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ANNUAL REPORT FOR SMALL BUSINESS ISSUERS SUBJECT
TO THE 1934 ACT REPORTING REQUIREMENTS
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number 0-28483
Pinnacle Data Systems, Inc.
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(Exact name of small business issuer in its charter)
Ohio 31-1263732
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
6600 Port Road, Groveport, Ohio 43125
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (614) 748-1150
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which
registered
None None
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Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
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Indicate by check mark whether the Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State Issuer's revenues for its most recent fiscal year. $12,202,701
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The aggregate market value of the voting and non-voting common equity
held by non-affiliates, computed on the basis of the average bid and asked
prices of the common shares as of March 24, 2000, was $12,424,119.
On March 24, 2000, the Issuer had outstanding 2,327,402 common shares,
without par value (after giving effect to a 2-for-1 stock split to be effective
March 31, 2000), which is the Issuer's only class of common equity.
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<TABLE>
<CAPTION>
Table of Contents
<S> <C>
PART I..............................................................................1
ITEM 1. DESCRIPTION OF BUSINESS..............................................1
ITEM 2. DESCRIPTION OF PROPERTY.............................................10
ITEM 3. LEGAL PROCEEDINGS...................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................10
PART II............................................................................11
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS........................11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........12
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........................19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................20
PART III...........................................................................21
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....21
ITEM 10. EXECUTIVE COMPENSATION..............................................24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................29
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K....................................30
SIGNATURES.........................................................................34
EXHIBIT INDEX......................................................................35
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
The Company designs, assembles and sells computer products and provides computer
repair and other related services primarily to Original Equipment Manufacturers
(OEMs) in industries such as telecommunications, medical systems, process
control, and governmental. During 1999 the Company reported revenue of approxi-
mately $12.2 Million, net income of approximately $351,000 and total assets of
approximately $6.3 Million. Approximately 75% of the Company's revenue is
generated from product sales and approximately 25% is generated from services.
However, the gross profit from both segments of the business is approximately
equal.
The Company's products are custom designed to meet the needs of its customers.
Often customers have special computer system requirements that can not be met by
off-the-shelf products alone. The Company helps customers by engineering,
designing, assembling and modifying computer equipment to meet customers'
particular needs. The Company takes circuit board type products manufactured by
Sun Microsystems, Inc., one of the world's largest producers of computer
systems, and combines it with technology engineered and developed by the
Company, such as customized circuit boards, enclosures, power supplies and other
engineered computer components requested by customers and assembles them along
with other off the shelf computer peripherals into finished products for
customers. The Company's products are based upon high performance computer
processor technology from Sun Microsystems, Inc. In a typical system
manufactured by the Company, approximately 50% of the components will be Sun
products, 30% of the components will be off-the-shelf products and 20% will be
products designed and developed by the Company. These percentages will vary from
product to product. By adding its own internally developed products and
engineering capabilities to Sun's off-the-shelf board technology, the Company is
able to offer solutions with minimal non-recurring engineering (product design)
charges. These are turnkey, application-specific computer circuit boards and
entire computer systems that the Company's customer imbeds into the customer's
products. See "Products."
The Company also offers end-of-life management and complete service and support
to OEMs. Many manufacturers will include Sun Microsystems' boards and components
in their own products. If Sun stops manufacturing that board or component, then
the equipment manufacturer is left without a source to supply it with the parts
needed to build its own products. The Company's end of life management allows
the Company's customers to maximize their investment in technology by providing
continued support for products no longer supported by the manufacturer. This
allows OEMs to eliminate or delay the engineering and software development
charges required to integrate new technology.
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The Company also provides repair services for advanced technology systems, and
printed circuit board assemblies. The Company's repair services are all depot
repair, which means that the malfunctioning part is sent to the Company for
repair. The Company does not provide any repairs outside of its facilities. The
Company's repair services are focused on UNIX computer equipment and currently
are limited predominantly to equipment manufactured by Sun Microsystems, Inc.
The Company is partnering with Sun Microsystems to provide streamlined
distribution of Sun parts to Sun customers using an online information
management system that connects the two companies. The Company also offers a
repair service whereby it will, overnight, exchange a malfunctioning or broken
electronic component or part for a similar component or part in the Company's
inventory. The Company will then repair the malfunctioning or broken component
and include that part in its inventory as a replacement. The Company also
generates revenue from the sale of spare parts and components.
The Company believes that the services segment of its business provides a
competitive advantage to it in connection with its product sales, because the
Company can offer the purchasers of its products a more complete answer to their
system needs by providing not only products, but also service and support after
the sale. The Company also believes that the product segment of its business
provides it with a competitive advantage in connection with the services it
provides, because product development and engineering activities keeps it
current with the latest technology and how to repair it. The Company considers
its product and services segments to be equally important, not only because of
the synergies they provide to one another, but also because they contribute
relatively equally to the Company's gross profit.
Almost all of the Company's products and services are based on Sun's SPARC
architecture. If for any reason Sun or its products began to experience
significant difficulties in the market place or in operations or otherwise it
could materially and adversely affect the Company.
The Company believes that its relationship with Sun Microsystems provides a
significant advantage to the Company. The Company has a number of contracts with
Sun under which Sun provides the Company proprietary designs for its products or
which enable the Company to utilize and sell Sun circuit board technology and
operating systems or other software to its customers. Additionally, in 1997, the
Company was accepted into the Sun Microelectronics' Partners Program. As a
member of this program, Company personnel make marketing calls on Fortune 500
companies, together with sales representatives of Sun, to provide complete
technology solutions to mutual customers. In March 1999, the Company entered
into a Repair Services Agreement with Sun Microsystems, Inc. under which the
Company provides repair and testing services on Sun circuit boards and related
components, and maintains an inventory for Sun of repaired boards and
components. The Company then provides streamlined distribution of these
components and parts to Sun Enterprise Service Division's stocking locations,
field engineers or customers using an online information management system that
connects the two companies. See "Contractual Relationships with Sun
Microsystems, Inc. and its Affiliates".
The Company is much smaller in size than Sun Microsystems, Inc. In its most
recently completed fiscal year, ending June 30, 1999, Sun reported revenue of
approximately $12 billion, approximately 1,000 times greater than the Company's
current level of annual revenue. While
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the Company is relatively insignificant to Sun, the Company is significantly
dependent upon its relationship with Sun. In 1999, approximately 19% of the
Company's sales were services sales made to Sun under a services agreement and
approximately 9% of the Company's sales were product sales to Sun made under
purchase orders. In the same period, approximately 57% of its purchases of
inventory were made from Sun. Additionally, the Company has entered into license
agreements with Sun pursuant to which it sells products and services to third
parties which aggregated to approximately 28% of sales for 1999. For information
about the various contracts the Company has with Sun, and the amount of revenue
generated under each agreement. See "Contractual Relationships with Sun
Microsystems, Inc. and its Affiliates".
If all of the Company's relationships with Sun were to end, the Company's
operations would be adversely affected, particularly in the short term. However,
the Company would continue to sell products to OEM's, and it would continue to
provide repair and other services to TPM's and end-users. The Company would also
pursue providing repair-related services to other OEM's. The Company's
management believes that a complete severing of all of the various Sun
relationships is unlikely, because those relationships are diverse, and
independent of one another.
Sun could elect to discontinue buying services from the Company, but because of
the size and breadth of the services provided, management believes it would take
several months for Sun to replace the Company with one or more vendors to
provide those services.
DEVELOPMENT OF THE BUSINESS
The Company was incorporated as an Ohio corporation on March 9, 1989. Initially,
the Company focused on providing electronic repair services to universities,
which primarily had installed networks of Sun Microsystems workstations.
Gradually, the Company expanded its services to other users of Sun Microsystems
workstations who were self-maintaining such equipment. In 1992, the Company
began providing engineering and manufacturing services for CPU board designs for
OEMs. In 1994, the Company began engineering and manufacturing computer systems
patterned after Sun Microsystems workstations. In 1995, the Company focused its
product sales efforts on custom-designed circuit boards. Also in 1995, the
Company re-focused its repair marketing efforts from sales to universities and
end users to sales to Third Party Maintainers (TPM's), and Fortune 500
self-maintainers. In 1996, the Company began providing depot repair services to
OEMs. In 1997, the Company began designing and manufacturing custom integrated
computer systems for OEMs and found significant interest for these products in
the growing telecommunications market.
In early 1997, the Company entered into a joint venture as a minority partner of
LogistixPDSi Services in Northern California to provide repair services to the
OEM marketplace. In connection with this venture, the Company established a
repair depot facility within the headquarters of the majority partner in
Fremont, California. The Company also provided services outside of the joint
venture to TPM's from this facility. While the incremental services performed by
the Company for its own TPM customers at that facility was profitable, the level
of
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business generated by the joint venture entity from OEM customers failed to meet
the Company's expectations. The joint venture entity was not successful and
losses accumulated during 1997.
In November 1997, the company was offered an opportunity to establish a
dedicated depot for Sun Microsystems in California. The Company terminated its
participation in the joint venture, hired the joint venture employees and
established a facility within the distribution center of the Company's customer,
Sun Microsystems. In late 1998, in anticipation of accepting a larger role in
Sun's service business model, the Company closed the California facility and
consolidated its operations in Columbus, Ohio.
In early 1999 the Company entered into a 10-year lease for 56,000 spare feet of
space for its operations in a building in a free-trade zone in Groveport Ohio, a
suburb of Columbus. In January 2000 the Company amended its lease to expand the
amount of square feet under lease to approximately 113,000. The Company sold the
building in which it previously housed operations.
BACKGROUND OF INDUSTRY
Original equipment manufacturers in the telecommunications, medical systems,
process control and government markets embed advanced technology systems in
their products to enhance functionality and performance. OEMs select a platform
for their products based on the performance and availability required by the
application. Management believes that OEMs who choose Sun Microsystem's SPARC
platform make this decision based on the speed of Sun Microsystems processor
technology and the stability of the UNIX operating system. Management further
believes that the reliability and speed of Sun processors combined with the
stability of Sun's Solaris operating systems provides excellent performance and
system availability.
To fully integrate these systems into their products, OEMs often have special
requirements that cannot be met by off-the-shelf products manufactured by Sun
Microsystems. Traditionally, these companies modified off-the-shelf components
to meet their specific needs, utilizing either in-house engineering resources or
outside engineering firms to create custom system configurations. In doing so,
these OEMs incurred significant non-recurring engineering (NRE) charges to cover
development costs. As the pace of technology has increased and competition has
intensified in these markets, OEMs are now less willing to incur the time and
expense required to develop custom systems. Instead, they are looking for
sources, such as the Company, that can provide application-specific systems and
products with minimal engineering development time and expense. The Company
believes OEMs will continue to look for ways to reduce product development time
and cost without compromising their ability to customize technology to their
application.
At the same time, there is a growing base of OEM products built around
technology that is no longer being supported by the manufacturer. These OEMs are
faced with having to modify software and reconfigure their product to
incorporate new technology that does not enhance their systems' performance
simply because their existing technology is no longer being supported by the
manufacturer. As a result, OEMs are looking for ways to extend the life of their
current
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technology. Some of these OEM's contract with entities to provide end of life
management, that may include manufacturing and/or repair of the products not
supported or manufactured by the OEM.
In the repair business there has been a trend during the last several years
towards outsourcing in the electronics repair industry which the Company
believes will continue in the future. The Company believes that this is due to:
(1) the desire of OEMs to focus resources on their primary business, (2) the
accelerated pace of new product introductions which is necessary for OEMs to
keep pace with competition, (3) the need to reduce costs, which can be
accomplished by converting fixed costs of an internal service department into
variable costs by outsourcing the service, and (4) the difficulties inherent in
servicing a wide range of equipment produced by multiple vendors, as data
centers have moved from using predominantly one company's hardware to using
equipment from multiple vendors in many locations.
PRODUCTS
The Company's products include complete systems, specially designed products,
including boards and attach cards, and software. The Company resells some
hardware and software manufactured by Sun Microsystems and other OEM's, as well
as products developed internally by the Company's engineers. Complete systems
bring together hardware and software from multiple sources into fully integrated
systems.
One type of product developed and manufactured by the Company is known as a
"High Availability" system. This includes redundant system components with
sophisticated failover software. This allows systems to continue to operate
despite failure of any component by the instantaneous transfer of system
functions to the redundant backup system. These products have been purchased by
companies primarily in the telecommunications industry that cannot afford a
system failure or even the time delay involved in rebooting a system.
The Company has also developed products that allow OEMs to more fully integrate
SPARC technology into their technology systems. These products include power
supplies, specially modified motherboards, transition cards, and I/O boards.
The Company engages in research and development in connection with designing new
products for customers. This work is done in response to requests from customers
with specific product requirements. Upon completion of design and testing of the
newly developed product, the Company typically receives orders for production of
that product from the customer. During 1999 and 1998 the Company incurred
$552,143 and $191,557 respectively, for research and development. These expenses
were not paid by the Company's customers but are typically recouped over time as
part of the cost of the developed products that are sold to customers.
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SOFTWARE
The Company is a SunSoft Master Distributor and is authorized to provide its
customers with the right to use Solaris, Sun Microsystem's UNIX operating
system. The Company also resells failover software as part of its "High
Availability" systems.
SERVICES
The Company repairs products that have been developed, manufactured, marketed
and sold by other companies, and which generally have a well-established
installed base as well as products developed internally. The Company also
designs and manufactures customized modifications to products of other companies
for integration into existing systems. Due in part to the capital costs
necessary to maintain adequate inventory and equipment to service large OEMs and
TPMs, the Company has focused its services on products manufactured primarily by
Sun Microsystems, Inc. and has built an inventory of Sun Microsystems components
and parts.
DEPOT REPAIR SERVICES: The Company provides OEMs, TPMs and end users who
maintain their own equipment the opportunity to outsource repairs of their
proprietary products or products produced by third parties. The entity that is
actually providing the maintenance service in the field will place an order with
the Company for the repair of defective components or parts. The time of
completion of the repair will be scheduled, with higher charges being incurred
for shorter time frame repairs. The Company offers its customers a choice of
5-day and 15-day repair and return services. The Company also maintains an
extensive inventory of spare components and offers the ability to provide
replacement components or parts overnight from its existing inventory in
exchange for the defective component or part, which is then repaired and
included in inventory. For repairs not requiring overnight service, the entity
maintaining the equipment in the field sends the defective component or part to
the Company. The Company's electronic technicians then repair the component or
part, test it, and ship it back to the customer. Since inception, the Company
has specialized in the repair of hardware manufactured by Sun Microsystems, Inc.
These systems are typically high end-user workstations able to perform
multi-tasking functions.
SUN MICROSYSTEMS LOGISTICS MANAGEMENT SERVICES: In August 1999, the Company
entered into an agreement with Sun Microsystems, Inc. to provide to Sun's
Enterprise Services Division test and repair services, and inventory and
logistics management services. Under this program, called the Virtual Logistics
Network (VLN), the Company is partnering with Sun Microsystems to provide
streamlined distribution of Sun components and parts to Sun customers using an
online information management system that connects the two companies. The
Company also provides management and logistics services to other
vendors/partners of Sun that participate in the VLN.
SPARE PARTS SALES: Spare parts sales include sales of repaired parts, new parts,
and reclaimed parts. There is a demand in the computer industry for the
necessary parts and components to provide repair services. New components are
often difficult to obtain and costly to purchase. The Company is able to provide
a wide variety of parts at a significant discount compared to the cost of
comparable new parts. The Company's spare parts capabilities enhance the
efficiency of
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its other service offerings. The Company either supplies the spare parts from
its own inventory when it has a surplus of a particular part or component, or it
acquires the requested parts from brokers or other suppliers of used equipment.
The Company sometimes dismantles used equipment to obtain used components. The
Company maintains an inventory consisting primarily of Sun Microsystems' spare
parts and components.
CONTRACT MANUFACTURING AND ENGINEERING: In certain cases, an OEM will outsource
the design and manufacture of a product to the Company. The outsourcing of
manufacturing enables the OEM to transfer its internal manufacturing
responsibilities to the Company, thereby enabling the OEM to reduce
manufacturing costs and improve its return on assets. The Company's contract
manufacturing services primarily involve products which have high engineering,
technical and test content, and low to medium production requirements. The
Company will also merge technology from a standard workstation to a customer's
product with private labeling. In connection with these services, the Company
will obtain orders for custom engineering and manufacturing services from
entities which are customers of Sun Microsystems. These customers are using the
Sun operating system software and want to continue to use the sun software in
workstations, data servers or other applications not manufactured and sold by
Sun. The Company will design and engineer modifications to the Sun component
boards to fit the desired customized use and will then build the custom designed
products for the customer. The end product is a component board or computer
system that does not resemble the original Sun Microsystems board or system, but
operates the Sun software and performs the same functions as the Sun board or
system. Each product is unique and custom designed to the customer's
specifications. Some of these products use commercially available parts
configured to produce the desired function. In other cases, the custom-built
product contains components or functions conceived and developed by Company
personnel.
