ALVEY SYSTEMS INC, 10-K405, 1997-03-31

ALVEY SYSTEMS INC
10-K405, 1997-03-31
COMPUTER INTEGRATED SYSTEMS DESIGN

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to
----------- -------------

Commission file number 333-2600

ALVEY SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)

Delaware 43-0157210
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)

101 S. Hanley Street, Suite 1300
St. Louis, Missouri 63105
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (314) 863-5776

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------

None None

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X

The aggregate market value of the voting stock held by non-affiliates
of the Registrant is zero as all of the outstanding shares of the Company's
Common Stock, $0.01 par value per share (the "Common Stock"), are held by
Pinnacle Automation, Inc., a Delaware corporation.

The number of shares of Common Stock outstanding on March 25, 1997 was
1,000 shares.

DOCUMENTS INCORPORATED BY REFERENCE

See Exhibit Index.

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PART 1.................................................................... 1

ITEM 1. BUSINESS........................................................ 1
ITEM 2. PROPERTIES...................................................... 11
ITEM 3. LEGAL PROCEEDINGS............................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 12

PART II................................................................... 12

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................. 12
ITEM 6. SELECTED FINANCIAL DATA.......................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 25
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 25

PART III.................................................................. 25

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 25
ITEM 11. EXECUTIVE COMPENSATION........................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 30

PART IV................................................................... 33

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K......................................................... 33

SIGNATURES

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PART I
ITEM 1. BUSINESS

OVERVIEW

Alvey Systems, Inc., a Delaware corporation ("Alvey", or the
"Company") and a wholly-owned subsidiary of Pinnacle Automation, Inc., a
Delaware corporation ("Pinnacle"), together with its six operating subsidiaries,
is a materials handling and information systems company which produces equipment
and related software and controls that enable manufacturers, wholesalers,
distributors and retailers to operate their manufacturing plants, distribution
centers and warehouses more efficiently. In connection with providing equipment
and software, the Company's engineers and sales force work closely with its
customers to analyze their specific manufacturing, distribution and warehousing
needs and to design customized systems that improve efficiency and reduce costs.
As a full-service provider of materials and information handling products and
information services, the Company is uniquely positioned to offer to its
customers integrated systems comprised of combinations of equipment, software
and controls. The Company believes that its ability to offer both engineering
design services as well as the equipment and related software necessary to
implement integrated solutions to materials handling needs provides a distinct
competitive advantage.

The Company manufactures a broad range of materials handling
equipment such as palletizers, depalletizers, conveyors, carousels and sorters
which automate the physical acts of loading, unloading, sorting and transporting
raw materials and finished products. In addition to moving materials, the
Company's integrated systems incorporate advanced software and controls
developed by the Company to collect data, process information and provide
real-time feedback with respect to equipment performance and materials
processing. While a significant portion of the Company's revenues are
attributable to the manufacture and sale of equipment, approximately 53% of
total revenues result from product support functions and non-manufactured
products delivered in connection with sales of the Company's equipment. Such
revenues are generated from engineering, software license fees, computer support
services, systems and equipment maintenance, computer hardware and peripheral
equipment, and the integration and installation of these products.

For customers applying materials handling and information
solutions to manufacturing applications, the Company offers products designed to
(i) automate and accelerate the input of materials into a manufacturing line,
(ii) track and transport finished products within a manufacturing facility,
distribution center or warehouse and (iii) automate the palletizing of finished
goods. The Company's customers, in large part, use the Company's products to
sort (as used herein, the term "sort" and sortation mean the segregation of
packages destined for different locations), transport and palletize large
quantities of relatively small-sized products, such as beverages, canned and
bottled goods and personal consumer goods. For warehousing and distribution
applications, the Company offers conveyor and carousel systems to sort, track
and transport goods, and advanced software systems which monitor and optimize
the movement and shipment of products.

The Company's sales have increased from $72.3 million in 1989 to
$331.2 million for the year ended December 31, 1996. The principal factors
contributing to the Company's rapid growth in sales and operating performance
include, in their order of importance, new product offerings and management
initiatives, and acquisitions of complementary businesses. EBITDA (See Item 6.
"Selected Financial Data" for definition) has increased from $4.2 million in
1989 to $13.1 million for the year ended December 31, 1996. As of December 31,
1996, the Company's backlog was $136.1 million.

PRODUCTS

The Company believes that each of its operating entities is a
leading supplier in its principal markets. The Company operates through the
entities described below. (Insignificant entities have not been included in
discussions throughout this document.)

ALVEY SYSTEMS, INC.: Alvey manufactures and sells case
palletizers and depalletizers, case and pallet conveyors, related custom
products and software and controls which are sold to end users by a nationwide
network of direct sales personnel and independent representatives. Palletizers
are large machines,

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operated by programmable controls, that receive packaged products (typically
case goods) from a conveyor delivery system and deliver them to a pallet
conveyor take away system. The palletizer sequentially arranges individual
packages and groups them into rows and layers to form predetermined patterns
which are stacked onto a pallet or into a unit load, producing a stable cube for
efficient handling and shipping. Depalletizers unload palletized products for
further handling in the distribution process. Conveyor systems are used to move
products from one location to another and can be designed to sort, feed or
perform a number of different applications. Alvey primarily serves the consumer
products segment of the materials handling market that focuses on manufacturers
of food, beverages, paper, soap and other consumer products.

Alvey's annual net sales have increased 201% since its
acquisition by Pinnacle in August 1988 and currently represent approximately 38%
of the Company's total net sales. The Company believes that this increased
revenue is principally attributable to management's initiatives which include
the development and introduction of new or improved products. Management's
primary initiative to increase revenues at Alvey was to assemble experienced and
highly qualified sales and marketing personnel and develop the necessary
products to support their efforts. Management believed this would provide Alvey
the means to further penetrate its traditional manufacturing market and provide
the sales and consulting expertise to become a significant competitor in the
more rapidly growing warehousing and distribution segment of the materials
handling market. To fully support marketing efforts, Alvey found it necessary
to re-engineer many of its conveyor products and develop new equipment such as
the case depalletizer used primarily in warehouse applications. In addition,
the engineering and manufacturing managers recruited subsequent to 1988 brought
new ideas and processes which have resulted in a complete redesign of Alvey's
entire palletizer and pallet conveyor product lines. With the acquisition of
Buschman in 1992, responsibility for marketing major systems to the warehouse
and distribution market segments was shifted from Alvey to Buschman, and a
number of senior marketing managers were transferred to Buschman. This shift of
responsibilities and transfer of personnel has resulted in lower sales growth at
Alvey, while increasing Buschman's sales growth for 1993 and each subsequent
year.

EBITDA (as defined in Item 6. "Selected Financial Data"), at
Alvey has increased by approximately 186% since 1988. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

BUSSE BROS., INC.: Busse Bros., Inc. ("Busse") manufactures bulk
palletizing and depalletizing systems which are sold through its direct sales
force and in conjunction with Alvey's sales force. Busse's bulk palletizers
accumulate and arrange empty containers, such as cans and bottles, for shipment
to consumer product manufacturers, by building layers of containers separated by
plastic or paperboard sheets. The pallet load of containers will then be
strapped down to secure and stabilize the load. When a pallet of containers
arrives at the filling location, containers must be removed from the pallet and
fed into a production line where they will be washed, filled and then capped or
seamed. Busse's bulk depalletizers accept the pallet of containers and
systematically sweep each layer of containers off the pallet and onto conveyors
that take the containers into the production line. Busse's products serve the
manufacturing phase of the industry segments to which Alvey serves the
distribution phase, and Busse also serves the container manufacturers that
supply these industries.

