<PAGE>
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
Pinnacle Data Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Pinnacle Data Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
Preliminary
PINNACLE DATA SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 14, 2000
To the Shareholders of
PINNACLE DATA SYSTEMS, INC.:
The Annual Meeting of Shareholders of Pinnacle Data Systems, Inc., an
Ohio corporation (the "Company"), will be held at the Company's principal
executive offices located at 6600 Port Road, Groveport, Ohio 43125 on Wednesday,
June 14, 2000, at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to amend the Company's Amended and
Restated 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.
2. To elect three Class I directors and three Class II directors.
3. To consider and vote upon a proposal to amend the Company's Amended and
Restated Articles of Incorporation to require the affirmative vote of
shares representing at least 75% of the voting power of the Company to
approve mergers, acquisitions or other matters for which Ohio law
specifies a required percentage vote of shareholders unless the
transaction has previously been approved by the vote of at least
two-thirds of the members of the Board of Directors.
4. To consider and vote upon a proposal to amend the Company's Amended and
Restated Code of Regulations to require the affirmative vote of shares
representing at least 75% of the voting power of the Company to amend
the provisions governing the two classes of directors and the removal
of directors unless the amendment has previously been approved by the
vote of at least two-thirds of the members of the Board of Directors.
5. To consider and vote upon a proposal to amend the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized
common shares from 5,000,000 to 10,000,000.
6. To consider and vote upon a proposal to amend the Company's Amended and
Restated Articles of Incorporation to authorize a class of preferred
shares consisting of 4,000,000 authorized shares.
7. To consider and vote upon amendments to the Pinnacle Data System, Inc.
1995 Stock Option Plan which increase the number of shares that may be
issued upon the exercise of stock options and which modify the terms of
the Plan to reflect certain changes in the administration and operation
of the Plan.
<PAGE>
8. To consider and vote upon a proposal to approve the Pinnacle Data
Systems, Inc. 2000 Directors' Stock Option Plan.
9. To consider and vote upon a proposal to ratify the selection of Hausser
+ Taylor LLP as the Company's independent accountants for the year
ending December 31, 2000.
10. To transact such other business as may properly come before the meeting
or any adjournment of the meeting.
The close of business on April 21, 2000, has been established as the
record date for the determination of shareholders entitled to notice of and to
vote at the meeting and any adjournment thereof.
Please sign and return the enclosed proxy promptly so that your shares
will be represented at the meeting. A return addressed envelope, which requires
no postage, is enclosed. If you are able to attend the meeting, are the
registered owner, and wish to vote in person, at your request we will cancel
your proxy.
By Order of the Board of Directors
Joy Bair, Secretary
Dated: May __, 2000
<PAGE>
PINNACLE DATA SYSTEMS, INC.
PROXY STATEMENT
GENERAL
This Proxy Statement is being furnished to the holders of common shares,
without par value, of the Company in connection with the solicitation of proxies
by the Board of Directors of the Company to be used at the Company's Annual
Meeting of Shareholders. The Annual Meeting will be held at the Company's
principal executive offices located at 6600 Port Road, Groveport, Ohio 43125 on
Wednesday, June 14, 2000, at 10:00 a.m., local time, for the purposes set forth
on the accompanying Notice of Annual Meeting.
The approximate date on which this Proxy Statement and the form of proxy
will be first sent to shareholders is May 10, 2000.
PROXIES AND VOTING
The close of business on April 21, 2000, has been fixed as the record date
for the determination of shareholders entitled to notice of and to vote at the
Annual Meeting and any adjournment of the Annual Meeting. On the record date,
2,461,602 common shares were outstanding and entitled to vote. Each share is
entitled to one vote.
Only shareholders of record are entitled to vote. If you are a beneficial
owner of the Company's common shares, you must provide instructions on voting to
your nominee holder. In most cases, this is your broker or its nominee.
All shares represented by properly executed proxies will be voted at the
Annual Meeting in accordance with the choices indicated on the proxy. If no
choices are indicated on a proxy, the shares represented by that proxy will be
voted in favor of the proposals set forth on the accompanying Notice of Annual
Meeting. Any proxy may be revoked by the record owner at any time prior to its
exercise by delivering to the Company a subsequently dated proxy or by giving
notice of revocation to the Company in writing or in open meeting. A
shareholder's presence at the Annual Meeting will not by itself revoke the
proxy.
The shareholders of record that are present at the Annual Meeting, whether
in person or by proxy, will constitute a quorum. Consequently, the Company need
not count abstentions or broker non-votes to determine whether a quorum is
present. A "broker non-vote" is a term used to describe a vote that a broker or
other record owner that holds shares in street name is not authorized to cast
because the broker has not received voting instructions from its customer, the
beneficial owner, and does not have discretion to vote without such
instructions.
Three different voting requirements apply to the proposals set forth in the
accompanying Notice of Annual Meeting. The proposals that require the Company to
amend its Amended and Restated Articles of Incorporation and Amended and
Restated Code of Regulations must be approved by the affirmative vote of the
holders of a majority of the Company's outstanding
1
<PAGE>
common shares. As a result, abstentions and broker non-votes will have the same
effect as votes cast against such proposals. Directors are elected by a
plurality of votes, and thus the nominees who receive the highest number of
votes will be elected (shareholders do not have the right to cumulate their
votes in electing directors). As a result, assuming the nominees for director
named in this proxy statement receive at least one vote and there is no
competing slate of directors proposed for election, abstentions and broker non-
votes will not have any effect on the election of directors. All other proposals
must be approved by the affirmative vote of a majority of common shares present
at the Annual Meeting, whether by the presence of the record shareholders
themselves or by proxy. Abstentions and broker non-votes will be present at the
Annual Meeting and thus will have the same effect as votes cast against such
proposals.
ANTI-TAKEOVER EFFECT OF SOME PROPOSALS
Shareholder approval of proposals one, three, four, five, and six may
have an anti-takeover effect. In other words, approval of these proposals may
discourage a third person from attempting to obtain control of the Company or
make it more difficult for such an attempt to succeed. Approval of these
proposals may also better enable incumbent directors and management to retain
their positions in the event of a takeover attempt. For these reasons, a change
in control of the Company may not occur or be attempted even if some
shareholders believe that a change in control would be beneficial to
shareholders generally. Consequently, shareholders could be deprived of the
benefits that could result from a change in control of the Company or an attempt
at a change in control, such as the realization of a premium over the market
price for their shares in a tender offer or the temporary increase in market
price that such an attempt could cause.
The Company is not aware of any attempt by any person to obtain control of
the Company, whether by means of a tender offer, proxy contest, merger or
otherwise, and proposals one, three, four, five, and six are therefore not a
response to any such attempt. Nevertheless, the Company believes that these
proposals are in the best interest of the Company and its shareholders. Proposal
one will increase the continuity and stability of the Company's Board of
Directors. Proposals three and four will provide the Board of Directors with
additional time to consider a takeover proposal and alternatives to the proposal
and may encourage any person seeking to obtain control of the Company to
negotiate with the Board of Directors. Proposals five and six will provide the
Company with additional financial flexibility. All of these proposals will
better enable the Board of Directors to protect the interests of the Company and
its shareholders. Additional information on these proposals, including their
anti-takeover effect, is set forth in the discussion of these proposals.
The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Code of Regulations currently contain provisions that may have an
anti-takeover effect. 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. First, the affirmative vote of shares representing at least two-
thirds of the voting power of the Company is required to eliminate Ohio's
control share acquisition statute ((S)1701.831 of the Ohio Revised Code).
Second, the affirmative vote of shares representing at least 75% of the voting
power of the Company is required to remove a director
2
<PAGE>
from office. Proposals one, three, four, five, and six are intended to
supplement these provisions. The Company has no intention at this time to
propose any additional anti-takeover measures in future proxy solicitations.
PROPOSAL ONE: CLASSIFIED BOARD
The Board of Directors has unanimously adopted a resolution to amend the
Company's Amended and Restated 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 resolution also
increases the maximum number of directors from seven to nine. The text of the
proposed amendment is attached as Exhibit A to this Proxy Statement.
If shareholders approve the proposed amendment to the Company's Amended and
Restated Code of Regulations, then, commencing with the election of directors at
the Annual Meeting, the Board of Directors will be divided into two classes of
directors with staggered terms of office (the term used to describe such a Board
of Directors is a "classified board"). If shareholders approve the proposal, the
initial terms of office of the directors in Class I and Class II will expire at
the 2001 and 2002 annual meetings of shareholders, respectively. Upon the
expiration of these initial terms, the successors to the directors whose initial
terms of office have expired will be elected to serve for two-year terms and
until their successors are elected and qualified. This election procedure will
apply to all future elections of directors. Any vacancy may be filled by the
Board of Directors for the full remaining term of the director who created the
vacancy. If shareholders do not approve the proposed amendment to the Company's
Amended and Restated Code of Regulations, all of the nominees who are elected as
directors will serve one-year terms and until their successors are duly elected
and qualified.
The purpose of the proposal to create a classified board of directors is to
provide for more continuity and stability on the Company's Board of Directors
(although no problems with continuity or stability have been encountered to
date) and to increase the likelihood that all shareholders will be treated
fairly in the event of a takeover of the Company. Although the proposal is not
intended to prevent a takeover, shareholder approval of the proposal may 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. Under the Company's current Amended and Restated Code of Regulations,
all of the directors are elected at each annual meeting of shareholders. As a
result, the holders of shares representing a majority of the Company's voting
power could replace a majority or all of the directors at one annual meeting. In
contrast, if a classified board of directors is created, the holders of shares
representing a majority of the Company's voting power will not be able to
replace all of the directors at one annual meeting. Although this will enhance
the stability and continuity of the Company's Board of Directors and management,
it may also discourage a third person from initiating a proxy contest, making a
tender offer, or otherwise attempting to obtain control of the Company without
first negotiating with the Board of Directors and management.
Although the proposed amendment to the Company's Amended and Restated Code
of Regulations may have an anti-takeover effect, the Board of Directors believes
that the advantages of a classified board outweigh any disadvantages. As a
result, the Board of
3
<PAGE>
Directors unanimously recommends that shareholders vote "For" approval of the
proposal to amend the Amended and Restated Code of Regulations to create a
classified Board of Directors.
ELECTION OF DIRECTORS
If proposal one to create a classified Board of Directors is approved by
shareholders, then at the Annual Meeting all shares represented by proxies,
unless otherwise specified, will be voted to elect the three Class I directors
nominated below to a one-year term expiring in 2001 and the three Class II
directors nominated below to a two-year term expiring in 2002. If proposal one
to create a classified Board of Directors is not approved by shareholders, then
at the Annual Meeting all shares represented by proxies, unless otherwise
specified, will be voted to fix the number of directors at eight and to elect
the six nominees named below as directors for a one-year term expiring in 2001.
Each of the nominees, except Mr. Lambert, presently is a director of the Company
and each of the nominees has consented to be named in the proxy statement and to
serve if elected. If any nominee named below as a director is unable to serve
(which is not anticipated), the persons named in the proxy may vote for another
nominee of their choice.
The number of directors is being fixed at a number higher than the number
to be elected because the Company believes that it is desirable to have one or
two vacancies available to be filled by the Board of Directors, without the time
and expense involved in holding a special meeting of shareholders, in the event
that an individual who is able to make a valuable contribution as a director
becomes available during the year. No decision has been made to fill the
vacancies, nor has any candidate been considered and approved by the Board of
Directors. If a classified Board of Directors is created, Class I and Class II
will each have a vacancy.
Proxies cannot be voted at the Annual Meeting for a greater number of
individuals than the six nominees named in this Proxy Statement. However,
additional nominations can be made by shareholders at the meeting.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Class I Directors
(Nominees for Election)
- ----------------------------------------------------------------------------------------------------------------------
Director Shares
of the Beneficially
Name of Director and Principal Occupation(s) During the Company Owned as of April Percent
Position with the Company Age Past Five Years Since 21, 2000/(1)/ of Class
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Thomas J. Carr, Treasurer, 46 Treasurer and Chief Financial 1996 76,062/(2)(3)/ 3.0%
Chief Financial Officer, Officer of the Company since May
and Director 1996. Controller of the Company
from September 1995 to May 1996. Prior
to September 1995, President of Celtic
Resources, a business consulting firm.