END OF LIFE MANAGEMENT: End of Life Management services bring together the
Company's board design and manufacturing, parts stocking, and repair
capabilities to extend the life of technology that is no longer supported by the
manufacturer. The Company will enter into an end of life service contract with
its customers which may include depot repair of installed technology as well as
acquisition or manufacture of products that have been end-of-lifed by the
manufacturer.
EXTENDED WARRANTY SERVICES. In 1992, the Company began initial marketing efforts
to provide customers with extended warranty support services. Generally, the
Company will extend warranty of the OEM's product for a fixed fee. The Company
is willing to develop warranty programs specifically tailored to meet a
customer's needs with the goal of fulfilling as many of the customer's repair
needs as is required.
CONTRACTUAL RELATIONSHIPS WITH SUN MICROSYSTEMS, INC. AND ITS AFFILIATES
In August 1999, the Company entered into an agreement with Sun Microsystems,
Inc. to provide to Sun's Enterprise Services Division test and repair services,
and inventory and logistics management services. The agreement has a one-year
term and renews automatically for additional one-year terms. In 1999 the Company
generated approximately $2.3 million of revenue from this agreement, or
approximately 19% of total
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revenue and 77% of service revenue. These sales represented approximately 90% of
the service segment's operating income of $608,326 for the same period. The
Company considers this agreement to be of critical importance to its future
viability, and considers it to be the basis of its prospects for future growth
of the service segment.. See "Services - Sun Microsystems Logistics Management
Services".
The Company designs and sells products under various technology license
agreements with Sun Microsystems. Two of the license agreements are of material
importance to the Company's viability. It is not possible to cite the respective
operating earnings contributions of the products sold under the two license
agreements, as the Company does not allocate labor and overhead costs to
individual products. Consequently, the respective revenue contributions are
cited below. If either of these agreements is terminated it would significantly
impede the Company's ability to perform its design and manufacturing services.
In October 1997, the Company entered into a Development and Manufacturing
License Agreement with Sun Microelectronics, a division of Sun Microsystems,
Inc. pursuant to which the Company has been licensed to develop, manufacture and
sell products based upon and using the Sun PCI card and Open Boot PROM
technology. The Company uses this license in the custom design of products. The
license enables the Company to use the Sun technology and make engineering or
design changes to meet customers' specific needs. The Company generated revenue
from these products of approximately $92,000 in 1998 and $792,000 in 1999
(approximately 2% and 9% of total product revenue, respectively) The Company
expects the portion of its products based on this license to increase in future
years. Consequently, the importance of this license to the Company is likely to
increase in future years. This license agreement is for a term of three years
expiring in 2000, subject to automatic renewal for one-year periods unless
either party gives notice of non-renewal. The license can be terminated earlier
upon default.
In May 1994, the Company entered into a microprocessor platform design license
agreement with Sun Microsystems Computer Corporation, acting through its SPARC
Technology Business Division, pursuant to which the Company has been licensed to
develop, manufacture and sell products based upon and using the Sun SPARC
microprocessor technology. The Company uses this license in the custom design of
products. The license enables the Company to use Sun technology and make
engineering or design changes to meet customers' specific needs. The Company
generated revenue from these products of approximately $2.7 million in 1998 and
$1.7 million in 1999 (approximately 44% and 19% of total product revenue,
respectively). The technology of this license is utilized in customer projects
that began prior to 1997. It has not been utilized in any new customer projects
since before 1997. The Company does not anticipate that it will develop any new
products based on the technology licensed under this agreement, although it will
continue to sell products that it has developed under this license.
Consequently, the importance of this license to the Company is likely to decline
in future years. A license fee in the amount of $35,000 was paid in full upon
execution of the license. This license agreement is for a term of 7 years
expiring in 2001, subject to automatic renewal for one-year periods unless
either party gives notice of non-renewal. The license can be terminated earlier
upon default.
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SALES AND MARKETING
The Company focuses its marketing efforts on large OEMs and on TPMs. Since
marketing is primarily to large OEMs or TPMs, the Company does not maintain a
large field sales organization. The Company currently uses four independent
manufacturers representative firms to generate sales opportunities. The Company
employs three in-house sales representatives, who are focused on targeted
accounts. During 1999 the Company had revenue from three customers that
represented approximately 56% of sales. The Company's largest customer in 1999,
Sun Microsystems, accounted for approximately 29% of sales during 1999. During
1998, the Company had revenue from three customers that represented
approximately 59% of sales. The Company's largest customer in 1998, Computer
Network Technologies, Inc., accounted for approximately 22% of the Company's
sales. In 1997, the Company's three largest customers represented approximately
49% of sales. In 1997, the Company was accepted into the Sun Microelectronics'
Partners Program. As a member of this program, Company personnel make marketing
calls on Fortune 500 companies, together with sales representatives of Sun, to
provide complete technology solutions to mutual customers.
COMPETITION
Competition for the specially designed products of the Company come from two
primary sources: (1) other companies that provide similar products, and (2)
products that are competitive with Sun Microsystem's products.
A number of companies are now targeting the telecommunications industry, due to
the continued growth in this market that is expected in the future. Many of
these companies are more established than the Company and have substantially
greater financial and other resources than the Company. The Company believes it
can differentiate itself from the competition through the strength of its close
relationship with Sun Microsystems, its ability to offer a complete turnkey
product/service solution, its unique product set, and its focus on providing
off-the-shelf solutions wherever possible.
Primary competition for the Company's products also comes indirectly from
increased performance and acceptance of the "Wintel" platform. OEMs who are
choosing a platform for their products increasingly narrow their choice down to
SPARC-based systems sold by Sun Microsystem and systems using Intel processors
with Windows NT. If the Wintel platform were to gain acceptance in the
telecommunications industry it would erode the Company's potential market as the
Company does not provide products or services to support this platform.
Primary competitive factors in the repair industry are price, scope and quality
of a company's repair services and know-how. The Company competes with the
in-house repair centers of OEMs and TPMs for end-of-life programs and for repair
services. While the Company believes it offers a cost-effective repair solution
to OEMs and TPMs and, therefore, believes these entities are the Company's
primary potential customers, there is no assurance that these entities will
choose to outsource their repair needs and will not become competitors of the
Company. These
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entities could also choose to compete directly with the Company for the services
of unrelated OEMs and TPMs and for end-users. In addition to competing with OEMs
and TPMs, the Company also competes with a number of independent organizations
similar to the Company.
In the contract manufacturing area, the Company competes against numerous
entities that focus specifically on turnkey contract manufacturing. Many of the
OEMs, TPMs and contract manufacturers with which the Company competes have
significantly greater manufacturing, financial, technical and marketing
resources than the Company. Similarly, some of the independent depot repair
businesses may generate significantly more revenues than the Company and may
have greater manufacturing, financial, technical and marketing resources than
the Company.
EMPLOYEES
As of March 24, 2000, the Company had a total of 83 employees, 78 of whom
were full-time. None of its employees are subject to collective bargaining
agreements, and the Company considers its relationship with its employees
to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 56,000 square feet of office, warehouse,
laboratory and production space in a building located at 6600 Port Road,
Groveport, Ohio. The Company entered into a ten-year lease commencing May 1,
1999. In January 2000 the Company amended its lease to expand the amount of
square feet under lease to approximately 113,000, effective February 1, 2000.
The Company has the option to extend the term of the lease for an additional
five years. The building is in good condition. The Company believes that this
space is adequate for the foreseeable future. See Item 2, Management Discussion
and Analysis.
In May 1999, the Company sold a 19,200 square foot building in which it formerly
conducted its operations. The sale resulted in a gain of $85,922 to the Company.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter of
1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .
(a) MARKET INFORMATION. Since April 1996, the Shares have been traded
on the over-the-counter market and since April 1996, the Shares have been
included on the NASDAQ OTC Bulletin Board under the trading symbol PNDS. Prior
to April 1996, there was no established trading market in the Shares. Set forth
below is the range of high and low bid prices for the Shares for each quarterly
period during the last two fiscal years, as reported by National Quotation
Bureau and as adjusted to give effect to a 2-for-1 stock split, which will be
effective March 31, 2000, as if it occurred prior to the periods reported. These
quotations reflect interdealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
BID PRICES
----------
HIGH LOW
---- ---
<S> <C> <C>
Fiscal Year 1999
First quarter (ended March 31)........................................... $2.75 $1.125
Second quarter (ended June 30)........................................... 2.688 1.375
Third quarter (ended September 30)....................................... 2.625 1.50
Fourth quarter (ended December 31)....................................... 2.188 1.813
Fiscal Year 1998
First quarter (ended March 31)........................................... $2.625 $1.875
Second quarter (ended June 30)........................................... 2.625 1.688
Third quarter (ended September 30)....................................... 1.875 0.438
Fourth quarter (ended December 31)....................................... 1.375 0.438
</TABLE>
(b) HOLDERS. On March 24, 2000, there were 72 holders of record of
the Shares. Most of the Shares not held by officers and directors of the Company
are held in street name.
(c) DIVIDENDS. During the past three years, the company has not paid
any cash dividends. Payments of dividends are within the discretion of the
Company's board of directors and depend upon the earnings, capital requirements,
and operating and financial condition of the Company, among other factors. The
Company currently expects to retain its earnings to finance the growth and
development of its business and does not expect to pay cash dividends in the
foreseeable future. In addition, under the terms of a loan agreement with a
bank, the Company is prohibited from declaring or paying dividends to common
shareholders and from redeeming stock from shareholders.
(d) RECENT SALES OF UNREGISTERED SECURITIES. The following is
information about all securities that the Company sold during 1999 without
registration under the Securities Act of 1933, as amended. The number of shares
and the per share prices set forth below have been
-11-
<PAGE> 15
adjusted to give effect to a 2-for-1 stock split which will be effective March
31, 2000, as though it occurred prior to the issuance of such securities:
(i) On March 1, 1999, the Company granted options pursuant to
the Pinnacle Data Systems, Inc. 1995 Stock Option Plan for 8000 common
shares, without par value, to John Kniley, its vice president of
marketing, at an exercise price of $2.03 per share. The Company
received no consideration for the grant of the options. The options
were issued pursuant to the exemption from registration under the
Securities Act of 1933, as amended, set forth in Rule 701.
(ii) On June 23, 1999, the Company granted options pursuant to
the Pinnacle Data Systems, Inc. 1995 Stock Option Plan for 134,900
common shares, without par value, to employees of the Company. Options
for 8,000 of the shares were issued to John D. Bair and 4,000 of the
shares to Joy Bair at an exercise price of $2.27 per share. The
exercise price for the remainder of 122,900 shares was $2.063 per
share. The Company received no consideration for the grant of the
options. The options were issued pursuant to the exemption from
registration under the Securities Act of 1933, as amended, set forth in
Rule 701.
(iii) On June 23, 1999, under separate Stock Option
Agreements, the Company granted options for 8,000 common shares to both
Thomas M. O'Leary and to Robert V.R. Ostrander, directors of the
Company, at an exercise price of $2.065 per share. Additionally, on
June 23, 1999, the Company repriced options for 10,000 shares
originally granted to Mr. O'Leary in 1996, and in connection therewith
issued a new option agreement reflecting an exercise price of $2.065
per share until October 1, 2006. The Company received no consideration
for the grant of the options or in connection with the repricing. The
options were issued pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Rule 701 promulgated thereunder.
(iv) On August 12, 1999, the Company granted options pursuant
to the Pinnacle Data Systems, Inc. 1995 Stock Option Plan for 6,000
common shares, without par value, to employees of the Company. The
exercise price was $2.313 per share. The Company received no
consideration for the grant of the options. The options were issued
pursuant to the exemption from registration under the Securities Act of
1933, as amended, set forth in Rule 701.
(v) During 1999, the Company has issued 29,000 common shares,
without par value, to employees of the Company pursuant to their
exercise of stock options previously granted to them. The aggregate
amount received by the Company upon such exercise was $43,500. The
shares were registered under Ohio law, and were the subject of a Form D
filing under Rule 504 with the Securities and Exchange Commission.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and Notes contained herein.
The following sections contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements involve risks and uncertainties, and the cautionary statements set
forth below identify important factors that could cause actual results over the
next few quarters to differ materially from those predicted in any such
forward-looking statements. Such factors include, but are not limited to,
adverse changes in general economic conditions, including adverse changes in the
specific markets for the Company's products and services, adverse business
conditions, decreased or lack of growth in the
-12-
<PAGE> 16
computing industry, adverse changes in customer order patterns, including any
decline or change in product orders from any of the three customers that made up
approximately 51% of the Company's revenue during 1999, increased competition,
any adverse change in Sun Microsystems' business or the Company's relationship
with Sun, around whose operating systems the Company's business is based, lack
of acceptance of new products, pricing pressures, lack of adequate financing to
take advantage of business opportunities that may arise, lack of success in
technological advancements, risks associated with the Company's new business
practices, processes and information systems, and other factors.
On March 7, 2000, the Board of Directors of the Company declared a 2-for-1 stock
split in the form of a 100 percent stock dividend, payable on March 31, 2000 to
shareholders of record on March 14, 2000.
The effect of the stock split has been recognized in all share and per share
data in the following discussion of Results of Operations.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
SALES
Sales were $12,202,701 in 1999, an increase of 35% over sales of $9,032,332 in
1998.
Product sales were $9,036,646 for of 1999, an increase of 47% over 1998. The 47%
increase in product sales was fully attributable to new customers obtained in
1999.
Service sales for 1999 were $3,044,099, which was 12% higher than in 1998. The
increase in service sales resulted primarily from higher volumes of repairs from
the Company's largest OEM customer. The Company provides repairs and logistics
management services for a specific list of electronic computer circuit boards
and other computer components for one large and several smaller OEM customers.
The volumes of those listed components grew in 1999, more components were added
to the list, and the Company provided services for additional customers. The
Company expects sales volumes to continue to grow from each of those three
sources.
The relative levels of growth of product and service sales continued a
multi-year trend of an evolution in the mix of the two types of sales. Product
sales, as a percentage of total sales have grown from 56% in 1996, to 65% in
1997, to 68% in 1998, to 74% in 1999. Service sales, as a percentage of total
sales, have gone from 41 %, to 32%, to 30%, to 25% over the same period.
GROSS PROFIT
Total gross margin was 26% in 1999, up from 20% in 1998.
-13-
<PAGE> 17
The gross margin on product sales was 20% in 1999, compared to 18% in 1998. The
improvement is primarily attributable to declines in component costs.
The gross margin on service sales increased to 44% in 1999, from 29% in 1998.
The predominant factor in the difference in margins on service sales resulted
from an inventory writedown of $300,000 the Company took in the 3rd quarter of
1998. Without the writedown, the gross margin on service sales in 1998 would
have been 40%. A major factor in the gross margin improving to 44% in 1999 was a
significant reduction in labor and overhead costs, resulting from the Company's
decision to close its depot repair facility in California. That facility was
opened at the request of the Company's largest service customer in the first
quarter of 1998. When that customer elected in late 1998 to implement its new
vendor model that did not require a West Coast depot, the Company closed the
California facility, thereby reducing labor and overhead costs.
OPERATING EXPENSES
Operating expenses totaled $2,555,657 for 1999, compared with $1,751,213 for
1998. The 46% increase from 1998 to 1999 exceeded the rate of growth of sales,
but was less than the rate of growth of gross profit. The increase came
primarily from higher wages from an expanded professional technical staff,
higher depreciation resulting from fixed asset purchases, facility costs
resulting from the Company's relocation to a larger facility, and higher
professional fees, which included one-time recruiting fees relating to
professional technical staff hiring. As a percentage of sales, operating
expenses increased from 19% in 1998 to 21% in 1999.
Income from operations improved to $565,392 (5% of sales) in 1999, from $88,885
(1% of sales) in 1998.
OTHER INCOME AND EXPENSE
In May 1999, the Company sold its building in which it conducted operations, and
relocated to a larger facility, which it leases. The sale of the building
resulted in a gain before taxes of $85,922.
In anticipation of higher sales volumes, the Company entered into a new
financing package with Star (now Firstar) Bank in the first fiscal quarter of
1998. The package included an installment loan of $300,000 and a revolving line
of credit. The two new loans were used to liquidate loans the Company had with
its previous bank, which included a mortgage loan on the Company's building.
After making the initial draw against the line of credit to liquidate the
mortgage loan, the Company made modest drawings against its line of credit for
the remainder of the first year of 1998. In July 1998, the Company obtained
another mortgage loan on its building. The Company used the proceeds of the
mortgage loan to pay down the line of credit balance, but then continued to make
draws against the line to support working capital through the last year of 1998
and the first year of 1999. At December 31, 1999 the balance of the line of
credit was $1,300,000. Primarily as a result of the Company's increased use of
its line of credit, interest expense in 1999 grew 11% from 1998.
