and the 122% increase in gross profit.
The majority of the increase came from higher wages from an expanded
professional technical staff, caused by the significantly higher number of
customer product design projects. The other major expense categories
contributing to the increase were facility costs, relating to Pinnacle's
relocation to a larger building, and higher professional fees, relating to
becoming a fully SEC-reporting company.
As a percentage of sales, operating expenses decreased from 22% in 1999 to 17%
in 2000. Income from operations increased 303% to $881,364 (7% of sales) for
the first twenty-six weeks of 2000, from $218,758 (4% of sales) for the first
twenty-six weeks of 1999.
OTHER INCOME AND EXPENSE
In anticipation of higher sales volumes, Pinnacle entered into a new financing
package with Key Bank in March, 2000. The package included an installment loan
of $400,000 and a revolving line of credit. The two new loans were used to
liquidate loans Pinnacle had with its previous bank. At June 30, 2000 the
balance of the line of credit was $2,031,100. Primarily as a result of
Pinnacle's increased use of its line of credit to support higher accounts
receivable and inventory, interest expense in the first twenty-six weeks of 2000
grew 115% from the first twenty-six weeks of 1999.
In May 1999, Pinnacle sold the building in which it previously conducted
operations. The building sale resulted in a gain before taxes of $85,922.
Netted against interest expense, the net other income for the first twenty-six
weeks of 1999 was $42,027 compared to net other expense in 2000 of $94,515, a
difference of $136,542.
INCOME TAXES AND NET INCOME
The improved income from operations exceeded the increase in net other expense,
and resulted in income before income taxes of $786,849 for the first twenty-six
weeks of 2000, compared to $260,786 for the first twenty-six weeks of 1999.
Consequently, income tax expense increased from $106,924 in 1999 to $307,000 in
2000. Net income was $479,849 (4% of sales) for the first twenty-six weeks of
2000, compared to $153,862 (3% of sales) for the first twenty-six weeks of 1999,
an increase of 212%. Without the building sale in 1999, net income would have
been only 2% of sales.
Pinnacle's basic earnings per share improved from $0.06 for the first twenty-six
weeks of 1999, to $0.20 for the first twenty-six weeks of 2000. Fully diluted
earnings per share improved from $0.06 for the first twenty-six weeks of 1999,
to $0.17 for the first twenty-six weeks of 2000. Without the building sale,
earnings per share in 1999 would have been only $0.04.
Year ended December 31, 1999 compared to year ended December 31, 1998
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<PAGE>
SALES
Pinnacle's sales were $12,202,701 in 1999, an increase of 35% over sales of
$9,032,332 in 1998.
Pinnacle's product sales were $9,036,646 for 1999, an increase of 47% over 1998.
The 47% increase in product sales was fully attributable to new customers
obtained in 1999.
Pinnacle's service sales for 1999 were $3,044,099, which was 12% higher than in
1998. The increase in service sales resulted primarily from higher volumes of
repairs from Pinnacle's largest OEM customer. Pinnacle provides repairs and
logistics management services for a specific list of electronic computer circuit
boards and other computer components for one large and several smaller OEM
customers. The volumes of those listed components grew in 1999, more components
were added to the list, and Pinnacle provided services for additional customers.
Pinnacle expects sales volumes to continue to grow from each of those three
sources.
GROSS PROFIT
Pinnacle's total gross margin was 26% in 1999, up from 20% in 1998.
The gross margin on product sales was 20% in 1999, compared to 18% in 1998. The
improvement is primarily attributable to declines in component costs.
The gross margin on service sales increased to 44% in 1999, from 29% in 1998.
The predominant factor in the difference in margins on service sales resulted
from an inventory writedown of $300,000 Pinnacle took in the 3rd quarter of
1998. Without the writedown, the gross margin on service sales in 1998 would
have been 40%. A major factor in the gross margin improving to 44% in 1999 was
a significant reduction in labor and overhead costs, resulting from Pinnacle's
decision to close its depot repair facility in California. That facility was
opened at the request of Pinnacle's largest service customer in the first
quarter of 1998. When that customer elected in late 1998 to implement its new
vendor model that did not require a West Coast depot, Pinnacle closed the
California facility, thereby reducing labor and overhead costs.
OPERATING EXPENSES
Pinnacle's operating expenses totaled $2,555,657 for 1999, compared with
$1,751,213 for 1998. The 46% increase from 1998 to 1999 exceeded the 35%
increase in sales, but was less than the 70% increase in gross profit. The
increase came primarily from higher wages from an expanded professional
technical staff, higher depreciation resulting from fixed asset purchases,
facility costs resulting from Pinnacle's relocation to a larger facility, and
higher professional fees, which included one-time recruiting fees relating to
professional technical staff hiring. As a percentage of sales, operating
expenses increased from 19% in 1998 to 21% in 1999.
Income from operations improved to $565,392 (5% of sales) in 1999, from $88,885
(1% of sales) in 1998.
OTHER INCOME AND EXPENSE
In May 1999, Pinnacle sold its building in which it conducted operations, and
relocated to a larger facility, which it leases. The sale of the building
resulted in a gain before taxes of $85,922.
In anticipation of higher sales volumes, Pinnacle entered into a new financing
package with Star (now Firstar) Bank in the first fiscal quarter of 1998. The
package included an installment loan of $300,000 and a revolving line of credit.
The two new loans were used to liquidate loans Pinnacle had with its
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<PAGE>
previous bank, which included a mortgage loan on Pinnacle's building. After
making the initial draw against the line of credit to liquidate the mortgage
loan, Pinnacle made modest drawings against its line of credit for the remainder
of 1998. In July 1998, Pinnacle obtained another mortgage loan on its building.
Pinnacle used the proceeds of the mortgage loan to pay down the line of credit
balance, but then continued to make draws against the line to support working
capital through 1998 and 1999. At December 31, 1999 the balance of the line of
credit was $1,300,000. Primarily as a result of Pinnacle's increased use of its
line of credit, interest expense in 1999 grew 11% from 1998.
INCOME TAXES AND NET INCOME
The improved income from operations, combined with the one-time gain on the sale
of Pinnacle's building, resulted in income before income taxes of $558,841 for
1999, compared to $5,333 for 1998. Income tax expense increased from $4,745 in
1998 to $207,675, or 37% of income before income taxes in 1999. Net income was
$351,166 in 1999, compared to $588 for 1998.
Pinnacle's fully diluted earnings per share improved from less than one cent per
share in 1998, to $0.14 for 1999, after consideration of the 2-for-1 stock
split.
Year ended December 31, 1998 compared to year ended December 31, 1997
SALES
In 1998 sales increased 38% over 1997, from $6,551,490 in 1997 to $9,032,332 in
1998. During 1998, Pinnacle achieved a 43% increase in product sales and a 28%
increase in service sales.
The 43% increase in product sales resulted from two primary factors: (1)
obtaining new significant orders from existing customers during the year, and
(2) producing products during the year which were in the design stage at year
end 1997.
The 28% increase in service sales resulted from Pinnacle's decision to focus on
increasing sales to OEM's. Sales to this target market increased 234% during
the year. By contrast, repair sales to TPM's and to self-maintainers declined
by 45% from the previous year, as Pinnacle de-emphasized sales to this market
segment.
GROSS PROFIT
Pinnacle's decision to direct its marketing efforts toward the OEM marketplace
and away from the TPM marketplace was intended to improve Pinnacle's long-term
prospects for growth and profitability. Pinnacle's management believes the OEM
segment holds greater opportunities for growth than the TPM segment, and also
believes that OEM sales will be more profitable with greater labor efficiencies
and greater returns on investments in inventory and capital equipment.
The transition from a TPM focus to an OEM focus in 1998 had a short-term
negative impact on Pinnacle's financial results. For several years Pinnacle
maintained an inventory of spare parts exclusively for the purpose of supporting
TPM sales. Due to Pinnacle's sharp decline in revenue from the TPM market
segment from 1997 levels, Pinnacle elected to record a writedown of the value of
that segment of its inventory of $300,000 during the third fiscal quarter of
1998. The writedown was recorded as a charge to cost of goods sold. The
writedown resulted in a net loss of $126,240 in the third quarter. For the
total of the other three fiscal quarters of 1998 Pinnacle posted operating
income of $126,828.
While some of the inventory items that were written down were sold in the
ordinary course of business during the fourth quarter of 1998, others were
scrapped or sold at reduced prices as part of a specific effort to liquidate
this inventory.
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Largely as a result of this inventory writedown, cost of goods sold increased
substantially during 1998, and gross margin was thereby reduced, dropping to 20%
from 27% in 1997. The gross margin on product sales decreased from 21% to 18%.
In addition to providing custom-designed circuit boards, in 1998 Pinnacle began
providing entire custom-designed computer systems, which had lower margins than
the circuit board products. The gross margin on service sales declined from 39%
to 29%, due in part to the inventory writedown, and due in part to having two
depot repair facilities open throughout most of 1998. The second repair
facility, located in Northern California, was closed by Pinnacle in late 1998.
Therefore, despite a 38% increase in sales during 1998, Pinnacle's gross profit
increased by only 5.4%. Another factor contributing to Pinnacle's reduced gross
profit margin in 1998 was the fact that product sales grew in 1998 at a higher
rate than repair sales. Product sales typically have lower gross profit margins
than repair sales.
OPERATING EXPENSES
During 1998, while the gross profit of Pinnacle remained relatively constant in
total dollars, operating expenses of Pinnacle increased by 31% over 1997 levels,
primarily as a result of increased wage and benefit expenses associated with an
expanded work force. However, because operating expenses increased by less than
the rate of increase of sales during 1998, operating expenses as a percentage of
each sales dollar declined from 20% in 1997 to 19% in 1998.
Because operating expenses increased by more than the relatively modest increase
in gross profit, Pinnacle's income from operations dropped by $322,735, or 78%,
from $411,620, or 6% of sales, in 1997, to $88,885 in 1998, which was 1% of
sales.
OTHER INCOME AND EXPENSE
Pinnacle made minimal drawings against its line of credit in 1997, and at year-
end 1997 the balance on Pinnacle's line of credit was zero. During 1998, the
line of credit was used often and extensively by Pinnacle to support the higher
receivables resulting from higher sales volumes and to fund fixed asset
acquisitions. At year-end 1998, the outstanding balance stood at $150,000.
Primarily as a result of Pinnacle's increased use of its line of credit, net
interest expense in 1998 grew by 21% over 1997 levels, from $68,853 in 1997 to
$83,552 in 1998.
The increased interest expense, combined with Pinnacle's reduced income from
operations, resulted in lower income before income taxes during 1998 of $5,333,
compared to $264,819 in 1997.
INCOME TAXES AND NET INCOME
Because Pinnacle's income before income taxes was lower, its income tax expense
was only $4,745 in 1998, compared to $107,580 in 1997.
Pinnacle's net income was $588 in 1998, less than one cent per share, both basic
and diluted, while the 1997 net income was $157,239, or 7 cents per share, both
basic and diluted.
LIQUIDITY AND CAPITAL RESOURCES
During the first twenty-six weeks of 2000, Pinnacle used $739,685 of cash in its
operating activities, compared to a use of $899,601 for the first twenty-six
weeks of 1999. The largest use of cash was an increase of $1,924,817 in
inventory. Primarily, the purchases of inventory were made for customer product
orders expected to be fulfilled in the 3rd quarter of 2000. Another use of cash
was the increase in accounts receivable of $456,639. That increase was fully
attributable to the fact that June sales exceeded $2.5 million, Pinnacle's
second-highest monthly
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sales total. Pinnacle expects to maintain a substantial investment in inventory
for the foreseeable future in order to support its expected growth in product
sales. The increases in inventory and accounts receivable were partially offset
by increases in Pinnacle's liabilities, particularly accounts payable, which
increased by $968,731 during the first twenty-six weeks of 2000. Expanded credit
from Pinnacle's vendors was crucial to its ability to increase its purchases of
inventory components to support its increased product sales.
For the year 1999, Pinnacle consumed $806,970 of cash in its operating
activities. The foremost use of cash in 1999 was inventory, which increased by
$1,392,474 from the beginning of 1999. Much of the increase in inventory was
attributable to current and anticipated future sales growth. Another minor
factor in the increase in inventory was an increased number of requests from
product customers for delivery of prototype/evaluation systems. Another factor
was the request of some product customers that Pinnacle hold in stock a quantity
of their specific-designed systems on hand for immediate delivery. In these
cases, the customer is committed to purchase these products within a specified
period of time under a volume purchase agreement. Pinnacle also made some one-
time component purchases, in some cases to take advantage of price discounts,
and in other cases to secure the availability of components that were no longer
going to be manufactured. Pinnacle expects to maintain a substantial investment
in inventory for the foreseeable future in order to support its expected growth
in product sales.
Other asset categories that increased in 1999, thereby using cash, were accounts
receivable and prepaid expenses, which increased by $1,001,407 and $38,134,
respectively. These uses of cash were partially offset by increases in accounts
payable of $724,274, in accrued liabilities and taxes of $331,791, and in
unearned revenues of $16,123.
For the year 1998, Pinnacle used only $63,622 of cash in its operating
activities. Pinnacle's accounts receivable increased by $459,867 in 1998.
Accounts receivable increased 46% from December 31, 1997 to December 31, 1998,
which was more than the 38% increase in annual sales, but was less than the 57%
increase in sales from the month of December 1997 to the month of December 1998.
As a result of the inventory writedown and of efforts by Pinnacle to liquidate
older inventory components, its investment in inventory declined by
approximately $150,000, but would have increased by over $100,000 without the
writedown.
Pinnacle used $278,088 of cash in its investing activities in the first twenty-
six weeks of 2000, compared to net proceeds of $13,181 in the comparable period
of 1999. Most of the investments were for furniture and computer equipment for
new employees. Pinnacle also invested in leasehold improvements in its new
facility. In 1999 Pinnacle's investment of $134,434 in fixed assets was offset
by proceeds of $147,615 from the sale of its building.
Pinnacle's investing activities in 1999 consumed $296,678 in cash. Purchases of
furniture and computer equipment consumed $444,293 of cash, but were offset by
Pinnacle's sale of its land and building, which generated $147,615. In 1998
Pinnacle's investing activities consumed cash of $168,664, and consisted
entirely of purchases of furniture and computer equipment. Total expenditures
of capital assets, all of which were made with cash, were $168,664.
In March 2000, Pinnacle entered into a new loan agreement with Key Bank in order
to increase its borrowing capacity and to reduce its interest rates. The
initial package with Key included a revolving line of credit and a $400,000 term
loan requiring 36 monthly principal and interest payments of $12,627. Both
instruments have an interest rate of prime minus 0.25%. The line of credit
initially had a limit of the lower of $2,500,000, or a percentage of eligible
accounts receivables and inventory. In May 2000, the limit of the line of
credit was increased to $3,000,000. In August 2000, the limit of the line of
credit was increased to $7,000,000, and the interest rate was reduced to prime
minus 0.85%. The loan agreement also includes a $250,000 lease line of credit
for purchases of equipment and furnishings. The loan agreement requires
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Pinnacle to meet certain financial targets and to comply with certain other
covenants, including restrictions on paying dividends, incurring additional
indebtedness and liens, guarantees of other obligations, and reorganizations.
Pinnacle's obligations under the loan agreement are collateralized by
substantially all of its assets.