- ----------------------------------------------------------------------------------------------------------------------
Robert V.R. Ostrander, 54 Chairman of Manex Financial 1997 29,000/(3)/ 1.2%
Director Management, Inc.; President of
Manex Risk Management, Inc., Manex
Management Services, Inc.,
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Manex Advisors, Inc., and Omni
Financial Services, Inc. for more
than five years.
- ----------------------------------------------------------------------------------------------------------------------
Paul H. Lambert 46 Retired from UUNET, a division of Nominee -0- 0%
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, Vice
President and General Manager of
UUNET Hosting Services. Prior to
July 1999, held a variety of
technical and marketing management
positions while at CompuServe
Incorporated, including Vice
President, Network Technology of
CompuServe Network Services
(responsible for development,
engineering, operations, and
administration of the worldwide
CompuServe network) and Chief
Technology Officer.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Class II Directors
(Nominees for Election)
- ----------------------------------------------------------------------------------------------------------------------
Director Shares
of the Beneficially
Name of Director and Principal Occupation(s) During the Company Owned as of April Percent
Position with the Company Age Past Five Years Since 21, 2000/(1)/ of Class
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chairman and Chief Executive
John D. Bair, Chairman of Officer of the Company since May
the Board of Directors, 34 1996; President of the Company 1989 724,462/(2)(3)/ 28.6%
President and Chief since 1998; Secretary of the
Executive Officer Company from 1989 to 1998.
- ----------------------------------------------------------------------------------------------------------------------
C. Robert Hahn, Chief 47 Chief Operating Officer and Vice 1995 63,662/(2)(3)/ 2.5%
Operating Officer, Vice President of the Company since June
President, and Director 1998. President of the Company
from June 1996 to June 1998. Vice
President of Sales and Marketing of
the Company from October 1994 to
June 1996.
- ----------------------------------------------------------------------------------------------------------------------
Thomas M. O'Leary, Director 56 Retired from AT&T Corp./Lucent 1996 31,000/(3)/ 1.2%
Technologies, Inc. in 1996.
Business consultant since 1996 and
presently member of Worthington
City School Board. Prior to 1996,
employed in a managerial capacity
at AT&T Corp./Lucent Technologies
Inc. in the following areas:
manufacturing operations,
engineering, product development,
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
project management, product repair,
and support and sales.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
1. Unless otherwise indicated below, the persons listed in the foregoing two
tables have the sole right to vote and to dispose of the common shares of
the Company 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 two tables 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 that are exercisable within the next 60
days:
--------------------------------------------------------------------------
John D. Bair 70,000
--------------------------------------------------------------------------
C. Robert Hahn 58,000
--------------------------------------------------------------------------
Thomas J. Carr 68,000
--------------------------------------------------------------------------
Thomas M. O'Leary 30,000
--------------------------------------------------------------------------
Robert V.R. Ostrander 29,000
--------------------------------------------------------------------------
The foregoing tables do not reflect options for 4,000 shares held by Joy
Bair, the spouse of John D. Bair, over which John D. Bair disclaims beneficial
ownership.
As of April 21, 2000, the number of shares owned by all directors and
executive officers of the Company as a group (6 persons) was 912,862 (33.6%).
The foregoing amount includes 255,000 shares which may be acquired upon the
exercise of options which are currently exercisable or exercisable within 60
days of April 21, 2000.
Board of Directors Committees And Meetings
The Board of Directors held seven meetings and took action one time by
written consent during 1999. Each director attended at least 75% of the meetings
held by the Board of Directors except that Mr. O'Leary attended five of the
seven meetings.
The Board of Directors established a Compensation Committee in December
1999. The Compensation Committee, which is comprised of Messrs. Carr, O'Leary,
and Ostrander, reviews executive compensation policies and levels of
compensation. The Compensation Committee held no meetings during 1999.
The Board of Directors has no standing audit or nominating committee or
committee performing similar functions and no other standing committees.
6
<PAGE>
Compensation of Directors
Directors who are officers of the Company receive no separate compensation
for their services as directors. Compensation of the outside directors is
determined by the whole Board of Directors after receiving the recommendations
of the President. Currently, outside directors receive a fee of $500 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 the Company's
common stock at an exercise price of $3.50 per share. These options were
repriced in 1999 and are now exercisable at $2.065 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 $2.065 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 $2.065
per share until June 2009. All share amounts set forth in this paragraph have
been adjusted to give effect to the 2-for-1 stock split which became effective
March 31, 2000.
Executive Compensation
The following table sets forth for the fiscal years ended December 31, 1999
and 1998, the compensation of the Company's Chief Executive Officer and the only
other executive officer whose compensation exceeded $100,000 during 1999. No
other executive officer of the Company received salary and bonus compensation in
excess of $100,000 in the most recent completed fiscal year.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
(*) (***)
Securities All
Under- Other
lying Compen-
Name and Fiscal Salary Bonus Options/ sation
Positions Year ($) ($) SAR's ($)
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John D. Bair 1999 148,500 18,158 8,000 2,498
Chairman of the 1998 135,520 7,370 3,000
Board of Directors, 70,000(**)
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.
7
<PAGE>
**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 the Company to
its 401(k) plan for the benefit of Messrs. Bair and Hahn.
Option Grants in Last Fiscal Year
The following table indicates information about stock options granted
to the Company'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% $2.065 2009
</TABLE>
Stock Option Exercises and Year End Option Values
The following table indicates stock option exercises during 1999 by the
Company'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.
8
<PAGE>
Employment Agreements
The Company has entered into an employment agreement with John D. Bair, its
Chairman of the Board, President and Chief Executive Officer. The agreement is
for a term of three years ending on September 1, 2000, and provides 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. The agreement also
provides for those benefits generally available to other employees. If the
Company terminates Mr. Bair's employment without cause, he is entitled to a
severance payment equal to one year's base salary.
The Company has entered into an employment agreement with C. Robert Hahn,
its Vice President and Chief Operating Officer. The agreement is for a term of
three years ending on September 1, 2000, and provides 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. The agreement also provides for those
benefits generally available to other employees. If the Company terminates Mr.
Hahn's employment without cause, he is entitled to a severance payment equal to
one year's base salary.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers, directors and persons who own more than 10% of
a registered class of the Company's equity securities to file statements of
beneficial ownership of the Company's shares of common stock. Because the
Company was not subject to reporting under the Securities Exchange Act of 1934
during 1999, this requirement did not apply to its officers, directors and
shareholders during 1999 and there is nothing to report under this item with
respect to 1999.
Principal Holders Of Voting Securities
The following table sets forth certain information with respect to the
only persons known by the Company to own beneficially more than 5% of its common
shares:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner Amount and Nature of Beneficial
Ownership/(1)/ Percent of Ownership
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
John D. Bair
Pinnacle Data Systems, Inc.
6600 Post Road 724,462/(2)/ 28.6%
Columbus, Ohio 43215
- ---------------------------------------------------------------------------------------------------------------
David J. Richards
7964 Holyrood Ct. 194,500/(3)/ 7.3%
Dublin, Ohio 43017
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Beneficial ownership as of April 21, 2000. Except as otherwise indicated
below, the persons listed in the foregoing table have the sole right to vote and
to dispose of the common shares of the Company listed in that person's name.
9
<PAGE>
(2) Includes 70,000 shares which may be acquired by Mr. Bair upon the exercise
of options which are currently exercisable or exercisable within 60 days of
April 21, 2000; and (ii) 5,662 shares held in the Pinnacle Data Systems, Inc.
401(k) Profit Sharing Plan over which Mr. Bair shares voting power as a trustee.
Does not include options for 4,000 shares held by Joy Bair, the spouse of John
D. Bair, over which he disclaims beneficial ownership.
(3) Includes 74,000 shares subject to outstanding options which are currently
exercisable.
PROPOSAL TWO: SHAREHOLDER APPROVAL
OF MERGERS AND OTHER TRANSACTIONS
The Board of Directors has unanimously adopted a resolution to amend the
Company's Amended and Restated Articles of Incorporation to require the
affirmative vote of shares representing at least 75% of the Company's voting
power to approve mergers, acquisitions or other matters for which Ohio law
specifies a required percentage vote of shareholders unless the transaction has
previously been approved by the vote of at least two-thirds of the members of
the Board of Directors. The text of the proposed amendment is attached as
Exhibit B to this Proxy Statement.
Ohio law requires corporations to obtain shareholder approval (with some
exceptions) of mergers, combinations, majority share acquisitions, amendments to
a corporation's articles of incorporation, and certain other matters by the
affirmative vote of shares representing at least two-thirds of the corporation's
voting power. The Company has opted out of this two-thirds voting requirement by
including in its Amended and Restated Articles of Incorporation a provision
permitting shareholder approval of such matters by the affirmative vote of
shares representing a majority of the Company's voting power. If approved by
shareholders, the proposed amendment to the Amended and Restated Articles of
Incorporation will increase this majority voting requirement to a 75% voting
requirement if the matter being voted upon by shareholders has not been approved
in advance by at least two-thirds of the members of the Board of Directors. If a
merger, combination, majority share acquisition, amendment to the Company's
Amended and Restated 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 affirmative vote of shares representing a majority of the
Company's voting power.
The purpose of the proposed amendment is to encourage a person who may be
seeking to obtain control of the Company to negotiate in advance with the Board
of Directors, since the 75% shareholder approval requirement will not apply if
at least two-thirds of the members of the Board of Directors has approved the
transaction in advance. The Board of Directors believes that the interests of
the Company and its shareholders are best served by a transaction that occurs
after careful negotiation of the terms of the transaction, including the price
to be paid for the Company's shares. Nevertheless, although the proposed
amendment is not intended to prevent a change in control of the Company, the
proposed amendment 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. On balance, however, the Board of
Directors believes that the advantages offered by the proposed amendment
outweigh any disadvantages. As a
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result, the Board of Directors unanimously recommends that shareholders vote
"For" approval of the proposal to amend the Company's Amended and Restated
Articles of Incorporation to provide for the affirmative vote of shares
representing at least 75% of the Company's voting power under the circumstances
described above.
PROPOSAL THREE: AMENDMENT TO PROVISIONS
OF THE AMENDED AND RESTATED CODE OF REGULATIONS
The Board of Directors has unanimously adopted a resolution to amend the
Company's Amended and Restated Code of Regulations. As explained below, the
proposed amendments are necessary to ensure that the results intended by the
creation of a classified Board of Directors are not circumvented. Additionally,
an existing provision of the Amended and Restated Code of Regulations requires
the affirmative vote of the holders at least 75% of the shares that are entitled
to vote in the election of directors to remove a director without assigning
cause. The proposed amendments would also help ensure that this provision is not
circumvented. For these reasons, the proposed amendments may have an anti-
takeover effect. The text of the proposed amendment is attached as Exhibit C to
this Proxy Statement.
If the amendments to the Company's Amended and Restated Code of Regulations
are approved by shareholders, any amendment to Section 2.2 (which will govern
the classification of the Board of Directors) or Section 2.7 (which governs the
removal of directors) will require the approval of shares representing at least
75% of the Company's voting power, 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 shares representing a majority
of the Company's voting power. The purpose of these amendments is to ensure that
the results intended by the creation of a classified Board of Directors and by
requiring a super-majority vote to remove a director without cause are not
circumvented by a person who is seeking to obtain control of the Company. If the
amendments are not approved by shareholders, a person who obtains shares
representing a majority of the Company's voting power will be able to circumvent
the provisions of the Amended and Restated Code of Regulations governing the
classification and removal of directors by simply voting his or her shares in
favor of an amendment that would eliminate these provisions. That person could
then remove all of the directors and elect his or her own nominees to the Board
of Directors. The proposed amendments are designed to guard against this
possibility and to encourage a person who is seeking to obtain control of the
Company to negotiate with the Board of Directors.
The proposed amendment will also revise 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 shares representing a majority of the Company's voting power. The
proposed amendment to Article 10 will not change this majority-vote requirement
except that it will eliminate its applicability to amendments to Sections 2.2
and 2.7 in light of the super-majority vote required to amend these sections.