-14-
<PAGE> 18
INCOME TAXES AND NET INCOME
The improved income from operations, combined with the one-time gain on the sale
of the Company's building, resulted in income before income taxes of $558,841
for 1999, compared to 5,333 for 1998. Income tax expense increased from $4,745
in 1998 to $207,675, or 37% of income before income taxes in 1999. Net income
was $351,166 in 1999, compared to $588 for 1998.
The Company's fully diluted earnings per share improved from less than one cent
per share in 1998, to $0.14 for 1999, after consideration of the 2-for-1 stock
split.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
SALES
Sales of the Company in 1998 increased 38% over 1997, from $6,551,490 in 1997 to
$9,032,332 in 1998. During 1998, the Company achieved a 43% increase in product
sales and a 28% increase in service sales.
The 43% increase in product sales resulted from two primary factors: (1)
obtaining new significant orders from existing customers during the year, and
(2) producing products during the year which were in the design stage at year
end 1997.
The 28% increase in service sales resulted from management's decision to focus
on increasing sales to OEM's. Sales to this target market increased 234% during
the year. By contrast, repair sales to TPM's and to self-maintainers declined by
45% from the previous year, as management de-emphasized sales to this market
segment.
GROSS PROFIT
Management's decision to direct its marketing efforts toward the OEM marketplace
and away from the TPM marketplace was intended to improve the Company's
long-term prospects for growth and profitability. Management believes the OEM
segment holds greater opportunities for growth than the TPM segment, and also
believes that OEM sales will be more profitable with greater labor efficiencies
and greater returns on investments in inventory and capital equipment.
The transition from a TPM focus to an OEM focus in 1998 had a short-term
negative impact on the Company's financial results. For several years the
Company maintained an inventory of spare parts exclusively for the purpose of
supporting TPM sales. Due to the Company's sharp decline in revenue from the TPM
market segment from 1997 levels, the Company elected to record a writedown of
the value of that segment of its inventory of $300,000 during the third fiscal
quarter of 1998. The writedown was recorded as a charge to cost of goods sold.
The writedown resulted in a net loss of $126,240 in the third quarter. For the
total of the other three fiscal quarters of 1998 the Company posted operating
income of $126,828.
-15-
<PAGE> 19
While some of the inventory items that were written down were sold in the
ordinary course of business during the fourth quarter of 1998, others were
scrapped or sold at reduced prices as part of a specific effort to liquidate
this inventory.
Largely as a result of this inventory writedown, cost of goods sold increased
substantially during 1998, and gross margin was thereby reduced, dropping to 20%
from 27% in 1997. The gross margin on product sales decreased from 21% to 18%.
In addition to providing custom-designed circuit boards, in 1998 the Company
began providing entire custom-designed computer systems, which had lower margins
than the circuit board products. The gross margin on service sales declined from
39% to 29%, due in part to the inventory writedown, and due in part to having
two depot repair facilities open throughout most of 1998. The second repair
facility, located in Northern California, was closed by the Company in late
1998.
Therefore, despite a 38% increase in sales during 1998, the Company's gross
profit increased by only 5.4%. Another factor contributing to the Company's
reduced gross profit margin in 1998 was the fact that product sales grew in 1998
at a higher rate than repair sales. Product sales typically have lower gross
profit margins than repair sales.
OPERATING EXPENSES
During 1998, while the gross profit of the Company remained relatively constant
in total dollars, operating expenses of the Company increased by 31% over 1997
levels, primarily as a result of increased wage and benefit expenses associated
with an expanded work force. However, because operating expenses increased by
less than the rate of increase of sales during 1998, operating expenses as a
percentage of each sales dollar declined from 20% in 1997 to 19% in 1998.
Because operating expenses increased by more than the relatively modest increase
in gross profit, the Company's income from operations dropped by $322,735, or
78%, from $411,620, or 6% of sales, in 1997, to $88,885 in 1998, which was 1% of
sales.
OTHER INCOME AND EXPENSE
The Company made minimal drawings against its line of credit in 1997, and at
year-end 1997 the balance on the Company's line of credit was zero. During 1998,
the line of credit was used often and extensively by the Company to support the
higher receivables resulting from higher sales volumes and to fund fixed asset
acquisitions. At year-end 1998, the outstanding balance stood at $150,000.
Primarily as a result of the Company's increased use of its line of credit, net
interest expense in 1998 grew by 21% over 1997 levels, from $68,853 in 1997 to
$83,552 in 1998.
The increased interest expense, combined with the Company's reduced income from
operations, resulted in lower income before income taxes during 1998 of $5,333,
compared to $264,819 in 1997.
INCOME TAXES AND NET INCOME
-16-
<PAGE> 20
Because its income before income taxes was lower, the Company's income tax
expense was only $4,745 in 1998, compared to $107,580 in 1997.
The Company's net income was $588 in 1998, or 5/100ths of one cent per share,
both basic and diluted, while the 1997 net income was $157,239, or 13 cents per
share, both basic and diluted.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, the Company consumed $806,970 of cash in its operating activities.
In 1998, the Company used only $63,622 of cash in its operating activities. The
foremost use of cash in 1999 was inventory, which increased by $1,392,474 from
the beginning of 1999. Much of the increase in inventory was attributable to
current and anticipated future sales growth. Another minor factor in the
increase in inventory was an increased number of requests from product customers
for delivery of prototype/evaluation systems. Another factor was the request of
some product customers that the Company hold in stock a quantity of their
specific-designed systems on hand for immediate delivery. In these cases, the
customer is committed to purchase these products within a specified period of
time under a volume purchase agreement. The Company also made some one-time
component purchases, in some cases to take advantage of price discounts, and in
other cases to secure the availability of components that were no longer going
to be manufactured. The Company expects to maintain a substantial investment in
inventory for the foreseeable future in order to support its expected growth in
product sales.
Other asset categories that increased, thereby using cash, were accounts
receivable and prepaid expenses, which increased by $1,001,407 and $38,134,
respectively. These uses of cash were partially offset by increases in accounts
payable of $724,274, in accrued liabilities and taxes of $331,791, and in
unearned revenues of $16,123.
The Company's accounts receivable increased by over $425,000 in both 1997 and
1998. The rate of increase in accounts receivable from December 31, 1996 to
December 31, 1997 was 69%, which was greater than the 40% increase in annual
sales, but far less than the 156% increase in sales from the month of December
1996 to the month of December 1997. Likewise, accounts receivable increased 46%
from December 31, 1997 to December 31, 1998, which was more than the 38%
increase in annual sales, but was less than the 57% increase in sales from the
month of December 1997 to the month of December 1998.
For 1997 and 1998 the Company consumed $34,461 and $63,622, respectively, of
cash in its operating activities. Inventory increased by more than $650,000 in
1997, primarily due to the increase in product sales. In 1998, as a result of
the inventory writedown and of efforts by the Company to liquidate older
inventory components, the Company's investment in inventory declined by
approximately $150,000, but would have increased by over $100,000 without the
writedown.
The Company's investing activities in 1999 consumed $296,678 in cash. Purchases
of furniture and computer equipment consumed $444,293 of cash, but were offset
by the Company's sale of
-17-
<PAGE> 21
its land and building, which generated $147,615. In 1998 the Company's investing
activities consumed cash of $168,664.
The Company's investing activities throughout 1997 and 1998 consisted entirely
of purchases of furniture and computer equipment. Total expenditures of capital
assets, all of which were made with cash, were $153,779 in 1997 and $168,664 in
1998.
Through the last half of 1997, in anticipation of higher sales volumes, the
Company sought a new financing package, and in early 1998 completed an agreement
with Star (now Firstar) Bank. The initial package with Star included a revolving
line of credit and a $300,000 term loan requiring 60 monthly payments of $5,000
plus variable interest. Both instruments had an interest rate of prime. The
combined package had a limit of the lower of $1,500,000, or a percentage of the
Company's eligible accounts receivables. The loan agreements require the Company
to meet certain financial targets and to comply with certain other covenants,
including restrictions on paying dividends, incurring additional indebtedness
and liens, guarantees of other obligations, and reorganizations. The Company's
obligations under these loan agreements are secured by substantially all of the
Company's assets.
The initial draw on the line of credit was approximately $241,000. Combined with
the $300,000 term loan, the proceeds were used to retire a term loan and a
mortgage loan at Huntington Bank. The payoff of those loans were approximately
$180,000 and $361,000, respectively.
In July 1998, the Company obtained a mortgage loan from Firstar Bank on the
Company's building in the amount of $412,500. The mortgage loan had a 5-year
maturity and was amortized on a 15-year basis. The building was sold in May
1999, and the mortgage loan was retired by the proceeds of the sale.
During 1998, the line of credit was used often and extensively by the Company to
support the higher receivables resulting from higher sales volumes and to fund
fixed asset acquisitions. At year-end 1998, the outstanding balance stood at
$150,000. For the year 1998, net of regularly scheduled principal payments, the
Company's bank debt increased by approximately $238,000 to fund operating
activities and capital equipment purchases.
For 1999 principal payments on the Company's long-term debt and capital lease
totaled $89,657. Those payments were partially offset by proceeds of $43,500
from the exercise of employee incentive stock options. However, The Company's
principle means of funding its operations in 1999 were draws on its bank line of
credit, which totaled $1,150,000. At December 31, 1999, the balance was
$1,300,000.
These draws consumed most of the Company's borrowing capacity under the formulas
of its initial financing package with Firstar. Consequently, in September 1999,
the Company renegotiated its financing agreement with Firstar to increase the
maximum amount available on a revolving basis through September 2000 to
$2,000,000, and to include the Company's inventory as part of the borrowing base
calculation, in addition to its accounts receivable, thereby significantly
increasing the Company's borrowing capacity. The line of credit and the $300,000
-18-
<PAGE> 22
term loan are secured by a security interest in substantially all of the
Company's assets and by the collateral assignment of $1,000,000 of coverage of a
$2,000,000 life insurance policy on the life of John Bair. As of December 31,
1999, the Company had approximately $575,000 of unused availability on the line
of credit.
As the Company continues to grow, it will need to obtain additional working
capital, to support higher levels of accounts receivable and inventory and will
need to fund additional investments in capital equipment. The amount for
additional capital needed by the Company will depend, in part, on the relative
growth of the service and product segments. The Company intends to expand its
service sales at a pace greater than or equal to product sales. Service sales
are significantly less capital intensive than product sales, which require a
much greater investment in inventory.
In February 2000 the Company entered into a new loan agreement with Key Bank, to
refinance its loan with Firstar. The agreement provides for a line of credit up
to $2.5 million, a $400,000 three-year term loan, both at a variable interest
rate of prime minus 0.25%, and a $250,000 lease line of credit. Differences
between the new loan agreement and the previous agreement will result in
significantly expanded borrowing capacity for the Company. The new term loan
will not reduce the borrowing availability of the line of credit, as was the
case in the old agreement, and amounts owed to Sun Microsystems will not be
deducted from any amounts owed from Sun, in the calculation of the borrowing
availability.
The Company believes that if it continues with steady growth, then the new loan
agreement will be sufficient to meet its immediate financing needs. However, the
Company's management believes that it would need to raise additional debt and/or
equity capital in order to fund larger product sales opportunities that may
arise. The Company is currently investigating several alternatives. One
alternative is specific bank financing for customer sales projects, and for
fixed asset acquisitions. The Company is pursuing expanded credit terms from its
suppliers for specific projects. For the longer term the Company will consider
additional debt or equity financing.
YEAR 2000 IMPACT ON COMPUTER RESOURCES
The Company did not experience any substantial difficulty relating to the
arrival of the year 2000.
-19-
<PAGE> 23
ITEM 7. FINANCIAL STATEMENTS.
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
FINANCIAL REPORT
DECEMBER 31, 1999 AND 1998
<PAGE> 24
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2-3
Statements of Income 4
Statements of Changes in Stockholders' Equity 5
Statement of Cash Flows 6-7
Notes to Financial Statements 8-21
<PAGE> 25
To the Board of Directors
Pinnacle Data Systems, Inc. (dba PDSi)
Columbus, Ohio
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying balance sheets of Pinnacle Data
Systems, Inc. (dba PDSi) as of December 31, 1999 and 1998, and the related
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Pinnacle Data
Systems, Inc. (dba PDSi) as of December 31, 1999 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Hausser + Taylor LLP
Columbus, Ohio
March 10, 2000
<PAGE> 26
<TABLE>
<CAPTION>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
BALANCE SHEETS
December 31, 1999 and 1998
1999 1998
---- ----
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 35,296 $ 35,101
Accounts receivable, net of allowance for doubtful
accounts of $10,000 and $9,000, respectively 2,470,081 1,469,674
Inventory (Note 1) 2,677,281 1,427,792
Other prepaid expenses 135,039 115,017
Deferred income taxes (Note 8) 132,000 97,675
--------------- ---------------
5,449,697 3,145,259
--------------- ---------------
PROPERTY AND EQUIPMENT (Notes 1 and 6)
Land - 13,230
Building and improvements - 522,179
Leasehold improvements 59,481 -
Furniture and fixtures 221,303 117,396
Computer equipment 1,069,388 675,414
Shop equipment 283,125 265,366
Vehicle 21,846 21,846
--------------- ---------------
1,655,143 1,615,431
Less accumulated depreciation 798,925 556,013
--------------- ---------------
856,218 1,059,418
--------------- ---------------
OTHER ASSETS
Deposits 18,112 -
Product design costs, less accumulated amortization
of $13,525 and $12,825, respectively (Note 2) - 700
--------------- ---------------
18,112 700
--------------- ---------------
$ 6,324,027 $ 4,205,377
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
BALANCE SHEETS
December 31, 1999 and 1998
--------------------------
1999 1998
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
<S> <C> <C>
Line of credit (Note 3) $ 1,300,000 $ 150,000
Current portion of long-term debt (Note 4) 64,521 79,148
Current portion of capital lease obligation - 20,635
Accounts payable 1,779,216 1,054,942
Accrued expenses:
Wages and payroll taxes 204,420 105,738
Vacation 61,733 33,197
Profit sharing plan (Note 7) 48,625 21,865
Property taxes - 4,539
Income taxes 190,221 25,401
Other 55,292 37,760
Unearned service revenue 61,253 45,130
--------------- ---------------
3,765,281 1,578,355
--------------- ---------------
LONG-TERM LIABILITIES
Long-term debt, less current portion (Note 4) 130,558 586,500
Deferred income taxes (Note 8) 14,000 21,000
--------------- ---------------
144,558 607,500
--------------- ---------------
3,909,839 2,185,855
--------------- ---------------
STOCKHOLDERS' EQUITY (Note 5)
Common stock; no par value; 10,000,000 shares authorized;
2,437,402 and 2,408,402 shares issued
and outstanding, respectively 1,615,638 1,572,138
Additional paid-in capital 214,506 214,506
Retained earnings 584,044 232,878
--------------- ---------------
2,414,188 2,019,522
--------------- ---------------
$ 6,324,027 $ 4,205,377
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF INCOME
Years Ended December 31, 1999 and 1998
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
SALES
Service sales $ 3,044,099 $ 2,721,388
Product sales 9,036,646 6,141,722
Other sales 121,956 169,222
--------------- ---------------
12,202,701 9,032,332
--------------- ---------------
COST OF SALES
Service sales 1,702,240 1,936,882
Product sales 7,225,533 5,017,652
Other sales 153,879 237,700
--------------- ---------------
9,081,652 7,192,234
--------------- ---------------
GROSS PROFIT 3,121,049 1,840,098
--------------- ---------------
OPERATING EXPENSES
Selling, general and administrative 2,555,657 1,751,213
--------------- ---------------
INCOME FROM OPERATIONS 565,392 88,885
OTHER INCOME (EXPENSE)
Gain on sale of building 85,922 -
Interest expense (92,473) (83,552)
--------------- ---------------
(6,551) (83,552)
--------------- ---------------
INCOME BEFORE INCOME TAXES 558,841 5,333
INCOME TAXES (Note 8) 207,675 4,745
=============== ===============
NET INCOME $ 351,166 $ 588
=============== ===============
BASIC EARNINGS PER COMMON SHARE (Note 9) $ 0.15 $ -
=============== ===============
DILUTED EARNINGS PER COMMON SHARE (Note 9) $ 0.14 $ -
=============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
--------------------------------------
Common Stock
---------------------------- Total
Outstanding Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
--------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE - December 31, 1997 2,389,402 $1,559,200 $ 214,506 $ 232,290 $2,005,996
Issuance of common stock (Note 10) 19,000 12,938 -- -- 12,938
Net income -- -- -- 588 588
--------- --------- ------- ------- ---------
BALANCE - December 31, 1998 2,408,402 1,572,138 214,506 232,878 2,019,522
Options Exercised 29,000 43,500 -- -- 43,500
Net income -- -- -- 351,166 351,166
--------- --------- ------- ------- ---------
BALANCE - December 31, 1999 2,437,402 $1,615,638 $ 214,506 $ 584,044 $2,414,188
========= ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 30
<TABLE>
<CAPTION>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 351,166 $ 588
============= =============
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization 329,844 268,129
Provision for doubtful accounts 1,000 (1,000)
Inventory reserves (1,906) 90,921
Provision for deferred taxes (41,325) (41,255)
Gain on sale of property and equipment (85,922) -
(Increase) decrease in assets:
Accounts receivable (1,001,407) (459,867)
Inventory (1,392,474) 150,513
Prepaid expenses and other assets (38,134) (41,262)
Increase (decrease) in liabilities:
Accounts payable 724,274 73,056
Accrued expenses and taxes 331,791 (117,844)
Unearned revenues 16,123 14,399
------------- -------------
Total adjustments (1,158,136) (64,210)
------------- -------------
Net cash used in operating activities (806,970) (63,622)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (444,293) (168,664)
Proceeds from sale of property and equipment 147,615 -
------------- -------------
Net cash used in investing activities (296,678) (168,664)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 1,150,000 321,915
Principal payments on long-term debt (69,022) (66,457)
Principal payments on capital lease obligation (20,635) (17,158)
Net proceeds from sale of stock 43,500 12,938
------------- -------------
Net cash provided by financing activities 1,103,843 251,238
------------- -------------
INCREASE IN CASH 195 18,952
CASH - Beginning of year 35,101 16,149
------------- -------------
CASH - End of year $ 35,296 $ 35,101
============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1999 and 1998
--------------------------------------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Interest paid $ 92,770 $ 85,358
=============== ===============
Income taxes paid, net of refunds $ 84,180 $ 118,261
=============== ===============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING TRANSACTIONS
In May 1999, the Company sold its land, building and improvements. Of the
proceeds, $401,547 was used to pay off the remaining mortgage balance.