The initial draw on the line of credit was approximately $1,475,000. Combined
with the $400,000 term loan, the proceeds were used to retire a term loan and
line of credit at Firstar Bank. The payoffs of those loans were approximately
$175,000 and $1,700,000, respectively. At June 30, 2000, the line of credit
balance was $2,031,100. Pinnacle had not yet made any draws against the lease
line of credit.
In the first twenty-six weeks of 2000, Pinnacle's overall financing activities
provided cash of $1,013,512, compared to $936,116 in the comparable period in
1999. Long-term debt increased by a net of approximately $180,000 and the line
of credit increased by approximately $731,000. Pinnacle also received $102,413
from employees exercising stock options.
In early 1998 Pinnacle completed an agreement with Firstar Bank. The initial
package with Firstar included a revolving line of credit and a $300,000 term
loan requiring 60 monthly payments of $5,000 plus variable interest. Both
instruments had an interest rate of prime. The combined package had a limit of
the lower of $1,500,000, or a percentage of Pinnacle's eligible accounts
receivables. The loan agreements required Pinnacle to meet certain financial
targets and to comply with certain other covenants, including restrictions on
paying dividends, incurring additional indebtedness and liens, guarantees of
other obligations, and reorganizations. Pinnacle's obligations under these loan
agreements were secured by substantially all of its assets.
The initial draw on the line of credit was approximately $241,000. Combined
with the $300,000 term loan, the proceeds were used to retire a term loan and a
mortgage loan at Huntington Bank. The payoff of those loans were approximately
$180,000 and $361,000, respectively.
In July 1998, Pinnacle obtained a mortgage loan from Firstar Bank on its
building in the amount of $412,500. The mortgage loan had a 5-year maturity and
was amortized on a 15-year basis. The building was sold in May 1999, and the
mortgage loan was retired by the proceeds of the sale.
During 1998, the line of credit was used by Pinnacle to support the higher
receivables resulting from higher sales volumes and to fund fixed asset
acquisitions. At year-end 1998, the outstanding balance stood at $150,000. For
the year 1998, net of regularly scheduled principal payments, the Pinnacle's
bank debt increased by approximately $238,000 to fund operating activities and
capital equipment purchases.
For 1999 principal payments on Pinnacle's long-term debt and capital lease
totaled $89,657. Those payments were partially offset by proceeds of $43,500
from the exercise of employee incentive stock options. However, Pinnacle's
principle means of funding its operations in 1999 were draws on its bank line of
credit, which totaled $1,150,000. At December 31, 1999, the balance was
$1,300,000.
These draws consumed most of Pinnacle's borrowing capacity under the formulas of
its initial financing package with Firstar. Consequently, in September 1999,
Pinnacle renegotiated its financing agreement with Firstar to increase the
maximum amount available on a revolving basis through September 2000 to
$2,000,000, and to include inventory as part of the borrowing base calculation,
in addition to accounts receivable, thereby significantly increasing Pinnacle's
borrowing capacity. The line of credit and the $300,000 term loan were secured
by a security interest in substantially all of Pinnacle's assets and by the
collateral assignment of $1,000,000 of
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coverage of a $2,000,000 life insurance policy on the life of John Bair. As of
December 31, 1999, Pinnacle had approximately $575,000 of unused availability on
the line of credit.
As Pinnacle continues to grow, it will need to obtain additional working
capital, to support higher levels of accounts receivable and inventory and will
need to fund additional investments in capital equipment. The amount for
additional capital Pinnacle will need will depend, in part, on the relative
growth of the service and product segments. Pinnacle intends to expand its
service sales at a pace greater than or equal to product sales. Service sales
are significantly less capital intensive than product sales, which require a
much greater investment in inventory.
Pinnacle believes that if it continues with steady growth, then the new loan
agreement will be sufficient to meet its financing needs for the intermediate
term. However, Pinnacle believes that it could need to raise additional debt
and/or equity capital in order to fund larger product sales opportunities that
may arise. Pinnacle is currently investigating alternatives. Those alternatives
include specific bank financing for customer sales projects, and for fixed asset
acquisitions. Pinnacle is also pursuing expanded credit terms from some
suppliers for specific projects. For the longer term Pinnacle will consider
additional debt or equity financing.
Year 2000 Impact on Computer Resources
Pinnacle did not experience any substantial difficulty relating to the arrival
of the year 2000.
BUSINESS
Background
Pinnacle designs, assembles and sells computer products and provides computer
repair and other related services primarily to Original Equipment Manufacturers
(OEMs) in industries such as telecommunications, medical systems, process
control, and government. During 1999, Pinnacle reported revenue of
approximately $12.2 million, net income of approximately $351,000 and total
assets of approximately $6.3 million. Approximately 75% of Pinnacle's revenue
is generated from product sales and approximately 25% is generated from
services. However, the gross profit from both segments of the business is
approximately equal.
Pinnacle's products are custom designed to meet the needs of its customers.
Often customers have special computer system requirements that can not be met by
off-the-shelf products alone. Pinnacle helps customers by engineering,
designing, assembling and modifying computer equipment to meet customers'
particular needs. Pinnacle takes circuit board type products manufactured by Sun
Microsystems, Inc., one of the world's largest producers of computer systems,
and combines it with technology engineered and developed by Pinnacle, such as
customized circuit boards, enclosures, power supplies and other engineered
computer components requested by customers and assembles them along with other
off-the-shelf computer peripherals into finished products for customers.
Pinnacle's products are based upon high performance computer processor
technology from Sun Microsystems, Inc. In a typical system manufactured by
Pinnacle, approximately 50% of the components will be Sun products, 30% of the
components will be off-the-shelf products and 20% will be products designed and
developed by Pinnacle. These percentages will vary from product to product. By
adding its own internally developed products and engineering capabilities to
Sun's off-the-shelf board technology, Pinnacle is able to offer solutions with
minimal non-recurring engineering (product design) charges. These are turnkey,
application-specific computer circuit boards and entire computer systems that
Pinnacle's customers imbed into the customers' products. See "Products."
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Pinnacle also offers end-of-life management and complete service and support to
OEMs. Many manufacturers will include Sun Microsystems' boards and components in
their own products. If Sun stops manufacturing that board or component, then
the equipment manufacturer is left without a source to supply it with the parts
needed to build its own products. Pinnacle's end-of-life management allows
Pinnacle's customers to maximize their investment in technology by providing
continued support for products no longer supported by the manufacturer. This
allows OEMs to eliminate or delay the engineering and software development
charges required to integrate new technology.
Pinnacle also provides repair services for advanced technology systems and
printed circuit board assemblies. Pinnacle's repair services are all depot
repair, which means that the malfunctioning part is sent to Pinnacle for repair.
Pinnacle does not provide any repairs outside of its facilities. Pinnacle's
repair services are focused on UNIX computer equipment and currently are limited
predominantly to equipment manufactured by Sun Microsystems, Inc. Pinnacle is
partnering with Sun Microsystems to provide streamlined distribution of Sun
parts to Sun customers using an online information management system that
connects the two companies. Pinnacle also offers a repair service whereby it
will, overnight, exchange a malfunctioning or broken electronic component or
part for a similar component or part in Pinnacle's inventory. Pinnacle will
then repair the malfunctioning or broken component and include that part in its
inventory as a replacement. Pinnacle also generates revenue from the sale of
spare parts and components.
Pinnacle believes that the services segment of its business provides a
competitive advantage to it in connection with its product sales, because
Pinnacle can offer the purchasers of its products a more complete answer to
their system needs by providing not only products, but also service and support
after the sale. Pinnacle also believes that the product segment of its business
provides it with a competitive advantage in connection with the services it
provides, because product development and engineering activities keeps it
current with the latest technology and how to repair it. Pinnacle considers its
product and services segments to be equally important, not only because of the
synergies they provide to one another, but also because they contribute
relatively equally to Pinnacle's gross profit.
Almost all of Pinnacle's products and services are based on Sun's SPARC
architecture. If for any reason Sun or its products began to experience
significant difficulties in the market place or in operations or otherwise it
could materially and adversely affect Pinnacle.
Pinnacle believes that its relationship with Sun Microsystems provides a
significant advantage to Pinnacle. Pinnacle has a number of contracts with Sun
under which Sun provides Pinnacle proprietary designs for its products or which
enable Pinnacle to utilize and sell Sun circuit board technology and operating
systems or other software to its customers. Additionally, in 1997, Pinnacle was
accepted into the Sun Microelectronics' Partners Program. As a member of this
program, Company personnel make marketing calls on Fortune 500 companies,
together with sales representatives of Sun, to provide complete technology
solutions to mutual customers. In March 1999, Pinnacle entered into a Repair
Services Agreement with Sun Microsystems, Inc. under which Pinnacle provides
repair and testing services on Sun circuit boards and related components, and
maintains an inventory for Sun of repaired boards and components. Pinnacle then
provides streamlined distribution of these components and parts to Sun
Enterprise Service Division's stocking locations, field engineers or customers
using an online information management system that connects the two companies.
See "Contractual Relationships with Sun Microsystems, Inc. and its Affiliates".
Pinnacle is much smaller in size than Sun Microsystems, Inc. In its most
recently completed fiscal year, ending June 30, 2000, Sun reported revenue of
approximately $15.7 billion, approximately 1,000 times greater than Pinnacle's
current level of annual revenue. While Pinnacle is relatively insignificant to
Sun, Pinnacle is significantly dependent upon its relationship with Sun. In
1999, approximately 19% of Pinnacle's sales were services sales made to Sun
under a services agreement and approximately 9% of Pinnacle's sales were product
sales to Sun made under purchase orders. In the same period, approximately 57%
of its purchases of inventory were made from Sun. Additionally, Pinnacle has
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entered into license agreements with Sun pursuant to which it sells products and
services to third parties which aggregated to approximately 28% of sales for
1999. For information about the various contracts Pinnacle has with Sun, and the
amount of revenue generated under each agreement. See "Contractual Relationships
with Sun Microsystems, Inc. and its Affiliates".
If all of Pinnacle's relationships with Sun were to end, Pinnacle's operations
would be adversely affected, particularly in the short term. However, Pinnacle
would continue to sell products to OEM's, and it would continue to provide
repair and other services to TPM's and end-users. Pinnacle would also pursue
providing repair-related services to other OEM's. Pinnacle's management
believes that a complete severing of all of the various Sun relationships is
unlikely, because those relationships are diverse, and independent of one
another.
Sun could elect to discontinue buying services from Pinnacle, but because of the
size and breadth of the services provided, management believes it would take
several months for Sun to replace Pinnacle with one or more vendors to provide
those services.
Development of the Business
Pinnacle was incorporated as an Ohio corporation on March 9, 1989. Initially,
Pinnacle focused on providing electronic repair services to universities, which
primarily had installed networks of Sun Microsystems workstations. Gradually,
Pinnacle expanded its services to other users of Sun Microsystems workstations
who were self-maintaining such equipment. In 1992, Pinnacle began providing
engineering and manufacturing services for CPU board designs for OEMs. In 1994,
Pinnacle began engineering and manufacturing computer systems patterned after
Sun Microsystems workstations. In 1995, Pinnacle focused its product sales
efforts on custom-designed circuit boards. Also in 1995, Pinnacle refocused its
repair marketing efforts from sales to universities and end-users to sales to
Third Party Maintainers (TPM's), and Fortune 500 self-maintainers. In 1996,
Pinnacle began providing depot repair services to OEMs. In 1997, Pinnacle began
designing and manufacturing custom integrated computer systems for OEMs and
found significant interest for these products in the growing telecommunications
market.
In early 1997, Pinnacle entered into a joint venture as a minority partner of
LogistixPDSi Services in Northern California to provide repair services to the
OEM marketplace. In connection with this venture, Pinnacle established a repair
depot facility within the headquarters of the majority partner in Fremont,
California. Pinnacle also provided services outside of the joint venture to
TPM's from this facility. While the incremental services performed by Pinnacle
for its own TPM customers at that facility was profitable, the level of business
generated by the joint venture entity from OEM customers failed to meet
Pinnacle's expectations. The joint venture entity was not successful and losses
accumulated during 1997.
In November 1997, Pinnacle was offered an opportunity to establish a dedicated
depot for Sun Microsystems in California. Pinnacle terminated its participation
in the joint venture, hired the joint venture employees and established a
facility within the distribution center of Pinnacle's customer, Sun
Microsystems. In late 1998, in anticipation of accepting a larger role in Sun's
service business model, Pinnacle closed the California facility and consolidated
its operations in Columbus, Ohio.
In early 1999, Pinnacle entered into a 10-year lease for 56,000 spare feet of
space for its operations in a building in a free-trade zone in Groveport, Ohio,
a suburb of Columbus. In January 2000, Pinnacle amended its lease to expand the
amount of square feet under lease to approximately 113,000. Pinnacle sold the
building in which it previously housed operations.
Background of Industry
Original equipment manufacturers in the telecommunications, medical systems,
process control and government markets embed advanced technology systems in
their products to enhance functionality and
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performance. OEMs select a platform for their products based on the performance
and availability required by the application. Management believes that OEMs who
choose Sun Microsystem's SPARC platform make this decision based on the speed of
Sun Microsystems processor technology and the stability of the UNIX operating
system. Management further believes that the reliability and speed of Sun
processors combined with the stability of Sun's Solaris operating systems
provides excellent performance and system availability.
To fully integrate these systems into their products, OEMs often have special
requirements that cannot be met by off-the-shelf products manufactured by Sun
Microsystems. Traditionally, these companies modified off-the-shelf components
to meet their specific needs, utilizing either in-house engineering resources or
outside engineering firms to create custom system configurations. In doing so,
these OEMs incurred significant non-recurring engineering (NRE) charges to cover
development costs. As the pace of technology has increased and competition has
intensified in these markets, OEMs are now less willing to incur the time and
expense required to develop custom systems. Instead, they are looking for
sources, such as Pinnacle, that can provide application-specific systems and
products with minimal engineering development time and expense. Pinnacle
believes OEMs will continue to look for ways to reduce product development time
and cost without compromising their ability to customize technology to their
application.
At the same time, there is a growing base of OEM products built around
technology that is no longer being supported by the manufacturer. These OEMs are
faced with having to modify software and reconfigure their product to
incorporate new technology that does not enhance their systems' performance
simply because their existing technology is no longer being supported by the
manufacturer. As a result, OEMs are looking for ways to extend the life of their
current technology. Some of these OEM's contract with entities to provide end-
of-life management, that may include manufacturing and/or repair of the products
not supported or manufactured by the OEM.
In the repair business there has been a trend during the last several years
towards outsourcing in the electronics repair industry which Pinnacle believes
will continue in the future. Pinnacle believes that this is due to: (1) the
desire of OEMs to focus resources on their primary business, (2) the accelerated
pace of new product introductions which is necessary for OEMs to keep pace with
competition, (3) the need to reduce costs, which can be accomplished by
converting fixed costs of an internal service department into variable costs by
outsourcing the service, and (4) the difficulties inherent in servicing a wide
range of equipment produced by multiple vendors, as data centers have moved from
using predominantly one company's hardware to using equipment from multiple
vendors in many locations.
Products
Pinnacle's products include complete systems, specially designed products,
including boards and attach cards, and software. Pinnacle resells some hardware
and software manufactured by Sun Microsystems and other OEM's, as well as
products developed internally by Pinnacle's engineers. Complete systems bring
together hardware and software from multiple sources into fully integrated
systems.