The Board of Directors unanimously recommends that shareholders vote "For"
approval of the proposal to amend the Company's Amended and Restated Code of
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Regulations to require the affirmative vote of shares representing at least 75%
of the Company's voting power to amend the provisions governing the two classes
of directors and the removal of directors unless the amendment has previously
been approved by the vote of at least two-thirds of the members of the Board of
Directors.
PROPOSAL FOUR: INCREASE IN THE NUMBER
OF AUTHORIZED COMMON SHARES
The Board of Directors has unanimously adopted a resolution to amend the
Company's Amended and Restated Articles of Incorporation to increase the number
of authorized common shares from 5,000,000 to 10,000,000. The text of the
proposed amendment is attached as Exhibit D to this Proxy Statement.
Currently, the Amended and Restated Articles of Incorporation authorize the
Company to issue 5,000,000 common shares, of which 2,461,602 shares were
outstanding at the close of business on April 21, 2000. A total of 1,067,600
shares are reserved for issuance under the Company's 1995 Stock Option Plan;
250,000 shares are reserved for issuance under the 2000 Directors Stock Option
Plan; and 149,000 shares are reserved for issuance upon exercise of existing but
unexercised options granted to directors and to David J. Richards. Additionally,
50,000 shares were reserved for issuance pursuant to warrants granted to Corna
Securities, the underwriter, in connection with the Company's 1995 public
offering. As a result, only 1,021,798 common shares remain available for future
issuance.
The purpose of the proposed amendment of the Amended and Restated Articles
of Incorporation is to make additional common shares available for the Company's
use from time to time for general corporate purposes. If the proposed amendment
is approved by shareholders, the Company will be able to issue the newly
authorized common shares for any corporate purpose, including stock splits,
stock dividends, employee benefit and compensation plans, public or private
sales for cash as a means of raising capital, or acquisitions. The Company will
be able to meet these and other potential future needs without having to incur
the delay and significant expense that would accompany a future request for
shareholder approval. In determining whether to issue common shares the Board of
Directors would be required to exercise its judgment regarding the best
interests of the Company and its shareholders.
The newly authorized common shares will have rights identical to the rights
of the common shares that are currently issued and outstanding. Moreover,
shareholder approval of the proposal to increase the number of authorized common
shares, and the issuance of such shares, will not alter the rights of the common
shares that are currently issued and outstanding. The effect of the issuance of
any newly authorized common shares will be the same as the effect of issuing
common shares that are currently authorized. For example, the issuance of newly
authorized common shares may dilute the Company's earnings per share and book
value per share. Shareholders have no preemptive rights. As a result,
shareholders will not have a preferential right to purchase any of the
additional common shares that will be authorized if the proposed amendment is
approved by shareholders.
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Shareholder approval of the proposal to increase the number of authorized
common shares may have an anti-takeover effect because, if an attempt to obtain
control of the Company were made, the Company could issue a block of common
shares (or rights to purchase such shares) to persons who are loyal to the
Company'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 the Company.
Although the proposed amendment to the Amended and Restated Articles of
Incorporation may have an anti-takeover effect, the Board of Directors believes
that the advantages offered by the amendment outweigh any disadvantages. As a
result, the Board of Directors unanimously recommends that shareholders vote
"For" approval of the proposal to amend the Amended and Restated Articles of
Incorporation to increase the number of authorized common shares from 5,000,000
to 10,000,000.
PROPOSAL FIVE: AUTHORIZATION OF
CLASS OF PREFERRED STOCK
The Board of Directors has unanimously adopted a resolution to amend the
Company's Amended and Restated Articles of Incorporation to create 4,000,000
authorized shares of "blank check" preferred stock. The text of the proposed
amendment is attached as Exhibit D to this Proxy Statement. The term "blank
check" refers to preferred shares whose terms, rights and features are not
established when the preferred shares are authorized for issuance but rather are
established by the Board of Directors at the time of issuance. The Company is
not currently authorized to issue preferred shares and does not currently have
plans to issue any such shares.
The purpose of the proposed amendment of the Amended and Restated Articles
of Incorporation is to provide the Company with increased financial flexibility
by making another type of security (in addition to common shares) available for
issuance in public offerings or private placements. The Board of Directors
believes that having a class of blank check preferred stock provides it with
more flexibility in connection with potential acquisitions and potential equity
financings. It is not uncommon in these situations for the persons selling the
business or providing significant financing to request and negotiate for
preferred stock with special rights. Having a class of blank check preferred
stock gives the Company the ability to enter into these transactions without the
delay and expense that would be involved in calling a special shareholder
meeting.
Shareholder authorization of the proposal to authorize the issuance of
blank check preferred stock would permit the Company to issue preferred shares
from time to time in one or more series for any lawful corporate purpose. The
Board of Directors would be authorized to adopt resolutions to issue preferred
shares, to fix the number of such shares, to change the number of shares
constituting any series, and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights (including whether dividends are cumulative), dividend rates, terms of
redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
preferred stock. The Board of Directors could do all of this without any further
action or vote by shareholders. In determining whether to issue preferred shares
and,
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if so, the terms of such shares, the Board of Directors would be required
to exercise its judgment regarding the best interests of the Company and its
shareholders.
The issuance of preferred shares may adversely affect the rights of the
common shareholders. Preferred shares will be senior in rank to the Company's
common shares. The issuance of preferred shares may reduce the amount of funds
available for the payment of dividends on common shares or otherwise restrict
the payment of dividends on common shares. The issuance of preferred shares may
dilute the voting power of common shares or adversely affect the right of common
shareholders to share in the Company's assets upon liquidation. Preferred stock
may have full or limited voting rights and may or may not be convertible into
common shares. Accordingly, the issuance of preferred shares may decrease the
amount of earnings and assets allocable to or available for distribution to
common shareholders, adversely affect the rights and powers (including voting
rights) of the common shareholders, discourage bids for common shares, or
otherwise adversely affect the market price of common shares.
Shareholder approval of the proposal to create 4,000,000 authorized shares
of blank check preferred stock may have an anti-takeover effect because, if an
attempt to obtain control of the Company were made, the Company could issue a
block of preferred shares (or rights to purchase such shares) to persons who are
loyal to the Company'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 the Company.
Although the proposed amendment to the Amended and Restated Articles of
Incorporation may have an anti-takeover effect, the Board of Directors believes
that the advantages offered by the amendment outweigh any disadvantages. As a
result, the Board of Directors unanimously recommends that shareholders vote
"For" approval of the proposal to amend the Amended and Restated Articles of
Incorporation to create 4,000,000 authorized shares of blank check preferred
stock.
PROPOSAL SIX: AMENDMENT TO THE
1995 STOCK OPTION PLAN
The directors of the Company adopted the Company's 1995 Stock Option Plan
(the "Plan") in 1995, and it was approved by shareholders in December 1995. The
purpose of the Plan is to encourage employees of the Company and its
subsidiaries to acquire or increase a proprietary interest in the Company, to
assist the Company and its subsidiaries in attracting and retaining highly
qualified employees by providing them with options to purchase shares in the
Company, and to further promote and strengthen the interest of the Company's
employees in the development and financial success of the Company.
At the Annual Meeting, shareholders will be asked to approve Amendment No.
1 to the Plan, which was adopted by the Company's Board of Directors on February
16, 2000, as well as an earlier amendment adopted August 12, 1999, which has now
been modified by Amendment No. 1. Pursuant to the requirements of the Plan and
in order to be effective under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), the proposed amendments must be approved by the
Company's shareholders within 12 months after adoption by the Board of
Directors. At the Annual Meeting, unless otherwise indicated, proxies will be
voted for the
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adoption of the proposed amendments. The following discussion of the Plan and
the proposed amendments to the Plan are qualified in their entirety by reference
to the full text of the Plan, including the proposed amendments. The proposed
amendments are attached to this Proxy Statement as Exhibits E.
Amendment No. 1 does five things: (1) it increases the number of shares for
which options can be granted under the Plan, (2) it changes the administrative
provisions of the Plan to comport with changes in Rule 16b-3 since the time the
Plan was adopted, (3) it eliminates a restriction required by former Rule 16b-3
that prevented plan committee members from participating in the Plan for a
period of 12 months after they stopped serving on the committee, (4) it gives
the administrator of the Plan the ability to grant non-qualified options which
are transferable to a person's immediate family members or trusts or
partnerships set up for their benefit, and (5) it removes a six-month holding
period on options held by officers and directors, which was required by former
Rule 16b-3. Several of the changes resulted from changes in Rule 16b-3. If
complied with, Rule 16b-3 provides an exemption from the short swing profit
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), for option grants so that option grants to purchase common
shares of the Company do not need to be matched against sales of the Company's
common shares that occur within a less than six-month period. Some of the
restrictions in former Rule 16b-3 have been eliminated, and Amendment No. 1
would also eliminate these restrictions from the Plan.
A total of 600,000 common shares (after adjustment for a 2 for 1 stock
split which occurred on March 31, 2000) were originally reserved for issuance
(subject to anti-dilution adjustments) under the Plan. Options for all 600,000
of these common shares have been granted under the Plan. Additional common
shares need to be added to the Plan so that it may continue to function. The
Company's management would like the Plan to continue to function because the
grant of options under the Plan aligns an employee's interest in the Company
with that of a shareholder's, namely to see the value of his or her shares
appreciate. On August 12, 1999, the Board of Directors approved an amendment to
the Plan to increase the number of common shares reserved for issuance under the
Plan to 800,000 (post stock split). On February 16, 2000 the Board of Directors
reconsidered the number of common shares and adopted Amendment No. 1 which,
among other things, increases the number of common shares reserved for issuance
under the Plan to 1,200,000 (post stock split). Although Amendment No. 1 now
supercedes the August 12, 1999 amendment, the August 12, 1999, amendment still
needs to be approved by shareholders so that options granted under that
amendment can qualify as incentive stock options under the Code.
If approved by shareholders, Amendment No. 1 will increase the total number
of common shares reserved for issuance under the Plan by 600,000 to 1,200,000.
Options for 6,000 additional common shares authorized in the August 12, 1999,
amendment were granted to employees on August 12, 1999, and options for 2,000 of
these additional common shares were granted to an employee on December 15, 1999.
None of these options were granted to executive officers or directors of the
Company. No options have been granted from the additional shares authorized in
Amendment No. 1. All of these options have been granted subject to shareholder
approval of the August 12, 1999, amendment and Amendment No. 1, which means that
if the amendments are not approved by shareholders, these options will
terminate.
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The Plan provides that all employees of the Company and its subsidiaries
are eligible to receive options under the Plan and that directors who are not
also employees of the Company or one of its subsidiaries are not eligible to
receive options under the Plan. Amendment No. 1, if approved by shareholders,
would eliminate a restriction that prevented any member of a committee which
administers the Plan from participating in the Plan until 12 months after he or
she stops serving on the Committee. This provision was originally included in
the Plan to comply with Rule 16b-3 as it was in effect on the date the Plan was
adopted. Rule 16b-3 has been changed to eliminate this restriction and the Board
of Directors did not think such restriction was needed for any other purpose.
Accordingly, the Board of Directors believes this restriction should be
eliminated.
Amendment No. 1 also provides that the Plan is to be administered by the
Board of Directors of the Company, with authority given to the Board of
Directors to delegate administration to a committee of non-employee directors.
Historically, the Board of Directors has administered the Plan. However, the
Plan provides that at such time as the Company becomes a reporting company under
the 1934 Act that the Plan is to be administered by a committee of not less than
three directors. This is to comply with the provisions of (S).16b-3 of the 1934
Act at the time the Plan was adopted. Rule 16b-3 has been changed since the time
the Plan was adopted and the provision contained in Amendment No. 1 follows the
administration provisions of new Rule 16b-3. As a result of Amendment No. 1, the
Board of Directors will continue to administer the Plan. The administrator of
the Plan is authorized, among other things, to interpret the provisions of the
Plan, designate the employees who are to receive options under the Plan,
determine the number, type, frequency, and terms and conditions of options to be
granted under the Plan, specify the number of shares subject to each option and
the method of exercise, and determine the vesting requirements, if any, for
option exercises. The administrator is also authorized under the Plan to grant
options intended to qualify as incentive stock options under Section 422 of the
Code ("Incentive Options") and options not intended to qualify as incentive
stock options ("Nonqualified Options").