During 1999, the Company capitalized $144,891 of inventory as computer
equipment.
During 1998, 19,000 shares of common stock were issued for advisory
services of $12,938.
During 1998, the Company capitalized $75,413 of inventory as computer
equipment. Also, computer equipment with a net book value of $14,454 was
transferred to saleable inventory.
During 1998, the Company refinanced mortgage and long-term debt totaling
$540,585 with a $300,000 term note and line of credit draws of $240,585.
Later in 1998, $412,500 of outstanding line of credit was refinanced via
term debt.
The accompanying notes are an integral part of these financial statements.
<PAGE> 32
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Business - Pinnacle Data Systems, Inc. (dba PDSi) (the
Company) is an independent provider of component-level depot
repair services for electronic equipment such as computers,
peripherals and printed circuit board assemblies. The Company's
repair services are focused on UNIX/RISC workstations for
original equipment manufacturers (OEM's). The Company also
designs and manufactures custom printed circuit boards and
provides custom integration of standard computing equipment for
OEM's.
B. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
C. Concentration of Credit Risk - Financial instruments, which
potentially subjects the Company to a concentration of credit
risk principally consist of accounts receivable. The Company
grants credit to its customers, which are varied in terms of
size, geographic location and financial strength. Customer
balances are continually monitored to minimize the risk of loss.
For 1999, the Company had three customers that generated revenues
of approximately $3,486,000, $1,285,000, and $2,006,000 or 29%,
11%, and 16%, respectively, of total revenue. In the Statement of
Income, approximately $2,348,000 is included in service sales and
$4,429,000 is included in product sales. In addition, these
customers represented 19%, 18%, and 20% of accounts receivable at
December 31, 1999.
For 1998, the Company had three customers that generated revenues
of approximately $1,933,000, $1,978,000, and $1,063,000 or 21%,
22%, and 12%, respectively, of total revenue. In the Statement of
Income, approximately $1,839,000 is included in service sales and
$3,135,000 is included in product sales. In addition, these
customers represented 5%, 37%, and 20% of accounts receivable at
December 31, 1998.
D. Revenue Recognition - Revenue from product sales is recognized
upon shipment to customers. Revenue from service sales is
generally recognized as the service is provided which consists
of: (i) repairing products produced by third parties, (ii)
earning a fee by exchanging with a customer a replacement
component or part for a defective component or part; and (iii)
servicing contracts to certain customers generally for six to
twelve months; for which, revenue is deferred and recognized in
income on a straight-line basis over the contract period.
<PAGE> 33
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Inventories - Inventories are valued at average cost, not in
excess of market.
Inventory at December 31, 1999 and 1998 was comprised of the
following:
1999 1998
---- ----
Component parts(raw materials) $ 1,880,742 $ 594,062
Work-in-progress 368,122 220,297
Finished goods 428,417 613,433
----------- -----------
$ 2,677,281 $ 1,427,792
The carrying values of component parts and finished goods
represent management's estimate of their net realizable value.
Such value is based on forecasts of repair/trade-in activity in
the ensuing years. Such forecasts are based on historical
information, known contracts, and management's expertise in
computer hardware life cycles. The computer hardware industry is
characterized by rapid technological advancement and change.
Should demand for repair/trade-in hardware prove to be
significantly less than anticipated, the ultimate realizable
value of such products could be substantially less than the
amount shown in the balance sheet
F. Statement of Cash Flows - For purposes of the statement of cash
flows, the Company considers all short-term instruments purchased
with a maturity of three months or less to be cash equivalents.
There were no cash equivalents at December 31, 1999 or 1998.
G. Property and Equipment - Property and equipment are recorded at
cost. Depreciation is provided on the straight-line method for
financial reporting purposes over the estimated useful lives of
the respective assets. Expenditures for maintenance and repairs
are charged to operations as incurred, while expenditures for
additions and improvements are capitalized. The vehicle is
depreciated over 3 years. Furniture, fixtures, and equipment are
depreciated over useful lives of 5 and 7 years. The building is
depreciated over a useful life of 40 years, while building
improvements are depreciated over 10 years. Leasehold
improvements are being amortized over 10 years. Depreciation
expense amounted to $329,144 and $267,429 for the years ended
December 31, 1999 and 1998, respectively.
H. Advertising - All of the Company's advertising costs are of the
nondirect-response type. The Company expenses all advertising
costs as incurred or at the time the advertising takes place.
Total advertising costs incurred during the years ended December
31, 1999 and 1998 were $1,345 and $7,930, respectively.
I. Life Insurance - The Company has purchased, and is the
beneficiary, of three term life insurance policies on key
employees of the Company. The total amount of coverage at
December 31, 1999 and 1998 was $3,250,000. Subsequent to December
31, 1998, in conjunction with refinancing of long-term debt,
$1,000,000 of the coverage was assigned to a new lender as
discussed in Notes 3 and 4.
<PAGE> 34
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. Stock-Based Compensation - The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" in the year ended December 31, 1996.
This standard encourages the adoption of the fair value-based
method of accounting for employee stock options or similar equity
instruments, but continues to allow the Company to measure
compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the fair value-based method,
compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method,
compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date
over the amount the employee must pay to acquire the stock. The
Company intends to continue the use of the intrinsic value-based
method.
As a result, adoption of this standard will not have any effect
to the Company's financial statements other than to require
disclosure of the pro forma effect on net income of using the
fair value-based method of accounting. However, due to the
Company's stock price at December 31, 1998 being below the strike
price of all outstanding options, management deems it unlikely
that the options will be exercised. At December 31, 1999, as a
result of improved performance of the Company's stock price,
management now deems it likely all outstanding options will be
exercised. Accordingly, the Company has made the disclosures
required by SFAS 123 as of December 31, 1999 and for the year
then ended. (see Note 5).
K. Reclassifications - Certain 1998 amounts have been reclassified
to conform to the 1999 presentation.
NOTE 2. INTANGIBLE ASSETS
Intangible assets are summarized as follows:
1999 1998
---- ----
Product design costs $13,525 $13,525
Less accumulated amortization 13,525 12,825
------- -------
$ -- $ 700
======= =======
Product design costs, incurred in the design of custom circuit
boards to be sold in current and future years, are being
amortized using the straight-line method over five years.
Amortization expense charged to operations during the years ended
December 31, 1999 and 1998 amounted to $700 and $700,
respectively.
<PAGE> 35
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 3. SHORT-TERM DEBT
In January 1998, the Company entered into an agreement to
establish a $1,500,000 revolving line of credit that matured
on June 30, 1999 and carries an interest rate of prime (8.50%
and 7.75% at December 31, 1999 and 1998, respectively). The
amount available under the line of credit is subject to a
borrowing base as outlined in the agreement. The line is
collateralized by substantially all assets of the Company and
is subject to various covenants described further in Note 4.
In September 1999, the line of credit was extended through
September 2000, with an increase in the maximum borrowing
amount to $2,000,000.
In February 2000, the Company entered into an agreement with a
new financial institution to establish a $2,500,000 line of
credit, with monthly interest payments at prime minus .25%.
The line is payable on demand and is collateralized by a
"Blanket Lien" on all assets of the Company.
<TABLE>
<CAPTION>
<S> <C> <C>
NOTE 4. LONG-TERM DEBT
Following is a summary of long-term debt at December 31:
3.9% vehicle loan, payable in monthly
installments of $401, including interest
through January 2002 $ 10,079 $ 14,150
Prime rate (8.5% and 7.75% at December
31, 1999 and 1998, respectively) note payable
in monthly installments of $5,000 plus interest
through January 2003; collateralized by
substantially all assets of the Company 185,000 245,000
8.35% mortgage note payable in monthly
installments of $4,054 including interest
through July 2003; collateralized by the
Company's land, building and other personal
property. The real estate was sold and the
mortgage was paid off in May, 1999 -- 406,498
-------- --------
Total long-term debt 195,079 665,648
Less current portion 64,521 79,148
-------- --------
$130,558 $586,500
======== ========
</TABLE>
<PAGE> 36
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 4. LONG-TERM DEBT (CONTINUED)
The line of credit (Note 3) and long-term notes above are
subject to a loan and security agreement which contains
numerous covenants which require the Company to maintain
specific financial performance ratios, restrict payment of
dividends, and report various financial information to the
lender on a monthly basis. At December 31, 1999 and 1998, the
Company was in compliance with these covenants.
Aggregate maturities on long-term debt for the five years
ending after December 31, 1999 is as follows:
2000 $ 64,521
2001 64,701
2002 60,857
2003 5,000
2004 -
-----------------
$ 195,079
=================
In February 2000, the Company refinanced existing long-term
debt at a new financial institution. The company borrowed
$400,000 payable over three years, in equal monthly payments
of $12,627, including interest at prime minus .25%, and is
collateralized by a "Blanket Lien" on all assets of the
Company.
NOTE 5. STOCKHOLDERS' EQUITY
All share and per share amounts have been adjusted to reflect
the 2-for-1 stock split (see Note 13)
A. Common Stock - In April 1996, the Company completed an
offering of 500,000 shares of its no par value common stock at
$2.50 per share. Also, as part of the same offering, 200,000
shares of common stock were issued in exchange for the
exercise of previously issued warrants to purchase shares at
$1.25 per share.
B. Additional Paid-In Capital - On May 2, 1996, the Board of
Directors passed a resolution authorizing the transfer of
undistributed earnings accumulated while an S corporation of
$214,506 to additional paid-in capital. This transaction was
recorded in the Company's financial statements as of December
31, 1995.
C. Treasury Stock - In August 1996, an agreement was executed
whereby 8,800 shares of common stock were returned to the
Company at the then fair market value of $3.13 per share in
exchange for permitting a stockholder to exercise 20,000
options at $1.38 per share in advance of the stated exercise
date of December 20, 1997. During 1997, the Company retired
all 8,800 shares of treasury stock.
<PAGE> 37
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
D. Stock Options - The Company adopted the Pinnacle Data Systems,
Inc., 1995 Stock Option Plan (the Plan) on December 19, 1995.
Any employee who has been granted a discretionary option may
purchase Company common stock over a ten-year period, at the
fair market value at time of grant. (If the grantee owns more
than 10% of the Company's stock at the time of the grant, the
purchase price shall be at least 110% of the fair market value
and the options expire five years from the date of grant.) The
aggregate number of common shares of the Company, which could
have been granted under the plan, was 600,000 shares. All
incentive options available under the plan shall be granted by
December 19, 2005. On February 16, 2000 the Board of Directors
amended the plan, subject to shareholder approval, to increase
the number of shares reserved for issuance to 1,200,000 common
shares.
<TABLE>
<CAPTION>
Stock Option Plan 1999 1998
- ----------------- ---- ----
Weighted Weighted
Employee Stock Option Average Average
Agreements Number Exercise Price Number Exercise Price
- ---------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 465,900 $ 1.55 276,000 $ 2.94
Granted 148,900 $ 2.09 368,500 $ 1.56
Exercised 29,000 $ 1.50 None
Canceled 13,000 $ 1.54 178,600 $ 2.84
------- ---------- ------- ----------
Outstanding, end of year 572,800 $ 1.69 465,900 $ 1.55
======= ========== ======= ==========
Exercise price range of options
outstanding $1.25 to $2.75 $1.25 to $3.30
Director Stock Option Agreements
- --------------------------------
Outstanding, beginning of year 59,000 $ 1.84 59,000 $ 1.84
Granted 26,000 $ 2.06 None
Exercised None None
Canceled 10,000 $ 3.50 None
------- ---------- ------- ----------
Outstanding, end of year 75,000 $ 1.70 59,000 $ 1.84
======= ========== ======= ==========
Exercise price range of options
outstanding $1.50 to $3.50 $1.50 to $3.50
</TABLE>
On June 23, 1999, the Company cancelled the 10,000 Director
Stock Options at $3.50 and reissued the 10,000 options at $2.07.
<PAGE> 38
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
As noted in Note 1.J., the Company is continuing to utilize
the intrinsic value-based method for accounting for employee
stock options or similar equity instruments; therefore, the
Company has not recorded any compensation cost in the
Statement of Operations for stock-based employee compensation
awards.
The options outstanding at December 31, 1999 are exercisable
through periods ranging from May 2006 through September 2009.
On July 22, 1998, the Board granted options for 74,000 shares
to an employee of the Company at an option price of $1.75 per
share. The options were exercisable for a period commencing on
the grant date and continuing for two years. At December 31,
1998, based on the average market price, either being below or
approximating the option price, management deemed it unlikely
that these options would be exercised during the two-year
period. On December 15, 1999, the Board of Directors extended
the exercise date for an additional year. Therefore, the fair
value of these options was estimated at the new date using a
Black-Scholes option pricing model and included in proforma
disclosures as required by SFAS 123.
Pro forma information regarding net income and earnings per
share is required by SFAS 123, and has been determined as if
the Company had accounted for its employee stock options under
the fair value method of that Statement. At December 31, 1998,
the Company's stock price was below the exercise price for the
options. Therefore, management deemed it unlikely that these
options would be exercised over this period and the disclosure
required by SFAS 123 is not applicable. At December 31, 1999,
the Company's stock price was above the exercise price of the
options. Therefore, the fair value for these options were
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions
for December 31, 1999.
Risk-free interest rate 6%
Dividend yield 0%
Volatility factor 56.39%
Weighted average expected life in years 7
For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options'
vesting period. The Company's pro forma income and earnings
per share are as follows for the year ended December 31, 1999:
<PAGE> 39
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
Net income - as reported $ 351,166
Net income - pro forma $ 328,127
Basic earnings per common share-as reported $ .15
Basic earnings per common share-pro forma $ .14
Diluted earnings per common share - as reported $ .14
Diluted earnings per common share - pro forma $ .13
Weighted average fair value of options granted
during the year $ 2.09
E. Stock Warrants - As part of the April 1996 offering circular,
the underwriter was granted warrants to purchase 50,000 shares
of common stock at $2.75 per share. The warrants became
exercisable in May 1997 and expire in April 2001.
NOTE 6. LEASES
Operating
---------
The Company leases office equipment under operating leases
expiring in 1999 and 2002. Additionally, commencing in 1999,
the Company entered into a lease for its new operating
facility that has a term through 2009.
Minimum future lease payments under operating leases as of
December 31, 1999 are as follows:
2000 $ 388,793
2001 465,440
2002 488,890
2003 516,390
2004 547,898
Thereafter 2,708,357
-------------
$ 5,115,768
==============
Total lease payments charged to operations for the years ended
December 31, 1999 and 1998 amounted to $140,200 and $14,800,
respectively.
Capital
-------
The Company also leased certain diagnostic and schematic
equipment under a capital leases that expired in September,
1999. The equipment under capital lease is included in the
accompanying balance sheet under the following captions:
<PAGE> 40
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 6. LEASES (CONTINUED)
1999 1998
Shop equipment $57,000 $57,000
Less accumulated depreciation 39,900 28,500
------- -------
Net book value $17,100 $28,500
======= =======
These assets are depreciated over five years using the
straight-line method.
NOTE 7. PROFIT SHARING AND 401(K) SAVINGS PLAN
The Company maintains a qualified cash or deferred
compensation plan under section 401(k) of the Internal Revenue
Code. The plan covers all employees age 21 or over with one
year of service. Under the plan, employees may elect to defer
from 1% to 12% of their salary, subject to Internal Revenue
Code limits.