Busse's annual net sales have increased 99% since its acquisition
in April 1992 and currently represent approximately 5% of the Company's total
net sales. The Company believes that this significant sales growth is primarily
attributable to the recruitment of experienced marketing personnel at Busse and
utilizing Alvey's much larger sales force to offer Busse products to existing
customers of Alvey. Another factor contributing to this increase in sales was
the availability since 1993 of Busse's redesigned bulk depalletizers which has
accounted for 40-60% of Busse's sales in recent years.

Nineteen ninety-six was a year of transition at Busse. During
the first half of 1996, Busse operated three separate manufacturing and two
separate administrative facilities which, in combination with Busse's
development and introduction of a new generation palletizer and significant
customer demands, resulted in production and engineering requirements that
exceeded Busse's practical capabilities. In response to such requirements,
management at Busse authorized construction of a 62,000 square foot plant
addition, completed in October 1996, that has allowed management to consolidate
Busse's facilities. In addition, management at Busse retained independent
consultants to reduce cycle times and lower costs. While the

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operational issues described above resulted in a $427,000 EBITDA loss during
1996, management believes the corrective actions implemented during 1996 should
produce positive results in 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Furthermore, as part of a reassignment of corporate personnel and
a realignment of corporate responsibilities during 1996, the Company established
the Consumer Products Group ("CPG") which combines the operations and management
of Alvey and Busse under one group of senior managers. The formation of this
group is intended to (i) focus marketing efforts in order to better realize the
synergy potential associated with marketing to a common customer base, (ii)
transfer the equipment design successes of Alvey to Busse processes and (iii)
reduce overall costs through elimination of redundant support services. The
president of Alvey is also president of the CPG.

THE BUSCHMAN COMPANY: The Buschman Company ("Buschman")
manufactures and sells a broad range of case conveyors, controls, related
products and software which are sold to end users through its direct sales
force, through a national network of independent distributors and systems
integrators and through the sales forces of Alvey and White. Buschman sells
standard conveyor and sortation products and modified conveyor equipment as well
as high-speed sortation systems, controls, outside-purchased subsystems (such as
bar code scanners), engineering and/or installation services. In addition,
Buschman sells materials flow systems for warehouses and distribution centers
which are more complex in design and include high-speed sortation, sophisticated
control software and involve engineering, project management and installation
services. These systems are designed to customer and/or consultant
specifications through Buschman's "design and build" process. Buschman primarily
serves the warehouse and distribution systems markets that perform the logistics
operations required to deliver a finished product from a warehouse or
distribution center to a retail store. Buschman also provides case conveyors
used in systems sold by White and provides case conveyors for systems sold by
Alvey to the extent the conveyors used in such systems are not directly
manufactured by Alvey.

Buschman's annual net sales have increased approximately 108%
since its acquisition in October 1992 and currently represent approximately 29%
of the Company's total net sales. The Company believes that this increase in
net revenues has resulted primarily from management's initiative to reposition
the Company as a premier supplier of material handling solutions to the
warehouse and distribution market segment. This repositioning has been
accomplished by an aggressive marketing effort targeted at those customers
requiring complex solutions and ongoing services. Buschman's marketing efforts
have benefited from the transfer of senior managers from Alvey in 1992 and the
recruitment of additional highly qualified personnel. To support these
marketing efforts and provide superior solutions capabilities, Buschman
redesigned its product line, including products previously manufactured by
Alvey, and introduced what it believes to be state-of-the-art sortation
equipment and systems software.

Buschman's EBITDA was depressed in 1993 and 1994 primarily due to
the costs associated with (i) consolidating the manufacture of Alvey's conveyor
products in Buschman's expanded facility, (ii) redesigning and standardizing the
product lines, (iii) recruiting additional marketing personnel, (iv) recruiting
and training approximately 200 additional production employees, net of turnover
and (v) pursuing aggressive marketing efforts, particularly with strategic
national accounts. However, in 1995, management's efforts produced significant
results as Buschman recorded record earnings. As a percentage of gross sales,
earnings increased to levels above those realized before its 1992 acquisition.
In addition, 1996 results reflect an increase in EBITDA of 79% over 1995's
record results and have further enhanced management's belief in its strategic
plan. As a percentage of gross sales, EBITDA increased to levels well above
those realized before its 1992 acquisition. This is particularly significant in
that Buschman now supplies large quantities of hardware sold at negotiated lower
margins, which supports Alvey's case conveyor requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

REAL TIME SOLUTIONS: Real Time Solutions, Inc. ("RTS"), which
Alvey acquired in December 1996, manufactures and sells paperless inventory
picking systems to end users through its direct sales force, through the
sales forces of Buschman and White and through a national network of
independent distributors. Paperless picking systems are used to facilitate
the retrieval (picking) and storage (put) of inventory in warehouses and
distribution centers. Inventory quantities and information are updated
immediately upon input of completed transactions. RTS believes its systems
eliminate the need for paper

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picklists, increase the productivity of a customer's work force and improve a
customer's control over its inventory. RTS markets its products under the trade
names EASYpick-Registered Trademark-, EASYput, EASYpick-DMS, and SORTpro.

Easypick-Registered Trademark-, RTS' order-filling system and
software (known as a "pick-to-light system"), is currently installed in over 100
sites and is RTS' leading product. RTS' EASYput product addresses the growing
market for put-to-light systems and EASYpick-DMS, a warehouse control software,
enables customers without sophisticated warehouse management systems to more
easily install automated systems, such as pick-to-light. Many of RTS' current
customers, including Auto Zone, Avon, Family Dollar Stores, Sears and Wal-Mart,
are also customers of White and Buschman.

WHITE SYSTEMS, INC.: White Systems, Inc. ("White") manufactures
and sells a broad line of horizontal and vertical carousels, power columns,
movable aisle systems and related software and controls which are sold to end
users through its direct sales force and through a national dealer network.
Horizontal carousels are rotating storage devices which store and move parts to
the point of need, whether an operator workstation, an automated
inserter/extractor or another robotic interface device. Vertical carousels are
similar to horizontal carousels except that the carousel travels in a vertical
plane, like a ferris wheel. The power column is a modular automated vertical
lift device within which an inserter/extractor retrieves trays from internal
shelving and delivers them to an accessible location. Movable aisle storage
systems double the storage density of an area by enabling existing fixed
shelving to move on rollers, allowing an operator to open an aisle between any
two rows of shelves. White also manufactures a heavy duty pallet moveable aisle
system for warehousing applications which utilizes a customer's existing pallets
or racking. White serves the warehouse and distribution systems markets, and,
in addition, its storage and retrieval products are used in a broad range of
manufacturing and office applications.

White's net sales have decreased 21% since its acquisition in
December 1993 and currently represent approximately 16% of the Company's total
net sales. Prior to its acquisition by the Company, White purchased equipment
for resale to its customers and included the sales price of such purchased
equipment in its annual net sales. Subsequent to its acquisition by the Company,
various product and customer responsibilities have been realigned. This has
resulted in certain products previously purchased and resold by White to be
produced or otherwise furnished by other operating units of the Company.
Accordingly, the net annual sales of these products are now reflected at the
respective operating unit rather than White. The effect of this change in
product and customer responsibility accounts for the majority of the reduction
in White's annual net sales since its acquisition by the Company. Since its
acquisition in December 1993, earnings at White have decreased primarily as a
result of lower sales volumes as discussed above, the investments in additional
resources and information systems undertaken during this period and an
over-commitment of resources in 1996.