One type of product developed and manufactured by Pinnacle is known as a "High
Availability" system. This includes redundant system components with
sophisticated failover software. This allows systems to continue to operate
despite failure of any component by the instantaneous transfer of system
functions to the redundant backup system. These products have been purchased by
companies primarily in the telecommunications industry that cannot afford a
system failure or even the time delay involved in rebooting a system.
Pinnacle has also developed products that allow OEMs to more fully integrate
SPARC technology into their technology systems. These products include power
supplies, specially modified motherboards, transition cards, and I/O boards.
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Pinnacle engages in research and development in connection with designing new
products for customers. This work is done in response to requests from
customers with specific product requirements. Upon completion of design and
testing of the newly developed product, Pinnacle typically receives orders for
production of that product from the customer. During 1999 and 1998 Pinnacle
incurred $552,143 and $191,557, respectively, for research and development.
These expenses were not paid by Pinnacle's customers but are typically recouped
over time as part of the cost of the developed products that are sold to
customers.
Software
Pinnacle is a SunSoft Master Distributor and is authorized to provide its
customers with the right to use Solaris, Sun Microsystem's UNIX operating
system. Pinnacle also resells failover software as part of its "High
Availability" systems.
Services
Pinnacle repairs products that have been developed, manufactured, marketed and
sold by other companies, and which generally have a well-established installed
base as well as products developed internally. Pinnacle also designs and
manufactures customized modifications to products of other companies for
integration into existing systems. Due in part to the capital costs necessary
to maintain adequate inventory and equipment to service large OEMs and TPMs,
Pinnacle has focused its services on products manufactured primarily by Sun
Microsystems, Inc. and has built an inventory of Sun Microsystems components and
parts.
Depot Repair Services: Pinnacle provides OEMs, TPMs and end-users who maintain
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their own equipment the opportunity to outsource repairs of their proprietary
products or products produced by third parties. The entity that is actually
providing the maintenance service in the field will place an order with Pinnacle
for the repair of defective components or parts. The time of completion of the
repair will be scheduled, with higher charges being incurred for shorter time
frame repairs. Pinnacle offers its customers a choice of 5-day and 15-day
repair and return services. Pinnacle also maintains an extensive inventory of
spare components and offers the ability to provide replacement components or
parts overnight from its existing inventory in exchange for the defective
component or part, which is then repaired and included in inventory. For
repairs not requiring overnight service, the entity maintaining the equipment in
the field sends the defective component or part to Pinnacle. Pinnacle's
electronic technicians then repair the component or part, test it, and ship it
back to the customer. Since inception, Pinnacle has specialized in the repair
of hardware manufactured by Sun Microsystems, Inc. These systems are typically
high end-user workstations able to perform multi-tasking functions.
Sun Microsystems Logistics Management Services: In August 1999, Pinnacle entered
----------------------------------------------
into an agreement with Sun Microsystems, Inc. to provide to Sun's Enterprise
Services Division test and repair services, and inventory and logistics
management services. Under this program, called the Virtual Logistics Network
(VLN), Pinnacle is partnering with Sun Microsystems to provide streamlined
distribution of Sun components and parts to Sun customers using an online
information management system that connects the two companies. Pinnacle also
provides management and logistics services to other vendors/partners of Sun that
participate in the VLN.
Spare Parts Sales: Spare parts sales include sales of repaired parts, new parts,
-----------------
and reclaimed parts. There is a demand in the computer industry for the
necessary parts and components to provide repair services. New components are
often difficult to obtain and costly to purchase. Pinnacle is able to provide a
wide variety of parts at a significant discount compared to the cost of
comparable new parts. Pinnacle's spare parts capabilities enhance the
efficiency of its other service offerings. Pinnacle either supplies the spare
parts from its own inventory when it has a surplus of a particular part or
component, or it acquires the requested parts from brokers or other suppliers of
used equipment. Pinnacle sometimes dismantles used
-18-
<PAGE>
equipment to obtain used components. Pinnacle maintains an inventory consisting
primarily of Sun Microsystems' spare parts and components.
Contract Manufacturing and Engineering: In certain cases, an OEM will outsource
--------------------------------------
the design and manufacture of a product to Pinnacle. The outsourcing of
manufacturing enables the OEM to transfer its internal manufacturing
responsibilities to Pinnacle, thereby enabling the OEM to reduce manufacturing
costs and improve its return on assets. Pinnacle's contract manufacturing
services primarily involve products which have high engineering, technical and
test content, and low to medium production requirements. Pinnacle will also
merge technology from a standard workstation to a customer's product with
private labeling. In connection with these services, Pinnacle will obtain
orders for custom engineering and manufacturing services from entities which are
customers of Sun Microsystems. These customers are using the Sun operating
system software and want to continue to use the Sun software in workstations,
data servers or other applications not manufactured and sold by Sun. Pinnacle
will design and engineer modifications to the Sun component boards to fit the
desired customized use and will then build the custom designed products for the
customer. The end product is a component board or computer system that does not
resemble the original Sun Microsystems board or system, but operates the Sun
software and performs the same functions as the Sun board or system. Each
product is unique and custom designed to the customer's specifications. Some of
these products use commercially available parts configured to produce the
desired function. In other cases, the custom-built product contains components
or functions conceived and developed by Pinnacle personnel.
End-of-Life Management: End-of-Life Management services bring together
----------------------
Pinnacle's board design and manufacturing, parts stocking, and repair
capabilities to extend the life of technology that is no longer supported by the
manufacturer. Pinnacle will enter into an end of life service contract with its
customers which may include depot repair of installed technology as well as
acquisition or manufacture of products that have been end-of-lifed by the
manufacturer.
Extended Warranty Services. In 1992, Pinnacle began initial marketing efforts
--------------------------
to provide customers with extended warranty support services. Generally,
Pinnacle will extend warranty of the OEM's product for a fixed fee. Pinnacle is
willing to develop warranty programs specifically tailored to meet a customer's
needs with the goal of fulfilling as many of the customer's repair needs as is
required.
Contractual Relationships with Sun Microsystems, Inc. and its Affiliates
In August 1999, Pinnacle entered into an agreement with Sun Microsystems, Inc.
to provide to Sun's Enterprise Services Division test and repair services, and
inventory and logistics management services. The agreement has a one-year term
and renews automatically for additional one-year terms. In 1999, Pinnacle
generated approximately $2.3 million of revenue from this agreement, or
approximately 19% of total revenue and 77% of service revenue. These sales
represented approximately 90% of the service segment's operating income of
$608,326 for the same period. Pinnacle considers this agreement to be of
critical importance to its future viability, and considers it to be the basis of
its prospects for future growth of the service segment. See "Services - Sun
Microsystems Logistics Management Services".
Pinnacle designs and sells products under various technology license agreements
with Sun Microsystems. Two of the license agreements are of material importance
to Pinnacle's viability. It is not possible to cite the respective operating
earnings contributions of the products sold under the two license agreements, as
Pinnacle does not allocate labor and overhead costs to individual products.
Consequently, the respective revenue contributions are cited below. If either of
these agreements is terminated it would significantly impede Pinnacle's ability
to perform its design and manufacturing services.
In October 1997, Pinnacle entered into a Development and Manufacturing License
Agreement with Sun Microelectronics, a division of Sun Microsystems, Inc.
pursuant to which Pinnacle has been licensed to develop, manufacture and sell
products based upon and using the Sun PCI card and Open Boot PROM
-19-
<PAGE>
technology. Pinnacle uses this license in the custom design of products. The
license enables Pinnacle to use the Sun technology and make engineering or
design changes to meet customers' specific needs. Pinnacle generated revenue
from these products of approximately $92,000 in 1998 and $792,000 in 1999
(approximately 2% and 9% of total product revenue, respectively). Pinnacle
expects the portion of its products based on this license to increase in future
years. Consequently, the importance of this license to Pinnacle is likely to
increase in future years. This license agreement is for a term of three years
expiring in 2000, subject to automatic renewal for one-year periods unless
either party gives notice of non-renewal. The license can be terminated earlier
upon default.
In May 1994, Pinnacle entered into a microprocessor platform design license
agreement with Sun Microsystems Computer Corporation, acting through its SPARC
Technology Business Division, pursuant to which Pinnacle has been licensed to
develop, manufacture and sell products based upon and using the Sun SPARC
microprocessor technology. Pinnacle uses this license in the custom design of
products. The license enables Pinnacle to use Sun technology and make
engineering or design changes to meet customers' specific needs. Pinnacle
generated revenue from these products of approximately $2.7 million in 1998 and
$1.7 million in 1999 (approximately 44% and 19% of total product revenue,
respectively). The technology of this license is utilized in customer projects
that began prior to 1997. It has not been utilized in any new customer projects
since before 1997. Pinnacle does not anticipate that it will develop any new
products based on the technology licensed under this agreement, although it will
continue to sell products that it has developed under this license.
Consequently, the importance of this license to Pinnacle is likely to decline in
future years. A license fee in the amount of $35,000 was paid in full upon
execution of the license. This license agreement is for a term of 7 years
expiring in 2001, subject to automatic renewal for one-year periods unless
either party gives notice of non-renewal. The license can be terminated earlier
upon default.
Sales and Marketing
Pinnacle focuses its marketing efforts on large OEMs and TPMs. Since marketing
is primarily to large OEMs or TPMs, Pinnacle does not maintain a large field
sales organization. Pinnacle currently uses two independent manufacturers
representative firms to generate sales opportunities. Pinnacle employs seven
in-house sales and marketing representatives, who are focused on targeted
accounts. During 1999, Pinnacle had revenue from three customers that
represented approximately 56% of sales. Pinnacle's largest customer in 1999,
Sun Microsystems, accounted for approximately 29% of sales during 1999. During
1998, Pinnacle had revenue from three customers that represented approximately
59% of sales. Pinnacle's largest customer in 1998, Computer Network
Technologies, Inc., accounted for approximately 22% of Pinnacle's sales. In
1997, Pinnacle's three largest customers represented approximately 49% of sales.
In 1997, Pinnacle was accepted into the Sun Microelectronics' Partners Program.
As a member of this program, Pinnacle personnel make marketing calls on Fortune
500 companies, together with sales representatives of Sun, to provide complete
technology solutions to mutual customers.
Competition
Competition for the specially designed products of Pinnacle come from two
primary sources: (1) other companies that provide similar products, and (2)
products that are competitive with Sun Microsystem's products.
A number of companies are now targeting the telecommunications industry, due to
the continued growth in this market that is expected in the future. Many of
these companies are more established than Pinnacle and have substantially
greater financial and other resources than Pinnacle. Pinnacle believes it can
differentiate itself from the competition through the strength of its close
relationship with Sun Microsystems, its ability to offer a complete turnkey
product/service solution, its unique product set, and its focus on providing
off-the-shelf solutions wherever possible.
-20-
<PAGE>
Primary competition for Pinnacle's products also comes indirectly from increased
performance and acceptance of the "Wintel" platform. OEMs who are choosing a
platform for their products increasingly narrow their choice down to SPARC-based
systems sold by Sun Microsystems and systems using Intel processors with Windows
NT. If the Wintel platform were to gain acceptance in the telecommunications
industry it would erode Pinnacle's potential market, as Pinnacle does not
provide products or services to support this platform.
Primary competitive factors in the repair industry are price, scope and quality
of a company's repair services and know-how. Pinnacle competes with the in-
house repair centers of OEMs and TPMs for end-of-life programs and for repair
services. While Pinnacle believes it offers a cost-effective repair solution to
OEMs and TPMs and, therefore, believes these entities are Pinnacle's primary
potential customers, there is no assurance that these entities will choose to
outsource their repair needs and will not become competitors of Pinnacle. These
entities could also choose to compete directly with Pinnacle for the services of
unrelated OEMs and TPMs and for end-users. In addition to competing with OEMs
and TPMs, Pinnacle also competes with a number of independent organizations
similar to Pinnacle.
In the contract manufacturing area, Pinnacle competes against numerous entities
that focus specifically on turnkey contract manufacturing. Many of the OEMs,
TPMs and contract manufacturers with which Pinnacle competes have significantly
greater manufacturing, financial, technical and marketing resources than
Pinnacle. Similarly, some of the independent depot repair businesses may
generate significantly more revenues than Pinnacle and may have greater
manufacturing, financial, technical and marketing resources than Pinnacle.
Employees
As of August 18, 2000, Pinnacle had a total of 99 employees, 92 of whom were
full-time. None of its employees are subject to collective bargaining
agreements, and Pinnacle considers its relationship with its employees to be
good.
Property
Pinnacle leases approximately 113,000 square feet of office, warehouse,
laboratory and production space in a building located at 6600 Port Road,
Groveport, Ohio. Pinnacle has the option to extend the term of the lease for an
additional five years. The building is in good condition. Pinnacle believes
that this space is adequate for the foreseeable future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
In May 1999, Pinnacle sold a 19,200 square foot building in which it formerly
conducted its operations. The sale resulted in a gain of $85,922 to Pinnacle.
Legal Proceedings
Pinnacle is not a party to any legal proceedings nor, to its knowledge, is any
material legal proceeding threatened against it.
-21-
<PAGE>
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of Pinnacle are as follows:
Director
Name Age Position Since
John D. Bair 34 Chairman, President, Chief 1989
Executive Officer and Director
C. Robert Hahn 47 Chief Operating Officer, Vice 1995
President and Director
Thomas J. Carr 46 Treasurer, Chief Financial 1996
Officer and Director
Paul H. Lambert 46 Director 2000
Thomas M. O'Leary 57 Director 1996
Robert V.R. Ostrander 54 Director 1997
John D. Bair, one of the founders of Pinnacle, currently serves as Chief
Executive Officer and President of Pinnacle. He has served as a director since
inception, as the Chairman of the Board and Chief Executive Officer since May
1996, and as President since 1998. He served as Secretary from inception until
October 1998. Mr. Bair holds a Bachelor of Science Degree in Computer and
Information Science from the College of Engineering from the Ohio State
University.
C. Robert Hahn is an executive officer and has served as Chief Operating Officer
and Vice President of Pinnacle since June 1998. He served as President of
Pinnacle from June 1996 to June 1998, and as Vice President of Sales and
Marketing from October 1994 to June 1996. He has served as a director since
December 1995. Mr. Hahn previously worked for six years as general manager of
Cranel, Inc., a distributor of computer peripheral products. Mr. Hahn holds a
Bachelor Degree in Business Administration and a Master of Business
Administration degree, both from Ohio University, and has been certified as a
Certified Production and Inventory Manager by the American Production and
Inventory Control Society.
Thomas J. Carr is an executive officer and has served as Treasurer and Chief
Financial Officer and as a director of Pinnacle since May 1996. He joined
Pinnacle as Controller in September 1995. Previously, Mr. Carr was President for
three years of Celtic Resources, a business consulting firm. Mr. Carr taught
general computer courses at Columbus State Community College for two years. He
served as Controller and Director of Financial Planning for six years at
CompuServe Incorporated of Columbus, Ohio. Mr. Carr holds a Bachelor Degree in
Accounting and a Master of Business Administration degree, both from The Ohio
State University.
Paul H. Lambert was elected as a director at Pinnacle's 2000 annual shareholders
meeting. Mr. Lambert is retired from UUNET, a division of MCI Worldcom, in 2000
after 27 years of service to CompuServe Incorporated, which was acquired by MCI
Worldcom in 1998. From July 1999 until retirement, Mr. Lambert was Vice
President and General Manager of UUNET Hosting Services. Prior to July 1999, he
held a variety of technical and marketing management positions while at
CompuServe Incorporated, including Vice President, Network Technology of
CompuServe Network Services (responsible for
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<PAGE>
development, engineering, operations, and administration of the worldwide
CompuServe network) and Chief Technology Officer.