As originally adopted, Nonqualified Options granted under the Plan are not
transferable except by will or the laws of descent and distribution. Amendment
No. 1, if approved by shareholders, will give the administrator of the Plan the
sole discretion to permit a Nonqualified Option to be transferred to the
grantee's spouse, children, grandchildren, nieces, or nephews or to the trustee
of any trust established for the benefit of such persons or to a partnership
whose only partners are such persons. The reason for this change is to enable
the Company to assist employees of the Company in connection with their estate
plans in which they desire options and shares receivable upon exercise of
options to be outside of their estates. Additionally, this is a common feature
that has been added to option plans in recent years, and the Company would like
to include this provision so that its employees have benefits similar to those
provided by other companies.
Amendment No. 1, if approved by shareholders, will also eliminate a six-
month holding period in the Plan that prevents officers or directors from
selling shares purchased upon exercise for a period of six months from the date
the option was granted. This provision was originally included in the Plan to
comply with Rule 16b-3 as it was in effect on the date the Plan was adopted.
Rule 16b-3 was changed to eliminate this requirement, although it is one of the
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permissible choices for granting options which meet the Rule 16b-3 exemption.
Amendment No. 1 follows the provisions of Rule 16b-3 as currently in effect and
makes this an option available to the Administrator of the Plan, but not a
requirement.
No consideration is received by the Company or its subsidiaries for the
granting of options under the Plan. As of April 21, 2000, a total of 83
employees of the Company were eligible to receive options under the Plan. The
market value of shares subject to options outstanding under the Plan was
$________ as of April 21, 2000.
Two different kinds of options can be granted under the Plan. Incentive
Options provide employees with special favorable tax treatment. Nonqualified
options do not provide the kind of favorable tax treatment provided by Incentive
Options.
Set forth below is a general discussion of how the Plan operates.
The purchase price for shares subject to an Incentive Option may not be
less than the fair market value of the shares at the time the Incentive Option
is granted. If an employee who is granted an option owns stock representing more
than 10% of the total combined voting power of all classes of stock of the
Company or its subsidiaries at the time the option is granted, then the purchase
price of the shares subject to the Incentive Option must be at least 110% of the
fair market value of the shares at the time the Incentive Option is granted. For
purposes of the Plan, the fair market value of such shares means, as of any
given date: (a) the mean between the highest and lowest bid and ask prices, as
reported by the National Association of Securities Dealers, Inc., on the day the
Incentive Option is granted; (b) the last reported sale price on the Nasdaq
National Market system prior to the date the Incentive Option is granted; (c)
the last reported sale price on any stock exchange prior to the date the
Incentive Option is granted, or, if none of the foregoing is applicable, (d) the
value determined in good faith by the administrator of the Plan. The aggregate
fair market value (determined at the time of the grant of the option) of shares
with respect to which Incentive Options are exercisable for the first time by
any eligible person during any calendar year may not exceed $100,000.
Each Incentive Option granted under the Plan must be evidenced by a written
incentive option agreement in a form approved by the administrator of the Plan.
This can include option certificates. All Incentive Options granted under the
Plan must be granted within 10 years from the date on which the Company adopted
the Plan (December 19, 1995). All Incentive Options must be exercised within 10
years from the date on which the option was granted (5 years if the employee who
was granted the option owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Company or its
subsidiaries).
Incentive Options are not transferable other than by will or the laws of
descent and distribution. Incentive option agreements may contain provisions
restricting the transferability of shares subject to Incentive Options and
making such shares subject to repurchase by the Company upon the occurrence of
certain events. Except upon the discharge for cause of any grantee of an
Incentive Option (in which case all unexercised Incentive Options granted to
such grantee will lapse), if the grantee of an Incentive Option ceases to be an
employee of the Company or any of its subsidiaries for any reason, then the
Incentive Option or any unexercised portion of the Incentive Option which
otherwise is exercisable terminates unless it is exercised
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within three months after the date such grantee ceases to be an employee. If the
reason for cessation of such employment is death or disability, the three-month
period is instead a one-year period.
The purchase price for shares subject to Nonqualified Options is determined
by the administrator of the Plan. Each Nonqualified Option granted under the
Plan must be evidenced by a written nonqualified option agreement in a form
approved by the administrator. This can include option certificates.
Nonqualified Options are not exercisable after the expiration of 10 years from
the date granted.
Each Nonqualified Option agreement may contain provisions restricting the
transferability of shares subject to a Nonqualified Option or making such shares
subject to repurchase by the Company upon the occurrence of certain events.
Except upon the discharge for cause of any grantee of a Nonqualified Option (in
which case all unexercised Nonqualified Options granted to such grantee will
lapse), if the grantee of a Nonqualified Option ceases to be an employee of the
Company or any of its subsidiaries for any reason, then the Nonqualified Option
or any unexercised portion of the Nonqualified Option which otherwise is
exercisable terminates unless it is exercised within three months after the date
such grantee ceases to be an employee. If the reason for cessation of employment
is death or disability, the three-month period is instead a one-year period.
No option is exercisable and no shares are deliverable under the Plan
except in compliance with all applicable federal and state securities laws and
regulations.
If the Company's shares are not being regularly traded in open-market
brokerage transactions (either on a stock exchange, on Nasdaq, or over-the-
counter), the Company is authorized (but is not required) under the Plan to
repurchase any shares, in whole or in part, acquired through an option exercise
if the person who acquired the shares is no longer an employee of the Company.
The purchase price will be the fair market value of the shares as determined in
one of three ways: (i) by agreement of the Company and the person whose shares
are being purchased, (ii) by an appraiser agreed upon by the Company and the
person whose shares are being purchased, or (iii) by majority vote of a three-
member appraisal board.
If the grantee of an option is no longer employed by the Company and,
within six months of the date on which his or her employment was terminated,
competes directly or indirectly with the business carried on by the Company or
solicits any of the Company's customers or accounts or persons or businesses who
were customers or accounts at any time during the three-year period preceding
the date on which the grantee's employment was terminated, all unexercised held
by the grantee will lapse. In addition, with respect to any shares acquired
through an option exercise by the grantee during the six-month period preceding
the date of his or her termination of employment or at any time after such
termination, the grantee will be obligated to pay to the Company an amount equal
to the difference between the price paid by the grantee for such shares and the
fair market value of such shares on the date the option was exercised. The
Company is permitted under the Plan to offset this amount against amounts owed
by it to the grantee.
The Board of Directors, without further action on the part of the
shareholders, may from time to time amend the Plan or may at any time terminate
the Plan except that no amendment or
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termination may affect the rights of a grantee of a previously granted option
without the grantee's consent. In addition, no amendment can be made without
the prior approval of shareholders if such approval is required (with respect to
Incentive Options) to preserve the status of the Plan as an incentive stock
option plan and the qualification of options as incentive stock options under
(S)422 of the Code. Such amendments include those that would increase the
maximum number of shares that may be subject to Incentive Options, those that
would increase the benefits to a grantee, and those that would modify the
eligibility requirements under the Plan.
Federal income taxation of the various events related to the options
(option grant, option exercise, and sale of shares) under the Plan is different
for Nonqualified Options and Incentive Options.
Nonqualified Options. In general, for federal income tax purposes under
--------------------
present law:
(a) The grant of a Nonqualified Option, by itself, will not result in
income to the optionee.
(b) Except as provided in (e) below, the exercise of a Nonqualified Option
(in whole or in part, according to its terms) will result in ordinary income to
the optionee at that time in an amount equal to the excess (if any) of the fair
market value of the Company's shares on the date of exercise over the exercise
price.
(c) Except as provided in (e) below, the optionee's tax basis of shares
acquired upon the exercise of a Nonqualified Option, which will be used to
determine the amount of any capital gain or loss on a future taxable disposition
of such shares, will be the fair market value of the shares on the date of
exercise.
(d) No deduction will be allowable to the employer corporation upon the
grant of a Nonqualified Option, but upon the exercise of a Nonqualified Option,
a deduction will be allowable to the employer corporation at that time in an
amount equal to the amount of ordinary income realized by the optionee
exercising such Nonqualified Option if the employer corporation deducts and
withholds appropriate federal withholding tax.
(e) With respect to the exercise of a Nonqualified Option and the payment
of the exercise price by the delivery of shares, to the extent that the number
of shares received does not exceed the number of shares surrendered, no taxable
income will be realized by the optionee at that time, the tax basis of shares
received will be the same as the tax basis of shares surrendered, and the
holding period of the optionee in shares received will include his or her
holding period in shares surrendered. To the extent that the number of shares
received exceeds the number of shares surrendered, ordinary income will be
realized by the optionee at that time in the amount of the fair market value of
such excess shares, the tax basis of such shares will be equal to the fair
market value of such shares at the time of exercise, and the holding period of
the optionee in such shares will begin on the date such shares are transferred
to the optionee.
Incentive Options. In general, for federal income tax purposes under
-----------------
present law:
(a) Neither the grant nor the exercise of an Incentive Option, by itself,
will result in income to the optionee; however, the excess of the fair market
value of the Company's shares at
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the time of exercise over the exercise price is (unless there is a disposition
of shares acquired upon exercise of an Incentive Option in the taxable year of
exercise) includable in alternative minimum taxable income which may, under
certain circumstances, result in an alternative minimum tax liability to the
optionee.
(b) If shares acquired upon exercise of an Incentive Option are disposed
of in a taxable transaction after the later of two years from the date on which
the Incentive Option is granted or one year from the date on which such shares
are transferred to the optionee, long-term capital gain or loss will be realized
by the optionee in an amount equal to the difference between the amount realized
by the optionee and the optionee's basis which, except as provided in (e) below,
is the exercise price.
(c) Except as provided in (e) below, if the shares acquired upon the
exercise of an Incentive Option are disposed of within the two-year period from
the date of grant or the one-year period after the transfer of the shares to the
optionee upon exercise of the Incentive Option (a "disqualifying disposition"):
(i) Ordinary income will be realized by the optionee at the time of
the disqualifying disposition in the amount of the excess, if any, of the fair
market value of the shares at the time of such exercise over the exercise price,
but not in an amount exceeding the excess, if any, of the amount realized by the
optionee over the exercise price.
(ii) Short-term or long-term capital gain will be realized by the
optionee at the time of the disqualifying disposition in an amount equal to the
excess, if any, of the amount realized over the fair market value of the shares
at the time of such exercise.
(iii) Short-term or long-term capital loss will be realized by the
optionee at the time of the disqualifying disposition in an amount equal to the
excess, if any, of the exercise price over the amount realized.
(d) No deduction will be allowed to the employer corporation with respect
to Incentive Options granted or shares transferred upon exercise thereof, except
that if a disposition is made by the optionee within the two-year period
referred to above, the employer corporation will be entitled to a deduction in
the taxable year in which the disposition occurred in an amount equal to the
amount of ordinary income realized by the optionee making the disposition.
(e) With respect to the exercise of an Incentive Option and the payment of
the option price by the delivery of shares to the extent that the number of
shares received does not exceed the number of shares surrendered, no taxable
income will be realized by the optionee at that time, the tax basis of the
shares received will be the same as the tax basis of the shares surrendered, and
the holding period (except for purposes of the one-year period referred to in
(c) above) of the optionee in the shares received will include his or her
holding period in the shares surrendered. To the extent that the number of
shares received exceeds the number of shares surrendered, no taxable income will
be realized by the optionee at that time, such excess shares will be considered
Incentive Option stock with a zero basis, and the holding period of the optionee
in such shares will begin on the date such shares are transferred to the
optionee. If the shares surrendered were acquired as the result of the exercise
of an Incentive Option and the surrender
20
<PAGE>
takes place within two years from the date the option relating to the
surrendered shares was granted or within one year from the date of such
exercise, the surrender will result in a disqualifying disposition and the
optionee will realize ordinary income at the time of exercise of the shares
surrendered over the basis of such shares. If any of the shares received are
disposed of within one year after the shares are transferred to the optionee,
the optionee will be treated as first disposing of the shares with a zero basis.
The Board of Directors unanimously recommends a vote "For" the amendments
to the 1995 Stock Option Plan.