During 1996, White experienced a further deterioration of its
earnings resulting primarily from operating difficulties due to an
overcommitment of limited resources. Pinnacle management responded by
reorganizing and restructuring the management of White. As a result, nine
senior executives and managers were assigned to or recruited and the operating
and reporting structure was realigned in a manner consistent with that of the
Company's other material handling companies. Additionally, as part of an
overall corporate reorganization, White became part of the Company's
Distribution Logistics Group ("DLG"). This group includes White, Buschman, RTS
and Distribution Logistics Systems (a group formed from White and Buschman
personnel focused on marketing, designing and selling major systems to the
distribution market). The president of DLG is the former president of Buschman.
Although no assurances can be given, management believes the initiatives
introduced since the acquisition of White, particularly those initiatives
implemented in 1996, will ultimately produce a favorable earnings trend similar
to those realized from the Company's other acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

MCHUGH, FREEMAN & ASSOCIATES, INC.: McHugh, Freeman & Associates,
Inc. ("MFA") develops, markets and supports warehouse management software
systems ("WMS") which incorporate radio frequency equipment and computers.
Warehouse management systems manage the location and movement of goods within a
warehouse to facilitate the eventual shipment of such goods. These systems
track inventory on an interactive, real-time basis from the point of receiving
through shipping. The systems communicate with a central computer to obtain and
provide strategic data. Systems employ barcoded "license plates" which identify

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and allow the tracking of items, lot or model, storage locations, employees and
picking containers. The license plates are read by a bar code scanner and
transmitted by a radio frequency terminal. MFA provided custom systems until
late 1994, when it introduced its DMPLUS "standard product". DMPLUS is a
real-time, comprehensive software solution for businesses with large-scale,
high-volume warehouses and distribution centers. DMPLUS tracks and manages
inventory on an interactive real-time basis, from the point of receiving to
shipping, through the use of bar coding scanners and radio frequency
transmitters, providing users with real-time and precise information as to the
location of people, inventory and material handling equipment. DMPLUS improves
customer service by reducing fulfillment times and increasing fulfillment
accuracy and increases operational efficiencies by reducing downtime and
increasing human resource productivity throughout the warehouse. Additionally,
DMPLUS improves capital utilization through improved inventory management,
thereby reducing unnecessary overhead and improving space utilization. For the
twelve months ended December 31, 1996, custom and "standard product" warehouse
management systems represented 45% and 55%, respectively, of MFA's total net
sales. The Company anticipates that "standard product" sales will represent an
even larger percentage of MFA's total net sales in the future. MFA has
traditionally designed and installed warehouse management software systems
primarily for the distribution marketplace; however, the broad acceptance of
its product has created new and significant opportunities in additional market
niches.

MFA's annual net sales have increased more than fifteen times since
its acquisition in May 1989 and currently represent approximately 12% of the
Company's total net sales. The Company believes that this significant increase
in revenues was originally attributable to management's efforts to position MFA
as a provider of high quality, functional software to Fortune 500 customers
requiring systems at a number of locations. This strategy has allowed MFA to
create customer-specific systems which can be implemented throughout an
organization while requiring less customization, thus leveraging MFA's
resources. More recently, the development of DMPLUS (a standardized product
requiring little customization) has allowed MFA to reduce the cost to deliver a
system which opens additional markets and improves MFA's competitive position.

Since the acquisition of MFA in 1989, EBITDA has grown at a rate
higher than sales. In the years immediately following its acquisition, the
growth in EBITDA was suppressed by significant costs incurred in connection with
the development of additional software offerings, the aggressive pursuit of
multi-site accounts and the training of new employees, as employment was
increasing at a rate of approximately 50% per year. From 1993 through 1995,
EBITDA, as a percentage of sales, significantly exceeded that of any of the
other manufacturing companies in the Pinnacle family. In 1996 EBITDA, as a
percentage of sales, at MFA was within 0.1 percentage point of the highest of
the Pinnacle companies. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

WESELEY SOFTWARE DEVELOPMENT CORP.: Weseley Software
Development Corp. ("Weseley") became a wholly-owned subsidiary of MFA on
January 29, 1996. MFA paid $15.0 million in cash for the outstanding capital
stock of Weseley on the date of acquisition. Weseley develops, markets and
supports transportation management products and services which enable
manufacturers, distributors, wholesalers and third-party logistics companies
to more effectively and efficiently manage all aspects of the shipping
process, from shipment planning to operational execution and post-shipment
administration. Weseley's transportation management software ("TMS"), TRACS*,
is an open-systems, real-time client/server solution that enables businesses
to better manage all aspects of their shipping processes, from shipment
planning to operational execution and post-shipment administration. The
Company believes that TRACS* is the only suite of TMS products that offers
comprehensive, end-to-end transportation planning and management
functionality, employing sophisticated modeling and an architecture
specifically designed for the dynamic transportation execution environment.
TRACS* evaluates orders in real-time and determines the optimal way to
consolidate, rate and route orders, considering all available carriers and
modes, enabling businesses to significantly lower freight costs, gain greater
control over shipping operations, enhance customer service and improve
overall transportation efficiency.

For the three years ended December 31, 1996, revenues at
Weseley grew significantly. Earnings at Weseley prior to the date of its
acquisition are not considered meaningful as Weseley generally followed a
policy of paying employee bonuses and making profit-sharing contributions
based upon available cash rather than earnings. Accordingly, in 1995, these
significant payments exceeded earnings, which resulted

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in an operating loss. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

The Company recently integrated its WMS and TMS technologies to
create a software solution that enables users to both manage and execute the
storage and movement of goods in warehouses with the subsequent shipment of such
goods. The Company believes that its ability to offer an integrated
DMPLUS/TRACS* solution provides it with a significant competitive advantage as
customers increasingly demand a uniform logistics solution to warehouse and
transportation management.

Consistent with the integration of its software products, the
Company established the Software Logistics Group ("SLG"), which is comprised of
MFA and Weseley, to combine marketing, product development and management under
one group of senior managers. The formation of this group is intended to
advance the best practices of each Company so as to (i) focus and leverage
marketing efforts within the common customer base, (ii) market and present an
integrated, single solution, (iii) transfer and integrate the specific
technology strengths of each Company and (iv) create the basis for establishing
and advancing common SLG strategic objectives.

INTEGRATED SYSTEMS: For integrated systems, where the products
and expertise of Alvey's subsidiaries are combined, a conveyor is typically the
"linkage" that permits the movement of products through the manufacturing line
or distribution system and software is the "enabler" that drives the entire
system and provides needed information. The Company's systems typically include
significant design and engineering work and turnkey installation services.
Examples of some of the most common integrated systems sold by Alvey include:

CONSUMER PRODUCT MANUFACTURING LINES: Systems used by beverage
manufacturers including Coca-Cola and food manufacturers such as Kellogg. These
systems could include Alvey case palletizers, AEC robotic palletizers, Busse
bulk depalletizers, Buschman conveyors and related software designed by MFA,
Weseley, Alvey or Buschman. Revenues from such systems typically exceed $2
million and may reach $10 million.

WAREHOUSE AND DISTRIBUTION SYSTEMS: Systems used by retailers
including Sears and Target, by independent wholesalers or by manufacturers in
conjunction with a consumer product manufacturing line. A typical system could
include Buschman and/or Alvey conveyors, White carousels and related software
designed by MFA, Weseley, Alvey, Buschman or White. Revenues from such systems
typically exceed $2 million and may reach $10 million.

CONTAINER MANUFACTURING SYSTEMS: Systems used by can
manufacturers including Metal Container Corporation (an Anheuser-Busch
subsidiary), or bottle manufacturers including Ball Corporation. These systems
could include Busse bulk palletizers and Alvey conveyors and related software.
Such systems typically range in price from $300,000 to $1 million.