Thomas M. O'Leary has served as a director of Pinnacle since September 1996.
Mr. O'Leary retired from ATT/Lucent after 30 years of service in 1996. While
employed by ATT/Lucent, Mr. O'Leary acquired extensive experience in the areas
of management of manufacturing operations, engineering, product development,
project management, product repair and support and sales. He is currently on
the school board of the Worthington City School system and served as President
in 1998. He is also a board member of Liberty Communications Services, Inc. in
Gahanna, Ohio. Mr. O'Leary now serves as a private consultant for a number of
local companies in areas related to his accumulated experience.
Robert V.R. Ostrander has served as a director of Pinnacle since July 1997. Mr.
Ostrander is currently serving as Chairman of Manex Financial Management, Inc.
and President of Manex Risk Management, Inc., Manex Management Services, Inc.,
Manex Advisors, Inc. and Omni Financial Securities, Inc., which positions he has
held for more than five years. He is a Certified Financial Planner, a licensed
securities principal, and is licensed to sell several forms of insurance by the
State of Ohio. He was the founding president of The Central Ohio Chapter of
Society for Certified Financial Planners. He is also the author of Omni's
Business Navigator, and has been involved in numerous business start-ups.
Classified Board of Directors
The Board of Directors has approved an amendment to Pinnacle's Code of
Regulations which was approved by the shareholders at Pinnacle's 2000 annual
shareholders meeting. This amendment divided the board into two classes of four
directors. Three directors were elected in each class and a vacancy left in
each class. The board desires to have these vacancies so that it can fill them
with qualified individuals they may later meet who they believe would add a
valuable contribution to Pinnacle, without the time and effort involved in
calling a special shareholders meeting.
Pinnacle's board is classified as follows:
Class I Directors (term expiring in 2001):
Thomas J. Carr
Robert V.R. Ostrander
Paul H. Lambert
Class II Directors (term expiring in 2002):
John D. Bair
C. Robert Hahn
Thomas M. O'Leary
Executive Compensation
The following table sets forth for the fiscal years ended December 31, 1999 and
1998, the compensation of Pinnacle's Chief Executive Officer and the only other
executive officer whose compensation exceeded $100,000 during 1999. No other
executive officer of Pinnacle received salary and bonus compensation in excess
of $100,000 in the most recent completed fiscal year.
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<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
(*) (***)
Securities All
Under- Other
lying Compen-
Name and Fiscal Salary Bonus Options/ sation
Positions Year ($) ($) SAR's ($)
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John D. Bair 1999 148,500 18,158 8,000 2,498
Chairman of the Board 1998 135,520 7,370 70,000(**) 3,000
of Directors,
President, and Chief
Executive Officer
---------------------------------------------------------------------------------------------------------------------
C. Robert Hahn 1999 137,500 18,158 8,000 3,000
Chief Operating 1998 125,481 7,370 48,000(**) 3,000
Officer, Vice
President
---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Amounts in this column and in the related footnote have been adjusted to
give effect to a 2-for-1 stock split, which became effective March 31, 2000,
as if the stock split was effective prior to the issuance of the securities.
** In 1998, 60,000 of the options granted to Mr. Bair, and 30,000 of the
options granted to Mr. Hahn were replacement grants for options granted to
them in 1997, which were re-priced to reflect then-current market values.
*** Amounts in this column reflect matching contributions made by Pinnacle to
its 401 (k) plan for the benefit of Messrs. Bair and Hahn.
Employment Agreements
In 1997, Pinnacle entered into an employment agreement with John D. Bair, its
President and Chief Executive Officer. The agreement was for a term of three
years ending on September 1, 2000, and provided for an annual salary of $100,000
or such higher amount as shall be determined by the Board of Directors plus a
bonus of 3% of pre-tax net income, and provided for those benefits generally
available to other employees. If Pinnacle terminates Mr. Bair's employment
without cause, he is entitled to a severance payment equal to one year's base
salary.
Pinnacle entered into an employment agreement with C. Robert Hahn, its Vice
President and Chief Operating Officer. The agreement was for a term of three
years ending on September 1, 2000, and provided for an annual salary of $120,000
or such higher amount as shall be determined by the Board of Directors plus a
bonus of 3% of pre-tax net income, and provided for those benefits generally
available to other employees. If Pinnacle terminates Mr. Hahn's employment
without cause, he is entitled to a severance payment equal to one year's base
salary.
Pinnacle's compensation committee is currently working on new employment
packages for these executives which are to be included in new employment
agreements. It is expected that these arrangements will be completed in the
near future.
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<PAGE>
Option Grants in Last Fiscal Year
The following table indicates information about stock options granted to
Pinnacle's chief executive officer and the other officer named in the summary
compensation table during 1999, adjusted as if the 2-for-1 stock split, which
became effective March 31, 2000, was effective prior to 1999:
<TABLE>
<CAPTION>
Number Percent of
of Securities Total Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/sh) Date
---- ---------- ----------- ----- ----
<S> <C> <C> <C> <C>
John D. Bair 8,000 shares 5.3% $ 2.27 2004
C. Robert Hahn 8,000 shares 5.3% $ 2.0625 2009
</TABLE>
Stock Option Exercises and Year End Option Values
The following table indicates stock option exercises during 1999 by Pinnacle's
chief executive officer and the other officer named in the summary compensation
table, and the value, as of December 31, 1999, of in-the-money stock options
held by them, adjusted as if the 2-for-1 stock split, which became effective
March 31, 2000, was effective prior to 1999:
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised in-the-Money
Options at Options at
Shares 12/31/99(#) 12/31/99(#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized/(1)/ Unexercisable Unexercisable/(2)/
---- ------------ ----------- ------------- ----------------
<S> <C> <C> <C> <C>
John D. Bair 0 0 70,000/8,000 $ 24,500/$0
C. Robert Hahn 0 0 58,000/8,000 $ 31,500/$0
</TABLE>
/(1)/ Aggregate market value of the shares covered by the option less the
aggregate price paid by such person.
/(2)/ The value of in-the-money options was determined by subtracting the
exercise price from the average of the closing bid and asked prices of the
shares on December 31, 1999.
401(k) Profit Sharing Plan
Pinnacle has adopted the Pinnacle Data Systems, Inc. 401(k) Profit Sharing Plan
(the "401(k) Plan"). The 401(k) Plan is a defined contribution plan (within the
meaning of the Employee Retirement Income Security Act of 1974) and is intended
to be a qualified plan under Sections 401(a) and 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). Under the 401(k) Plan, each participant
is eligible to enter into a written salary reduction agreement with Pinnacle
whereby the participant's salary will be reduced by up to 12%, as elected by the
participant, in accordance with the rules governing cash or deferred
arrangements under Section 401(k) of the Code. The amount deferred by a
participant is contributed by Pinnacle to a trust fund for the 401(k) Plan and
invested by the trustee in accordance with the investment guidelines established
under the 401(k) Plan. Participants have the right to direct the trustee to
invest such participant's deferred amounts in the investment funds the
administrator directs the
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<PAGE>
trustee to make available for the 401(k) Plan. Mr. Bair, Mr. Carr and Mr. Hahn
serve as the trustees of the 401(k) Plan. Pinnacle serves as the administrator
of the 401(k) Plan, and McDonald & Company serves as investment advisor.
During 1997, the 401(k) Plan was amended to provide that if Pinnacle is
profitable, Pinnacle will match 100% of employee contributions up to 6% of wages
deferred with a maximum contribution of $3,000 per employee. Contributions of
$48,630, $24,520 and $28,665 have been accrued for 1999, 1998 and 1997,
respectively. The amounts contributed on behalf of Mr. Bair and the other
executive officer are reflected in the "All Other Annual Compensation" column of
the foregoing Summary Compensation Table. While a participant is always vested
in his or her own salary reduction contributions, contributions by Pinnacle
become fully vested after five years of employment.
Upon retirement or other termination of employment, vested benefits are
disbursed in a single lump sum to the participant. The amounts payable to a
participant will be determined by the amount credited to his bookkeeping account
in the trust fund, including his allocable share of trust fund earnings or
losses.
1995 Stock Option Plan
On December 19, 1995, Pinnacle adopted the Pinnacle Data Systems, Inc. 1995
Stock Option Plan (the "Employee Stock Option Plan"). Under the Employee Stock
Option Plan Pinnacle reserved 600,000 common shares (adjusted to give effect to
the 2-for-1 stock split effective March 31, 2000) for issuance pursuant to which
options may be granted to employees of Pinnacle or its subsidiaries. On August
12, 1999, the Board of Directors amended the Employee Stock Option Plan, which
was approved by the shareholders, to increase the number of shares reserved for
issuance to 800,000 (adjusted to give effect to the 2-for-1 stock split
effective March 31, 2000), and on February 16, 2000, the Board of Directors
amended the Employee Stock Option Plan, which was approved by the shareholders,
to increase the number of shares reserved for issuance to 1,200,000 common
shares (adjusted to give effect to the 2-for-1 stock split effective March 31,
2000). The purpose of the Employee Stock Option Plan is to attract and retain
qualified individuals to serve on behalf of Pinnacle. The Employee Stock Option
Plan is currently administered by the Board of Directors. Options granted under
the plan can qualify as incentive stock options under (S)422 of the Code, or at
the option of the directors, be non-qualified options. Directors of Pinnacle who
are not employees of Pinnacle or its subsidiaries are not eligible to
participate in the Employee Stock Option Plan.
Subject to the requirement that the price per share of any common shares to be
received upon the exercise of any incentive option will not be less than the
fair market value of the common shares at the time the option is granted, the
board or committee administering the Employee Stock Option Plan has the
exclusive authority, consistent with law and the terms of the Employee Stock
Option Plan, to designate recipients of options to be granted thereunder and to
determine the number and type of options and the number of common shares subject
thereto. See Note 5 of Notes to Financial Statements.
Compensation of Directors
Directors who are officers of Pinnacle receive no separate compensation for
their services as directors. Compensation of the outside directors is determined
by the whole Board after receiving the recommendations of the President.
Currently, outside directors receive a fee of $500.00 for each Board Meeting
attended. In 1996, upon his initial election to the Board of Directors, Mr.
O'Leary received options for 10,000 shares of Pinnacle's common stock at an
exercise price of $3.50 per share. These options were repriced in 1999 and are
now exercisable at $2.0625 per share until October 1, 2006. Mr. O'Leary also
received options for 20,000 shares in September 1997 that are exercisable at
$1.50 per share until September 2007, and received options for 8,000 shares in
June 1999 that are exercisable at $2.0625 per share until June 2009. Mr.
Ostrander received options for 29,000 shares in September 1997 that are
exercisable at $1.50 per share until September 2007. Mr. Ostrander also received
options for 8,000 shares in June 1999 that are exercisable at $2.0625 per share
until June 2009. All share amounts
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<PAGE>
set forth in this paragraph have been adjusted to give effect to the 2-for-1
stock split, which became effective March 31, 2000.
2000 Directors Stock Option Plan
On March 22, 2000, the Board of Directors of Pinnacle adopted the Pinnacle Data
Systems, Inc. 2000 Directors Stock Option Plan (the "Directors Plan"). Under the
Directors Plan Pinnacle reserved 250,000 common shares (post March 31, 2000
stock split) for issuance pursuant to which options may be granted to directors
of Pinnacle who are not employees of Pinnacle or its subsidiaries. The Directors
Plan was approved by the shareholders at the 2000 annual shareholders meeting.
The purpose of the Directors Plan is to provide eligible directors with an
opportunity to participate in Pinnacle's future prosperity and growth and an
incentive to increase the value of Pinnacle based on Pinnacle's performance,
development, and financial success. The Directors Plan is administered by a
committee of the Board consisting of directors who are not eligible to receive
options under the Directors Plan. Options granted under the Directors Plan will
be non-qualified options for tax purposes. Subject to the requirement that the
price per share of any common shares to be received upon the exercise of any
incentive option will not be less than the fair market value of the common
shares at the time the option is granted, the board or committee administering
the Directors Plan has the exclusive authority, consistent with law and the
terms of the Directors Plan, to designate recipients of options to be granted
thereunder and to determine the number of options and the number of common
shares subject thereto. As of August 18, 2000, no options have been granted
under the Directors Plan.
Certain Transactions
In 1998, Pinnacle refinanced three loans aggregating $540,585 in principal
amount. In addition to being collateralized by Pinnacle's land, building, rents,
leases, general business assets and profits thereof, these loans were guaranteed
by two shareholders of Pinnacle, one of whom was John Bair, the President and
principal shareholder of Pinnacle. These guarantees were released at the time of
the refinancing.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of August 10, 2000, with
respect to the Shares held of record by (a) Pinnacle's chief executive officer
and the persons serving as its other executive officers during 1999, (b) each of
the directors of Pinnacle, and (c) all executive officers and directors as a
group, including Shares subject to outstanding Options or Warrants that can be
exercised within a 60 day period. All share amounts have been adjusted to give
effect to the 2-for-1 stock split which became effective March 31, 2000:
<TABLE>
<CAPTION>
Name and Number of Percent
Address of Owner Shares Owned /(1) (2) (3)/ of Class
---------------- -------------------------- --------
<S> <C> <C>
John D. Bair 722,462 27.8%
6600 Port Road
Groveport, OH 43125
C. Robert Hahn 61,662 2.4%
6600 Port Road
Groveport, OH 43125
Thomas J. Carr 84,062 3.2%
6600 Port Road
Groveport, OH 43125
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Thomas M. O'Leary 38,000 1.5%
868 Paisley Place
Worthington, OH 43085
Robert V.R. Ostrander 37,000 1.4%
1585 Bethel Road
Columbus, OH 43220
Paul H. Lambert 1,000 .04%
7275 Roberts Road
Hilliard, Ohio 43026
Executive officers and directors 932,862 32.4%
as a group (6 persons)
</TABLE>
There are no other shareholders known to Pinnacle to own more than 5% of
Pinnacle's common shares.
________________________
/(1)/Except as otherwise indicated, the persons listed in the foregoing table
have the sole right to vote and to dispose of the common shares of Pinnacle
listed in that person's name.
/(2)/As trustees of the Pinnacle Data Systems, Inc. 401(K) Profit Sharing Plan,
Messrs. Bair, Hahn and Carr have the power to vote the Pinnacle shares held
in the plan. Each of these individuals is shown as beneficially owning the
5,662 shares in the Plan due to their shared voting power. However, they
have no investment power with respect to such shares.
/(3)/The shares set forth in the foregoing table include the following numbers
of Shares (adjusted to give effect to the 2-for-1 stock split effective
March 31, 2000) which may be acquired by the following persons upon the
exercise of stock options, which are exercisable within the next 60 days:
John D. Bair 68,000
C. Robert Hahn 56,000
Thomas J. Carr 76,000
Thomas M. O'Leary 38,000
Robert V.R. Ostrander 37,000
DESCRIPTION OF SECURITIES
The aggregate number of shares of capital stock, which Pinnacle has authority to
issue, is 10,000,000 shares, all of which are common shares, without par value.
As of August 10, 2000, there were 2,533,602 common shares outstanding. At the
2000 Annual Meeting of Shareholders, the shareholders approved amendments to
Pinnacle's Articles of Incorporation to increase the authorized number of common
shares from 5,000,000 to 10,000,000 and to authorize a class of "blank check"
preferred shares consisting of 4,000,000 authorized shares (the "Preferred
Shares").