PROPOSAL SEVEN: APPROVAL OF THE
2000 DIRECTORS STOCK OPTION PLAN
On March 22, 2000, the Company adopted the Pinnacle Data Systems, Inc. 2000
Directors Stock Option Plan (the "Directors Plan"). The purpose of the Directors
Plan is to provide eligible directors with an opportunity to participate in the
Company's future prosperity and growth and an incentive to increase the value of
the Company based on the Company's performance, development, and financial
success. The Company has reserved 250,000 common shares (post March 31, 2000
stock split) for issuance under the Directors Plan. The number of shares
reserved for issuance is subject to anti-dilution adjustments. The Directors
Plan is subject to shareholder approval within 12 months of the date of its
adoption. The Directors Plan is attached to this proxy statement as Exhibit F.
Only directors of the Company who are not employees of the Company or its
subsidiaries are eligible to participate in the Directors Plan. Currently, two
directors are eligible to receive options under the Directors Plan. If elected
as a director, Mr. Lambert will also be eligible to receive options under the
Directors Plan. As of the date of this Proxy Statement, no options have been
granted under the Directors Plan.
The Directors Plan is administered by a committee of the Board of Directors
consisting of directors who are not eligible to receive options under the
Directors Plan. Subject to the requirement that the price per share of any
common shares to be received upon the exercise of an option will not be less
than the fair market value of the common shares at the time the option is
granted, the committee administering the Directors Plan has the authority to
designate recipients of options to be granted under the Directors Plan, to
determine the number of options granted and the number of common shares subject
to such options, and to establish the terms and conditions of options. Each
option must be evidenced by a written agreement in a form approved by the
committee administering the Directors Plan. No option is exercisable after ten
years from the date on which the option was granted.
Options granted under the Directors Plan are not transferable except that
options may be transferred by will or the laws of descent and distribution or
(if approved by the committee administering the Directors Plan) by gift to the
grantee's spouse, children, grandchildren, nieces, or nephews or to the trustee
of any trust established for the benefit of such persons or to a partnership
whose only partners are such persons.
21
<PAGE>
If a director can no longer participate in the Directors Plan because of
death or disability, then all unvested options will automatically terminate
(unless the committee administering the Directors Plan approves of the immediate
vesting of such options) and all vested options will remain exercisable for one
year or the remaining term of the option, whichever is shorter, or for any other
period specified by the committee. If a director can no longer participate in
the Directors Plan for a reason other than death or disability (except a
termination for cause), then all unvested options will automatically terminate
and all vested options will remain exercisable for ninety days or the remaining
term of the option, whichever is shorter, or for any other period specified by
the committee. If a director is terminated for cause, all unexercised options
will terminate.
If a change in control of the Company occurs (as defined in the Directors
Plan), then all outstanding options will become fully vested and exercisable.
Upon a change in control, the Company may also terminate any or all unexercised
options within 30 days of the change in control, provided that the Company pays
the option holder the difference between the exercise price of the option and
the fair market value of the shares underlying the option. No payment need be
made if the fair market value is less than the exercise price.
Options granted under the plan will be Nonqualified Options for tax
purposes. In general, for federal income tax purposes under present law:
(a) The grant of a Nonqualified Option, by itself, will not result in
income to the optionee.
(b) Except as provided in (e) below, the exercise of a Nonqualified Option
(in whole or in part, according to its terms) will result in ordinary income to
the optionee at that time in an amount equal to the excess (if any) of the fair
market value of the Company's shares on the date of exercise over the exercise
price.
(c) Except as provided in (e) below, the optionee's tax basis of shares
acquired upon the exercise of a Nonqualified Option, which will be used to
determine the amount of any capital gain or loss on a future taxable disposition
of such shares, will be the fair market value of the shares on the date of
exercise.
(d) No deduction will be allowable to the employer corporation upon the
grant of a Nonqualified Option, but upon the exercise of a Nonqualified Option,
a deduction will be allowable to the employer corporation at that time in an
amount equal to the amount of ordinary income realized by the optionee
exercising such Nonqualified Option if the employer corporation deducts and
withholds appropriate federal withholding tax.
22
<PAGE>
(e) With respect to the exercise of a Nonqualified Option and the payment
of the exercise price by the delivery of shares, to the extent that the number
of shares received does not exceed the number of shares surrendered, no taxable
income will be realized by the optionee at that time, the tax basis of shares
received will be the same as the tax basis of shares surrendered, and the
holding period of the optionee in shares received will include his or her
holding period in shares surrendered. To the extent that the number of shares
received exceeds the number of shares surrendered, ordinary income will be
realized by the optionee at that time in the amount of the fair market value of
such excess shares, the tax basis of such shares will be equal to the fair
market value of such shares at the time of exercise, and the holding period of
the optionee in such shares will begin on the date such shares are transferred
to the optionee.
The Board of Directors unanimously recommends a vote "For" approval of the
2000 Stock Option Plan.
PROPOSAL EIGHT: RATIFICATION OF SELECTION
OF INDEPENDENT ACCOUNTANTS
The Board of Directors has selected Hausser + Taylor LLP as the Company's
independent accountants for the year ending December 31, 2000, and has directed
management to submit the board's selection to shareholders for ratification at
the Annual Meeting. Hausser + Taylor LLP has audited the Company's financial
statements since 1996. A representative of Hausser + Taylor LLP is expected to
be present at the Annual Meeting and to have an opportunity to make a statement
if the representative desires and to respond to appropriate questions.
Shareholders are not required by Ohio General Corporation Law to ratify the
selection of Hausser + Taylor LLP as the Company's independent accountants.
However, the Board of Directors is submitting the selection of Hausser + Taylor
LLP to shareholders for ratification as a matter of good corporate practice. If
shareholders do not ratify the selection of Hausser + Taylor LLP as the
Company's independent accountants, the Board of Directors will reconsider its
selection. Even if its selection is ratified, the Board of Directors may in its
discretion hire different independent accountants at any time during the year if
it determines that a change in independent accountants would be in the best
interest of the Company and its shareholders.
The Board of Directors unanimously recommends a vote "For" ratification of
its selection of Hausser + Taylor LLP as the Company's independent accountants.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the 2001 annual
meeting of shareholders must be received by the Company for inclusion in the
proxy statement and form of proxy on or before 120 days in advance of the first
anniversary of the date of this proxy statement.
OTHER MATTERS
23
<PAGE>
Management does not know of any other matters which may come before the
Annual Meeting. However, if any other matters properly come before the Annual
Meeting, the persons named in the accompanying form of proxy intend to vote the
proxy in accordance with their judgment on such matters.
The Company will bear the cost of soliciting proxies. In addition to the
use of the mails, proxies may be solicited by officers, directors, and regular
employees, personally or by telephone or telegraph. The Company will reimburse
banks, brokers, and nominees for any out-of-pocket expenses incurred by them in
sending proxy materials to the beneficial owners of shares held by any banks,
brokers or nominees. If follow-up requests for proxies are necessary, the
Company may employ other persons to make these requests.
Joy Bair, Secretary
24
<PAGE>
Exhibit A
Amended And Restated
Code Of Regulations
of
Pinnacle Data Systems, Inc.
Section 2.2 of the Company's Amended and Restated Code of Regulations
is proposed to be amended as follows:
Section 2.2 Number of Directors. Until changed in accordance with this
-------------------
section, the number of directors of the Company, none of whom need be
shareholders, shall be not less than three nor more than nine, provided
that when all shares of the Company are owned of record by one or two
shareholders, the number of directors may be less than three but not
less than the number of shareholders. The number of directors may be
fixed or changed at any annual meeting of the shareholders, or at any
special meeting of the shareholders called for that purpose, only by
the affirmative vote or consent of the holders of shares entitling them
to exercise at least 75% of the voting power of the Company; provided,
however, that such 75% voting requirement shall not be applicable if
the Company's Board of Directors shall have approved such action by a
resolution adopted by at least two-thirds of the members of the Board
of Directors, in which case the number of directors may be fixed or
changed by the affirmative vote of the holders of shares entitling them
to exercise a majority of the voting power of the Company.
The Board of Directors shall be divided into two classes, designated
Class I and Class II, with the number of directors in each class fixed
at four. The term of office of directors in one class shall expire at
each annual meeting of shareholders, and in all cases as to each
director until a successor shall be elected and qualified, or until his
earlier resignation, removal from office, death or incapacity. If the
number of directors is hereafter changed, an increase or decrease in
directorships shall be apportioned among the classes as to make all
classes as nearly equal in number as possible. The initial term of
office of directors in Class I shall expire at the annual meeting of
shareholders in 2001 and that of Class II shall expire at the annual
meeting of shareholders in 2002, and in all cases as to each director
until a successor shall be elected and qualified, or until his earlier
resignation, removal from office, death or incapacity. At each annual
meeting of shareholders, the number of directors equal to the number of
directors in the class whose term expires at the time of such meeting
(or, if less, the number of directors properly nominated and qualified
for election) shall be elected to hold office until the second
succeeding annual meeting of shareholders after their election.
<PAGE>
Exhibit B
Amended and Restated
Articles of Incorporation
of
Pinnacle Data Systems, Inc.
Article Tenth of the Company's Amended and Restated Articles of
Incorporation is proposed to be amended as follows:
TENTH: Notwithstanding any provision of the Ohio Revised Code, (SS) 1701.01
to 1701.98, inclusive, now or hereafter in force, requiring for the
authorization or taking of any action the vote or consent of the holders of
shares entitling them to exercise two-thirds or any other proportion of the
voting power of the Corporation or of any class or classes of shares
thereof, such action, unless otherwise expressly required by law or these
Articles of Incorporation, shall be authorized or taken by the vote or
consent of the holders of shares entitling them to exercise at least 75% of
the voting power of the Corporation or of such class or classes of shares
thereof; provided, however, that such 75% voting requirement shall not be
applicable if the Corporation's Board of Directors shall have approved such
action by a resolution adopted by at least two-thirds of the members of the
Board of Directors, in which case such action may be approved by the
affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Corporation or of such class or classes
thereof.
<PAGE>
Exhibit C
Amended And Restated
Code Of Regulations
of
Pinnacle Data Systems, Inc.
Sections 2.2 and 2.7 and Article 10 of the Company's Amended and Restated
Code of Regulations are proposed to be amended as follows:
Section 2.2: Number of Directors
--------------------------------
This Section 2.2 may be amended only by the vote or consent of the holders
of shares entitling them to exercise at least 75% of the voting power of
the Company; provided, however, that such 75% voting requirement shall not
be applicable if the Company's Board of Directors shall have approved such
amendment by a resolution adopted by at least two-thirds of the members of
the Board of Directors, in which case this Section 2.2 may be amended by
the affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Company.
Section 2.7: Removal of Directors
---------------------------------
This Section 2.7 may be amended only by the vote or consent of the holders
of shares entitling them to exercise at least 75% of the voting power of
the Company; provided, however, that such 75% voting requirement shall not
be applicable if the Company's Board of Directors shall have approved such
amendment by a resolution adopted by at least two-thirds of the members of
the Board of Directors, in which case this Section 2.7 may be amended by
the affirmative vote of the holders of shares entitling them to exercise a
majority of the voting power of the Company.
Article 10: Amendment of Regulations
------------------------------------
Except as otherwise expressly provided in Sections 2.2 and 2.7 of these
regulations, these regulations may be amended or new regulations may be
adopted: (a) at any meeting of the shareholders held for such purpose, by
the affirmative vote of the holders of record of shares entitling them to
exercise a majority of the voting power on such proposal; or (b) without a
meeting of the shareholders, by the written consent of the holders of
record of shares entitling them to exercise a majority of the voting power
on such proposal. If any amendment or new regulations are adopted without a
meeting of the shareholders, the secretary shall mail a copy of the
amendment or new regulations to each shareholder who would have been
entitled to vote on the proposal but who did not participate in the
adoption of the amendment or new regulations.
<PAGE>
Exhibit D
Amended and Restated
Articles of Incorporation
of
Pinnacle Data Systems, Inc.