MEAT PRODUCTION SYSTEMS: Systems used by each of the four
industry leaders in meat production. These specialized distribution systems
could include Alvey case palletizers, Buschman conveyors, White carousels and
related software designed by MFA, Alvey or White. Such systems typically range
in price from $8 million to $12 million. The Company's successful installation
of a revolutionary frozen meat distribution system for ConAgra's Monfort Beef
division in 1994 is an example of the opportunities available in integrated
systems. After the development and implementation of the integrated system for
ConAgra, the Company has received orders for approximately $47 million of
similar systems from ConAgra and other industry participants.

ENGINEERING AND SUPPORT SERVICES

While a significant portion of the Company's revenues is
attributable to the manufacture and sale of equipment, approximately 53% of
total revenues result from product support functions and non-manufactured
products delivered in connection with sales of the Company's equipment. Such
revenues are generated from engineering, software license fees, computer support
services, systems and equipment maintenance, computer hardware and peripheral
equipment, and the integration and installation of these

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products. The Company's sales process generally starts with a consultation
between Company engineers and a customer during which the Company assesses the
customer's specific materials handling needs and designs a system consisting of
the Company's equipment, including related software and controls, specifically
tailored to meet such needs. The Company installs the system and works with the
customer to insure that the system performs to the customer's expectations.
After the system is operational, the Company continues to provide ongoing
support and maintenance for the system and works with the customer in response
to changes in the customer's materials handling needs. These services are
regularly provided to the Company's customers, including through the
"value-added" partnerships the Company has formed with certain large customers.
See "Customers."

Through its Company-wide Customer One Protection ("COP") program, the
Company provides aggressive ongoing support and maintenance for its installed
base of equipment and integrated systems. COP provides the Company's customers
with comprehensive service and support including 24-hour assistance by phone,
on-site service, user training, replacement parts, maintenance programs and
equipment and systems upgrades. The COP program generated approximately $27.8
million of revenues during the year ended December 31, 1996.

BUSINESS STRATEGY

The Company's business objective is to build on its position as a
full-service provider of materials handling and information management products
and services tailored to meet the individual needs of its customers. To achieve
this objective, the Company intends to implement the following strategies:

- Continue to build upon the Company's integrated project
capabilities. Each of the Company's operating companies was
previously a stand-alone enterprise, and management
continually modifies the ways in which the subsidiaries work
together to design, market and implement solutions. By
combining the expertise of its subsidiaries, the Company is
able to provide manufacturers and distributors with
equipment and systems which represent the next step in
materials handling and information systems applications.
Integrated solutions exhibit a high degree of creativity and
represent a partnership with the customer, incorporating
flexibility in design and solution and a thorough
understanding of the customer's business. These integrated
solutions are also designed to meet the increasing
information needs of the Company's customers.

- Continue margin enhancement measures. While the margins of
the Company's early acquisitions have increased over time,
the margins of White are generally lower than those of the
other operating companies. The Company believes that as
White is further integrated into the Company through its
inclusion in the DLG, White's margins should improve,
resulting in higher margins for the Company as a whole. In
order to further improve margins, the Company has sought the
services of a leading industry consultant to assist in
implementing margin-enhancing improvements at Alvey, Busse
and White.

- Exploit the Company's strategic opportunity to expand its
information systems expertise and significantly increase the
Company's ability to provide integrated solutions to
warehousing, transportation and related demand-planning
problems.

- Exploit new and emerging market opportunities. The
manufacturing and distribution markets are constantly
changing. The Company intends to exploit new market
opportunities through its ability to create new and revised
custom and standard products that provide solutions to
market changes. In particular, the Company provides products
that respond to third-party warehousing, point-of-sale
ordering, mixed-load requirements, mail order purchasing,
improved occupational safety measures and other customer
needs.

<PAGE>

- Build upon the Company's success in supplying integrated
systems to the meat production industry. The Company intends
to build upon its success in developing meat production
systems by aggressively pursuing the potentially large meat
production market.

- Continue to seek product line expansions including
non-roller conveyor products, systems to automate
distribution centers and new software products.

- Expand the Company's international business. The Company has
significant opportunities for such expansion through its
U.S.-based international customers, as well as through new
international customers. The Company believes that the
international markets present significant opportunities for
Alvey and Busse palletizer/depalletizer systems, for MFA and
Weseley software systems and for White storage and retrieval
systems. The Company intends to focus initially on Latin
America, Asia and Europe, and intends to add additional
marketing personnel to support expanded geographical areas
as new order bookings and sales increase. Through its
subsidiary MFA, the Company established a marketing and
software engineering site in Europe during 1996. Costs
associated with this start-up were minimized by "boot
strapping" the operation and providing services in Europe to
MFA's existing U.S.-based customers while marketing to new
European customers.

INDUSTRY OVERVIEW

Constant changes in consumer demands and buying trends offer new
opportunities for materials handling and information systems applications as the
need for a quick response to supply consumer needs is heightened. Trends such as
third-party distribution, point-of-sale ordering, mixed-load shipments and more
frequent, smaller quantity deliveries create new opportunities while enhancing
the need for advanced software and integrated systems. Similarly, changes in
packaging shapes and the elimination of secondary packaging create new
challenges for manufacturers and distributors alike. The Company believes that
the need to increase employee productivity, improve worker safety, improve
margins and meet customer demands are factors which lead manufacturers and
distributors to upgrade and replace their existing materials handling equipment.

The materials handling industry is highly fragmented with many
small, single-product companies providing storage, transportation, software and
other products and services. Customers increasingly seek to satisfy their
materials handling requirements through fully integrated solutions consisting of
the equipment necessary to load, unload, sort and transport raw materials and
finished products, as well as related software and controls to monitor, optimize
and execute the movement and shipment of products. Customers are also seeking
systems to manage manufacturing, warehousing and distribution logistics.
Companies that are able to provide complex, integrated systems to satisfy
materials handling and logistics management requirements, such as the Company,
are experiencing new growth opportunities, and the Company believes that its
broad range of products and services provides it with a distinct competitive
position.

CUSTOMERS

The Company's product leadership has resulted in sales to a
diverse customer base which includes many of the largest corporations in the
United States. In addition, the Company has successfully forged important
"value-added partnerships" with customers such as Anheuser-Busch, ConAgra,
Gerber, Kellogg, Quaker Oats and Target. Many of the Company's customers have
reduced their engineering staffs and consequently look to the Company for design
and engineering services with respect to their materials handling requirements.
The Company has a large installed base of equipment and systems with these
customers which provides reference sites that are critical for attracting
potential new customers. The Company believes that these value-added
partnerships are a significant competitive advantage, as they serve as sources
of new product ideas, generate ongoing, relatively high-margin sales and
demonstrate proven systems capabilities to potential new customers.

Each of the customers listed below was one of the top 20
customers of one of the Company's operating subsidiaries during the last three
years. The customers on the list accounted for 44.9% and 38.3% of the Company's
sales in 1996 and 1995, respectively. While certain of the customers listed
below may not be current customers, the Company has no reason to believe that
all customers listed below will not continue to be customers in the future.