Common Shares
Subject to any senior rights of any Preferred Shares which may be outstanding,
holders of the common shares are entitled to receive such dividends as may be
declared by the Board of Directors out of funds legally available therefor. Upon
dissolution and liquidation of Pinnacle, holders of the common shares are
entitled to a ratable share of the net assets of Pinnacle remaining after
payments to creditors of Pinnacle and after payment to the holders of the
Preferred Shares of the full preferential amounts to which they may be entitled.
All outstanding common shares are, and the Shares offered hereby will,
-28-
<PAGE>
when sold and paid for as provided herein, be, validly issued, fully paid and
nonassessable. See "Dividend Policy".
The holders of common shares are entitled to one vote per share for the election
of directors and on all other matters submitted to a vote of shareholders.
Holders of common shares are not entitled to preemptive rights or to cumulative
voting for the election of directors. The absence of cumulative voting, together
with the ownership of approximately 30% of the common shares by Mr. Bair,
enables him to control the affairs and policies of Pinnacle and could be
expected to have the effect of delaying, averting or preventing a change in
control or management of Pinnacle unless Mr. Bair is in favor of such change.
At the 2000 Annual Meeting of Shareholders, shareholders approved amendments to
Pinnacle's Articles of Incorporation and Code of Regulations to accomplish a
number of purposes.
First, the shareholders amended Pinnacle's Code of Regulations to create two
classes of directors, with the terms of office of each class expiring every
other year and the number of directors in each class fixed at four. This
amendment also increased the maximum number of directors from seven to nine. See
"Management - Classified Board of Directors". The shareholders also approved
additional amendments to Pinnacle's Code of Regulations, to require the approval
of the holders of at least 75% of Pinnacle's outstanding voting shares to amend
Section 2.2 of the code (which governs the classification of the Board of
Directors) or Section 2.7 (which governs the removal of directors and currently
requires a 75% shareholder vote to remove a director without cause), unless the
amendment has previously been approved by the vote of at least two-thirds of the
members of the Board of Directors. If the Board of Directors has given such
approval, then Sections 2.2 and 2.7 may be amended by the affirmative vote of
the holders of a majority of Pinnacle's outstanding voting shares. The amendment
also revised Article 10, which governs amendments to the Amended and Restated
Code of Regulations. Article 10 permits the Amended and Restated Code of
Regulations to be amended by the affirmative vote of the holders of a majority
of Pinnacle's outstanding common shares. The amendment to Article 10 did not
change this majority-vote requirement except that it eliminates its
applicability to amendments to Sections 2.2 and 2.7 in light of the super-
majority vote required to amend these sections.
The shareholders also amended Pinnacle's Articles of Incorporation to require
the vote of at least 75% of Pinnacle's shareholders to approve a merger,
combination, majority share acquisition, amendment to the Articles of
Incorporation or other proposal requiring a particular shareholder vote under
Ohio law unless the transaction has previously been approved by the vote of at
least two-thirds of the members of the Board of Directors. If a merger,
combination, majority share acquisition, amendment to Articles of Incorporation,
or other proposal requiring a particular shareholder vote under Ohio law has
been approved by at least two-thirds of the members of the Board of Directors,
then such matter may be approved by the vote of the holders of a majority of the
outstanding voting shares of Pinnacle rather than by the holders of 75% or more
of the outstanding voting shares.
Preferred Shares
At the 2000 Annual Meeting of Shareholders, shareholders approved an amendment
to the Pinnacle Articles of Incorporation to add a class of Preferred Shares
consisting of 4,000,000 authorized shares. The Preferred Shares, if issued, may
have priority over the Common Shares with respect to dividends and to other
distributions, including the distribution of assets upon liquidation. The
Preferred Shares will be issuable in one or more series as determined by the
Board of Directors, and the Board of Directors is authorized to fix and
determine the terms, limitations and relative voting and other rights and
preferences of the Preferred Shares of each series. The Board of Directors,
without shareholder approval, could issue Preferred Shares with voting and
conversion rights that could adversely affect the voting power of the holders of
Common Shares and the issuance of which could be used by the Board of Directors
in defense of a hostile takeover.
-29-
<PAGE>
Anti-Takeover Provisions
Pinnacle's Articles of Incorporation and Code of Regulations contain provisions
that may have an anti-takeover effect. In other words, these provisions may
discourage a third person from attempting to obtain control of Pinnacle or make
it more difficult for such an attempt to succeed. Cumulative voting has been
eliminated, which tends to enable the shareholder or shareholders with the
largest block of shares to elect all directors. Super-majority voting
requirements are also required under two circumstances. The vote of at least 75%
of Pinnacle's shareholders is required to eliminate Ohio's control share
acquisition statute ((S)1701.831 of the Ohio Revised Code). The vote of at least
75% of Pinnacle's shareholders is also required to remove a director from
office.
The approved amendments to Pinnacle's Articles of Incorporation and Code of
Regulations discussed above may also have an anti-takeover effect. The amendment
to increase the number of common shares to 10,000,000 authorized shares may have
an anti-takeover effect because, if an attempt to obtain control of Pinnacle
were made, Pinnacle could issue a block of common shares (or rights to purchase
such shares) to persons who are loyal to Pinnacle's management. The issuance of
such shares could preclude a merger or takeover attempt -- or make them more
difficult -- because it could dilute the voting power of the person seeking to
obtain control of Pinnacle. The amendment to authorize a class of 4,000,000
"blank check" Preferred Shares may have an anti-takeover effect because, if an
attempt to obtain control of Pinnacle were made, Pinnacle could issue a block of
Preferred Shares (or rights to purchase such shares) to persons who are loyal to
Pinnacle's management. The issuance of such shares could preclude a merger or
takeover attempt -- or make them more difficult -- because it could dilute the
voting power of the person seeking to obtain control of Pinnacle. The classified
Board of Directors may also have an anti-takeover effect because the creation of
a classified Board of Directors could extend the time necessary to change the
composition of the Board of Directors. When there is no classified Board of
Directors, all of the directors are elected at each annual meeting of
shareholders. As a result, the holders of a majority of Pinnacle's common shares
could replace a majority or all of the directors at one annual meeting. In
contrast, with a classified Board of Directors, the holders of a majority of
Pinnacle's common shares will not be able to replace all of the directors at one
annual meeting. This may discourage a third person from initiating a proxy
contest, making a tender offer, or otherwise attempting to obtain control of
Pinnacle without first negotiating with the Board of Directors and management.
The amendment to require supermajority votes to approve certain transactions
under Ohio law, unless previously approved by two-thirds of the directors may
have an anti-takeover effect because of its increase in the shareholder approval
requirement. This increase may allow minority shareholders or management to veto
a transaction that may be viewed by other shareholders as desirable or
beneficial unless at least two-thirds of the Board of Directors are in favor of
the proposal. This could preclude a merger or takeover attempt - or make them
more difficult.
Shares Eligible for Future Sale
Upon the sale of the maximum number of Shares offered hereby, Pinnacle will have
2,583,602 Shares outstanding (assuming no other options or Warrants are
exercised). The 50,000 Shares covered by this Prospectus, when issued upon
exercise of the Warrants, will be freely tradable without restriction under the
Act. Of the common shares currently outstanding, 1,845,092 are freely tradable
without restriction under the Act. The 657,734 Shares currently held by
Pinnacle's executive officers and directors are deemed "affiliate" securities
within the meaning of Rule 144 under the Act.
In general, under Rule 144, persons who may be deemed "affiliates" of Pinnacle,
as the term affiliate is defined in Rule 144, would be entitled to sell, within
any three-month period, a number of common shares which does not exceed the
greater of 1% of the then outstanding common shares of Pinnacle or the average
weekly trading volume in the over-the-counter market during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. No sales are permitted, however, unless the
current information about Pinnacle prescribed by Rule 144 is publicly available,
sales are made through brokers or market makers in the manner prescribed by the
rule
-30-
<PAGE>
and all the other requirements of the rule are met. Sales of common shares by
Pinnacle's existing shareholders or sales of any Shares issuable upon exercise
of outstanding stock options may adversely affect the price of Pinnacle's common
shares. As of August 10, 2000, without taking into account the Warrants and the
Shares offered hereby, there were immediately exercisable options and Warrants
which, upon exercise, would enable their holders to purchase up to 539,600
Shares at prices ranging from $1.25 to $2.75.
Transfer Agent and Registrar
The transfer agent and registrar for the common shares is Firstar Bank.
EXERCISE OF WARRANTS
The Shares to be sold pursuant to this Prospectus are Shares that will be issued
when the Warrants are exercised. The Warrants were originally issued to Corna
Securities, Inc., the underwriter in Pinnacle's 1996 public offering. The
following is a description of the 50,000 Warrants, which may be exercised for up
to 50,000 Shares included in this Prospectus. The Warrants were originally
issued on April 23, 1996. Each Warrant evidences the right to purchase one
Share. Each Warrant is exercisable at a price of $2.75 per Share until 5:00 p.m.
on April 23, 2001.
The Warrants are exercisable in whole or in part by surrendering them prior to
the expiration date, duly executed, to Pinnacle, together with payment of the
exercise price in cash or by certified or official bank check payable to the
order of Pinnacle. Upon any partial exercise of the Warrants, Pinnacle will
issue a new Warrant or Warrants for the number of Shares for which Warrants have
not been exercised.
The exercise price of the Warrants was based on the initial public offering
price of Pinnacle's Shares in its 1996 public offering and is equal to 110% of
such price.
The Warrant Agreement provides for adjustment of the exercise price of the
Warrants and a change of the number and kind of Shares or other securities
available for purchase upon exercise of the Warrants upon the occurrence of
certain events, in order to protect Warrant holders against dilution. No
fractional shares will be issued upon the exercise of the Warrants, but Pinnacle
will have the option to pay the then current fair market value (as defined in
the Warrant) of any fractional shares otherwise issuable.
Holders of the Warrants have no voting, dividend, liquidation or other rights as
shareholders unless and until Shares are issued of record upon the due exercise
of the Warrants.
Notwithstanding the stated exercise period, the exercise of the Warrants will
not be allowed unless the Shares to be issued upon exercise have been registered
under federal and state securities laws or exemptions from such registration are
available. There can be no assurance that Pinnacle will, at all times during the
life of the Warrants, be able to secure such registrations or that appropriate
exemptions will be available, and in the event such registrations or exemptions
are not available, the Warrants will not be exercisable. The Warrants provide
that the holders of 50% or more of the Warrants have the right, one time only,
to request that Pinnacle register the Shares issuable upon exercise of the
Warrants with the Securities and Exchange Commission. Pinnacle has received a
request from Corna Securities, Inc. that it register the 50,000 shares issuable
upon exercise of its Warrants and this prospectus forms part of that
registration statement. When and if the Warrants are exercised and the exercise
price is paid for as set forth in the Warrants, Pinnacle will follow the terms
of the Warrants and issue the Shares to the holder of the Warrants.
Pinnacle has no other arrangements with the any underwriter or broker to
otherwise distribute the Shares after the issuance by Pinnacle. It is
anticipated, however, that the holders of the Warrants will, upon exercise, sell
the Shares they receive into the marketplace for Shares.
-31-
<PAGE>
EXPERTS
The financial statements included in this prospectus have been audited by
Hausser + Taylor LLP, independent auditors, as stated in their report herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
-32-
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Shares offered
hereby are being passed on for Pinnacle by Baker & Hostetler LLP, 65 East State
Street, Columbus, Ohio 43215.
-33-
<PAGE>
FINANCIAL STATEMENTS
-34-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
FINANCIAL REPORT
DECEMBER 31, 1999
-35-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 37
FINANCIAL STATEMENTS
Balance Sheets 38-39
Statements of Income 40
Statements of Changes in Stockholders' Equity 41
Statements of Cash Flows 42-43
Notes to Financial Statements 44-58
-36-
<PAGE>
To the Board of Directors
Pinnacle Data Systems, Inc. (dba PDSi)
Columbus, Ohio
Independent Auditors' Report
We have audited the accompanying balance sheet of Pinnacle Data Systems,
Inc. (dba PDSi) as of December 31, 1999, and the related statements of income,
changes in stockholders' equity and cash flows for the two years then ended.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pinnacle Data Systems, Inc.
(dba PDSi) as of December 31, 1999, and the results of its operations and its
cash flows for the two years then ended in conformity with generally accepted
accounting principles.