The Company, at its discretion, may match 100% of employee
contributions up to 6% of wages deferred with a maximum
contribution of $3,000 per employee. Matching contribution
expense of $48,625 and $21,865 has been accrued for 1999 and
1998, respectively.
NOTE 8. INCOME TAXES
Deferred income taxes arise from temporary differences
resulting from income and expense items reported for financial
accounting and tax reporting purposes in different periods.
Deferred taxes are classified as current or long-term,
depending on the classification of the assets and liabilities
to which they relate. Deferred taxes arising from temporary
differences that are not related to an asset or liability are
classified as current or long-term depending on the periods in
which the temporary differences are expected to reverse.
The components of the deferred tax asset (liability) consisted
of the following at December 31:
1999 1998
---- ----
Current:
Federal $ 122,000 $ 92,800
State 7,000 --
City 3,000 4,875
--------- ---------
$ 132,000 $ 97,675
========= =========
Noncurrent:
Federal $ (13,000) $ (20,000)
State (700) --
City (300) (1,000)
--------- ---------
$ (14,000) $ (21,000)
========= =========
<PAGE> 41
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES (CONTINUED)
Net deferred tax assets in the accompanying balance sheets
include the following components:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax liabilities arising from
depreciation and state tax benefit
temporary differences $ (14,000) $ (21,000)
Deferred tax assets arising from allowance
for doubtful accounts, inventory reserves
and vacation and bonus accrual temporary
differences 132,000 97,675
--------- ---------
$ 118,000 $ 76,675
========= =========
</TABLE>
The components of the tax expense (benefit) for the year ended
December 31, were as follows:
1999 1998
---- ----
Current:
Federal $ 225,000 $ 43,000
State 11,000 --
City 13,000 3,000
--------- ---------
249,000 46,000
--------- ---------
Deferred:
Federal (36,200) (38,400)
State (3,400) --
City (1,725) (2,855)
--------- ---------
(41,325) (41,255)
--------- ---------
Total $ 207,675 $ 4,745
========= =========
<PAGE> 42
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES (CONTINUED)
A reconciliation of the total provision for income taxes with
amounts determined by applying the statutory U.S. federal
income tax rate to income tax provision for the year ended
December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income tax provison at statutory rate $190,000 $ 1,745
Add:
Tax effect of permanent differences 4,800 4,000
State income taxes, net of federal
income tax provision 8,100 --
Other, net 4,775 (1,000)
-------- --------
Total income tax provision $207,675 $ 4,745
======== ========
</TABLE>
NOTE 9. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Earnings per common and common equivalent share were computed
by dividing net income by the weighted average number of
shares of common stock outstanding during the year. At
December 31, 1999 and 1998, the number of common shares was
increased by the number of shares issuable on the exercise of
outstanding stock options and warrants when the market price
of the common stock exceeds the exercise price of the options
and warrants. This increase in the number of common shares was
reduced by the number of common shares that are assumed to
have been purchased with the proceeds from the exercise of the
options; those purchases were assumed to have been made at the
average price of the common stock during that part of the year
when the market price of the common stock exceeded the
exercise price of the options. All share and per share amounts
have been adjusted to reflect the 2-for-1 stock split (see
Note 13)
The following data show the amounts used in computing earnings
per share (EPS) and the effect on income and the weighted
average number of shares of dilutive potential common stock.
<PAGE> 43
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 9. EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE (CONTINUED)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income available to common stockholders
used in basic EPS and diluted EPS $ 351,166 $ 588
========== ==========
Weighted average number of common shares
used in basic EPS 2,430,069 2,398,902
Effect of dilutive securities:
Stock options and warrants 124,063 --
---------- ----------
Weighted number of common shares and
dilutive potential common stock used in
diluted EPS 2,554,132 2,398,902
========== ==========
</TABLE>
Options and warrants on 2,000 and 574,900 shares,
respectively, of common stock were not included in computing
diluted EPS for the years ended December 31, 1999 and 1998,
respectively, because their effects were antidilutive.
NOTE 10. COMMITMENT RELATED TO 1996 PUBLIC OFFERING
On October 13, 1995, the Company entered into an agreement
with an advisor to assist the Company in its efforts to fund
the growth of its business. A provision in the agreement
required the Company to retain the advisor, to perform future
services, for two additional years since the Company received
at least one million dollars in equity capital in 1996. In
exchange, the advisor would be paid by the issuance of 38,000
shares of common stock of the Company in two annual
installments of 19,000 shares. The first installment was made
in 1997 and the second installment was made in 1998. The
common shares issued in 1997 and 1998 were accounted for at
the fair market value of the consulting services provided
which amounted to $3,750 and $12,938, which represented the
accumulated unpaid amounts at the date of the issuance of the
common stock. These expenses were recorded in the Statements
of Income for 1997 and 1998 as the services were performed
which amounted to $16,050 and $638, respectively. Previously,
the issuance of these shares had been reported as a reduction
of the equity capital raised in 1996. The effect of this
adjustment is to reduce net income and basic earnings and
diluted earnings per share as follows:
<PAGE> 44
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 10. COMMITMENT RELATED TO 1996 PUBLIC OFFERING (CONTINUED)
<TABLE>
<CAPTION>
Basic Diluted
Earnings Earnings
Net (Loss) Per (Loss) Per
Income Common Common
(Loss) Share Share
--------- --------- ---------
<S> <C> <C> <C>
Year Ended December 31, 1997
As previously reported $ 166,869 $ 0.07 $ 0.07
Adjustment (9,630) -- --
--------- --------- ---------
As restated $ 157,239 $ 0.07 $ 0.07
========= ========= =========
Year Ended December 31, 1998
As previously reported $ 971 $ -- $ --
Adjustment (383) -- --
--------- --------- ---------
As restated $ 588 $ -- $ --
========= ========= =========
</TABLE>
The reduction of $9,630 for the year ended December 31, 1997
has been included in the retained earnings amount of $232,290
at December 31, 1997 that is presented in the Statement of
Changes in Stockholders' Equity.
NOTE 11. OPERATING SEGMENTS
The Company's reportable segments include Service Sales and
Product Sales which are explained in Item 1 of this Form
10KSB, including a discussion of principle markets and
distribution. The other income reflected below is composed of
consulting services and freight charged to customers on
shipments.
The Company evaluates performance based on operating earnings
of the reportable segments.
Segment information for the years ended December 31, 1999 and
1998, was as follows:
<PAGE> 45
PINNACLE DATA SYSTEMS, INC.
(DBA PDSi)
NOTES TO FINANCIAL STATEMENTS
NOTE 11. OPERATING SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales $3,044,099 $9,036,646 $ 121,956 $12,202,701
Gross profit 1,341,859 1,811,113 (31,923) 3,121,049
Operating earnings 886,539 529,836 (850,983) 565,392
Depreciation and
amortization 148,370 49,501 131,973 329,844
Total assets 1,721,295 4,363,504 239,228 6,324,027
Capital expenditures 96,346 200,547 147,400 444,293
1998
--------------------------------------------------------------
Service Product
Sales Sales Other Total
----- ----- ----- -----
Sales $2,721,388 $6,141,722 $ 169,222 $ 9,032,332
Gross profit 784,506 1,124,070 (68,478) 1,840,098
Operating earnings 254,483 461,987 (627,585) 88,885
Depreciation and
amortization 135,780 47,110 85,239 268,129
Total assets 1,773,363 2,194,267 237,747 4,205,377
Capital expenditures 124,405 12,728 31,531 168,664
</TABLE>
NOTE 12. RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations when
incurred and are included in operating expenses. The amounts
charged for the years ended December 31, 1999 and 1998 were
$522,143 and $191,557, respectively.
NOTE 13. SUBSEQUENT EVENT
On March 7, 2000, the Board of Directors declared a 2-for-1
stock split in the form of a 100 percent stock dividend,
payable on March 31, 2000 to shareholders of record on March
14, 2000.
The effect of the stock split has been recognized
retroactively in the stockholders' equity accounts on the
balance sheet as of December 31, 1999 and 1998, and in all
share and per share data in the accompanying financial
statements and notes to the financial statements.
<PAGE> 46
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
-20-
<PAGE> 47
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors, executive officers and key personnel of the Company are as
follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- --------
<S> <C> <C> <C>
John D. Bair 33 Chairman, President, Chief 1989
Executive Officer and Director
C. Robert Hahn 47 Chief Operating Officer, Vice 1995
President and Director
Thomas J. Carr 45 Treasurer, Chief Financial Officer 1996
and Director
John C. Kniley 51 Vice President of Sales and
Marketing
Michael L. Antill 38 Vice President of Engineering
Joy Bair 29 Secretary
Thomas M. O'Leary 55 Director 1996
Robert V.R. Ostrander 53 Director 1997
</TABLE>
John D. Bair, one of the founders of the Company, currently serves as Chief
Executive Officer and President of the Company. He has served as a director
since inception, as the Chairman of the Board and Chief Executive Officer since
May 1996, and as President since 1998. He served as Secretary from inception
until October 1998. Mr. Bair holds a Bachelor of Science Degree in Computer and
Information Science from the College of Engineering from the Ohio State
University.
C. Robert Hahn is an executive officer and has served as Chief Operating Officer
and Vice President of the Company since June 1998. He served as President of the
Company from June 1996 to June 1998, and as Vice President of Sales and
Marketing from October 1994 to June 1996. He has served as a director since
December 1995. Mr. Hahn previously worked for six years as general manager of
Cranel, Inc., a distributor of computer peripheral products. Mr. Hahn holds a
Bachelor Degree in Business Administration and a Master of Business
-21-
<PAGE> 48
Administration degree, both from Ohio University, and has been certified as a
Certified Production and Inventory Manager by the American Production and
Inventory Control Society.
Thomas J. Carr is an executive officer and has served as Treasurer and Chief
Financial Officer and as a director of the Company since May 1996. He joined the
Company as Controller in September 1995. Previously, Mr. Carr was President for
three years of Celtic Resources, a business consulting firm. Mr. Carr taught
general computer courses at Columbus State Community College for two years. He
served as Controller and Director of Financial Planning for six years at
CompuServe Incorporated of Columbus, Ohio. Mr. Carr holds a Bachelor Degree in
Accounting and a Master of Business Administration degree, both from The Ohio
State University.
John C. "Skip" Kniley is an executive officer and has served as Vice President
of Sales and Marketing since March 1999. Mr. Kniley has 27 years of experience
in various sales and marketing positions, the most recent five years with the
Bucci-Augustyn group of companies, a medical technology firm, as Director of
Sales and Marketing. Mr. Kniley holds a Bachelor of Science in Marketing from
the University of Connecticut.
Michael L. Antill is an executive officer and has served as Vice President of
Engineering since August 1999. Mr. Antill has 17 years experience in various
engineering and engineering management positions, including the last 11 years as
Manager of Electronic Systems at Chiron Diagnostics Corp., a medical technology
company. Mr. Antill holds a Bachelor of Electrical Engineering Technology from
The Ohio Institute of Technology and a Masters of Electrical Engineering degree
from Cleveland State University.
Joy S. Bair has served as Secretary of the Company since October 1998. From
October 1997 until October 1998 she served as Assistant Secretary. Ms. Bair was
previously employed with the Company from June 1990 until April 1993, serving in
several positions including Accounting Manager. Ms. Bair holds a Bachelor of
Science Degree in Actuarial Science and a Master of Education Degree in
Mathematics, both from The Ohio State University.
Thomas M. O'Leary has served as a director of the Company since September 1996.
Mr. O'Leary retired from ATT/Lucent after 30 years of service in 1996. While
employed by ATT/Lucent, Mr. O'Leary acquired extensive experience in the areas
of management of manufacturing operations, engineering, product development,
project management, product repair and support and sales. He is currently on the
school board of the Worthington City School system and served as President in
1998. He is also a board member of Liberty Communications Services, Inc. in
Gahanna, Ohio. Mr. O'Leary now serves as a private consultant for a number of
local companies in areas related to his accumulated experience.
Robert V.R. Ostrander has served as a director of the Company since July 1997.
Mr. Ostrander is currently serving as Chairman of Manex Financial Management,
Inc. and President of Manex Risk Management, Inc., Manex Management Services,
Inc., Manex Advisors, Inc. and Omni Financial Securities, Inc., which positions
he has held for more than five years. He is a Certified Financial Planner, a
licensed securities principal, and is licensed to sell several forms of
-22-
<PAGE> 49
insurance by the State of Ohio. He was the founding president of The Central
Ohio Chapter of Society for Certified Financial Planners. He is also the author
of Omni's Business Navigator, and has been involved in numerous business
start-ups.
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.
-23-
<PAGE> 50
ITEM 10. 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 $100,000 in the most recent completed fiscal year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION
(*) (***)
SECURITIES ALL
UNDER- OTHER
LYING COMPEN-
NAME AND FISCAL SALARY BONUS OPTIONS/ SATION
POSITIONS YEAR ($) ($) SAR'S ($)
- -----------------------------------------------------------------------------------------------------------------
<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 70,000(**) 3,000
Board of Directors, 1997 100,000 5,181 60,000 3,000
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 1997 120,000 5,181 40,000 3,000
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 will be effective March 31, 2000, as if
the stock split was effective prior to the issuance of the securities.
**In 1998, 60,000 of the options granted to Mr. Bair, and 30,000 of the options
granted to Mr. Hahn were replacement grants for options granted to them in 1997,
which were re-priced to reflect then-current market values.
***Amounts in this column reflect matching contributions made by the Company to
its 401 (k) plan.
................................................................................
The Company has entered into an employment agreement with John D. Bair, its
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, and 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
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<PAGE> 51
September 1, 2000, and provides for an annual salary of $120,000 or such higher
amount as shall be determined by the Board of Directors plus a bonus of 3% of
pre-tax net income, and provides for those benefits generally available to other
employees. If the Company terminates Mr. Hahn's employment without cause, he is
entitled to a severance payment equal to one year's base salary.
OPTION GRANTS IN LAST FISCAL YEAR
The following table indicates information about stock options granted to the
Company's chief executive officer and the other officers named in the summary
compensation table during 1999, adjusted as if the 2-for-1 stock split, which
will be effective March 31, 2000, was effective prior to 1999:
<TABLE>
<CAPTION>
NUMBER PERCENT OF
OF SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE
---- ---------- ----------- ------ ----
<S> <C> <C> <C> <C>
John D. Bair 8,000 shares 5.4% $2.27 2004
C. Robert Hahn 8,000 shares 5.4% $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 officers 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 will
be 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 $30,500/$0
C. Robert Hahn 0 0 58,000/8,000 $31,500/$0
(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.
</TABLE>
-25-
<PAGE> 52
SAVINGS PLAN
The Company has adopted the Pinnacle Data Systems, Inc. 401(k) Savings and
Profit Sharing Plan (the "Savings Plan"). The Savings Plan is a defined
contribution plan (within the meaning of the Employee Retirement Income Security
Act of 1974) and is intended to be a qualified plan under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). Under the
Savings Plan, each participant is eligible to enter into a written salary
reduction agreement with the Company whereby the participant's salary will be
reduced by up to 12%, as elected by the participant, in accordance with the
rules governing cash or deferred arrangements under Section 401(k) of the Code.
The amount deferred by a participant is contributed by the Company to a trust
fund for the Savings Plan and invested by the trustee in accordance with the
investment guidelines established under the Savings Plan. Participants have the
right to direct the trustee to invest such participant's deferred amounts in the
investment funds the administrator directs the trustee to make available for the
Savings Plan. Mr. Bair, Mr. Carr and Mr. Hahn serve as the trustees of the
Savings Plan. Certified Pension Services serves as the administrator of the
Savings Plan, and McDonald & Company serves as investment advisor.
During 1997, the Savings Plan was amended to provide that if the Company is
profitable, the Company will match 100% of employee contributions up to 6% of
wages deferred with a maximum contribution of $3,000 per employee. Contributions
of $48,630, $24,520 and $28,665 have been accrued for 1999, 1998 and 1997,
respectively. The amounts contributed on behalf of Mr. Bair and the other
executive officers are reflected in the "All Other Annual Compensation" column
of the foregoing Summary Compensation Table. While a participant is always
vested in his or her own salary reduction contributions, contributions by the
Company become fully vested only after five years.
Upon retirement or other termination of employment, vested benefits are
disbursed in a single lump sum to the participant. The amounts payable to a
participant will be determined by the amount credited to his bookkeeping account
in the trust fund, including his allocable share of trust fund earnings or
losses.