<PAGE>

The following table sets forth a list of selected customers of the
Company by industry group:

BREWING CONSUMER PRODUCTS

Anheuser-Busch Black & Decker
Coors Char-Broil
Labatts General Electric
Miller Brewing Motorola
Russell Corp
SOFT DRINKS Sunbeam-Oster

Coca-Cola TOBACCO
Pepsi-Cola
Royal Crown Brown and Williamson
Philip Morris
FOOD
THIRD PARTY DISTRIBUTION
Campbell
Farmland Conrail
Hershey Foods Federal Express
Kellogg TNT Distribution
M&M Mars
Nestle WINE AND DISTILLED SPIRITS
Quaker Oats
Tropicana Gallo
Vlasic Foods United Distillers

INDUSTRIAL GENERAL DISTRIBUTION/RETAIL
DISTRIBUTION/MANUFACTURING
AAFES
Alcon BJ's Stores
Canadian Tire Corp. Consolidated Stores
Chrysler Chanel
Crown, Cork and Seal Dollar General
DEC Famous Footwear
DuPont J.C. Penney
Intel Liz Claiborne
Libbey Glass Meijer
LTV Steel Meldisco
Reynolds Metal Michaels Stores
Schering Plough Nike
The Ball Corporation Ross Stores
Thomas & Betts Sears
Warner Lambert Spiegel/Eddie Bauer
Whirlpool Staples
Tandy
CONSUMER GOODS Target Stores
United Stationers
Boise Cascade Wal-Mart
Johnson & Johnson
Kimberly Clark Corp.
Lever Bros.
Procter & Gamble
9
<PAGE>

During the year ended December 31, 1996, the Company's largest
customer was Target Stores, which accounted for 5.5% of the Company's total
sales. For the year ended December 31, 1995, the Company's largest customer was
Procter & Gamble, which accounted for 3.5% of the Company's total sales. The
Company's ten largest customers represented 27.5% of total sales in 1996, up
from 23.6% in 1995.

The Company focuses its research and development efforts on key
customers and applications. These customers serve as significant funding sources
for such research and development efforts, with most of the cost paid for
through contracts which focus on solving specific problems or technical
requirements. These contracts also provide the Company with opportunities to
enhance its competitive position without additional capital investments. The
Company expects to create additional value-added relationships as
it extends its product offerings and installs new, integrated systems which can
serve as additional reference sites.

The Company believes that it has excellent working relationships
with its customers. These relationships include proprietary accounts where
projects are generally awarded without a competitive bid process and
non-proprietary accounts where projects are typically awarded through a bid
process among two or three potential suppliers.

SALES AND DISTRIBUTION

The Company has developed strong domestic sales channels,
including approximately 100 direct salespeople and approximately 290 independent
distributors and independent manufacturer's representatives. This sales force
covers the entire United States, with especially strong coverage in the major
industrial centers. Management believes that the Company has the strongest
combination of direct and independent sales networks in the materials handling
industry.

International sales accounted for approximately $25.8 million or
8% of the Company's sales for the year ended December 31, 1996, a 21% increase
from $21.3 million in international sales for the year ended December 31, 1995.
The Company is pursuing a strategy to significantly increase international sales
as a percentage of the Company's total net sales. An international division has
been established within the Company to develop and implement strategies to
achieve this goal. The Company expects to leverage its existing relationships
with major multinational corporations in the United States in order to support
their activities throughout the global market.

BACKLOG

The Company's backlog is based upon firm customer orders that
are supported by purchase orders, other contractual documents and cash
payments. As of December 31, 1996, the Company's backlog was $136.1 million.
While the level of backlog at any particular time may be an indication of
future sales, it is not necessarily indicative of the future operating
performance of the Company. Additionally, certain backlog orders may be
subject to cancellation in certain circumstances. The Company believes that
virtually all of its orders in backlog at December 31, 1996 will be recorded
as revenue within one year.

RESEARCH AND DEVELOPMENT

Strong research and development efforts are the basis of the
Company's product and market leadership. In the fiscal years ended December 31,
1996, 1995 and 1994, the Company incurred $4.8 million, $2.1 million and $2.5
million, respectively, in research and development expenses. By utilizing
customer inputs, research with respect to competitors and research with respect
to externally available engineering to establish future product needs, the
Company focuses its research and development on key customers and applications.
Based on such data and subsequent analysis, the Company establishes product
plans that are continually reviewed and updated. To facilitate an integrated
solutions approach, the Company's research and development activities address
three engineering disciplines: mechanical, controls and computer software.

10
<PAGE>

In addition to the Company's research and development expenses
identified above, customers serve as a significant funding source for other
research and development efforts, with much of such costs funded through
customer contracts that focus on solving specific problems or technical
requirements. These contracts also provide the Company with opportunities to
enhance its competitive position without additional capital investments.

The Company holds 31 active U.S. patents, 16 active foreign
patents, 21 U.S. registered trademarks, four active foreign trademarks and 14
pending patent applications, and has 16 trademark applications pending. In
addition to its extensive patent and trademark portfolio, the Company also
licenses certain intellectual property rights from third parties and owns a
wide array of unpatented proprietary engineering. The Company's U.S. patents
have remaining terms ranging from one to 16 years.

RAW MATERIALS AND COMPONENTS

The Company's principal raw materials and components purchased
from third parties are steel and electric motors and reducers. The Company
avoids some of the price volatility of these products by purchasing most of its
requirements through annual contracts. The Company does not rely on any single
supplier for these materials and believes it has the ability to quickly switch
sources for any of these materials should the need arise.

ENVIRONMENTAL MATTERS

The Company's operations are subject to a variety of federal,
state and local environmental laws and regulations which have become
increasingly stringent. The Company believes its current operations are in
material compliance with current environmental laws and regulations. However,
the scope of environmental laws is very broad and is subject to change.

COMPETITION

The materials handling and related information systems industry
is highly fragmented and very competitive. The industry includes numerous small
to medium size suppliers who focus on specific market niches and/or singular
applications. The suppliers in this group generally do not offer systems or
integrated solutions, but instead offer individual kits, machines and
applications. Certain other competitors are larger, with significant financial
and marketing resources, and offer materials handling systems and integrated
solutions.

Although the Company believes it is one of the leading
suppliers of integrated materials handling systems, many of the Company's
competitors are large and have significant financial, marketing and technical
resources. In addition, the Company may encounter competition from new market
entrants.

EMPLOYEES

As of December 31, 1996, the Company had over 2,300 employees,
approximately 950 of whom are engineers and other professional staff. The
Company operates through a decentralized organizational structure,
interconnected by a corporate staff of 11 professionals located at Pinnacle's
headquarters in St. Louis, Missouri. The Company is subject to collective
bargaining agreements at all of its manufacturing facilities except the Busse
facility. The Company has not experienced any work stoppages related to labor
matters for more than 20 years. The Company considers its employee relations to
be good.

ITEM 2. PROPERTIES

The Company occupies over 1,000,000 square feet of manufacturing,
assembly and office space. Its primary production facilities are located in
St. Louis, Missouri; Cincinnati, Ohio; Randolph, Wisconsin; and Kenilworth, New
Jersey. The Company's software development facilities are located in Waukesha,
Wisconsin; San Diego, California; Grand Rapids, Michigan; Shelton, Connecticut;
and Berkeley, California.

<PAGE>

In order to meet customer demand and improve manufacturing
efficiencies, the Company completed two new manufacturing facilities in 1996: a
62,000 square foot addition to the Busse facility in Randolph, Wisconsin and an
82,000 square foot facility for Alvey in St. Louis, Missouri.