Columbus, Ohio
March 10, 2000
-37-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
---------
December 31, June 30,
1999 2000
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash $ 35,296 $ 31,035
Accounts receivable, net of allowance for doubtful
accounts of $10,000 and $15,000, respectively 2,470,081 2,921,720
Inventory 2,677,281 4,522,528
Other prepaid expenses 135,039 177,486
Deferred income taxes (Note 7) 132,000 132,000
---------- ----------
5,449,697 7,784,769
---------- ----------
PROPERTY AND EQUIPMENT
Leasehold improvements 59,481 122,538
Furniture and fixtures 221,303 298,281
Computer equipment 1,069,388 1,193,168
Shop equipment 283,125 297,398
Vehicle 21,846 21,846
---------- ----------
1,655,143 1,933,231
Less accumulated depreciation 798,925 968,334
---------- ----------
856,218 964,897
---------- ----------
OTHER ASSETS
Deposits 18,112 18,112
---------- ----------
$ 6,324,027 $ 8,767,778
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-38-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
BALANCE SHEETS
<TABLE>
<CAPTION>
Unaudited
---------
December 31, June 30,
1999 2000
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Line of credit (Note 2) $ 1,300,000 $ 2,031,100
Current portion of long-term debt (Note 3) 64,521 126,521
Accounts payable 1,779,216 2,747,946
Accrued expenses:
Wages and payroll taxes 204,420 277,943
Vacation 61,733 80,985
Profit sharing plan (Note 6) 48,625 39,993
Income taxes 190,221 66,634
Other 55,292 117,862
Unearned service revenue 61,253 19,788
---------- ----------
3,765,281 5,508,772
----------- ----------
LONG-TERM LIABILITIES
Long-term debt, less current portion (Note 3) 130,558 248,557
Deferred income taxes (Note 7) 14,000 14,000
----------- ----------
144,558 262,557
----------- ----------
3,909,839 5,771,329
----------- ----------
STOCKHOLDERS' EQUITY (Note 4)
Common stock; no par value; 5,000,000 and 10,000,000
shares authorized, respectively; 2,437,402 and 2,505,102
shares issued and outstanding, respectively 1,615,638 1,718,050
Preferred stock; no par value; 4,000,000 shares authorized
in 2000, no shares issued or outstanding - -
Additional paid-in capital 214,506 214,506
Retained earnings 584,044 1,063,893
---------- ----------
2,414,188 2,996,449
---------- ----------
$ 6,324,027 $ 8,767,778
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-39-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
----------------------------
Twenty-six Twenty-six
Years Ended Weeks Ended Weeks Ended
----------------------------- ----------- -----------
December 31, December 31, July 2, June 30,
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES
Product sales $ 6,199,772 $ 9,058,296 $ 3,630,961 $ 9,909,949
Service sales 2,832,560 3,144,405 1,442,284 1,856,650
---------- ---------- ----------- -----------
9,032,332 12,202,701 5,073,245 11,766,599
---------- ---------- ----------- -----------
COST OF SALES
Product sales 5,087,350 7,250,881 2,896,552 7,654,382
Service sales 2,104,884 1,830,771 862,106 1,194,599
---------- ---------- ----------- -----------
7,192,234 9,081,652 3,758,658 8,848,981
---------- ---------- ----------- -----------
GROSS PROFIT 1,840,098 3,121,049 1,314,587 2,917,618
---------- ---------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative 1,751,213 2,555,657 1,095,828 2,036,254
---------- ---------- ----------- -----------
INCOME FROM OPERATIONS 88,885 565,392 218,759 881,364
---------- ---------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on sale of building - 85,922 85,922 -
Interest expense (83,552) (92,473) (43,895) (94,515)
---------- ---------- ----------- -----------
(83,552) (6,551) 42,027 (94,515)
INCOME BEFORE INCOME TAXES 5,333 558,841 260,786 786,849
INCOME TAXES 4,745 207,675 106,924 307,000
---------- ---------- ----------- -----------
NET INCOME $ 588 $ 351,166 $ 153,862 $ 479,849
========== ========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ - $ 0.15 $ 0.06 $ 0.20
========== ========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $ - $ 0.14 $ 0.06 $ 0.17
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-40-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1999 and Twenty-six Weeks Ended June 30, 2000
-------------------------------------------------------------------------------
(Unaudited)
------------
<TABLE>
<CAPTION>
Common Stock
---------------------------- Total
Outstanding Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1997 2,389,402 $1,559,200 $214,506 $ 232,290 $ 2,005,996
Issuance of common stock (Note 9) 19,000 12,938 - - 12,938
Net income - - - 588 588
---------- ---------- -------- ---------- ----------
BALANCE - December 31, 1998 2,408,402 1,572,138 214,506 232,878 2,019,522
Net income - - - 351,166 351,166
Options exercised 29,000 43,500 - - 43,500
---------- ---------- -------- ---------- ----------
BALANCE - December 31, 1999 2,437,402 1,615,638 214,506 584,044 2,414,188
Net income (unaudited) - - - 479,849 479,849
Options exercised 67,700 102,412 - - 102,412
---------- ---------- -------- ---------- ----------
BALANCE - June 30, 2000 (Unaudited) 2,505,102 $1,718,050 $214,506 $1,063,893 $2,996,449
========= ========== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-41-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
----------------------------
Twenty-six Twenty-six
Years Ended Weeks Ended Weeks Ended
------------------------------ ----------- -----------
December 31, December 31, July 2, June 30,
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 588 $ 351,166 $ 153,862 $ 479,849
------------ ------------ ----------- -----------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 268,129 329,844 163,892 169,410
Provision for doubtful accounts (1,000) 1,000 6,024 5,000
Inventory reserves 90,921 (1,906) (2,185) 79,569
Provision for deferred taxes (41,255) (41,325) - -
Gain on sale of property and equipment - (85,922) (85,922) -
(Increase) decrease in assets:
Accounts receivable (459,867) (1,001,407) (332,849) (456,639)
Inventory 150,513 (1,392,474) (1,324,575) (1,924,817)
Prepaid expenses (41,262) (38,134) (118,515) (42,447)
Increase (decrease) in liabilities:
Accounts payable 73,056 724,274 381,900 968,731
Accrued expenses and taxes (117,844) 331,791 179,851 23,124
Unearned revenues 14,399 16,123 78,916 (41,465)
------------ ------------ ----------- -----------
Total adjustments (64,210) (1,158,136) (1,053,463) (1,219,534)
------------ ------------ ----------- -----------
Net cash used in operating activities (63,622) (806,970) (899,601) (739,685)
------------ ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (168,664) (444,293) (134,434) (278,088)
Proceeds from sale of property and equipment - 147,615 147,615 -
------------ ------------ ----------- -----------
Net cash used in investing activities (168,664) (296,678) 13,181 (278,088)
------------ ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 321,915 1,150,000 945,000 731,100
Principal payments on long-term debt (66,457) (69,022) (36,953) (220,001)
Principal payments on capital lease obligation (17,158) (20,635) (8,681) -
Long-term borrowings - - - 400,000
Net proceeds from sale of stock 12,938 43,500 36,750 102,413
------------ ------------ ----------- -----------
Net cash provided by financing activities 251,238 1,103,843 936,116 1,013,512
------------ ------------ ----------- -----------
INCREASE IN CASH 18,952 195 49,696 (4,261)
CASH - Beginning of period 16,149 35,101 35,101 35,296
------------ ------------ ----------- -----------
CASH - End of period $ 35,101 $ 35,296 $ 84,797 $ 31,035
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-42-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
----------------------------
Twenty-six Twenty-six
Years Ended Weeks Ended Weeks Ended
------------------------------- ----------- -----------
December 31, December 31, July 2, June 30,
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 85,358 $ 92,770 $ 44,192 $ 91,940
============ ============ =========== ===========
Income taxes paid, net of refunds $ 118,261 $ 84,180 $ 36,268 $ 430,589
============ ============ =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS
During 1998, the Company capitalized $75,413 of inventory
as computer equipment. Also, computer equipment with a
net book value of $14,454 was transferred to saleable inventory.
During 1998, the Company refinanced mortgage and long-term
debt totaling $540,585 with a $300,000 term note and line of
credit draws of $240,585. Later in 1998, $412,500 of
outstanding line of credit was refinanced via term debt.
In May 1999, the Company sold its land, building and
improvements. Of the proceeds, $401,197 was used to pay off
the remaining mortgage balance.
During 1999, the Company capitalized $144,891 of inventory
as computer equipment.
The accompanying notes are an integral part of these financial statements.
-43-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
A. Nature of Business - Pinnacle Data Systems, Inc. (dba PDSi) (the
Company) is an independent provider of component-level depot repair
services for electronic equipment such as computers, peripherals and
printed circuit board assemblies. The Company's repair services are
focused on UNIX/RISC workstations for original equipment manufacturers
(OEM's). The Company also designs and manufactures custom printed
circuit boards and provides custom integration of standard computing
equipment for OEM's.
B. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
C. Concentration of Credit Risk - Financial instruments, which
potentially subjects the Company to a concentration of credit risk
principally consist of accounts receivable. The Company grants credit
to its customers, which are varied in terms of size, geographic
location and financial strength. Customer balances are continually
monitored to minimize the risk of loss.
For 1999, the Company had three customers that generated revenues of
approximately $3,486,000, $1,285,000, and $2,006,000 or 29%, 11%, and
16%, respectively, of total revenue. In the Statement of Income,
approximately $2,348,000 is included in service sales and $4,429,000
is included in product sales. In addition, these customers represented
19%, 18%, and 20% of accounts receivable at December 31, 1999.
For 1998, the Company had three customers that generated revenues of
approximately $1,933,000, $1,978,000, and $1,063,000 or 21%, 22%, and
12%, respectively, of total revenue. In the Statement of Income,
approximately $1,839,000 is included in service sales and $3,135,000
is included in product sales. In addition, these customers represented
5%, 37%, and 20% of accounts receivable at December 31, 1998.
For the first twenty-six weeks of 2000, the Company had three
customers that generated revenues of approximately $4,495,000,
$2,177,000, and $1,272,000 or approximately 38%, 19%, and 11%,
respectively, of total revenue. In the Statement of Income,
approximately $1,557,000 is included in service sales and $6,387,000
is included in product sales. In addition, these customers represented
38%, 29%, and 33% of accounts receivable at June 30, 2000.
For the first twenty-six weeks of 1999, the Company had three
customers that generated revenues of approximately $1,077,000,
$1,028,000, and $538,000 or 21%, 20%, and 11%, respectively, of total
revenue. In the Statement of Income, approximately $1,077,000 is
included in service sales and $1,566,000 is included in product sales.
-44-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
D. Revenue Recognition - Revenue from product sales is recognized upon
shipment to customers. Revenue from service sales is generally
recognized as the service is provided which consists of: (i) repairing
products produced by third parties, (ii) earning a fee by exchanging
with a customer a replacement component or part for a defective
component or part; and (iii) servicing contracts to certain customers
generally for six to twelve months; for which, revenue is deferred and
recognized in income on a straight-line basis over the contract
period.
E. Inventories - Inventories are valued at average cost, not in excess of
market.
Inventory at December 31, 1999 and June 30, 2000 (Unaudited) was
comprised of the following:
1999 2000
---- ----
Component parts (raw materials) $ 1,880,742 $ 3,274,795
Work-in-process 368,122 979,238
Finished goods 428,417 268,495
------------ ------------
$ 2,677,281 $ 4,522,528
------------ ------------
The carrying values of component parts and finished goods represent
management's estimate of their net realizable value. Such value is
based on forecasts of repair/trade-in activity in the ensuing years.
Such forecasts are based on historical information, known contracts,
and management's expertise in computer hardware life cycles. The
computer hardware industry is characterized by rapid technological
advancement and change. Should demand for repair/trade-in hardware
prove to be significantly less than anticipated, the ultimate
realizable value of such products could be substantially less than the
amount shown in the balance sheet.
F. Statement of Cash Flows - For purposes of the statement of cash flows,
the Company considers all short-term instruments purchased with a
maturity of three months or less to be cash equivalents. There were no
cash equivalents at December 31, 1999 or 1998.
G. Property and Equipment - Property and equipment are recorded at cost.
Depreciation is provided on the straight-line method for financial
reporting purposes over the estimated useful lives of the respective
assets. Expenditures for maintenance and repairs are charged to
operations as incurred, while expenditures for additions and
improvements are capitalized. The vehicle is depreciated over 3 years.
Furniture, fixtures, and equipment are depreciated over useful lives
of 5 and 7 years. The building is depreciated over a useful life of 40
years, while building improvements are depreciated over 10 years.
Leasehold improvements are being amortized over 10 years. Depreciation
expense amounted to $329,144 and $267,429 for the years ended December
31, 1999 and 1998, respectively.
-45-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
H Advertising - All of the Company's advertising costs are of the
nondirect-response type. The Company expenses all advertising costs as
incurred or at the time the advertising takes place. Total advertising
costs incurred during the years ended December 31, 1999 and 1998 were
$1,345 and $7,930, respectively.
I. Life Insurance - The Company has purchased, and is the beneficiary, of
three term life insurance policies on key employees of the Company.
The total amount of coverage at December 31, 1999 was $3,250,000.
J. Stock-Based Compensation - The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" in the year ended December 31, 1996. This standard
encourages the adoption of the fair value-based method of accounting
for employee stock options or similar equity instruments, but
continues to allow the Company to measure compensation cost for those
equity instruments using the intrinsic value-based method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the fair value-
based method, compensation cost is measured at the grant date based on
the value of the award. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date or other measurement date over the amount
the employee must pay to acquire the stock. The Company intends to
continue the use of the intrinsic value-based method.
As a result, adoption of this standard will not have any effect to the
Company's financial statements other than to require disclosure of the
pro forma effect on net income of using the fair value-based method of
accounting. However, due to the Company's stock price at December 31,
1998 being below the strike price of all outstanding options,
management deems it unlikely that the options will be exercised. At
December 31, 1999, as a result of improved performance of the
Company's stock price, management now deems it likely all outstanding
options will be exercised. Accordingly, the Company has made the
disclosures required by SFAS 123 as of December 31, 1999 and for the
year then ended. (see Note 4).
K. Reclassifications - Certain 1998 and 1999 amounts have been
reclassified to conform to the 2000 presentation.
-46-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies (Continued)
L. Unaudited Financial Statements - The accompanying unaudited financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered
necessary for fair presentation of the results of operations for the
periods presented have been included. Interim results are not
necessarily indicative of results for the full year.
Note 2. Short-Term Debt
In January 1998, the Company entered into an agreement to establish a
$1,500,000 revolving line of credit that matured on June 30, 1999 and
carries an interest rate of prime (8.50% and 7.75% at December 31,
1999 and 1998, respectively). The amount available under the line of
credit is subject to a borrowing base as outlined in the agreement.
The line is collateralized by substantially all assets of the Company
and is subject to various covenants described further in Note 3. In
September 1999, the line of credit was extended through September
2000, with an increase in the maximum borrowing amount to $2,000,000.
In February 2000, the Company entered into an agreement with a new
financial institution to establish a $2,500,000 line of credit, with
monthly interest payments at prime minus .25%. The line is payable on
demand and is collateralized by a "Blanket Lien" on all assets of the
Company. In May 2000, the Company extended this agreement and
increased the limit to $3,000,000. In August 2000, the Company
increased the limit to $7,000,000 and reduced the interest rate to
prime minus 0.85%.
Note 3. Long-Term Debt
Following is a summary of long-term debt at December 31, 1999 and June
30, 2000 (Unaudited):
-47-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 3. Long-Term Debt (Continued)
1999 2000
3.9% vehicle loan, payable in monthly ---- ----
installments of $401, including interest
through January 2002. $ 10,079 $ 8,410
Prime rate (8.5% at December 31, 1999)
note payable in monthly installments of
$5,000 plus interest through January 2003;
collateralized by substantially all assets
of the Company. 185,000 -
Prime rate (9.5% at June 30, 2000) less .25%
note payable in monthly installments of
$11,111.11 through February 2003
collateralized by substantially all assets
of the Company. - 366,667
--------- ---------
Total long-term debt 195,079 375,078
Less current portion 64,521 126,521
--------- ---------
$ 130,558 $ 248,557
--------- ---------
The line of credit (Note 2) and long-term notes above are subject to a
loan and security agreement which contains numerous covenants which
require the Company to maintain specific financial performance ratios,
restrict payment of dividends, and report various financial
information to the lender on a monthly basis. At December 31, 1999,
the Company was in compliance with these covenants.
Aggregate maturities on long-term debt for the five years ending after
December 31, 1999 is as follows:
2000 $ 64,521
2001 64,701
2002 60,857
2003 5,000
2004 -
---------
$ 195,079
=========
-48-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 3. Long-term debt (Continued)
In February 2000, the Company refinanced existing long-term debt at a
new financial institution. The company borrowed $400,000 payable over
three years, in equal monthly payments of $12,627, including interest
at prime minus .25%, and is collateralized by a "Blanket Lien" on all
assets of the Company.
Note 4. Stockholders' Equity
A. Common Stock - In April 1996, the Company completed an offering of
500,000 shares of its no par value common stock at $2.50 per share.
Also, as part of the same offering, 200,000 shares of common stock
were issued in exchange for the exercise of previously issued warrants
to purchase shares at $1.25 per share.
On June 24, 2000, the shareholders approved amendments to the
Company's Articles of Incorporation to increase the authorized number
of common shares from 5,000,000 to 10,000,000.
B. On June 24, 2000, the shareholders approved amendments to the
Company's Articles of Incorporation to authorize a class of "blank
check" preferred shares consisting of 4,000,000 authorized shares. No
preferred shares were issued or outstanding at June 30, 2000.
C. Additional Paid-In Capital - On May 2, 1996, the Board of Directors
passed a resolution authorizing the transfer of undistributed earnings
accumulated while an S corporation of $214,506 to additional paid-in
capital. This transaction was recorded in the Company's financial
statements as of December 31, 1995.