If both proposal five and proposal six are approved by shareholders,
Article Fourth of the Company's Amended and Restated Articles of Incorporation
will be amended as follows to increase the number of authorized common shares
from 5,000,000 to 10,000,000 and to authorize a class of preferred shares
consisting of 4,000,000 authorized shares:
FOURTH: The maximum number of shares which the Corporation is
authorized to have outstanding is fourteen million (14,000,000), which
shall be divided into two classes consisting of ten million
(10,000,000) common shares, without par value ("Common Shares"), and
four million (4,000,000) preferred shares, without par value
("Preferred Shares"). The express terms of the shares of each class are
as follows:
(a) Common Shares. The Common Shares shall be subject to the terms of
-------------
the Preferred Shares and the express terms of any series thereof. Each
of the Common Shares shall be equal to each of the other Common Shares,
and the holders thereof shall be entitled to one vote for each of the
Common Shares on all questions presented to the holders of the Common
Shares. Subject to any rights to receive dividends to which the holders
of the Preferred Shares outstanding may be entitled, if any, the
holders of the Common Shares shall be entitled to receive dividends
only when and as declared from time to time by the board of directors
in amounts not exceeding those permitted by the laws of the State of
Ohio.
(b) Preferred Shares. Preferred Shares may be issued from time to time
----------------
in one or more series. Preferred Shares shall be of equal rank and
shall be identical, except in respect of the matters that may be fixed
by the board of directors as hereinafter provided, and each of the
shares of each of the series shall be identical with all other shares
of such series. Subject to the provisions of this paragraph (b), which
provisions shall apply to all of the Preferred Shares, the board of
directors hereby is authorized to cause such shares to be issued in one
or more series and with respect to each such series prior to the
issuance thereof to fix:
(1) the designation of the series, which series may be
designated by number, letter, or title;
(2) the number of shares of the series, which number the
board of directors may from time to time (except where otherwise
provided in the creation of the series) increase or decrease (but not
below the number of shares thereof then outstanding);
<PAGE>
(3) dividend or distribution rights, which may be
cumulative or noncumulative; at a specified rate, amount, or
proportion; with or without further participation rights; and in
preference to, junior to, or on a parity in whole or in part with
dividend or distribution rights of shares of any other class;
(4) liquidation rights, preferences and prices;
(5) redemption rights and price;
(6) sinking fund requirements, which may require the
Corporation to provide a sinking fund out of earnings or otherwise for
the purchase or redemption of the shares or for dividends or
distributions on them;
(7) voting rights, which may be full, limited or denied,
except as otherwise required by law;
(8) preemptive rights, or the denial or limitation of them;
(9) conversion rights;
(10) restrictions on the issuance of shares;
(11) rights of alteration of express terms; and
(12) such other terms as the board of directors may by law
from time to time be permitted to fix or change.
The board of directors is authorized to adopt from time to time
amendments to the Amended and Restated Articles of Incorporation fixing
or changing, with respect to each such series, the matters described in
the preceding clauses (1) to (12) of this paragraph (b).
If proposal five but not proposal six is approved by shareholders,
Article Fourth of the Company's Amended and Restated Articles of Incorporation
will be amended as follows to increase the number of authorized common shares
from 5,000,000 to 10,000,000:
FOURTH: The maximum number of shares which the Corporation is
authorized to have outstanding is ten million (10,000,000), all of
which shall be common shares without par value.
If proposal six but not proposal five is approved by shareholders,
Article Fourth of the Company's Amended and Restated Articles of Incorporation
will be amended as follows to authorize a class of preferred shares consisting
of 4,000,000 authorized shares:
<PAGE>
FOURTH: The maximum number of shares which the Corporation is
authorized to have outstanding is nine million (9,000,000), which shall
be divided into two classes consisting of five million (5,000,000)
common shares, without par value ("Common Shares"), and four million
(4,000,000) preferred shares, without par value ("Preferred Shares").
The express terms of the shares of each class are as follows:
(a) Common Shares. The Common Shares shall be subject to the terms of
-------------
the Preferred Shares and the express terms of any series thereof. Each
of the Common Shares shall be equal to each of the other Common Shares,
and the holders thereof shall be entitled to one vote for each of the
Common Shares on all questions presented to the holders of the Common
Shares. Subject to any rights to receive dividends to which the holders
of the Preferred Shares outstanding may be entitled, if any, the
holders of the Common Shares shall be entitled to receive dividends
only when and as declared from time to time by the board of directors
in amounts not exceeding those permitted by the laws of the State of
Ohio.
(b) Preferred Shares. Preferred Shares may be issued from time to time
----------------
in one or more series. Preferred Shares shall be of equal rank and
shall be identical, except in respect of the matters that may be fixed
by the board of directors as hereinafter provided, and each of the
shares of each of the series shall be identical with all other shares
of such series. Subject to the provisions of this paragraph (b), which
provisions shall apply to all of the Preferred Shares, the board of
directors hereby is authorized to cause such shares to be issued in one
or more series and with respect to each such series prior to the
issuance thereof to fix:
(1) the designation of the series, which series may be
designated by number, letter, or title;
(2) the number of shares of the series, which number the
board of directors may from time to time (except where otherwise
provided in the creation of the series) increase or decrease (but not
below the number of shares thereof then outstanding);
(3) dividend or distribution rights, which may be
cumulative or noncumulative; at a specified rate, amount, or
proportion; with or without further participation rights; and in
preference to, junior to, or on a parity in whole or in part with
dividend or distribution rights of shares of any other class;
(4) liquidation rights, preferences and prices;
(5) redemption rights and price;
(6) sinking fund requirements, which may require the
Corporation to provide a sinking fund out of earnings or otherwise for
the purchase or redemption of the shares or for dividends or
distributions on them;
<PAGE>
(7) voting rights, which may be full, limited or denied,
except as otherwise required by law;
(8) preemptive rights, or the denial or limitation of them;
(9) conversion rights;
(10) restrictions on the issuance of shares;
(11) rights of alteration of express terms; and
(12) such other terms as the board of directors may by law
from time to time be permitted to fix or change.
The board of directors is authorized to adopt from time to time
amendments to the Amended and Restated Articles of Incorporation fixing
or changing, with respect to each such series, the matters described in
the preceding clauses (1) to (12) of this paragraph (b).
<PAGE>
Exhibit E
Amendment No. 1
to
Pinnacle Data Systems, Inc.
1995 Stock Option Plan
----------------------
The Pinnacle Data Systems, Inc. 1995 Stock Option Plan (the "Plan") is
hereby amended pursuant to the following provisions:
1. Definitions
-----------
All capitalized terms used in this amendment which are not otherwise
defined herein shall have the respective meanings given such terms in the Plan.
2. Shares Subject To Plan
----------------------
The total number of Shares for which options may be granted under the
Plan, as provided under Section 3 of the Plan, is hereby increased by 300,000
Shares to a total of 600,000 Shares.
3. Administration of Plan
----------------------
The first paragraph of Section 2 of the Plan is hereby deleted in its
entirety from the Plan and replaced with the following two paragraphs:
The Plan shall be administered by the Company's Board of Directors
(the "Board") or, if the Board so elects, a committee (the "Committee")
which shall consist of not less than three directors of the Company
appointed by the Board. The members of the Committee shall serve at the
pleasure of the Board, which may remove members from the Committee or
appoint new members to the Committee from time to time, and members of
the Committee may resign by written notice to the President or
Secretary of the Company. For purposes of this Plan, the Board, if it
is administering the Plan, or the Committee, if it is administering the
Plan, shall hereinafter be referred to as the "Administrator."
Notwithstanding the foregoing to the contrary, if the common
shares of the Company are registered under Section 12 of the Securities
Exchange Act of 1934, as amended (the "Act"), or are required to be so
registered or the Company is subject to the reporting requirements of
Section 13 of the Act (hereinafter referred to as a "Reporting
Company"), any option granted to a person who, because of his
relationship with the Company, is subject to the reporting requirements
of Section 16(a) of the Act, shall not be effective unless (i) the
grant of such option is approved by either the Board or a committee
consisting solely of two or more "Non-Employee Directors" (as defined
in Rule 16b-3(b)(3) promulgated under the Act), (ii) the grant of such
option is approved or ratified by the shareholders of the Company, in
compliance with Section 14 of the Act, not later than the date of the
annual meeting of the Company's shareholders next following the date of
such grant, or (iii) such option, by its terms, provides that common
<PAGE>
shares received upon exercise of the option may not be disposed of
before at least six months have elapsed from the date the option was
granted.
4. Eligibility
-----------
Section 4 of the Plan is hereby deleted in its entirety from the Plan
and replaced with the following:
All employees of the Company and its subsidiaries are eligible to
receive options under the Plan ("Eligible Persons"). No director of the
Company who is not also an employee of the Company or any of its
subsidiaries shall be eligible to participate in the Plan.
5. Transferability
---------------
The following two sentences are hereby added to the end of Section
5(c)(iii) of the Plan:
Notwithstanding the foregoing to the contrary, the Administrator may,
in its sole discretion and in the manner established by the
Administrator, provide for the irrevocable transfer, without payment of
consideration, of any Nonqualified Option by a Grantee to such
Grantee's spouse, children, grandchildren, nieces, or nephews, or to
the trustee of any trust for the principal benefit of one or more such
persons, or to a partnership whose only partners are one or more such
persons. In the case of such a permitted transfer, the Nonqualified
Option shall be exercisable only by the transferee or such transferee's
legal representative.
6. Six Month Holding Period
------------------------
Section 6 of the Plan is hereby deleted in its entirety from the Plan.
7. Effective Date; Construction
----------------------------
The effective date of this amendment is February 16, 2000, and this
amendment shall be deemed to be a part of the Plan as of such date. In the event
of any inconsistencies between the provisions of the Plan and this amendment,
the provisions of this amendment shall control. Except as modified by this
amendment, the Plan shall continue in full force and effect without change.
This amendment shall be submitted to the stockholders of the Company for
approval as soon as reasonably practicable, but in any event not later than 12
months after the date of this amendment. Notwithstanding the preceding paragraph
or any other provisions of this amendment to the contrary, if this amendment is
not approved by the stockholders of the Company within such 12-month period,
this amendment and all options granted with respect to the additional common
shares subject to the Plan as a result of this amendment shall automatically
become null and void and have no further force or effect.
<PAGE>
August 12, 1999 Amendment
to the
Pinnacle Data Systems, Inc.
1995 Stock Option Plan
RESOLVED: That Section 3 of the Pinnacle Data Systems, Inc. 1995 Stock Option
Plan of 1995 is hereby amended to increase the maximum aggregate number of
common shares, without par value, of the Company with respect to which options
may be granted under the Plan from the existing maximum number of "300,000
shares" to "400,000 shares." No other provision of Section 3 is hereby changed.
Shareholder ratification of this change must be obtained within one year, and
all option certificates issued under the Plan before the next annual shareholder
meeting shall contain a provision reflecting that such options are conditional,
subject to shareholder approval, if such options are granted against the
increased authorized number of shares made possible by this resolution.
<PAGE>
Exhibit F
PINNACLE DATA SYSTEMS, INC.
2000 DIRECTORS STOCK OPTION PLAN
--------------------------------
(S)1. Purposes of Plan.
----------------
The purpose of this 2000 Directors Stock Option Plan (the "Plan") of
Pinnacle Data Systems, Inc., an Ohio corporation (the "Company"), is to advance
the interests of the Company and its stockholders by providing Eligible
Directors (as defined in (S)3, below) with an opportunity to participate in the
Company's future prosperity and growth and an incentive to increase the value of
the Company based on the Company's performance, development, and financial
success. These objectives will be promoted by granting to Eligible Directors
options (the "Options"), which are not intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), to purchase the Company's common shares, without par value (the
"Shares").
(S)2. Administration of Plan.
----------------------
The Plan shall be administered by a committee (the "Committee") of not
less than three directors, none of whom shall be an Eligible Director. The
member or members of the Committee shall serve at the pleasure of the Company's
board of directors (the "Board"), which may remove members from the Committee or
appoint new members to the Committee from time to time, and members of the
Committee may resign by written notice to the Chairman of the Board or the
Secretary of the Company. The Committee shall have the power and authority to:
(a) approve the grant of Options to Eligible Directors (such Eligible Directors,
"Participants"); (b) approve the terms and conditions, not inconsistent with the
terms hereof, of any Option, including without limitation time and performance
restrictions, and approve the form of Stock Option Agreement (as defined in
(S)5, below); (c) adopt, alter, and repeal such administrative rules,
guidelines, and practices governing the Plan as it shall, from time to time,
deem advisable; (d) interpret the terms and provisions of the Plan and any
Option granted and any agreements relating thereto; and (e) take any other
actions the Committee considers appropriate in connection with, and otherwise
supervise the administration of, the Plan, all in a manner consistent with the
other provisions of the Plan. All decisions made by the Committee pursuant to
the provisions hereof shall be made in the Committee's sole discretion and shall
be final and binding on all persons.