The location and size of each of the Company's significant
facilities is summarized below:

OPERATING COMPANY LOCATION SIZE (SQ. FT.) OWNED/LEASED LEASE EXPIRATION
----------------- -------- -------------- ------------ ----------------
<S> <C> <C> <C> <C>
Alvey Olivette, MO 250,000 Owned --
Alvey St. Peters, MO 82,000 Owned --
Busse Randolph, WI 122,000 Owned --
Buschman Cincinnati, OH 286,000 Owned --
RTS Napa, CA 21,000 Leased July 2003
White Kenilworth, NJ 263,000 Leased December 2006
White San Diego, CA 19,000 Leased May 1999
MFA Waukesha, WI 45,000 Leased October 2005
Weseley Shelton, CT 29,000 Leased December 2002

</TABLE>

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in various legal
proceedings arising in the ordinary course of business. None of the matters in
which the Company is currently involved, either individually or in the
aggregate, is expected to have a material adverse effect on the Company's
business, financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31, 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no established public market for the Company's Common
Stock. All of the Company's Common Stock is held by Pinnacle.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The selected historical consolidated financial data presented
below at and for the five years ended December 31, 1996 have been derived from
the historical Consolidated Financial Statements of Alvey which have been
audited by Price Waterhouse LLP, independent accountants. Alvey's historical
consolidated financial statements as of and for each of the three years ended
December 31, 1996, 1995 and 1994 are included elsewhere in this Form 10-K.

The information below is qualified in its entirety by the
detailed information included elsewhere herein and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and related Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K.

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (1):
Net sales....................................... $ 331,247 $ 288,018 $ 248,177 $ 164,022 $ 106,579
Cost of goods sold.............................. 256,218 217,297 189,007 123,033 75,343
---------- ---------- ---------- ---------- ---------
Gross profit.................................. 75,029 70,721 59,170 40,989 31,236
Selling, general and administrative
expenses...................................... 61,471 51,630 43,402 30,421 22,467
Write-off of purchased in-process research and
development costs (2)......................... 12,700 -- -- -- --
Research and development expenses............... 4,797 2,051 2,538 1,436 930
Write-off of goodwill (3)....................... 11,491
Amortization expense............................ 1,703 1,737 1,836 1,479 1,095
Other expense (income), net (4)................. 1,378 (108) 2,279 (11) (335)
Restructuring and plant consolidation
expense (5)................................... -- -- -- -- 1,801
---------- ---------- ---------- ---------- ----------
Operating income (loss)....................... (18,511) 15,411 9,115 7,664 5,278
Interest expense................................ 12,301 6,896 5,921 4,053 2,690
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary losses......................... (30,812) 8,515 3,194 3,611 2,588
Income tax expense (benefit).................... (1,909) 4,109 1,516 1,560 1,126
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary losses..... (28,903) 4,406 1,678 2,051 1,462
Extraordinary losses, net (6) 1,993 -- -- 6,203 614
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $ (30,896) $ 4,406 $ 1,678 $ (4,152) $ 848
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

Earnings per share (7)............................ -- -- -- -- --

AT DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA(1):
Working capital (deficit).................... $ 604 $ (401) $7,152 $8,155 $ (928)
Total assets................................. 181,851 150,285 138,536 129,658 83,021
Long-term debt, less current maturities...... 100,493 42,460 54,754 59,341 35,508
Redeemable preferred stock (8)............... - 27,322 23,435 20,034 16,902
Net investment of Parent (9)................. (41,129) (15,719) (16,332) (15,015) (9,729)

</TABLE>

<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA OF ALVEY

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER CONSOLIDATED FINANCIAL DATA (1):
Depreciation expense (10).................... $ 4,259 $ 2,952 $ 2,752 $ 2,583 $ 1,724
Capital expenditures, net (10)............... 11,633 4,496 5,091 3,471 1,920

OTHER PERFORMANCE MEASURES (NON-GAAP) (11):
EBITDA (12).................................. 13,087 20,100 15,877 11,726 8,097
Ratio of EBITDA to cash interest expense (13) 1.16 3.27 2.77 3.17 3.30
Ratio of long-term debt to EBITDA............ 7.68 2.11 3.45 5.06 4.33

</TABLE>

(1) Results include various acquisitions from the date of such acquisition,
including Busse and Buschman in 1992, White in 1993 and Weseley and RTS in
1996.

(2) Amount relates to $11.7 million and $1.0 million of the purchase price of
Weseley and RTS, respectively, which were allocated to purchased in-process
research and development and immediately expensed in the first and fourth
quarters of 1996, respectively.

(3) Amount represents the write-off of the remaining goodwill balance at one
subsidiary, which is considered to be impaired due to historical losses and
uncertainty regarding future income and cash flows.

(4) Amount in fiscal 1996 includes a $1.4 million one-time charge for the
termination of a management agreement. Amount in fiscal 1994 includes the
payment of a one-time stay bonus in the amount of $2.2 million to an
executive of White in connection with the acquisition of White.

(5) Amount reflects non-recurring restructuring and plant consolidation
expenses associated with the closure of a Company-owned manufacturing
plant.

(6) Amount reflects the write-off of unamortized deferred financing fees, net
of applicable income tax benefits, resulting from the early extinguishment
of debt during 1996, 1993 and 1992. Amount in 1993 also includes
approximately $5.4 million, net of applicable income tax benefits, for the
accrual of operating losses and other related costs associated with the
disposal of a carousel manufacturing plant in Lewiston, Maine pursuant to a
Federal Trade Commission order in 1993 (See Note 4 to the Consolidated
Financial Statements of Alvey).

(7) Given the historical organization and capital structure of Alvey, earnings
per share information is not considered meaningful or relevant and
therefore has not been presented.

(8) Amount represents redeemable preferred stock of Pinnacle. Due to the
exchangeable feature of the preferred stock which allows the holder to
exchange the preferred stock for subordinated notes of Alvey, the preferred
stock has been pushed down to the financial statements of Alvey at December
31, 1995. Outstanding redeemable preferred stock of Pinnacle at
December 31, 1996 has not been pushed down to the financial statements of
Alvey as it is not exchangeable into debt of Alvey.

(9) Net investment of Pinnacle represents the basis of Pinnacle's investment in
Alvey, which has been pushed down to the financial statements of Alvey, and
includes cumulative contributions of capital and cumulative losses before
extraordinary losses, extraordinary losses and aggregate accreted/paid
preferred stock dividends. The historical amount at December 31, 1996
consists of cumulative contributions of capital to Alvey by Pinnacle of
$8.8 million, cumulative losses of $35.5 million, including extraordinary
losses of $9.5 million and an aggregate accretion/payment of $14.4 million
of paid-in-kind dividends on preferred stock.

(10) Capital expenditures and related depreciation expense include amounts
related to investments in fixed assets and costs of software
development. In 1996, this includes $659,000 related to the write-off
of capitalized software costs (See Note 2 to the Consolidated Financial
Statements of Alvey).

(11) Other performance measures such as EBITDA (discussed further below)
should not be construed as an alternative to operating income or net
income calculated in accordance with generally accepted accounting
principles ("GAAP") or as an indicator of operating performance or
liquidity. However, the Company believes such non-GAAP performance
measures are commonly used to evaluate a company's ability to service
debt.

(12) EBITDA consists of earnings before interest, income taxes,
extraordinary items and depreciation and amortization expense. In
1996, EBITDA excluded a $12.7 million one-time write-off of purchased
in-process research and development costs, an $11.5 million write-off
of goodwill and a $1.4 million one-time charge for the termination of a
management agreement. In 1994, EBITDA excluded a $2.2 million one-
time payment of a stay bonus in connection with the acquisition of
White which is included in "Other expense (income), net" above.
Management fees reduced EBITDA by $502,000, $606,000, $502,000,
$665,000 and $500,000 for the years ended December 31, 1996, 1995,
1994, 1993 and 1992, respectively.

(13) For purposes of this computation, interest expense consists of interest
on indebtedness and does not include amortization of deferred
financing fees and other noncash charges to interest.

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

When used in the following discussion, the words "believes",
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

GENERAL OVERVIEW

The following discussion summarizes the significant factors
affecting the consolidated operating results and financial condition of the
Company for the three fiscal years ended December 31, 1996.