D. Stock Options - The Company adopted the Pinnacle Data Systems, Inc.,
1995 Stock Option Plan (the Plan) on December 19, 1995. Any employee
who has been granted a discretionary option may purchase Company
common stock over a ten-year period, at the fair market value at time
of grant. (If the grantee owns more than 10% of the Company's stock at
the time of the grant, the purchase price shall be at least 110% of
the fair market value and the options expire five years from the date
of grant.) The aggregate number of common shares of the Company, which
can be granted under the plan, are 600,000 shares. All incentive
options available under the plan shall be granted by December 19,
2005. On February 16, 2000 the Board of Directors amended the plan,
which was subsequently approved by the shareholders on June 24, 2000,
to increase the number of shares reserved for issuance to 1,200,000
common shares. The details of options granted at December 31, 1999 and
1998 are as follows:
-49-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 4. Stockholders' Equity (Continued)
<TABLE>
<CAPTION>
Stock Option Plan 1999 1998
----------------- ---- ----
Weighted Weighted
Employee Stock Option Average Average
Agreements Number Exercise Price Number Exercise Price
---------- ------ -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 463,900 $ 1.55 276,000 $ 2.94
Granted 150,900 $ 2.09 368,500 $ 1.56
Exercised 29,000 $ 1.50 None
Cancelled 13,000 $ 1.54 180,600 $ 2.84
-------- -------------- ------- --------------
Outstanding, end of year 572,800 $ 1.69 463,900 $ 1.55
======== ============== ======= ==============
Exercise price range of options
outstanding $1.25 to $2.75 $1.25 to $3.30
Director Stock Option Agreements
--------------------------------
Outstanding, beginning of year 59,000 $ 1.84 59,000 $ 1.84
Granted 26,000 $ 2.06 None
Exercised None None
Cancelled 10,000 $ 3.50 None
-------- -------------- ------- --------------
Outstanding, end of year 75,000 $ 1.70 59,000 $ 1.84
======== ============== ======= ==============
Exercise price range of options
outstanding $1.50 to $3.50 $1.50 to $3.50
</TABLE>
On June 23, 1999, the Company cancelled the 10,000 Director Stock Options at
$3.50 and reissued the 10,000 options at $2.07.
As noted in Note 1.J., the Company is continuing to utilize the intrinsic value-
based method for accounting for employee stock options or similiar equity
instruments; therefore, the Company has not recorded any compensation cost in
the Statements of Income for stock-based employee compensation awards.
The options outstanding at December 31, 1999 are exercisable through periods
ranging from May 2002 through December 2009.
-50-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 4. Stockholders' Equity (Continued)
On July 22, 1998, the Board granted options for 74,000 shares to
an employee of the Company at an option price of $1.75 per share.
The options were exercisable for a period commencing on the grant
date and continuing for two years. At December 31, 1998, based on
the average market price, either being below or approximating the
option price, management deemed it unlikely that these options
would be exercised during the two-year period. On December 15,
1999, the Board of Directors extended the exercise date for an
additional year. Therefore, the fair value of these options was
estimated at the new date using a Black-Scholes option pricing
model and included in proforma disclosures as required by SFAS
123.
Pro forma information regarding net income and earnings per share
is required by SFAS 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. At December 31, 1998, the Company's
stock price was below the exercise price for the options.
Therefore, management deemed it unlikely that these options would
be exercised over this period and the disclosure required by SFAS
123 is not applicable. At December 31, 1999, the Company's stock
price was above the exercise price of the options. Therefore, the
fair value for these options were estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted average assumptions for December 31, 1999.
Risk-free interest rate 6%
Dividend Yield 0%
Volatility factor 56.39%
Weighted average expected life in years 7
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting
period. The Company's pro forma income and earnings per share are
as follows for the year ended December 31, 1999 and twenty-six
weeks ended June 30, 2000.
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
(Unaudited)
Net income - as reported $ 351,166 $ 479,849
Net income - pro forma $ 328,127 $ 466,465
Basic earnings per common share-as reported $ 0.15 $ 0.20
Basic earnings per common share-pro forma $ 0.14 $ 0.19
Diluted earnings per common share - as reported $ 0.14 $ 0.17
Diluted earnings per common share - pro forma $ 0.13 $ 0.16
Weighted average fair value of options granted
during the year $ 2.09 $ -
</TABLE>
-51-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 4. Stockholders' Equity (Continued)
E. Stock Warrants - As part of the April 1996 offering circular, the
underwriter was granted warrants to purchase 50,000 shares of
common stock at $2.75 per share. The warrants became exercisable
in May 1997 and expire in April 2001. These warrants are being
registered under Form SB-2 that is to be filed with the Securities
and Exchange Commission.
Note 5. Leases
Operating
---------
The Company leases office equipment under operating leases
expiring in 1999 and 2002. Additionally, commencing in 1999, the
Company entered into a lease for its new operating facility that
has a term through 2009.
Minimum future lease payments under operating leases as of
December 31, 1999 are as follows:
2000 $ 388,793
2001 465,440
2002 488,890
2003 516,390
2004 547,898
Thereafter 2,708,357
------------
$ 5,115,768
============
Total lease payments charged to operations for the year ended
December 31, 1999 amounted to $140,200.
Note 6. Profit Sharing and 401(k) Savings Plan
The Company maintains a qualified cash or deferred compensation
plan under section 401(k) of the Internal Revenue Code. The plan
covers all employees age 21 or over with one year of service.
Under the plan, employees may elect to defer from 1% to 12% of
their salary, subject to Internal Revenue Code limits.
The Company, at its discretion, may match 100% of employee
contributions up to 6% of wages deferred with a maximum
contribution per employee of $3,000 in 1999 and $4,500 in 2000.
Matching contribution expense of $48,625 and $40,015 has been
accrued for 1999 and 2000 (Unaudited), respectively.
-52-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 7. Income Taxes
Deferred income taxes arise from temporary differences resulting
from income and expense items reported for financial accounting
and tax reporting purposes in different periods. Deferred taxes
are classified as current or long-term, depending on the
classification of the assets and liabilities to which they relate.
Deferred taxes arising from temporary differences that are not
related to an asset or liability are classified as current or
long-term depending on the periods in which the temporary
differences are expected to reverse.
The components of the deferred tax asset (liability) consisted of
the following at December 31:
1999
----
Current:
Federal $ 122,000
State 7,000
City 3,000
---------
$ 132,000
=========
Noncurrent:
Federal $ (13,000)
State (700)
City (300)
---------
$ (14,000)
=========
Net deferred tax assets in the accompanying balance sheet include
the following components at December 31:
1999
----
Deferred tax liabilities arising from
depreciation and state tax benefit
temporary differences $ (14,000)
Deferred tax assets arising from allowance
for doubtful accounts, inventory reserves
and vacation and bonus accrual temporary
differences
132,000
---------
$ 118,000
---------
-53-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 7. Income Taxes (Continued)
The components of the tax expense (benefit) for the year ended
December 31, were as follows:
1999 1998
---- ----
Current:
Federal $ 225,000 $ 43,000
State 11,000 -
City 13,000 3,000
---------- ---------
249,000 46,000
---------- ---------
Deferred:
Federal (36,200) (38,400)
State (3,400) -
City (1,725) (2,855)
---------- ---------
(41,325) (41,255)
---------- ---------
Total $ 207,675 $ 4,745
========== =========
A reconciliation of the total provision for income taxes with
amounts determined by applying the statutory U.S. federal income
tax rate to income tax provision for the year ended December 31,
is as follows:
1999 1998
---- ----
Income tax provison at statutory rate $ 190,000 $ 1,745
Add:
Tax effect of permanent differences 4,800 4,000
State income taxes, net of federal
income tax provision 8,100 -
Other, net 4,775 (1,000)
--------- --------
Total income tax provision $ 207,675 $ 4,745
========= ========
-54-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 7. Income Taxes (Continued)
Income taxes for interim periods were computed using the effective
tax rate estimated to be applicable for the full fiscal year,
which is subject to ongoing review and evaluation by management.
Note 8. Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share were computed by
dividing net income by the weighted average number of shares of
common stock outstanding during the year. At December 31, 1999 and
1998 and June 30, 2000 and July 2, 1999, the number of common
shares was increased by the number of shares issuable on the
exercise of outstanding stock options and warrants when the market
price of the common stock exceeds the exercise price of the
options and warrants. This increase in the number of common shares
was reduced by the number of common shares that are assumed to
have been purchased with the proceeds from the exercise of the
options; those purchases were assumed to have been made at the
average price of the common stock during that part of the year
when the market price of the common stock exceeded the exercise
price of the options.
The following data show the amounts used in computing earnings per
share (EPS) and the effect on income and the weighted average
number of shares of dilutive potential common stock.
<TABLE>
<CAPTION>
1999 1998 2000 1999
---- ---- ---- ----
(Year) (Year) (Twenty-six) (Twenty-six)
------ ------ ------------ ------------
Weeks) Weeks)
------ ------
<S> <C> <C> <C> <C>
Income available to common
stockholders used in basic EPS
and diluted EPS $ 351,166 $ 588 $ 479,849 $ 153,862
============ ============ ============= ============
Weighted average number of
common shares used in basic EPS 2,430,069 2,398,902 2,452,799 2,427,044
Effect of dilutive securities:
Stock options and warrants 124,063 0 384,579 93,953
------------ ------------ ------------- ------------
Weighted number of common
shares and dilutive potential
common stock used in diluted EPS 2,554,132 2,398,902 2,837,378 2,520,977
------------ ------------ ------------- ------------
</TABLE>
-55-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 8. Earnings Per Common and Common Equivalent Share (Continued)
Options and warrants on 2,000, 574,900,0, and 52,000 shares,
respectively, of common stock were not included in computing
diluted EPS for the years ended December 31, 1999 and 1998, and
June 30, 2000 and July 2, 1999, respectively, because their
effects were antidilutive.
Note 9. Commitment Related to 1996 Public Offering
On October 13, 1995, the Company entered into an agreement with an
advisor to assist the Company in its efforts to fund the growth of
its business. A provision in the agreement required the Company to
retain the advisor, to perform future services, for two additional
years since the Company received at least one million dollars in
equity capital in 1996. In exchange, the advisor would be paid by
the issuance of 38,000 shares of common stock of the Company in
two annual installments of 19,000 shares. The first installment
was made in 1997 and the second installment was made in 1998. The
common shares issued in 1997 and 1998 were accounted for at the
fair market value of the consulting services provided which
amounted to $3,750 and $12,938, which represented the accumulated
unpaid amounts at the date of the issuance of the common stock.
These expenses were recorded in the Statements of Income for 1997
and 1998 as the services were performed. The amount of expense
applicable to 1998 was $638.
Note 10. Operating Segments
The Company's reportable segments include Service Sales and
Product Sales which are explained in this Form SB-2, including a
discussion of principle markets and distribution. The other column
listed below reflects items that are not allocated to segments.
These items primarily represent assets and expenses for various
administrative functions within the Company. The Company evaluates
performance based on operating earnings of the reportable
segments.
-56-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 10. Operating Segments (Continued)
Segment information for the years ended December 31, 1999 and 1998
and the twenty-six weeks ended June 30, 2000 and July 2, 1999, was
as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1999
--------------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ---- -----
<S> <C> <C> <C> <C>
Sales $ 3,144,405 $ 9,058,296 $ - $ 12,202,701
Gross profit 1,313,635 1,807,414 - 3,121,049
Operating earnings 858,315 526,137 (819,060) 565,392
Depreciation and
amortization 148,370 49,501 131,973 329,844
Total assets 1,721,295 4,363,504 239,228 6,324,027
Capital expenditures 96,346 200,547 147,400 444,293
<CAPTION>
Year ended December 31, 1999
--------------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ---- -----
<S> <C> <C> <C> <C>
Sales $ 2,832,560 $ 6,199,772 $ - $ 9,032,332
Gross profit 727,676 1,112,422 - 1,840,098
Operating earnings 254,483 461,987 (627,585) 88,885
Depreciation and
amortization 135,780 47,110 85,239 268,129
Total assets 1,773,363 2,194,267 237,747 4,205,377
Capital expenditures 124,405 12,728 31,531 168,664
</TABLE>
-57-
<PAGE>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
Note 10. Operating Segments (Continued)
<TABLE>
<CAPTION>
Twenty-six weeks ended June 30, 2000
--------------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ---- -----
<S> <C> <C> <C> <C>
Sales $ 1,856,650 $ 9,909,949 $ - $ 11,766,599
Gross profit 662,051 2,255,567 - 2,917,618
Operating earnings 285,899 1,226,539 (631,074) 881,364
Depreciation and
amortization 35,104 24,985 109,321 169,410
Total assets 1,256,768 7,246,557 264,453 8,767,778
Capital expenditures 82,775 75,427 119,886 278,088
<CAPTION>
Twenty-six weeks ended July 2, 1999
--------------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ---- -----
<S> <C> <C> <C> <C>
Sales $ 1,442,284 $ 3,630,961 $ - $ 5,073,245
Gross profit 580,178 734,409 - 1,314,587
Operating earnings 381,528 228,381 (391,150) 218,759
Depreciation and
amortization 45,015 11,254 107,623 163,892
Total assets 1,721,613 3,518,014 294,849 5,534,476
Capital expenditures 21,040 41,091 72,303 134,434
</TABLE>
Note 11. Research and Development
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts
charged for the years ended December 31, 1999 and 1998 were
$522,143 and $191,557, respectively.
-58-
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS IN
CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND INFORMATION OR
REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY PINNACLE. NEITHER THE DELIVERY OF THE PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF PINNACLE SINCE THE
DATE AS OF WHICH INFORMATION IS FURNISHED.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY...................................................... 2
PINNACLE DATA SYSTEMS, INC.............................................. 2
SUMMARY FINANCIAL INFORMATION........................................... 3
RISK FACTORS............................................................ 4
USE OF PROCEEDS......................................................... 5
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY........................ 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 6
BUSINESS................................................................ 14
MANAGEMENT.............................................................. 22
PRINCIPAL SHAREHOLDERS.................................................. 27
DESCRIPTION OF SECURITIES............................................... 28
EXERCISE OF WARRANTS.................................................... 31
EXPERTS................................................................. 32
LEGAL MATTERS........................................................... 33
FINANCIAL STATEMENTS.................................................... 34
PART II INFORMATION NOT REQUIRED IN PROSPECTUS........................ 60
SIGNATURES.............................................................. 68
POWER OF ATTORNEY....................................................... 69
</TABLE>
50,000
Common Shares
(without par value)
of
PINNACLE DATA SYSTEMS, INC.
an Ohio corporation
6600 Port Road
Groveport, Ohio 43125
Issuable upon exercise of
up to 50,000 Warrants
-59-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 1701.13(E) of the Ohio Revised Code sets forth conditions and
limitations governing the indemnification of officers, directors, and other
persons.
Article 8 of the Amended and Restated Code of Regulations of Pinnacle, a copy of
which is filed as Exhibit 3(b), contains certain indemnification provisions
adopted pursuant to authority contained in Section 1701.13(E) of the Ohio
Revised Code. Pinnacle's Code of Regulations provides for the indemnification of
its officers, directors, employees, and agents, or persons who are serving or
have served at the request of the Corporation as a director, trustee, officer,
employee, or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, against all
expenses with respect to any judgments, fines, and amounts paid in settlement,
or with respect to any threatened, pending, or completed action, suit, or
proceeding to which they were or are parties or are threatened to be made
parties by reason of acting in such capacities, provided that it is determined,
either by a majority vote of a quorum of disinterested directors of Pinnacle or
by the shareholders of Pinnacle or otherwise as provided in Section 1701.13(E)
of the Ohio Revised Code, that: (a) they acted in good faith and in a manner
they reasonably believed to be in or not opposed to the best interests of
Pinnacle; (b) in any action, suit, or proceeding by or in the right of Pinnacle,
they were not, and have not been adjudicated to have been, negligent or guilty
of misconduct in the performance of their duties to Pinnacle; (c) with respect
to any criminal action or proceeding, that they had no reasonable cause to
believe that their conduct was unlawful. Section 1701.13(E) provides that
expenses, including attorneys' fees, incurred in defending any action, suit, or
proceeding, may be paid by Pinnacle in advance of the final disposition of such
action, suit, or proceeding, upon receipt of an undertaking by the indemnified
person to repay such amount in the event that indemnification shall be deemed
improper.