1995 STOCK OPTION PLAN
On December 19, 1995, the Company adopted the Pinnacle Data Systems, Inc. Stock
Option Plan (the "Plan"). Under the Plan the Company reserved 600,000 common
shares (adjusted to give effect to the 2-for-1 stock split to be effective March
31, 2000) for issuance pursuant to which options may be granted to employees of
the Company or its subsidiaries. On August 12, 1999, the Board of Directors
amended the Plan, subject to shareholder approval, to increase the number of
shares reserved for issuance to 800,000 (adjusted to give effect to the 2-for-1
stock split to be effective March 31, 2000), and on February 16, 2000, the Board
of Directors amended the Plan, subject to shareholder approval, to increase the
number of shares reserved for issuance to 1,200,000 common shares (adjusted to
give effect to the 2-for-1 stock split to be effective March 31, 2000). The
purpose of the Plan is to attract and retain qualified individuals to serve on
behalf of the Company. The Plan is currently administered by the Board of
Directors. Options
-26-
<PAGE> 53
granted under the plan can qualify as incentive stock options under ss.422 of
the Code, or at the option of the directors, be non-qualified options. Directors
of the Company who are not employees of the Company or its subsidiaries are not
eligible to participate in the Plan.
Subject to the requirement that the price per share of any common shares to be
received upon the exercise of any incentive option will not be less than the
fair market value of the common shares at the time the option is granted, the
board or committee administering the Plan has the exclusive authority,
consistent with law and the terms of such Plan, to designate recipients of
options to be granted thereunder and to determine the number and type of options
and the number of common shares subject thereto. See Note 5 of Notes to
Financial Statements.
COMPENSATION OF DIRECTORS
Directors who are officers of the Company receive no separate compensation for
their services as directors. Compensation of the outside directors is determined
by the whole Board after receiving the recommendations of the President.
Currently, outside directors receive a fee of $250.00 for each Board Meeting
attended. In 1996, upon his initial election to the Board of Directors, Mr.
O'Leary received options for 10,000 shares of 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 September 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 September 2009. All share amounts set forth in this paragraph have been
adjusted to give effect to the 2-for-1 stock split, which will be effective
March 31, 2000.
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"). Under the Directors Plan
the Company reserved 250,000 common shares (post March 31, 2000 stock split) for
issuance pursuant to which options may be granted to directors of the Company
who are not employees of the Company or its subsidiaries. The Directors Plan is
subject to shareholder approval within 12 months of the date of its adoption.
The purpose of the 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 Plan is administered by a committee of
the Board consisting of directors who are not eligible to receive options under
the Directors Plan. Options granted under the plan will be non-qualified options
for tax purposes. Subject to the requirement that the price per share of any
common shares to be received upon the exercise of any incentive option will not
be less than the fair market value of the common shares at the time the option
is granted, the board or committee administering the Plan has the exclusive
authority, consistent with law and the terms of such Plan, to designate
recipients of options to be granted thereunder and to determine the number of
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<PAGE> 54
options and the number of common shares subject thereto. As of March 24, 2000,
no options have been granted under the Directors Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 24, 2000, with
respect to the Shares held of record by (a) the Company's chief executive
officer and the three persons serving as its other executive officers during
1999, (b) each of the directors of the Company, (c) all executive officers and
directors as a group, and (d) each shareholder known to the Company to own more
than 5% of the Company's common shares, including Shares subject to outstanding
Options or Warrants that can be exercised within a 60 day period. All share
amounts have been adjusted to give effect to the 2-for-1 stock split which will
be effective March 31, 2000:
<TABLE>
<CAPTION>
NAME AND NUMBER OF PERCENT
ADDRESS OF OWNER SHARES OWNED (1) (2) (3) OF CLASS
---------------- ------------------------ --------
<S> <C> <C>
John D. Bair 724,462 24.4%
6600 Port Road
Groveport, OH 43125
C. Robert Hahn 63,662 2.1%
6600 Port Road
Groveport, OH 43125
Thomas J. Carr 76,062 2.6%
6600 Port Road
Groveport, OH 43125
Thomas M. O'Leary 31,000 1.0%
868 Paisley Place
Worthington, OH 43085
Robert V.R. Ostrander 29,000 1.0%
1585 Bethel Road
Columbus, OH 43220
Executive officers and directors 907,262 30.8%
as a group (6 persons)
</TABLE>
The following table sets forth certain information as of March 24, 2000 (as
adjusted to give effect to the 2-for-1 stock split to be effective March 31,
2000), with respect to the Shares held of record by any other shareholder known
to the Company to own more than 5% of the Company's common shares, including
Shares subject to outstanding Options or Warrants:
-28-
<PAGE> 55
<TABLE>
<S> <C> <C>
David J. Richards 222,640 7.5%
765 North Hamilton Rd.
Columbus, Ohio 43230
- -------------------------
</TABLE>
(1) 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 to be
effective March 31, 2000) which may be acquired by the following persons
upon the exercise of stock options, which are exercisable within the next
60 days:
John D. Bair 70,000 2.4 %
C. Robert Hahn 58,000 1.9 %
Thomas J. Carr 68,000 2.3 %
Thomas M. O'Leary 30,000 1.0 %
Robert V.R. Ostrander 29,500 1.0 %
David J. Richards 75,000 2.5 %
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1998, the Company refinanced three loans aggregating $540,585 in principal
amount. In addition to being collateralized by the Company's land, building,
rents, leases, general business assets and profits thereof, these loans were
guaranteed by two shareholders of the Company, one of whom was John Bair, the
President and principal shareholder of the Company. These guarantees were
released at the time of the refinancing.
On July 22, 1998, the Company entered into an employment agreement with David J.
Richards, an advisor who is a shareholder, but otherwise unrelated to a director
or executive officer, to provide to the Company consulting and advisory services
with respect to the Company's communications with its stockholders and with
members of the financial community. The agreement expired on July 22, 1999. In
exchange for his services, the advisor was granted options to purchase 74,000
(adjusted to give effect to the 2-for-1 stock split to be effective March 31,
2000) shares of common stock at the then market price. On December 15, 1999, the
board of directors extended the agreement with Mr. Richards until July 22, 2001.
-29-
<PAGE> 56
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) LISTING OF EXHIBITS. The following is a listing of Exhibits either
filed with this report or incorporated by reference :
<TABLE>
<CAPTION>
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH THE SEC
------- ---------------------- -----------------------------
<S> <C> <C>
3(a) Amended and restated articles of Registration Statement on Form 10-SB filed with
incorporation the Securities and Exchange Commission on
December 13, 1999.
3(b) Amended and restated code of Registration Statement on Form 10-SB filed with
regulations the Securities and Exchange Commission on
December 13, 1999.
3(c) Amendment to Amended and Restated Contained Herein
Code of Regulations
4 Instruments defining the rights of Registration Statement on Form 10-SB filed with
security holders, including the Securities and Exchange Commission on
indentures December 13, 1999.
10(a) Technology license agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and Sun the Securities and Exchange Commission on
Microsystems, Inc. dated May 12, 1994 December 13, 1999.
10(b) Development and manufacturing Registration Statement on Form 10-SB filed with
license agreement between Pinnacle the Securities and Exchange Commission on
Data Systems, Inc. and Sun December 13, 1999.
Microsystems, Inc. dated October 27,
1997
10(c) Repair services agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and Sun the Securities and Exchange Commission on
Microsystems, Inc. dated March 29, December 13, 1999.
1999
10(d) Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and John the Securities and Exchange Commission on
D. Bair dated October 29, 1997 December 13, 1999.
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH THE SEC
------- ---------------------- -----------------------------
<S> <C> <C>
10(e)* Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and C. the Securities and Exchange Commission on
Robert Hahn dated October 29, 1997 December 13, 1999.
10(f)* Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and the Securities and Exchange Commission on
Thomas J. Carr dated October 29, 1997 December 13, 1999.
10(g)* Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and the Securities and Exchange Commission on
Michael L. Antill dated September December 13, 1999.
20, 1999
10(h)* Standard form Director stock option Registration Statement on Form 10-SB filed with
agreement between Pinnacle Data the Securities and Exchange Commission on
Systems, Inc. and individual members December 13, 1999.
of the Board of Directors
10(i)* Employment agreement and stock Registration Statement on Form 10-SB filed with
option agreement between Pinnacle the Securities and Exchange Commission on
Data Systems, Inc. and David J. December 13, 1999.
Richards dated July 22, 1998
10(j)* Pinnacle Data Systems, Inc. 1995 Registration Statement on Form 10-SB filed with
stock option plan the Securities and Exchange Commission on
December 13, 1999.
10(k)* Amendment No. 1 to Pinnacle Data Contained herein
Systems, Inc. 1995 Stock Option Plan
10(l)* Pinnacle Data Systems, Inc. 2000 Contained herein
Directors Stock Option Plan
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH THE SEC
------- ---------------------- -----------------------------
<S> <C> <C>
10(m) Real estate contract on sale of Registration Statement on Form 10-SB filed with
building, dated March 17, 1999 the Securities and Exchange Commission on
December 13, 1999.
10(n) Lease agreement between Pinnacle Registration Statement on Form 10-SB filed with
Data Systems, Inc. and Duke Realty the Securities and Exchange Commission on
Limited Partnership dated March 9, December 13, 1999.
1999
10(o) First Lease Amendment between Pinnacle Contained herein
Data Systems, Inc. and Duke Realty
Limited Partnership dated January 5, 2000
10(p) Loan and security agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and the Securities and Exchange Commission on
Firstar Bank, N.A. dated September December 13, 1999.
30, 1999
10(q) Business Loan Agreement between Contained herein
Pinnacle Data Systems, Inc. and Key
Bank National Association dated
February 18, 2000.
21 List of Subsidiaries Contained herein
23 Independent Auditor's Consent Contained herein
24 Powers of Attorney Contained herein
27 Financial Data Schedule Contained herein
- ---------
</TABLE>
*Executive Compensation Plans and Arrangements required to be filed
pursuant to Reg. 601(B)(10) of Regulation S-B.
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-B.
-32-
<PAGE> 59
(b) REPORTS ON FORM 8-K
-------------------
No Form 8-K's were filed during the fourth quarter of the Company's
fiscal year ended December 31, 1999.
(c) EXHIBITS
--------
The exhibits in response to this portion of Item 13 are submitted as a
separate section of this report following the signatures.
-33-
<PAGE> 60
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PINNACLE DATA SYSTEMS, INC.
Date : March 28, 2000 By: /s/ John D. Bair
----------------------------
John D. Bair, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John D. Bair Chairman, President, Chief March 28, 2000
- ------------------------------------ Executive Officer and
John D. Bair Director (principal
executive officer)
Thomas J. Carr* Chief Financial Officer, March 28, 2000
- ------------------------------------ Treasurer, and Director
Thomas J. Carr (principal financial and
principal accounting officer)
C. Robert Hahn* Chief Operating Officer, March 28, 2000
- ------------------------------------ Vice President, and
C. Robert Hahn Director
Thomas M. O'Leary* Director March 28, 2000
- ------------------------------------
Thomas M. O'Leary
Robert V.R. Ostrander* Director March 28, 2000
- ------------------------------------
Robert V.R. Ostrander
*The undersigned, by signing his name hereto, does sign this document on behalf
of the person indicated above pursuant to a Power of Attorney duly executed by
such person.
By /s/ John D. Bair March 28, 2000
-------------------------------
John D. Bair,
Attorney-in-Fact
</TABLE>
-34-
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH THE SEC
------- ---------------------- -----------------------------
<S> <C> <C>
3(a) Amended and restated articles of Registration Statement on Form 10-SB filed with
incorporation the Securities and Exchange Commission on
December 13, 1999.
3(b) Amended and restated code of Registration Statement on Form 10-SB filed with
regulations the Securities and Exchange Commission on
December 13, 1999.
3(c) Amendment to Amended and Restated Contained Herein
Code of Regulations
4 Instruments defining the rights of Registration Statement on Form 10-SB filed with
security holders, including the Securities and Exchange Commission on
indentures December 13, 1999.
10(a) Technology license agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and Sun the Securities and Exchange Commission on
Microsystems, Inc. dated May 12, 1994 December 13, 1999.
10(b) Development and manufacturing Registration Statement on Form 10-SB filed with
license agreement between Pinnacle the Securities and Exchange Commission on
Data Systems, Inc. and Sun December 13, 1999.
Microsystems, Inc. dated October 27,
1997
10(c) Repair services agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and Sun the Securities and Exchange Commission on
Microsystems, Inc. dated March 29, December 13, 1999.
1999
10(d) Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and John the Securities and Exchange Commission on
D. Bair dated October 29, 1997 December 13, 1999.
</TABLE>
-35-
<PAGE> 62
<TABLE>
<CAPTION>
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH THE SEC
------- ---------------------- -----------------------------
<S> <C> <C>
10(e)* Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and C. the Securities and Exchange Commission on
Robert Hahn dated October 29, 1997 December 13, 1999.
10(f)* Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and the Securities and Exchange Commission on
Thomas J. Carr dated October 29, 1997 December 13, 1999.
10(g)* Employment agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and the Securities and Exchange Commission on
Michael L. Antill dated September December 13, 1999.
20, 1999
10(h)* Standard form Director stock option Registration Statement on Form 10-SB filed with
agreement between Pinnacle Data the Securities and Exchange Commission on
Systems, Inc. and individual members December 13, 1999.
of the Board of Directors
10(i)* Employment agreement and stock Registration Statement on Form 10-SB filed with
option agreement between Pinnacle the Securities and Exchange Commission on
Data Systems, Inc. and David J. December 13, 1999.
Richards dated July 22, 1998
10(j)* Pinnacle Data Systems, Inc. 1995 Registration Statement on Form 10-SB filed with
stock option plan the Securities and Exchange Commission on
December 13, 1999.
10(k)* Amendment No. 1 to Pinnacle Data Contained herein
Systems, Inc. 1995 Stock Option Plan
10(l)* Pinnacle Data Systems, Inc. 2000 Contained herein
Directors Stock Option Plan
10(m) Real estate contract on sale of Registration Statement on Form 10-SB filed with
building, dated March 17, 1999 the Securities and Exchange Commission on
December 13, 1999.
</TABLE>
-36-
<PAGE> 63
<TABLE>
<CAPTION>
IF INCORPORATED BY REFERENCE,
EXHIBIT DOCUMENT WITH WHICH EXHIBIT WAS
NO. DESCRIPTION OF EXHIBIT PREVIOUSLY FILED WITH THE SEC
------- ---------------------- -----------------------------
<S> <C> <C>
10(n) Lease agreement between Pinnacle Registration Statement on Form 10-SB filed with
Data Systems, Inc. and Duke Realty the Securities and Exchange Commission on
Limited Partnership dated March 9, December 13, 1999.
1999
10(o) First Lease Amendment between Pinnacle Contained herein
Data Systems, Inc. and Duke Realty
Limited Partnership dated January 5, 2000
10(p) Loan and security agreement between Registration Statement on Form 10-SB filed with
Pinnacle Data Systems, Inc. and the Securities and Exchange Commission on
Firstar Bank, N.A. dated September December 13, 1999.
30, 1999
10(q) Business Loan Agreement between Contained herein
Pinnacle Data Systems, Inc. and Key
Bank National Association dated
February 18, 2000.
21 List of Subsidiaries Contained herein
23 Independent Auditors' Consent Contained herein
24 Powers of Attorney Contained herein
27 Financial Data Schedule Contained herein
- --------------
</TABLE>
*Executive Compensation Plans and Arrangements required to be filed
pursuant to Reg. 601(B)(10) of Regulation S-B.
-37-
<PAGE> 1
EXHIBIT 3(C)
AMENDMENT TO AMENDED AND RESTATED CODE OF REGULATIONS
<PAGE> 2
PINNACLE DATA SYSTEMS, INC.
AMENDMENT TO
AMENDED AND RESTATE D CODE OF REGUALTIONS
Adopted June 23, 1999
The shareholders of the Company hereby repeal existing section 1.6 of the Code
of Regulations of the Company and adopt instead the following:
"The shareholders present in person or by proxy at any meeting of
shareholders shall constitute quorum for such meeting, but no action required by
Law, the Articles of Incorporation, or this Code of Regulations, to be
authorized or taken by the holders of a designated proportion of the shares of
any particular class, or of each class, may be authorized or taken by a lesser
proportion. The shareholders present in person or by proxy at any meeting may
also adjourn such meeting from time to time."
<PAGE> 1
EXHIBIT 10(K)
AMENDMENT NO. 1 TO PINNACLE DATA
SYSTEMS, INC. 1995 STOCK OPTION PLAN
<PAGE> 2
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
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.
<PAGE> 3
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
<PAGE> 4
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> 1
EXHIBIT 10(L)
PINNACLE DATA SYSTEMS, INC.
2000 DIRECTORS STOCK OPTION PLAN
<PAGE> 2
PINNACLE DATA SYSTEMS, INC.
2000 DIRECTORS STOCK OPTION PLAN
--------------------------------
ss.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 ss.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").
ss.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
ss.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.
ss.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").
ss.4. Shares Subject to Plan.
----------------------
<PAGE> 3
The maximum aggregate number of Shares which may be issued under the
Plan shall be 250,000 Shares (following the stock split to be effective on March
31, 2000). 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.
ss.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
<PAGE> 4
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 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) last reported sale price on any other stock exchange on which the Shares
are listed on the most recent previous trading day, (iv) mean between the bid
and asked prices at the close of business, as reported by the National
Association of Securities Dealers, Inc. ("NASD") on the most recent previous
trading day, or (v) if not reported by the NASD, the mean between the bid and
asked prices for the Shares at the close of business on the most recent previous
trading day as reported by the OTC Bulletin Board or as reported in The Wall
Street Journal or, if such prices are not reported by the OTC Bulletin Board or
in The Wall Street Journal, as verified by another reputable publication or
authoritative source, 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.