Subsequent to the acquisition of Alvey by Pinnacle in August
1988, Alvey and Pinnacle completed a succession of six complementary
acquisitions which has resulted in expanded product lines and an ability to
provide integrated solutions in a wide range of manufacturing and distribution
applications. Set forth below is certain information with respect to the
Company's acquisitions:

ACQUISITION ACQUISITION DATE
McHugh, Freeman & Associates, Inc................... May 1989
Busse Bros., Inc.................................... April 1992
The Buschman Company................................ October 1992
White Systems, Inc.................................. December 1993
Weseley Software Development Corp................... January 1996
Real Time Solutions, Inc............................ December 1996

The Company believes that its emphasis on complementary
acquisitions of companies serving either targeted markets or providing niche
products has enabled it to provide customers a single source for complete
integrated materials handling and information flow systems. Further, the
Company believes that it benefits from productivity and integration gains
resulting from its succession of complementary acquisitions combined with a
strategy of integrating the operations of each newly-acquired company with the
operations of Alvey and its other operating subsidiaries, which strategy is more
fully described in the next succeeding paragraph.

Shortly after acquiring each of its operating subsidiaries,
management reviewed each newly-acquired subsidiary with respect to the possible
integration of operations with Alvey and its other operating subsidiaries in
order to improve operating efficiencies. As a result of such previous reviews,
the Company initiated changes in each operating subsidiary's production
processes that were targeted at the improvement of manufacturing efficiencies,
the increase in facility capacity and ultimately the reduction of product cost.
Additionally, in recent years, management has undertaken a number of programs
targeted at reducing the cost to produce a specific product by simplifying and
standardizing components and assemblies, thereby improving the productivity of
the manufacturing process. The following is a brief summary of some of the
actions taken and programs initiated in order to improve operating efficiencies:

- Each of the manufacturing facilities of Alvey, Busse and
Buschman have been reorganized to modify the flow of product
and raw materials through the manufacturing process. Within
three to 12 months after completing these changes, each of
Alvey, Busse and Buschman recorded meaningful improvements
in labor productivity and facility capacity.

- In 1993, Alvey began production of the series 920
palletizer, which was designed to be manufactured in modules
rather than a single unit, thus reducing the labor
requirements. As with most new products, the manufacture of
the initial units

<PAGE>

resulted in cost overruns; however, by early 1994, Alvey
produced these units more efficiently than originally
estimated. The result of this engineering process was to
produce a state-of-the-art machine that could be sold at a
price 15-25% below the machine it replaced, yet generate a
gross margin percentage significantly higher than that of
its predecessor.

- Alvey also began production of the series 880 palletizer in
late 1994. This machine was redesigned to incorporate many
of the same assemblies used on the 920 series, resulting in
labor efficiencies and reduced inventories. While not as
significant as those realized in the production of the 920
palletizer, the redesign of the series 880 has resulted in
meaningful cost improvements and efficiency trends.

- Busse introduced the "Turbo" series depalletizer in 1993.
Busse has realized similar results on the production of the
Turbo series depalletizers as Alvey experienced with the
series 920 palletizer. Furthermore, the production changes
initiated in 1993 enabled Busse to increase sales by
approximately 300% over 1992 results (the year that Busse
was acquired by Alvey), with the number of employees
increasing by approximately 200%.

- The Company has completed the process of combining the
conveyor product line of Alvey with that of Buschman. The
best products from each company were selected and then
re-engineered to incorporate current technologies and
manufacturing capabilities. The effect of this program was
to greatly reduce the number of parts required to support
two separate products and to simplify the manufacture of the
new enhanced product. As a result of this undertaking, and
other programs targeted at specific issues, productivity at
Buschman began increasing in the last half of 1994 and has
continued to do so throughout 1996. Buschman increased 1996
sales by 26% over 1994 with only a minimal increase in
factory employment.

- During the last half of 1995 and throughout 1996, the
Company has increased spending on state-of-the-art computer
and manufacturing equipment and technology targeted at
improving its production capabilities and reducing product
costs. In addition, during this period, the Company has
spent $7.3 million to expand, construct and equip new
manufacturing and engineering facilities at Alvey and Busse.
The Company believes these new facilities and equipment will
allow the Company to expand capacity and improve processes,
thereby eliminating duplicate costs and increasing
productivity. The Company expects that the implementation
of these processes and acquisition of equipment will
continue through 1998 and ultimately encompass the entire
Company.

- The Company recently integrated its WMS and TMS technologies
to create a software solution that enables users to both
manage and execute the storage and movement of goods in
warehouses with the subsequent shipment of such goods. The
Company believes that its ability to offer an integrated
DMPLUS/TRACS* solution provides it with a significant
competitive advantage as customers increasingly demand a
uniform logistics solution to warehouse and transportation
management.

While no assurance may be given with respect to future
productivity performance, management believes additional efficiencies will be
realized from these programs.

Each of the Company's acquisitions was accounted for under the
purchase method of accounting, with the purchase prices allocated to the
estimated fair market value of the assets acquired and liabilities assumed. In
each acquisition, the excess of the purchase price paid over the estimated fair
value of the net assets acquired was allocated to goodwill. The Company has
allocated an aggregate of $43.0 million to

<PAGE>

goodwill since 1988, $26.5 million of which is recorded on Alvey's balance
sheet at December 31, 1996. See Note 6 to the Consolidated Financial
Statements for a discussion of the $11.5 million of goodwill that was
written-off in 1996. Goodwill is generally amortized over a period of 40
years; however, the Company is amortizing the goodwill associated with the
acquisitions of Weseley and RTS over ten years. Goodwill amortization will
result in future annual expense of approximately $1.3 million per year. The
Company financed the acquisitions primarily through borrowings, resulting in
increases in the Company's debt and interest expense. Results of operations
of each acquired company have been included in the Company's consolidated
statement of operations from the dates of the respective acquisition.

The Company's parent, Pinnacle, is considering a series of
transactions pursuant to which it would spin-off the material handling
businesses presently conducted by the Company, Buschman, White, Busse and RTS
(together, the "Equipment Business") to the stockholders of Pinnacle (the
"Spin-off") and immediately thereafter effect an initial public offering of the
common stock of Pinnacle (the "IPO") which, following the Spin-Off, would
continue to own and operate the businesses currently operated by MFA and Weseley
(together, the "Software Business"). The proposed Spin-Off of the Equipment
Business and the contemporaneous IPO of the Software Business would be
conditioned on a number of factors, including the Company's ability to
restructure the terms of its outstanding Senior Subordinated Notes and
Pinnacle's outstanding Preferred Stock on acceptable terms, the receipt of a
private letter ruling from the IRS confirming the "tax-free" nature of the
Spin-Off and certain other contingencies. In addition, the IPO would only occur
if and to the extent the Company deems it advisable, in its sole discretion. It
is currently contemplated that the Company would offer to exchange its
outstanding Senior Subordinated Notes in one or more steps for a combination of
cash (which would be provided by the proceeds from the IPO) and Senior
Subordinated Notes of the Equipment Business. As a result of these
contingencies, no assurances can be given that either the Spin-Off or the IPO
will be consummated. No offer in connection with the IPO or related
restructuring of the Senior Subordinated Notes is made hereby.

<PAGE>

RESULTS OF OPERATIONS

The following table sets forth, for the fiscal periods indicated,
net sales and categories of expenses, in thousands of dollars and as a
percentage of net sales.