(S)3. Participants in Plan.
--------------------
The persons eligible to receive Options under the Plan shall be those
directors of the Company who are not employees of the Company or any subsidiary
of the Company (any such person, an "Eligible Director").
(S)4. Shares Subject to Plan.
----------------------
<PAGE>
The maximum aggregate number of Shares which may be issued under the
Plan shall be 125,000 Shares. The Shares which may be issued under the Plan may
be authorized but unissued Shares or issued Shares reacquired by the Company and
held as treasury Shares.
If any Shares that have previously been the subject of an Option cease
to be the subject of an Option (other than by reason of exercise), or if any
Shares previously distributed under the Plan are returned to the Company in
connection with the exercise of an Option (including without limitation in
payment of the exercise price or tax withholding), such Shares shall again be
available for distribution in connection with future grants under the Plan.
(S)5. Grant of Options.
----------------
Each Option granted under the Plan shall be authorized by the Committee
and shall be evidenced by a written agreement (the "Stock Option Agreement") in
the form approved by the Committee from time to time, which shall be dated as of
the date on which the Option is granted, signed by an officer of the Company
authorized by the Committee, and signed by the Participant, and which shall
describe the Option and state that the Option is subject to all the terms and
conditions of the Plan and such other terms and conditions, not inconsistent
with the Plan, as the Committee may approve. The date on which the Committee
approves the granting of an Option shall be deemed to be the date on which the
Option is granted for all purposes, unless the Committee otherwise specifies in
its approval. However, the granting of an Option under the Plan shall be
effective only if a written Stock Option Agreement is duly executed and
delivered by or on behalf of the Company and the Participant.
In addition to the foregoing, all Stock Option Agreements shall include
without limitation the following provisions:
(a) Vesting.
-------
Each Option shall be exercisable only with respect to the Shares
which have become vested pursuant to the terms of that Option. Each
Option shall become vested with respect to Shares subject to that
Option on such date or dates and on the basis of such other criteria,
including without limitation the performance of the Company, as the
Committee may determine, in its discretion, and as shall be specified
in the applicable Stock Option Agreement. The Committee shall have the
authority, in its discretion, to accelerate the time at which an Option
shall be exercisable whenever it may determine that such action is
appropriate by reason of changes in applicable tax or other laws or
other changes in circumstances occurring after the grant of such
Option.
(b) Exercise Price.
--------------
The exercise price per Share issuable upon exercise of an Option
shall be determined by the Committee at the time of grant and set forth
in the applicable Stock Option Agreement; provided that such exercise
price shall not be less than the fair market value per Share on the
date the Option is granted. For purposes of the Plan, the fair market
value of the Shares shall mean, as of any given date, the (i) last
reported sale price
<PAGE>
on the New York Stock Exchange or the American Stock Exchange on the
most recent previous trading day, (ii) last reported sale price on the
NASDAQ National Market System on the most recent previous trading day,
(iii) mean between the high and low bid and ask prices, as reported by
the National Association of Securities Dealers, Inc. on the most recent
previous trading day, or (iv) last reported sale price on any other
stock exchange on which the Shares are listed on the most recent
previous trading day, whichever is applicable; provided that if none of
the foregoing is applicable, then the fair market value of the Shares
shall be the value determined by the Committee, in its sole discretion.
(c) Term.
----
No Option shall be exercisable after the expiration of 10 years
from the date on which that Option is granted.
(d) Method of Exercise.
------------------
An Option may be exercised, in whole or in part, by giving
written notice to the Company stating the number of Shares (which must
be a whole number) to be purchased. Upon receipt of payment of the full
purchase price for such Shares, plus applicable withholding taxes, by
certified or bank cashier's check or other form of payment acceptable
to the Company, or, if approved by the Committee, by (i) delivery of
unrestricted Shares having a fair market value on the date of such
delivery equal to the total exercise price, (ii) surrender of Shares
subject to the Option which have a fair market value equal to the total
exercise price at the time of exercise, or (iii) a combination of the
preceding methods, and subject to compliance with all other terms and
conditions of the Plan and the Stock Option Agreement relating to such
Option, the Company shall issue, as soon as reasonably practicable
after receipt of such payment, such Shares to the person entitled to
receive such Shares, or such person's designated representative. Such
Shares may be issued in the form of a certificate, by book entry, or
otherwise, in the Company's sole discretion.
(e) Restrictions on Shares Subject to Options.
-----------------------------------------
Shares issued upon the exercise of any Option may be made subject
to such transferability or other restrictions or conditions as the
Committee may determine, in its discretion, and as shall be set forth
in the applicable Stock Option Agreement.
(f) Transferability.
---------------
Except as provided in this paragraph, Options shall not be
transferable, and any attempted transfer (other than as provided in
this paragraph) shall be null and void. Except for Options transferred
as provided in this paragraph, all Options shall be exercisable during
a Participant's lifetime only by the Participant or the Participant's
legal representative. Without limiting the generality of the foregoing,
(i) Options may be transferred by will or the laws of descent and
distribution and, in the case of such a
<PAGE>
transfer, shall be exercisable only by the transferee or such
transferee's legal representative, and (ii) the Committee may, in its
sole discretion and in the manner established by the Committee, provide
for the irrevocable transfer, without payment of consideration, of any
Option by a Participant to such Participant's spouse, children,
grandchildren, nieces, or nephews or to the trustee of a trust for the
principal benefit of one or more such persons or to a partnership whose
only partners are one or more such persons, and, in the case of such
transfer, such Option shall be exercisable only by the transferee or
such transferee's legal representative.
(g) Termination of Status as an Eligible Director by Reason of Death
----------------------------------------------------------------
or Disability.
-------------
If a Participant's status as an Eligible Director terminates
by reason of the Participant's death or disability (as defined by the
Committee from time to time, in its sole discretion), then (i) unless
otherwise determined by the Committee within 90 days of such
termination, to the extent an Option held by such Participant is not
vested as of the date of such termination, such Option shall
automatically terminate on such date; and (ii) to the extent an Option
held by such Participant is vested (whether pursuant to its terms, a
determination of the Committee under the preceding clause (i), or
otherwise) as of the date of such termination, such Option may
thereafter be exercised by the Participant, the legal representative of
the Participant's estate, the legatee of the Participant under the will
of the Participant, the distributee of the Participant's estate, or the
Participant's other successor in interest, whichever is applicable (A)
if such termination results from the Participant's death, for a period
of one year from the date of death or, if sooner, until the expiration
of the stated term of the Option, (B) if such termination results from
the Participant's disability, for one year from the date of termination
of the Participant's status as an Eligible Director or, if sooner,
until the expiration of the stated term of the Option, or (C) for such
other period as the Committee may specify at or after grant or the
Participant's death or disability.
(h) Other Termination of Status as an Eligible Director.
---------------------------------------------------
If a Participant's status as an Eligible Director terminates
for any reason other than death or disability, then (i) to the extent
any Option held by such Participant is not vested as of the date of
termination, such Option shall automatically terminate on such date;
and (ii) unless otherwise determined by the Committee at or after grant
or termination, to the extent any Option held by such Participant is
vested as of the date of such termination, such Option may thereafter
be exercised for a period of 90 days from the date of termination or,
if sooner, until the expiration of the stated term of the Option;
provided that, if the Participant's status as an Eligible Director is
terminated for Cause, any and all unexercised Options held by such
Participant shall immediately lapse and be of no further force or
effect. For purposes of the Plan, whether termination of a
Participant's status as an Eligible Director is for "Cause" shall be
determined by the Committee, in its sole discretion.
(i) Effect of Termination of Participant's Status as an Eligible
------------------------------------------------------------
Director on Transferee.
----------------------
<PAGE>
Except as otherwise permitted by the Committee, in its sole
discretion, no Option held by a transferee of a Participant pursuant to
(S)5(f), above, shall remain exercisable for any period of time longer
than would otherwise be permitted under (S)(S)5(g) and 5(h) without
specification of other periods by the Committee as provided therein.
(S)6. Restriction on Exercise After Termination.
-----------------------------------------
Notwithstanding any provision of this Plan to the contrary, no
unexercised right created under this Plan (an "Unexercised Right") shall be
exercisable if, prior to such exercise, the Participant violates any
non-competition, confidentiality, conflict of interest, or similar provision set
forth in the Stock Option Agreement pursuant to which such Unexercised Right was
awarded or otherwise conducts himself in a manner adversely affecting the
Company or any subsidiary of the Company, as determined by the Committee, in its
sole discretion.
(S)7. Withholding Tax.
---------------
The Company, at its option, shall have the right to require the
Participant or any other person receiving Shares under the Plan to pay the
Company the amount of any taxes which the Company is required to withhold with
respect to such Shares or, in lieu of such payment, to retain or sell without
notice a number of such Shares sufficient to cover the amount required to be so
withheld. The Company, at its option, shall have the right to deduct from all
dividends paid with respect to Shares the amount of any taxes which the Company
is required to withhold with respect to such dividend payments. The obligations
of the Company under the Plan shall be conditional on such payment or other
arrangements acceptable to the Company.
(S)8. Securities Law Restrictions.
---------------------------
No right under the Plan shall be exercisable and no Share shall be
delivered under the Plan except in compliance with all applicable federal and
state securities laws and regulations. The Company shall not be required to
deliver any Shares or other securities under the Plan prior to such registration
or other qualification of such Shares or other securities under any state or
federal law, rule, or regulation as the Committee shall determine to be
necessary or advisable, in its sole discretion.
The Committee may require each person acquiring Shares under the Plan
(a) to represent and warrant to and agree with the Company in writing that such
person is acquiring the Shares without a view to the distribution thereof, and
(b) to make such additional representations, warranties, and agreements with
respect to the investment intent of such person or persons as the Committee may
reasonably request. Any certificates for such Shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All Shares or other securities delivered under the Plan shall be
subject to such stop-transfer orders and other restrictions as the Committee may
deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Shares are
then listed, and any applicable federal or state securities
<PAGE>
law, and the Committee may cause a legend or legends to be put on any
certificates evidencing such Shares to make appropriate reference to such
restrictions.
(S)9. Change in Capital Structure.
---------------------------
In the event the Company changes its outstanding Shares by reason of
stock splits, stock dividends, or any other increase or reduction of the number
of outstanding Shares without receiving consideration in the form of money,
services, or property deemed appropriate by the Board, in its sole discretion,
the aggregate number of Shares subject to the Plan shall be proportionately
adjusted and the number of Shares and the exercise price for each Share subject
to the unexercised portion of any then-outstanding Option shall be
proportionately adjusted with the objective that the Participant's proportionate
interest in the Company shall remain the same as before the change without any
change in the total exercise price applicable to the unexercised portion of any
then-outstanding Options, all as determined by the Committee in its sole
discretion.
In the event of any other recapitalization or any merger,
consolidation, or other reorganization of the Company, the Committee shall make
such adjustment, if any, as it may deem appropriate to accurately reflect the
number and kind of shares deliverable, and the exercise prices payable, upon
subsequent exercise of any then-outstanding Options, as determined by the
Committee in its sole discretion.
The Committee's determination of the adjustments appropriate to be made
under this (S)9 shall be conclusive upon all Participants under the Plan.
(S)10. Change in Control.
-----------------
(a) Accelerated Vesting and Company Purchase Option.
-----------------------------------------------
Notwithstanding any provision of this Plan or any Stock Option
Agreement to the contrary (unless such Stock Option Agreement contains
a provision referring specifically to this (S)10 and stating that this
(S)10 shall not be applicable to the Option evidenced by such Stock
Option Agreement), if a Change in Control (as defined below) occurs,
then:
(i) Any and all Options theretofore granted and not fully
vested shall thereupon become vested and exercisable in full and
shall remain so exercisable in accordance with their terms;
provided that no Option which has previously been exercised or
otherwise terminated shall become exercisable; and
(ii) The Company may, at its option, terminate any or all
unexercised Options and portions thereof not more than 30 days
after such Change in Control; provided that the Company shall,
upon such termination and with respect to each Option so
terminated, pay to the Participant (or such Participant's
transferee, if applicable) theretofore holding such Option cash
in an amount equal to the difference between the fair market
value (as defined in (S)5(a), above) of the Shares subject to the
Option at the time the Company exercises its option under this
<PAGE>
(S)10(a)(ii) and the exercise price of the Option, less
applicable withholding taxes; and provided further that if such
fair market value is less than such exercise price, then the
Committee may, in its discretion, terminate such Option without
any payment.