-----------------------------------------
<PAGE> 5
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 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
<PAGE> 6
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.
------------------------------------------------------------
Except as otherwise permitted by the Committee, in its sole
discretion, no Option held by a transferee of a Participant pursuant to
ss.5(f), above, shall remain exercisable for any period of time longer
than would otherwise be permitted under ss.ss.5(g) and 5(h) without
specification of other periods by the Committee as provided therein.
ss.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.
ss.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.
ss.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
<PAGE> 7
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 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.
ss.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 ss.9 shall be conclusive upon all Participants under the Plan.
ss.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
<PAGE> 8
to this ss.10 and stating that this ss.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 ss.5(a), above) of the Shares
subject to the Option at the time the Company exercises its
option under this ss.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 ss.3(a)(9) of the Securities Exchange
Act of 1934, as amended (the "1934 Act"), and as used in
ss.ss.13(d) and 14(d) thereof, including a "group" within the
meaning of ss.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);
<PAGE> 9
(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
ss.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 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.
ss.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.
ss.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.
<PAGE> 10
ss.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.
ss.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.
ss.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 ss.424(f) of the Code.
ss.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.
ss.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.
ss.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.
ss.19. Governing Law.
-------------
<PAGE> 11
The Plan shall be construed and governed by the laws of the State of
Ohio.
ss.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.
ss.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.
ss.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 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.
ss.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.
ss.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> 1
EXHIBIT 10(O)
FIRST LEASE AMENDMENT BETWEEN
PINNACLE DATA SYSTEMS, INC.
AND
DUKE REALTY LIMITED PARTNERSHIP
DATED JANUARY 5, 2000
<PAGE> 2
FIRST LEASE AMENDMENT
THIS FIRST LEASE AMENDMENT (the "Amendment") is executed this 5TH day
of January , 2000, by and between DUKE-WEEKS REALTY LIMITED PARTNERSHIP, an
Indiana limited partnership ("Landlord") and PINNACLE DATA SYSTEMS, INC., an
Ohio corporation ("Tenant").
W I T N E S S E TH:
WHEREAS, Duke Realty Limited Partnership, an Indiana limited
partnership, as predecessor in interest to Landlord and Tenant entered into a
certain lease dated March 9, 1999 (the "Lease"), whereby Tenant leased from
Landlord certain premises consisting of approximately 56, 601 rentable square
feet of space (the "Original Premises") located in an office/warehouse building
commonly known as 6600 Port Road, Groveport, OH 43125;
WHEREAS, Landlord and Tenant desire to expand the Original Premises by
a total of approximately 56,601 rentable square feet of space which Tenant shall
commence occupancy of one-half of the Additional Space (approximately 28,301
rentable square feet of space) on February 1, 2000 and commence occupancy of the
remaining one half of the Additional Space (approximately 28,300 rentable square
feet of space) on June 1, 2000 (both halves individually and/or collectively
referred to as the "Additional Space"). Collectively, the Original Premises and
Additional Space shall hereinafter be referred to as the "Lease Premises"; and
WHEREAS, THEREFORE, in consideration of the foregoing premises, the
mutual covenants herein contained and each act performed hereunder by the
parties, Landlord and Tenant hereby enter into this Amendment.
1. INCORPORATION OF RECITALs. The above recitals are hereby
incorporated into this Amendment as if fully set forth herein.
2. AMENDMENT OF ARTICLE 1. SECTION 1.01. BASIC LEASE PROVISIONS
AND DEFINITIONS. Commencing February 1, 2000, ARTICLE 1,
SECTION 1.01, subsections A, B, C, D, E, and L are hereby
amended as follows:
A. AMENDED EXHIBIT A is attached hereto and incorporated herein
by reference, which identifies the Original Premises and the
Additional Space, in lieu of EXHIBIT A attached to the Lease.
B. Rentable Area (02/01/00 - 05/31/00: approximately 84,902
rentable square feet; Rentable Area (06/01/00 - 04/30/09):
approximately 113,202 rentable square feet;
Landlord shall use commercially reasonable standards,
consistently applied, in determining the Rentable Area and the
rentable area of the Building. Landlord's
-1-
<PAGE> 3
determination of Rentable Area shall conclusively be deemed
correct for all purposes hereunder.
C. Tenant's Proportionate Share (02/01/00 - 05/31/00): 8.33%
Tenant's Proportionate Share (06/01/00 - 04/30/99): 11.10%;
D. Minimum Annual Rent:
Original Premises:
-----------------
02/01/00 - 04/30/04 $202,065.60 per year
05/01/04 - 04/30/09 $232,630.08 per year
Additional Space:
----------------
02/01/00 - 05/31/00 $ 40,281.76 (4 months)
06/01/00 - 04/30/01 $221,545.72 (11 months)
05/01/01 - 04/30/02 $266,024.76 per year
05/01/02 - 04/30/03 $294,325.20 per year
05/01/03 - 04/30/04 $324,323.76 per year
05/01/04 - 04/30/09 $356,586.36 per year
E. Monthly Rental
Installments:
Original Premises:
-----------------
02/01/99 - 04/30/04 $ 16,838.80 per month
05/01/04 - 04/30/09 $ 19,385.84 per month
Additional Space:
----------------
02/01/00 - 05/31/00 $10,070.44 per month
06/01/00 - 04/30/00 $20,140.52 per month
05/01/01 - 04/30/02 $22,168.73 per month
05/01/02 - 04/30/03 $24,527.10 per month
05/01/03 - 04/30/04 $27,026.98 per month
05/01/04 - 04/30/09 $29,715.53 per month
L. Address for notices:
Landlord: Duke-Weeks Realty Limited Partnership
5600 Blazer Parkway, Suite 100
Dublin, OH 43017
Attn: Property Manager
-2-
<PAGE> 4
Tenant: Pinnacle Data Systems, Inc.
6600 Port Road
Groveport, OH 43125
Address for rental and other payment:
Duke-Weeks Realty Limited Partnership
P.O. Box 931998
Cleveland, OH 44193
3. INCORPORATION INTO ARTICLE 2. CONSTRUCTION OF TENANT
IMPROVEMENTS FOR ADDITIONAL SPACE. The following shall be added to SECTION 2.02
of the Lease:
Landlord agrees to perform and complete, at Landlord's sole cost and
expense, the work on the tenant finish improvements for the Additional Space in
accordance with the plans and specifications which have been mutually agreed
upon by both Landlord and Tenant and attached hereto as EXHIBIT B-1 (the
"Additional Space Improvements"). Upon written notice from Landlord, Tenant
shall have the right and privilege of going onto the Additional space to
complete interior decoration work and to prepare the Additional Space for its
occupancy, provided, however, that its schedule in so doing shall be
communicated to Landlord and the approval of Landlord secured so as not to
interfere with other work of Landlord being carried on at the time; and provided
further that Landlord shall have no responsibility or liability whatsoever for
any loss or damage to any of Tenant's leasehold improvements, fixtures,
equipment and any other materials installed or left in the Additional Space.
Notwithstanding anything stated herein to the contrary, Landlord agrees
that in the event Landlord is able to complete the installation of a new
exterior dock door (as described in EXHIBIT B-1) ("Exterior Dock Work") for an
amount less than One Hundred and Seven Thousand Dollars ($107,000.00) as set
forth in EXHIBIT B-1 (such savings hereinafter referred to as "Exterior Dock
Savings"), Landlord shall reduce the Minimum Annual Rent for the Additional
Space by multiplying the Exterior Dock Savings by a factor of .095.
4. AMENDMENT OF SECTION 16.13. OPTION TO EXTEND. SECTION 16.13 of
the Lease is hereby deleted in its entirety and the following substituted in
lieu thereof:
A. GRANT AND EXERCISE OF OPTION. Provided that (i) Tenant has not
been in Default hereunder at any time during the Term of this Lease ("Original
Term"), (ii) the creditworthiness of Tenant is then acceptable to Landlord,
(iii) Tenant named herein remains in possession of and has been continuously
operating in the entire Leased Premises, throughout the Original Term and (iv)
the current use of the Leased Premises is acceptable to Landlord, Tenant shall
have one (1) option to extend the Original Term for one (1) additional period of
five (5) years (the "Extension Term"). The Extension Term shall be upon the same
terms and conditions contained in the Lease for the Original Term except (i)
Tenant shall not have any further option to extend and (ii) the Minimum Annual
Rent shall be adjusted as set forth here ("Rent Adjustment"). Tenant shall
exercise such option by delivering to Landlord, no later than nine (9) months
prior to the expiration of the Original Term, written notice of Tenant's desire
to extend the Original Term.
-3-
<PAGE> 5
Tenant's failure to properly exe4rcise such option shall waive it. If Tenant
properly exercises its option to extend, Landlord shall notify Tenant of the
Rent Adjustment no later than ninety (90) days prior to the commencement of the
Extension Term. Tenant shall be deemed to have accepted the Rent Adjustment if
it fails to deliver to Landlord a written objection thereto within five (5)
business days after receipt thereof. If Tenant properly exercises its option to
extend, Landlord and Tenant shall execute an amendment to the Lease s(or, at
Landlord's option, a new lease on the form then in use for the Building)
reflecting the terms and conditions of the Extension Term, within thirty (30)
days after Tenant's acceptance of the Rent Adjustment.
B. MARKET RENT ADJUSTMENT. The Minimum Annual Rent for the
Original Premises for the Extension Term shall be Four Dollars and Seventy-Two
Cents ($4.72) per rentable square foot of the Original Premises. The Minimum
Annual Rent for the Additional Space for the Extension Term shall be Seven
Dollars and Twenty-Five Cents ($7.25) per rentable square foot of the Additional
Space. The Minimum Monthly Rent shall be an amount equal to one-twelfth (1/12)
of the Minimum Annual Rent for the Extension Term and shall be paid at the same
time and in the same manner as provided in the Lease.
5. DELETION OF SECTION 16.14. TENANT'S CONTINGENCY. SECTION 16.14
of the Lease is hereby deleted in its entirety and is of no further force and
effect.
6. INCORPORATION OF SECTION 16.16. LANDLORD'S ALLOWANCE FOR
FUTURE IMPROVEMENT. The following section is hereby incorporated into the Lease
as SECTION 16.16:
At any time during years 1-5 of the Lease Term, Tenant may request in
writing that Landlord construct and install a hydraulic lift to service the
first and second floors of the Building ("Lift Work"). Landlord agrees to
perform such Lift Work, subject to Landlord and Tenant mutually agreeing upon
construction plans and specifications related thereto. Landlord and Tenant shall
share on a fifty-fifty basis the costs and expenses associated with the Finish
Work; provided, however, the Landlord's responsibility with respect to the Lift
Work shall not exceed Fifteen Thousand Dollars ($15,000.00). Performance of the
Lift Work is also contingent upon Tenant securing the consent and approval of
those Building tenants whose leased premises may be encroached upon as a result
of the Finish Work.
7. TENANT'S REPRESENTATIONS AND WARRANTIES. The undersigned
represents and warrants to Landlord that (i) Tenant is duly organized, validly
existing and in good standing in accordance with the laws of the state under
which it was organized; (ii) all action necessary to authorize the execution of
this Amendment has been taken by Tenant; and (iii) the individual executing and
delivering this Amendment on behalf of Tenant has been authorized to do so, and
such execution and delivery shall bind Tenant. Tenant, at Landlord's request,
shall provide Landlord with evidence of such authority.
8. EXAMINATION OF AMENDMENT. Submission of this instrument for
examination or signature to Tenant does not constitute a reservation or option,
and it is not effective until execution by and delivery to both Landlord and
Tenant.
-4-
<PAGE> 6
9. DEFINITIONS. Except as otherwise provided herein, the
capitalized terms used in this Amendment shall have the definitions set forth in
the Lease.
10. INCORPORATION. This Amendment shall be incorporated into and
made a part of the Lease, and all provisions of the Lease not expressly modified
or amended hereby shall remain in full force and effect.
-5-
<PAGE> 7
IN WITNESSES WHEREOF, the parties have caused this Amendment to be
executed on the day and year first written above.
WITNESS 1: LANDLORD:
/s/Jeffrey D. Palmquist DUKE-WEEKS REALTY LIMITED
- -------------------------- an Indiana limited partnership
Partnership (Signature)
Jeffrey D. Palmquist By: Duke-Weeks Realty Corporation
- -------------------------- its General Partner
Printed
WITNESS 2: By: /s/J. Kurt Dehner
-------------------------------
J. Kurt Dehner
/s/ Laureen McElhaney Senior Vice President
- -------------------------- Columbus Industrial
Signature
Laureen McElhaney
Printed
WITNESS 1: TENANT:
/s/R. Hahn PINNACLE DATA SYSTEMS, INC.
- -------------------------- an Ohio corporation
Signature
R. Hahn By: /s/John D. Bair
- -------------------------- ----------------------------------
Printed
Printed: John D. Bair
-----------------------------
WITNESS 2: Title: CEO
------
/s/Thomas J. Carr
- --------------------------
Signature
Thomas J. Carr
- --------------------------
Printed
-6-
<PAGE> 8
STATE OF OHIO )
) SS.
COUNTY OF FRANKLIN )
Before me, a Notary Public in and for said County and State, personally
appeared J. Kurt Dehner, by me known and by me known to be the Senior Vice
President, Columbus Industrial of Duke-Weeks Realty Corporation, an Indiana
corporation, the general partner of Duke-Weeks Realty Limited Partnership, an
Indiana limited partnership, who acknowledged the execution of the above and
foregoing First Lease Amendment for and on behalf of said partnership.
WITNESS my hand and Notarial Seal this 5TH day of JANUARY , 2000.
/s/Laureen H. McElhaney
-----------------------------------------
Notary Public
Laureen H. McElhaney
-----------------------------------------
Printed Signature
My Commission Expires: 10-19-04
-------------
My County of Residence: Franklin
-------------
STATE OF OHIO )
) SS.
COUNTY OF FRANKLIN )
Before me, a Notary Public in and for said County and State, personally
appeared JOHN D. BAIR, by me known and by me known to be the CEO of Pinnacle
Data Systems, Inc., an Ohio corporation, who acknowledged the execution of the
above and foregoing First Lease Amendment for and on behalf of said corporation.
WITNESS my hand and Notarial Seal this 5TH day of JANUARY , 2000.
/s/Laureen H. McElhaney
-----------------------------------------
Notary Public
Laureen H. McElhaney
-----------------------------------------
Printed Signature
My Commission Expires: 10-19-04
--------------
My County of Residence: Franklin
--------------
-7-
<PAGE> 9
EXHIBIT B-1
-----------
Landlord agrees to perform and complete, at Landlord's sole cost and expense,
the work itemized below.
First Floor Area
- ----------------
1. Install three (3) new 6' case openings with headers along north side of
office space.
Second Floor Area
- -----------------
1. Replace the carpeting and cove base with new, building-standard
carpeting and cove base in one (1) office and one (1) conference room
located at the northeast corner of the second floor office area. Color
selection by Tenant.
2. All remaining carpeted areas shall be thoroughly cleaned.
3. Paint all interior office walls with one (1) coat of latex paint.
Exterior Changes
- ----------------
1. Landlord shall provide an allowance of $107,000 to install a new
exterior dock on the rear of the building, adjacent to Tenant's current
dock area. This concrete dock area to be approximately 6'- 8' in width
and approximately 30'- 40' in length and 48" in height. The dock area
will be accessed by the current set of double doors, also to include
handrails and a canopy system.
2. Landlord shall provide an allowance of up to $10,000 towards the cost
of fabricating and installing an exterior illuminated sign, to be
located on the front of the building over the main entrance. The sign
shall be approved by Landlord, and shall be in accordance with all
applicable laws of the Village of Groveport.
Future Changes
- --------------
1. Landlord shall provide an allowance of up to $15,000 towards the cost
of installing a hydraulic lift to service the first and second floors
of the building.
<PAGE> 1
EXHIBIT 10(Q)
BUSINESS LOAN AGREEMENT
BETWEEN
PINNACLE DATA SYSTEMS, INC.
AND
KEY BANK NATIONAL ASSOCIATION
DATED FEBRUARY 18, 2000
<PAGE> 2
BUSINESS LOAN AGREEMENT
THIS BUSINESS LOAN AGREEMENT between Pinnacle Data Systems, Inc. ("Borrower")
and KeyBank National association ("Lender") is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of February 18, 2000, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
BORROWER. The word "Borrower" means Pinnacle Data Systems, Inc. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
<PAGE> 3
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security interest in any
Collateral for the indebtedness, including without limitation all
Borrowers granting such a Security interest.
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such indebtedness may be or
hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means KeyBank National Association, its
successors and assigns.