Pinnacle maintains directors and officers liability insurance.
At present, there are no claims, actions, suits, or proceedings pending where
indemnification would be required under these provisions, and Pinnacle does not
know of any threatened claims, actions, suits, or proceedings which may result
in a request for such indemnification.
Item 25. Other Expenses of Issuance and Distribution
The following sets forth the estimated expenses payable in connection with the
preparation and filing of this Registration Statement:
Securities and Exchange Commission
Registration Fee.......................... $ 36.30
*Accounting Fees and Expenses.................. 5,000.00
*Legal Fees and Expenses....................... 25,000.00
*Blue Sky Fees and Expenses.................... 2,000.00
* Miscellaneous Expenses....................... 2,000.00
Total.......................... $34,036.30
------------------
*Estimate
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Item 26. Recent Sales of Unregistered Securities
The following is information about all securities that Pinnacle sold within the
past three years without registration under the Securities Act of 1933, as
amended. On March 7, 2000, the Board of Directors of Pinnacle declared a 2-for-1
stock split in the form of a 100 percent stock dividend, payable on March 31,
2000 to shareholders of record on March 14, 2000. The effect of the stock split
has been recognized in all share and per share data in the following discussion.
(a) On May 16, 1997, Pinnacle granted options pursuant to the Pinnacle
Data Systems, Inc. 1995 Stock Option Plan for 155,600 common shares, without par
value, to employees of Pinnacle. Options for 20,000 of the shares were issued to
John D. Bair at an exercise price of $3.30 per share, and the exercise price for
the remainder of 135,600 shares was $3.00 per share. Pinnacle received no
consideration for the grant of the options. The options were issued pursuant to
the exemption from registration under the Securities Act of 1933, as amended,
set forth in Regulation D, Rule 504. In addition, the shares underlying such
options were registered with the State of Ohio and a filing was made with the
Securities and Exchange Commission on Form D under Rule 504. On July 30, 1998,
123,500 of the options were re-priced at $1.50 per share. The 20,000 options
issued to John D. Bair were re-priced at $1.65 per share. Prior to the re-
pricing, 12,100 of the options originally issued in 1997 had been forfeited by
terminated employees. The repriced options were issued pursuant to the exemption
from registration under the Securities Act of 1933, as amended, set forth in
Rule 701.
(b) On June 4, 1997, Pinnacle issued 19,000 common shares, without par
value, to Corsair Associates, Ltd., an advisor to Pinnacle. On October 13, 1995,
Pinnacle had entered into an agreement with the advisor to assist Pinnacle in
its efforts to fund the growth of its business. A provision in the agreement
required Pinnacle to retain the advisor for two additional years if Pinnacle
received at least $1 million in equity capital in 1996. In exchange, the advisor
would receive 38,000 shares of common stock of Pinnacle in two annual
installments of 19,000 shares. The first installment was made in 1997 and the
second installment of 19,000 shares was made in 1998. The shares were issued
pursuant to Regulation D, Rule 504, and a Form D was filed with the Securities
and Exchange Commission. In addition, the shares were registered under Ohio law.
The value of the services received by Pinnacle and paid by the 1997 installment
of shares was $3,750.
(c) During 1997, Pinnacle issued 59,200 common shares, without par value,
to employees of Pinnacle pursuant to their exercise of stock options previously
granted to them. The aggregate amount received by Pinnacle upon such exercise
was $76,500. The shares were registered under Ohio law and were the subject of a
Form D filing under Rule 504 with the Securities and Exchange Commission.
(d) On September 12, 1997, under separate Stock Option Agreements,
Pinnacle granted an option for 20,000 common shares to Thomas M. O'Leary, a
director of Pinnacle, and 29,000 options to Robert V.R. Ostrander, another
director of Pinnacle. Pinnacle also granted options for 100,000 common shares to
three employees who are also directors. Options for 40,000 of the shares were
issued to John D. Bair at an exercise price of $3.27 per share. Options for
20,000 shares were granted to C. Robert Hahn and options for 40,000 shares were
granted to Thomas Carr at an exercise price of $2.97 per share. Pinnacle
received no consideration for the grant of the options. The options were issued
pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 701
promulgated there under. On July 30, 1998, all of the options were re-priced.
The 40,000 options issued to John D. Bair were re-priced at $1.65 per share. The
remaining options of O'Leary, Ostrander, Hahn and Carr were re-priced at $1.50
per share. The repriced options were issued pursuant to the exemption from
registration under the Securities Act of 1933, as amended, set forth in Rule
701.
(e) On May 20, 1998, Pinnacle issued 19,000 common shares, without par
value, to Corsair Associates, Ltd., an advisor to Pinnacle. On October 13, 1995,
Pinnacle had entered into an agreement with the advisor to assist Pinnacle in
its efforts to fund the growth of its business. A provision in the
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agreement required Pinnacle to retain the advisor for two additional years if
Pinnacle received at least $1 million in equity capital in 1996. In exchange,
the advisor would receive 38,000 shares of common stock of Pinnacle in two
annual installments of 19,000 shares. The first installment was made in 1997 and
the second installment of 19,000 shares was made in 1998. The shares were issued
pursuant to Regulation D, Rule 504 and a Form D was filed with the Securities
and Exchange Commission. The shares were also registered under the Ohio law. The
value of the services received by Pinnacle and paid by the 1998 installment of
shares was $12,938.
(f) On July 30, 1998, Pinnacle granted options pursuant to the Pinnacle
Data Systems, Inc. 1995 Stock Option Plan for 149,000 common shares, without par
value, to employees of Pinnacle. Options for 10,000 of the shares were issued to
John D. Bair at an exercise price of $1.65 per share and the exercise price for
the remainder of 139,000 shares was $1.50 per share. Pinnacle received no
consideration for the grant of the options. The options were issued pursuant to
the exemption from registration under the Securities Act of 1933, as amended,
set forth in Rule 701. In addition, the shares underlying such options were
registered with the State of Ohio and a filing was made with the Securities and
Exchange Commission on Form D under Rule 504.
(g) On March 1, 1999, Pinnacle granted options pursuant to the Pinnacle
Data Systems, Inc. 1995 Stock Option Plan for 8,000 common shares, without par
value, to John Kniley, its vice president of marketing, at an exercise price of
$2.03 per share. Pinnacle received no consideration for the grant of the
options. The options were issued pursuant to the exemption from registration
under the Securities Act of 1933, as amended, set forth in Rule 701.
(h) On June 23, 1999, Pinnacle granted options pursuant to the Pinnacle
Data Systems, Inc. 1995 Stock Option Plan for 134,900 common shares, without par
value, to employees of Pinnacle. Options for 8,000 of the shares were issued to
John D. Bair and 4,000 of the shares to Joy Bair at an exercise price of $2.27
per share. The exercise price for the remainder of 122,900 shares was $2.063 per
share. Pinnacle received no consideration for the grant of the options. The
options were issued pursuant to the exemption from registration under the
Securities Act of 1933, as amended, set forth in Rule 701.
(i) On June 23, 1999, under separate Stock Option Agreements, Pinnacle
granted options for 8,000 common shares to both Thomas M. O'Leary and to Robert
V.R. Ostrander, directors of Pinnacle, at an exercise price of $2.063 per share.
Additionally, on June 23, 1999, Pinnacle repriced options for 10,000 shares
originally granted to Mr. O'Leary in 1996, and in connection therewith issued a
new option agreement reflecting an exercise price of $2.063 per share until
October 1, 2006. Pinnacle received no consideration for the grant of the options
or in connection with the repricing. The options were issued pursuant to Section
4(2) of the Securities Act of 1933, as amended, and Rule 701 promulgated
thereunder.
(j) On August 12, 1999, Pinnacle granted options pursuant to the Pinnacle
Data Systems, Inc. 1995 Stock Option Plan for 6,000 common shares, without par
value, to employees of Pinnacle. The exercise price was $2.313 per share.
Pinnacle received no consideration for the grant of the options. The options
were issued pursuant to the exemption from registration under the Securities Act
of 1933, as amended, set forth in Rule 701.
(k) During 1999, Pinnacle issued 29,000 common shares, without par value,
to employees of Pinnacle pursuant to their exercise of stock options previously
granted to them. The aggregate amount received by Pinnacle upon such exercise
was $43,500. The shares were registered under Ohio law, and were the subject of
a Form D filing under Rule 504 with the Securities and Exchange Commission.
(l) On May 17, 2000, Pinnacle granted options pursuant to the Pinnacle
Data Systems, Inc. 1995 Stock Option Plan for 1,000 common shares, without par
value, to an employee of Pinnacle at an
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exercise price of $4.5625 per share. The shares underlying these options were
registered under the Securities Act of 1933 on Form S-8.
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<PAGE>
Item 27. Exhibits
The following is a listing of Exhibits either filed with this report or
incorporated by reference:
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with the SEC
--- ---------------------- -----------------------------
<S> <C> <C>
3(a) Amendments and Restated Articles of Registration Statement on Form 10-SB filed with
Incorporation the Securities and Exchange Commission on
December 13, 1999.
3(b) Amendments to Amended and Restated Registration Statement on Form 8-A filed with the
Articles of Incorporation adopted June Securities and Exchange Commission on September
14, 2000 6, 2000.
3(c) Amended and Restated Code of Regulations Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on
December 13, 1999.
3(d) Amendment to Amended and Restated Code Form 10-KSB Annual Report filed with the
of Regulations Securities and Exchange Commission on March 30,
2000.
3(e) Amendments to Amended and Restated Code Registration Statement on Form 8-A filed with the
of Regulations adopted June 14, 2000 Securities and Exchange Commission on September
6, 2000.
4(a) Warrant to Purchase Common Shares dated Contained Herein
April 23, 1996
4(b) Instruments defining the rights of Contained Herein
security holders, including indentures
5 Opinion of Baker & Hostetler, LLP Contained Herein
10(a) Technology license agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and Sun the Securities and Exchange Commission on
Microsystems, Inc. dated May 12, 1994 December 13, 1999.
10(b) Development and manufacturing license Registration Statement on Form 10-SB filed with
agreement between Pinnacle Data the Securities and Exchange Commission on
Systems, Inc. and Sun Microsystems, December 13, 1999.
Inc. dated October 27, 1997
10(c) Repair services agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, the Securities and Exchange Commission
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with the SEC
--- ---------------------- -----------------------------
<S> <C> <C>
Inc. and Sun Microsystems, Inc. dated on December 13, 1999.
March 29, 1999
10(d)* Employment agreement between Pinnacle Registration Statement on Form 10-SB filed with
Data Systems, Inc. and John D. Bair the Securities and Exchange Commission on
dated October 29, 1997 December 13, 1999.
10(e)* Employment agreement between Pinnacle Registration Statement on Form 10-SB filed with
Data Systems, Inc. and C. Robert Hahn the Securities and Exchange Commission on
dated October 29, 1997 December 13, 1999.
10(f)* Employment agreement between Pinnacle Registration Statement on Form 10-SB filed with
Data Systems, Inc. and Thomas J. Carr the Securities and Exchange Commission on
dated October 29, 1997 December 13, 1999.
10(g)* Employment agreement and stock option Registration Statement on Form 10-SB filed with
agreement between Pinnacle Data the Securities and Exchange Commission on
Systems, Inc. and David J. Richards December 13, 1999.
dated July 22, 1998
10(h)* Pinnacle Data Systems, Inc. 1995 Stock Registration Statement on Form 10-SB filed with
Option Plan the Securities and Exchange Commission on
December 13, 1999.
10(i)* Amendment No. 1 to Pinnacle Data Form 10-KSB Annual Report filed with the
Systems, Inc. 1995 Stock Option Plan Securities and Exchange Commission on March 30,
2000.
10(j)* Pinnacle Data Systems, Inc. 2000 Form 10-KSB Annual Report filed with the
Directors Stock Option Plan Securities and Exchange Commission on March 30,
2000.
10(k) Real estate contract on sale of Registration Statement on Form 10-SB filed with
building, dated March 17, 1999 the Securities and Exchange Commission on
December 13, 1999.
10(l) Lease agreement between Pinnacle Data Registration Statement on Form 10-SB filed with
Systems, Inc. and Duke Realty Limited the Securities and Exchange Commission on
Partnership dated March 9, 1999 December 13, 1999.
10(m) First Lease Amendment between Pinnacle Form 10-KSB Annual Report filed with the
Data Systems, Inc. and Duke Realty Securities and Exchange Commission on March 30,
Limited Partnership dated January 5, 2000.
2000
10(n) Loan and security agreement Registration Statement on Form 10-SB filed
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
If Incorporated by Reference,
Exhibit Document with which Exhibit was
No. Description of Exhibit Previously Filed with the SEC
--- ---------------------- -----------------------------
<S> <C> <C>
between Pinnacle Data Systems, Inc. and with the Securities and Exchange Commission on
Firstar Bank, N.A. dated September 30, 1999 December 13, 1999.
10(o) Business Loan Agreement between Pinnacle Form 10-KSB Annual Report filed with the
Data Systems, Inc. and Key Securities and Exchange Commission on March 30,
Bank National Association dated 2000.
February 18, 2000.
21 List of Subsidiaries Form 10-KSB Annual Report filed with the
Securities and Exchange Commission on March 30,
2000.
23(a) Consent of Hausser + Taylor, LLP Contained herein
23(b) Consent of Baker & Hostetler, LLP Contained in Exhibit 5
24 Powers of Attorney Contained on signature page of this Registration
Statement.
27 Financial Data Schedule Form 10-KSB Annual Report filed with the
Securities and Exchange Commission on March 30,
2000, and Form 10-QSB Quarterly Report filed with
the Securities and Exchange Commission on May 12,
2000.
</TABLE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
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<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as express in the Act and is, therefore, unenforceable.
(c) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorizes this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Groveport, State of Ohio, on this 15th day of September, 2000.
PINNACLE DATA SYSTEMS, INC.
Date: September 15, 2000 By: /s/ John D. Bair
----------------------------------
John D. Bair, Chairman, President,
and Chief Executive Officer
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POWER OF ATTORNEY
Know all men by these presents that each person whose signature appears below
constitutes and appoints John D. Bair and Thomas J. Carr, and each of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any or all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all the said attorneys-in-
fact and agents, or any of them, or their substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/John D. Bair Chairman, President, Chief September 21, 2000
---------------------- Executive Officer and
John D. Bair Director (principal
executive officer)
/s/Thomas J. Carr Chief Financial Officer, September 21, 2000
---------------------- Treasurer, and Director
Thomas J. Carr (principal financial and
principal accounting officer)
/s/ C. Robert Hahn Chief Operating Officer, September 21, 2000
---------------------- Vice President, and
C. Robert Hahn Director
/s/ Thomas M. O'Leary Director September 20, 2000
----------------------
Thomas M. O'Leary
/s/ Robert V.R. Ostrander Director September 20, 2000
----------------------
Robert V.R. Ostrander
/s/ Paul H. Lambert Director September 20, 2000
----------------------
Paul H. Lambert
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