(b) Definition of Change in Control.
-------------------------------
For purposes of the Plan, a "Change in Control" means the
happening of any of the following:
(i) The direct or indirect acquisition by any "person" as
defined in (S)3(a)(9) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and as used in (S)(S)13(d) and 14(d)
thereof, including a "group" within the meaning of (S)13(d) of
the 1934 Act (hereinafter, simply a "Person"), of "beneficial
ownership" (within the meaning of Rule 13d-3 under the 1934 Act)
of securities of the Company representing more than 50% of the
combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of
directors of the Company (the "Company Voting Securities");
provided that: (A) for purposes of this subsection (i), the term
"Person" shall not include the Company, any subsidiary of the
Company, any employee benefit plan sponsored or maintained by the
Company or any subsidiary of the Company (including any trustee
of such plan acting as trustee), any person who was a shareholder
of the Company on the effective date of the Plan (an "Existing
Shareholder"), and any affiliate of an Existing Shareholder; and
(B) the provisions of this subsection (i) shall not apply to (1)
any acquisition of securities from the Company or any of its
subsidiaries, or (2) any acquisition of securities pursuant to a
Business Combination (as defined below) which satisfies clauses
(A), (B), and (C) of subsection (iii) of this Section 10(b);
(ii) When, during any period of 24 consecutive months
during the existence of the Plan, the individuals who, at the
beginning of such period, constitute the Board (the "Incumbent
Directors") cease for any reason other than death to constitute
at least a majority of the Board; provided, however, that a
director who was not a director at the beginning of such 24-month
period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director was
elected by, or on the recommendation of or with the approval of,
at least two-thirds of the directors who then qualified as
Incumbent Directors either actually (because they were directors
at the beginning of such 24-month period) or by prior operation
of this (S)10(b)(ii);
(iii) Approval by the shareholders of the Company of a
reorganization, merger, consolidation, or recapitalization of the
Company, or a sale or other disposition of all or substantially
all of the assets of the Company, or the acquisition of the
assets of another corporation (any such transaction, a "Business
Combination"), or the consummation of a Business Combination for
which shareholder approval is not obtained, unless, in any such
case, following such
<PAGE>
Business Combination: (A) all or substantially all of the
individuals and entities who were the beneficial owners of the
Company Voting Securities outstanding immediately prior to
such Business Combination beneficially own, directly or
indirectly, immediately following such Business Combination,
more than 50% of the combined voting power of the then
outstanding voting securities entitled to vote generally in
the election of directors of the corporation resulting from
such Business Combination in substantially the same
proportions as their ownership of the Company Voting
Securities immediately prior to such Business Combination, and
(B) at least a majority of the members of the board of
directors of the corporation resulting from such Business
Combination were Incumbent Directors at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company
of a complete liquidation or dissolution of the Company.
(S)11. Six-Month Holding Period.
------------------------
Shares purchased upon exercise of an Option may not be sold before at
least six months have elapsed from the date the Option was granted.
(S)12. No Enlargement of Rights.
------------------------
The adoption of this Plan and the grant of one or more Options to an
Eligible Director shall not confer any right to the Eligible Director to
continue in the status of Eligible Director and shall not restrict or interfere
in any way with the right of the Company to terminate such Eligible Director's
status as such at any time, with or without cause.
(S)13. Rights as Stockholder.
---------------------
No Participant or his executor or administrator or other transferee
shall have any rights of a stockholder in the Company with respect to the Shares
covered by an Option unless and until such Shares has been duly issued and
delivered to him under the Plan.
(S)14. Acceleration of Rights.
----------------------
The Committee shall have the authority, in its discretion, to
accelerate the time at which an Option shall be exercisable whenever it may
determine that such action is appropriate by reason of changes in applicable tax
or other laws or other changes in circumstances occurring after the award of
such Option.
(S)15. Definition of Subsidiary.
------------------------
The terms "subsidiary" and "subsidiary corporation" when used in the
Plan or any Stock Option Agreement made pursuant to the Plan mean a subsidiary
corporation as defined in (S)424(f) of the Code.
<PAGE>
(S)16. Interpretation, Amendment or Termination of Plan.
------------------------------------------------
The interpretation by the Committee of any provision of the Plan or of
any Stock Option Agreement executed pursuant to the grant of an Option under the
Plan shall be final and conclusive upon all Participants or transferees under
the Plan. The Board, without further action on the part of the stockholders of
the Company, may from time to time alter, amend, or suspend the Plan or may at
any time terminate the Plan; provided that no such action shall adversely affect
any Participant's rights with respect to outstanding Options then held by such
Participant without such Participant's consent.
(S)17. Protection of Board and Committee.
---------------------------------
No member of the Board or the Committee shall have any liability for
any determination or other action made or taken in good faith with respect to
the Plan or any Option granted under the Plan.
(S)18. Government Regulations.
----------------------
Notwithstanding any provision of the Plan or any Stock Option
Agreement executed pursuant to the Plan, the Company's obligations under the
Plan and such Agreement shall be subject to all applicable laws, rules, and
regulations and to such approvals as may be required by any governmental or
regulatory agencies, including without limitation any stock exchange on which
the Shares may then be listed.
(S)19. Governing Law.
-------------
The Plan shall be construed and governed by the laws of the State of
Ohio.
(S)20. Genders and Numbers.
-------------------
When permitted by the context, each pronoun used in the Plan shall
include the same pronoun in other genders and numbers.
(S)21. Captions.
--------
The captions of the various sections of the Plan are not part of the
context of the Plan, but are only labels to assist in locating those sections,
and shall be ignored in construing the Plan.
(S)22. Effective Date.
--------------
The Plan is effective March 22, 2000 (the "Effective Date"). The Plan
shall be submitted to the shareholders of the Company for approval and
ratification as soon as practicable but in any event not later than 12 months
after the adoption of the Plan by the Board. If the Plan is not approved and
ratified by the shareholders of the Company within 12 months after the adoption
of
<PAGE>
the Plan by the Board, the Plan and all Options granted under the Plan shall
became null and void and have no further force or effect.
(S)23. Term of Plan.
------------
No Option shall be granted pursuant to the Plan on or after the tenth
anniversary of the Effective Date, but Options granted prior to such tenth
anniversary may extend beyond that date.
(S)25. Savings Clause.
--------------
In case any one or more of the provisions of this Plan shall be held
invalid, illegal, or unenforceable in any respect, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby, and the invalid, illegal, or unenforceable provision shall be
deemed null and void; however, to the extent permissible by law, any provision
which could be deemed null and void shall first be construed, interpreted, or
revised retroactively to permit this Plan to be construed so as to foster the
intent of this Plan. This Plan and all transactions pursuant to this Plan are
intended to comply in all respects with applicable law and regulation,
including, with respect to persons subject to Section 16 of the 1934 Act
("Reporting Persons"), Rule 16b-3 under the 1934 Act. In case any one or more of
the provisions of this Plan or any transaction pursuant to this Plan shall be
held to violate or be unenforceable in any respect under Rule 16b-3, then, to
the extent permissible by law, any provision which could be deemed to violate or
be unenforceable under Rule 16b-3 shall first be construed, interpreted, or
revised retroactively to permit the Plan or transaction to be in compliance with
Rule 16b-3.
<PAGE>
Preliminary Copy
PROXY
-----
PINNACLE DATA SYSTEMS, INC.
---------------------------
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints John D. Bair, C. Robert Hahn and Thomas
J. Carr, and each of them, with full power of substitution, proxies to vote and
act with respect to all common shares, without par value (the "Shares"), of
Pinnacle Data Systems, Inc., an Ohio corporation (the "Company"), which the
undersigned is entitled to vote at the Annual Meeting of Shareholders to be held
at the Company's principal executive offices located at 6600 Port Road,
Groveport, Ohio 43125 on Wednesday, June 14, 2000, at 10:00 a.m., local time,
and at any and all adjournments thereof, with all the powers the undersigned
would possess if present in person, on the following proposals and any other
matters that may properly come before the Annual Meeting.
1. WITH [ ] OR WITHOUT [ ] AUTHORITY TO ELECT ALL NOMINEES LISTED BELOW AS
CLASS I DIRECTORS (except as marked to the contrary below):
Thomas J. Carr Robert V.R. Ostrander Paul H. Lambert
Instruction: To withhold authority to vote for any individual nominee, strike a
line through his name.
2. WITH [ ] OR WITHOUT [ ] AUTHORITY TO ELECT ALL NOMINEES LISTED BELOW AS
CLASS II DIRECTORS (except as marked to the contrary below):
John D. Bair C. Robert Hahn Thomas M. O'Leary
Instruction: To withhold authority to vote for any individual nominee, strike a
line through his name.
3. PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED 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.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO REQUIRE THE AFFIRMATIVE VOTE OF SHARES REPRESENTING AT
LEAST 75% OF THE VOTING POWER OF THE COMPANY TO APPROVE MERGERS,
ACQUISITIONS OR OTHER MATTERS FOR WHICH OHIO LAW SPECIFIES A REQUIRED
PERCENTAGE VOTE OF SHAREHOLDERS UNLESS THE TRANSACTION HAS PREVIOUSLY
BEEN APPROVED BY THE VOTE OF AT LEAST TWO-THIRDS OF THE MEMBERS OF THE
BOARD OF DIRECTORS.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
5. PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED CODE OF
REGULATIONS TO REQUIRE THE AFFIRMATIVE VOTE OF SHARES REPRESENTING AT
LEAST 75% OF THE VOTING POWER OF THE COMPANY TO AMEND THE PROVISIONS
GOVERNING THE TWO CLASSES OF DIRECTORS AND THE REMOVAL OF DIRECTORS
UNLESS THE AMENDMENT HAS PREVIOUSLY BEEN APPROVED BY THE VOTE OF AT
LEAST TWO-THIRDS OF THE MEMBERS OF THE BOARD OF DIRECTORS.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
<PAGE>
6. PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED COMMON SHARES FROM
5,000,000 TO 10,000,000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
7. PROPOSAL TO AMEND THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO AUTHORIZE A CLASS OF PREFERRED SHARES CONSISTING OF
4,000,000 AUTHORIZED SHARES.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
8. PROPOSAL TO APPROVE AMENDMENTS TO THE PINNACLE DATA SYSTEMS, INC. 1995
STOCK OPTION PLAN WHICH INCREASE THE NUMBER OF SHARES THAT MAY BE
ISSUED UPON THE EXERCISE OF STOCK OPTIONS AND WHICH MODIFY THE TERMS OF
THE PLAN TO REFLECT CERTAIN CHANGES IN THE ADMINISTRATION AND OPERATION
OF THE PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
9. PROPOSAL TO APPROVE THE PINNACLE DATA SYSTEMS, INC. 2000 DIRECTORS'
STOCK OPTION PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
10. PROPOSAL TO RATIFY THE SELECTION OF HAUSSER + TAYLOR LLP AS THE
COMPANY'S INDEPENDENT ACCOUNTANTS FOR THE YEAR ENDING DECEMBER 31,
2000.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
MATTERS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT
THEREOF.
The Shares represented by this Proxy will be voted upon the proposals
listed above in accordance with the instructions given by the undersigned, but
if no instructions are given, this Proxy will be voted to elect all directors as
set forth in Item 1 and Item 2, above, and FOR the proposals listed in Item 3,
Item 4, Item 5, Item 6, Item 7, Item 8, Item 9, and Item 10, above, and, and in
the discretion of the proxies, on any other matter which properly comes before
the Annual Meeting.
Please be sure to sign and date this Proxy in the box below.
- -------------------------------------------------------------------------------
- ----------------------------------------- ---------------------------------
Shareholder signature Co-holder (if any) signature
- -------------------------------------------------------------------------------
Date:_____________________________________ Date:____________________________
- -------------------------------------------------------------------------------