LOAN. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes thereof.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interest securing indebtedness owed by Borrower to Lender; (b)
liens for taxes, assessments, or similar charges either not yet due or
being contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens
<PAGE> 4
arising in the ordinary course of business and securing obligations
which are not yet delinquent; (d) purchase money liens or purchase
money security interest upon or in any property acquired or held by
Borrower in the ordinary course of business to secure indebtedness
outstanding on the date of this Agreement or permitted to be incurred
under the paragraph of this Agreement titled "Indebtedness and Liens";
(e) liens and security interest which, as of the date of this
Agreement, have been disclosed to an approved by the Lender in writing;
and (f) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect
to the net value of Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
under understandings or other agreements. whether created by law,
contract, or otherwise, evidencing, governing, creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factors lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or
otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the Initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender proper certified resolutions, duly
authorizing the execution
<PAGE> 5
and delivery of this Agreement, the Note and the Related Documents, and
such other authorizations and other documents and instruments as Lender
or its counsel, in their sole discretion, may require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Ohio and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in which
it is presently engaged or presently proposes to engage. Borrower also
is duly qualified as a foreign corporation and is in good standing in
all states in which the failure to so quality would have a material
adverse effect on its businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute
a default under (a) any provision of its articles of incorporation or
organization, or bylaws or code of regulations, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
<PAGE> 6
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are filed in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, at seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, at seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (b) Borrower has no knowledge of,
or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower
nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or
from any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws.
regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon the properties to make such inspections
and tests as Lender may deem appropriate to determine compliance of the
properties with this section of the Agreement. Any inspections or tests
made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or
liability on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on Borrower's
due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs
<PAGE> 7
under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages,
penalties, and expenses which Lender may directly or indirectly sustain
or suffer resulting from a breach of this section of the Agreement or
as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release of a hazardous waste or
substance on the properties. The provisions of this section of the
Agreement, including the obligation to indemnity, shall survive the
payment of the Indebtedness and the termination or expiration of this
Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event
has occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other
events, if any, that have been disclosed to and acknowledged by Lender
in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred
with respect to any such plan, (ii) Borrower has not withdrawn from any
such plan or6fiated steps to do so, (iii) no steps have been taken to
terminate any such plan, and (iv) there are no unfunded
<PAGE> 8
liabilities other than those previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICE AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 6600 Port Rd., Groveport. OH
43215. Unless Borrower has designated otherwise in writing this
location is also the office or offices where Borrower keeps its records
concerning the Collateral.
YEAR 2000. Borrower warrants and represents that all software utilized
in the conduct of Borrower's business will have appropriate
capabilities and compatibility, for operation to handle calendar dates
falling on or after January 1, 2000, and all information pertaining to
such calendar dates, in the same manner and with the same functionality
as the software does respecting calendar dates falling on or before
December 31, 1999. Further, Borrower warrants and represents that the
data-related user interface functions, data-fields, and data-related
program instructions and functions of the software include the
indication of the century.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warrants in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations
and warranties shall be continuing in nature and shall remain in full
force and effect until such time as Borrower's indebtedness shall be
paid in full, or until this Agreement shall be terminated in the manner
provided above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
FINANCIAL RECORDS. Maintain its books and records In accordance with
generally accepted accounting principles, applied on a consistent basis
and permit Lender to
<PAGE> 9
examine and audit Borrower's books and records at all reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available but in
no event later than one hundred twenty (120) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year
ended reviewed by a certified public accountant satisfactory to Lender,
and, as soon as available, but in no event later than forty five (45)
days after the end of each fiscal quarter, Borrower's balance sheet and
profit and loss statement for the period ended, prepared and certified
as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender. All
financial reports required to be provided under this Agreement shall be
prepared in accordance with generally accepted accounting principles,
applied on a consistent basis and certified by Borrower as being true
and correct.
ADDITIONAL INFORMATION. Furnish such additional Information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
INSURANCE. Maintain fire and other risk Insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender. Borrower,
upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Lender holds or
is offered a security interest for the Loans. Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following: (a)
the name of the Insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
<PAGE> 10
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations unless specifically consented to the contrary by Lender In
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same
shall be contested in good faith by appropriate proceedings, and (b)
Borrower shall have established on its books adequate reserves with
respect to such contested assessment, lax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of
the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrowers properties, income, or
profits.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related manner, and
promptly notify Lender if Borrower learns of the occurrence of any
event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts,
and records and to make copies and memoranda of Borrowers books,
accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the
<PAGE> 11
generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit
Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at
Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that as of the date of the certificate, no Event of Default
exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or Instrumentality concerning any Intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, Instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court of administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
rotates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment,
<PAGE> 12
which demand shall be accompanied by an explanation of such Imposition or charge
and a calculation In reasonable detail of the additional amounts payable by
Borrower, which explanation and calculations shall be conclusive in the absence
of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender.
INDEBTEDNESS AND LIENs. (a) except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money, including
capital leases. (b) except as allowed as a Permitted Lien, sell, transfer.
mortgage, assign. pledge. lease. grant a security Interest In, or encumber any
of Borrower's assets, or (c) sell with recourse any of Borrower's accounts,
except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage In any business activities
substantially different than those in which Borrower is presently engaged, (b)
cease operations, liquidate, merge, transfer, acquire or consolidate with any
other entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided, however
that notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership of shares
of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) Incur any obligation as surety or guarantor other
than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt, (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
<PAGE> 13
FINANCIAL COVENANTS AND ADDITIONAL DEFINITIONS. Borrower shall comply with all
covenants and ratios:
TOTAL DEBT/TANGIBLE NET WORTH RATIO Borrower shall maintain a ratio of Total
Debt to Tangible Net Worth of less than 2.50 to 1.00; calculated at the end of
each quarterly. The words "Tangible Net Worth" mean Borrower's total assets
excluding all intangible assets (i.e., goodwill, trademarks. patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less Total Debt. The words "Total Debt"
mean all of Borrower's liabilities including Subordinated Debt. The words
"Subordinated Debt" mean indebtedness and liabilities of Borrower which have
been subordinated by written agreement to indebtedness owed by Borrower to
Lender in form and substance acceptable to Lender.
OPERATING CASH FLOW TO TOTAL FIXED CHARGE RATIO Borrower shall maintain a ratio
of Operating Cash Flow to Total Fixed Charges of not ins than 1.20 to 1.00;
calculated at the end of each quarter for the preceding 12-month period. The
words "Operating Cash Flow" mean not income after taxes and exclusive of
extraordinary gains and losses and gains on asset sales and other Income, plus
depreciation, amortization, interest expense and lease expense, less dividends
and distributions. The words "Total Fixed Charges" mean interest expense, plus
current maturities of long-term debt and current maturities of capital leases,
plus lease expenses, plus preferred stock dividends, plus Capital Expenditures
(calculated for the preceding, twelve-month period.) The words "Capital
Expenditure" mean current period not fixed assets less prior period not find
assets, plus current period depreciation.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement.
DEFAULT AN INDEBTEDNESS. Failure of Borrower to make any payment when due on the
Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to perform
when due any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents, or failure of Borrower to comply
with or to perform any other term, obligation, covenant or condition contained
in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default under
any loan, extension of credit, security agreement, purchase or sales agreement,
or any other agreement in favor of any other creditor or person that may
materially affect any of Borrower's property or Borrower's or any Grantor's
ability to repay the Loans or perform their respective obligations under this
Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or furnished to
Lender by or on behalf of Borrower or any Grantor under this Agreement or the
Related Documents is false or misleading in any material respect at the time
made or furnished, or becomes false or misleading at any time thereafter.
DETECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and for
any reason.
INSOLVENCY The dissolution or termination of Borrower's existence as a going
business.
<PAGE> 14
the Insolvency of Borrower, the appointment of a receiver for
any part of Borrower's property, any assignment for the benefit of creditors,
any type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor against
any collateral securing the Indebtedness, or by any governmental agency. This
includes a garnishment. attachment, or levy on or of any of Borrowers deposit
accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under any
Guaranty of ft Indebtedness.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired. Insecurity. Lender, in good faith. deems itself
insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided In this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement Immediately will terminate including any obligation to make Loan
Advances or disbursements), and, at Lender's option, all Indebtedness
Immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
In the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise Its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions we a part of
this Agreement:
AMENDMENTs. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Cuyahoga County,
the State of Ohio. Lender and Borrower hereby waive the right to any jury trial
in any action, proceeding, or counterclaim brought by either Lender or Borrower
against the other. This Agreement
<PAGE> 15
shall be governed by and construed In accordance with the laws of the State of
Ohio.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or
transfer, whether now or later, of one or more participation interests in the
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide. without any limitation whatsoever, to any one or more purchasers,
or potential purchasers, any Information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower hereby
waives any rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation Interests. Borrower
also agrees that the purchasers of any such participation interests will be
considered as the absolute owners of such Interests In the Loans and will have
all the rights granted under the participation agreement or agreements governing
the sale of such participation Interests. Borrower further waives all rights of
offset or counterclaim that It may have now or later against Lender or against
any purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans Irrespective of the failure or insolvency of any holder of any Interest in
the Loans. Borrower further agrees that the purchaser of any such participation
interests may enforce Its interests irrespective of any personal claims or
defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses,
including without limitation attorneys' fees, incurred In connection with the
preparation, execution, enforcement, modification and collection of this
Agreement or in connection with the Loans made pursuant to this Agreement.
Lender may pay someone else to help collect the Loans and to enforce this
Agreement, and Borrower will pay that amount. This includes, subject to any
limits under applicable law, Lenders attorneys' fees and Lender's legal
expenses, whether or not there is a lawsuit, including attorneys' few for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or Injunction), appeals, and any anticipated post-judgment collection services.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
NOTICES. All notices required to be given under this Agreement shall be given in
writing, may be sent by telefascimile (unless otherwise required by law and
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier or deposited in the United States mail, first
class, postage prepaid, addressed to the party to whom the notice, is to be
given at the address shown above. Any party may change Its address for notices
under this Agreement by giving formal written notice to the other parties
specifying that the purpose of the notice is to change the party's address. To
the extent permitted by applicable law, if there is more than one Borrower,
notice to any Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all times of Borrower's current
address).
SEVERABILITY. If a court of competent jurisdiction finds any provision of this
Agreement to be Invalid or unenforceable as to any person or circumstance, such
finding shall root render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending provision shall
be deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so
<PAGE> 16
modified, it shall be stricken and all other provisions of this Agreement in all
other respects shall remain valid and enforceable.
SUBSIDIARIES & AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without limitation
any representation, warranty or covenant, the word "Borrower" as used herein
shall include all subsidiaries and affiliates of Borrower. Notwithstanding the
foregoing however, under no circumstances shall this Agreement be construed to
require Lender to make any loan or other financial accommodation to any
subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lenders right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall constitute a
waiver of any of Lender's rights or of any obligations of Borrower or of any
Grantor as to any future transactions. Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent Instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
FEBRUARY 18, 2000.
BORROWER:
Pinnacle Data Systems, Inc.
Thomas J. Carr, Chief Financial Officer and Treasurer
LENDER:
By: Authorized Officer
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
None
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
<PAGE> 2
[HAUSSER + TAYLOR LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to the incorporation by reference in the Registration Statement of
Pinnacle Data Systems, Inc. on Form S-8 (file number 333-33214), under the
Securities Act of 1933, of our report dated March 10, 2000 relating to the
balance sheets of Pinnacle Data Systems, Inc. as of December 31, 1999 and 1998,
and the related statements of income, stockholders' equity, and cash flows for
the years then ended, which report appears in the report on Form 10-KSB of
Pinnacle Data Systems, Inc.
/s/ HAUSSER + TAYLOR LLP
HAUSSER + TAYLOR LLP
Columbus, Ohio
March 29, 2000
<PAGE> 1
EXHIBIT 24
POWERS OF ATTORNEY
<PAGE> 2
POWER OF ATTORNEY
FOR ANNUAL REPORT ON FORM 10-KSB
The undersigned, a director or officer of Pinnacle Data Systems, Inc.,
an Ohio corporation (the "Company"), hereby constitutes and appoints John D.
Bair, my true and lawful attorney-in-fact and agent, with full power to act, for
me and in my name, place, and stead, in my capacity as director or officer of
the Company, to execute the Company's Form 10-KSB Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Company's
fiscal year ended December 31, 1999, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, may
lawfully do or cause to be done by virtue hereof.
The undersigned has executed and delivered this Power of Attorney on
March 22, 2000.
/s/ Thomas J. Carr Director and CFO
- ---------------------------- ----------------------------
Signature Position(s) with the Company
Thomas J. Carr
- ----------------------------
Print or Type Name
-22-
<PAGE> 3
POWER OF ATTORNEY
FOR ANNUAL REPORT ON FORM 10-KSB
The undersigned, a director or officer of Pinnacle Data Systems, Inc.,
an Ohio corporation (the "Company"), hereby constitutes and appoints John D.
Bair, my true and lawful attorney-in-fact and agent, with full power to act, for
me and in my name, place, and stead, in my capacity as director or officer of
the Company, to execute the Company's Form 10-KSB Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Company's
fiscal year ended December 31, 1999, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, may
lawfully do or cause to be done by virtue hereof.
The undersigned has executed and delivered this Power of Attorney on
March 22, 2000.
/s/ Thomas M. O'Leary Director
- ---------------------------- ----------------------------
Signature Position(s) with the Company
Thomas M. O'Leary
- ----------------------------
Print or Type Name
-23-
<PAGE> 4
POWER OF ATTORNEY
FOR ANNUAL REPORT ON FORM 10-KSB
The undersigned, a director or officer of Pinnacle Data Systems, Inc.,
an Ohio corporation (the "Company"), hereby constitutes and appoints John D.
Bair, my true and lawful attorney-in-fact and agent, with full power to act, for
me and in my name, place, and stead, in my capacity as director or officer of
the Company, to execute the Company's Form 10-KSB Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Company's
fiscal year ended December 31, 1999, and any and all amendments thereto, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as I might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agent, may
lawfully do or cause to be done by virtue hereof.
The undersigned has executed and delivered this Power of Attorney on
March 22, 2000.
/s/ C. R. Hahn Vice President/COO/Director
- ---------------------------- ----------------------------
Signature Position(s) with the Company
C. R. Hahn
- ----------------------------
Print or Type Name
-24-
<PAGE> 5
POWER OF ATTORNEY
FOR ANNUAL REPORT ON FORM 10-KSB
The undersigned, a director or officer of Pinnacle Data Systems, Inc., an
Ohio corporation (the "Company"), hereby constitutes and appoints John D. Bair,
my true and lawful attorney-in-fact and agent, with full power to act, for me
and in my name, place, and stead, in my capacity as director or officer of the
Company, to execute the Company's Form 10-KSB Annual Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 for the Company's fiscal year
ended December 31, 1999, and any and all amendments thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, may lawfully do or
cause to be done by virtue hereof.
The undersigned has executed and delivered this Power of Attorney on
March 22, 2000.
/s/ Robert V. R. Ostrander Director
- ---------------------------- ----------------------------
Signature Position(s) with the Company
Robert V. R. Ostrander
- ----------------------------
Print or Type Name
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 35,296
<SECURITIES> 0
<RECEIVABLES> 2,480,081
<ALLOWANCES> 10,000
<INVENTORY> 2,677,281
<CURRENT-ASSETS> 5,449,697
<PP&E> 1,655,143
<DEPRECIATION> 798,925
<TOTAL-ASSETS> 6,324,027
<CURRENT-LIABILITIES> 3,765,281
<BONDS> 0
0
0
<COMMON> 1,615,638
<OTHER-SE> 798,550
<TOTAL-LIABILITY-AND-EQUITY> 6,324,027
<SALES> 12,202,701
<TOTAL-REVENUES> 12,202,701
<CGS> 9,081,652
<TOTAL-COSTS> 9,081,652
<OTHER-EXPENSES> 2,555,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 92,473
<INCOME-PRETAX> 558,841
<INCOME-TAX> 207,675
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351,166
<EPS-BASIC> 0.15
<EPS-DILUTED> 0.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 35,101
<SECURITIES> 0
<RECEIVABLES> 1,478,674
<ALLOWANCES> 9,000
<INVENTORY> 1,427,792
<CURRENT-ASSETS> 3,145,259
<PP&E> 1,615,431
<DEPRECIATION> 556,013
<TOTAL-ASSETS> 4,205,377
<CURRENT-LIABILITIES> 1,578,355
<BONDS> 0
0
0
<COMMON> 1,572,138
<OTHER-SE> 447,384
<TOTAL-LIABILITY-AND-EQUITY> 4,205,377
<SALES> 9,032,332
<TOTAL-REVENUES> 9,032,332
<CGS> 7,192,234
<TOTAL-COSTS> 7,192,234
<OTHER-EXPENSES> 1,751,213
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83,552
<INCOME-PRETAX> 5,333
<INCOME-TAX> 4,745
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</TABLE>