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- ------------------------

<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... $331,247 100.0% $288,018 100.0% $248,177 100.0%
Cost of goods sold................. 256,218 77.3 217,297 75.4 189,007 76.2
-------- -------- --------
Gross profit....................... 75,029 22.7 70,721 24.6 59,170 23.8
Selling, general & administrative
expenses......................... 61,471 18.6 51,630 17.9 43,402 17.5
Write-off of purchased in-process
research & development costs..... 12,700 3.8 0 0.0 0 0.0
Research & development
expenses......................... 4,797 1.5 2,051 0.7 2,538 1.0
Write-off of goodwill.............. 11,491 3.5 0 0.0 0 0.0
Amortization expense............... 1,703 0.5 1,737 0.6 1,836 0.7
Other expense (income), net........ 1,378 0.4 (108) (0.0) 2,279 0.9
-------- -------- --------
Operating income (loss)............ (18,511) (5.6) 15,411 5.4 9,115 3.7
Interest expense................... 12,301 3.7 6,896 2.4 5,921 2.4
-------- -------- --------
Income (loss) before income taxes
and extraordinary loss......... (30,812) (9.3) 8,515 3.0 3,194 1.3
Income tax expense (benefit)....... (1,909) (0.6) 4,109 1.5 1,516 0.6
-------- -------- --------
Income (loss) before
extraordinary loss............. (28,903) (8.7) 4,406 1.5 1,678 0.7
Extraordinary loss, net............ 1,993 0.6 0 0.0 0 0.0
-------- -------- --------
Net income (loss) $(30,896) (9.3)% $4,406 1.5% $ 1,678 0.7%
-------- -------- --------
-------- -------- --------

</TABLE>

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 TO THE YEAR ENDED DECEMBER 31,
1995

NET SALES were $331.2 million for the year ended December 31,
1996, representing an increase of $43.2 million, or 15.0%, over net sales of
$288.0 million for the year ended December 31, 1995. Excluding Weseley and
RTS, "same store" sales increased $37.2 million or 12.9% over 1995 as sales
increases were realized at each of the Company's operating groups.

The most significant growth was produced by the CPG where sales
increased $22.1 million or 18.1% over 1995. This strong growth resulted from
the delivery of large in-process production and storage systems and the
continuing market demand for the Company's mid-range and high-speed palletizing
systems. Revenues from the Company's DLG increased $9.1 million or 6.2% over
1995 despite a revenue decrease in the Company's storage and retrieval products
from the prior year. Within the DLG, the demand for integrated and major
warehouse systems continued as revenues from these products increased $11.0
million or 12.8% over 1995. Revenues from the Company's SLG increased $6.7
million or 16.7% over 1995, attributable primarily to the inclusion of Weseley
and its TRACS product line. However, the Company believes the overall revenue
growth of this group was adversely affected during 1996 as the Company was
presented with significant strategic opportunities that involved enhancing the
functionality of DMPLUS to address the needs of the retail apparel segment of
the WMS market. Accordingly, the Company deployed certain of its marketing,
development and implementation efforts to enter this significant market segment.
While the Company believes it has and will continue to realize the benefits from
these efforts, such efforts involved revising certain marketing processes and
devoting significant time to designing additional functionality, which
activities resulted in a delay in the recognition of license revenues during
this period with the results for the fourth quarter of 1996 being adversely
affected. Also during 1996, the Company substantially completed the migration
of TRACS* from a DOS-based application system to an open-systems, client/server
solution. The Company believes that some potential TRACS* customers may have
deferred licensing TRACS* during the first half of 1996 in anticipation of the
open systems, client/server release that became available in the second
half of 1996. The Company further believes that many customers that deferred
licensing TRACS* in the first half of 1996 subsequently licensed TRACS* prior to
year-end; however, certain of these potential customers may have opted instead
to purchase competing TMS products rather than waiting for the completion of the

<PAGE>

migration of TRACS* to an open systems, client/server system, thereby adversely
affecting TRACS* license fees in 1996. In addition, hardware revenues within
the SLG decreased $4.9 million from 1995 as a significant one-time purchase by a
single customer in 1995 did not repeat in 1996. Furthermore, one strategy of
the SLG is to grow license and maintenance revenues through the increased usage
of third party implementation services. To the extent these efforts are
successful, hardware revenues will continue to decline as a percentage of
revenues.

New order bookings were $316.3 million for 1996, a decrease of
$2.6 million or 0.8% from record levels in 1995. This decrease is primarily
attributable to the CPG and, in particular, to Alvey where new order bookings
decreased $20.2 million from 1995 record bookings of $125.5 million. This
decrease generally reflects a reduction in the amount of major in-process
production and storage systems booked in 1995 but not repeated in 1996. The
lack of new orders is attributable to customer-driven delays on new projects
with existing customers and the loss of a potential new customer to competition.
The Company believes that firm contracts for these previously delayed projects
will be awarded during 1997. Despite the decrease in year-over-year bookings
at Alvey and on a consolidated basis, 1996 bookings were 14.4% and 17.8% above
1994 levels, respectively.

The slight year-over-year decrease in bookings, combined with
the significant increase in sales, has resulted in a $7.7 million decrease in
the consolidated backlog at year-end 1996 compared to year-end 1995. This
decrease is entirely attributable to the CPG as backlog for the other groups
increased approximately $16.1 million. The decrease in the backlog of the
CPG can be explained by the shortfall in new orders and the significant
increase in sales. Portions of the CPG sales increase and resulting decrease
in backlog are attributable to management initiatives undertaken during 1996
to improve engineering productivity and reduce project cycle times. The
Company believes that the successful implementation of these initiatives
should result in a reduction in backlog relative to historical measures.

GROSS PROFIT was $75.0 million in 1996, an increase of $4.3
million, or 6.1% over the $70.7 million in 1995. The gross profit margin, as a
percentage of sales, decreased to 22.7% from 24.6% in 1995. Excluding the
effects of the first-time inclusion of Weseley, gross profit decreased $683,000,
or 1.0% and, as a percentage of sales, was 21.5% or 3.1 points below 1995
levels. Gross profit, in both dollars and as a percentage of sales, was
adversely affected at three of the Company's manufacturing operations, as
project overruns were incurred due to (i) the cost of outsourcing production,
the use of temporary facilities, overtime premiums and production
inefficiencies, all due to a lack of capacity and over-committed resources, (ii)
the implementation of first-time product applications and (iii) significant
increases in start-up and commissioning efforts resulting from the preceding
items (i) and (ii). These overruns were partially offset by continuing
engineering and manufacturing productivity gains at Buschman where gross profit
increased $5.3 million and 3.3 percentage points over 1995 and 10.0 percentage
points over 1994 results. Management believes that the recent completion of two
new production facilities, the addition of new equipment and resources, the
integration of various systems and processes, the management reorganization at
White, the operational focus to result from the creation of distinct operating
groups and the productivity and engineering programs initiated during 1996
should produce manufacturing efficiencies, productivity gains and eliminate or
greatly reduce the project overruns incurred during 1996.

Gross profit from the SLG increased $5.3 million or 42.5% over
1995. Although the first-time inclusion of Weseley accounted for the largest
portion of this increase, gross profit margins also increased at MFA despite
the reduction in hardware revenues discussed above. These margin gains were
achieved through engineering productivity improvements and volume increases in
higher-margin license fees and services. Additional growth in 1996 gross
margins was sacrificed for long-term gains as the Company deployed a number of
its product implementation teams to perform pre-contract services related to
changes in the marketing programs and the development efforts associated with
pursuing and acquiring license agreements in the retail apparel market, as
discussed above. As a result, license fee revenues resulting from these efforts
have not been fully recognized. As costs were incurred without the full benefit
of matching revenues, management estimates that gross profit in 1996 was
adversely affected by approximately $1.0 million. Also during 1996, the Company
installed the first release of its TRACS* client/server software product as it
migrated TRACS* from its earlier DOS-based version. Initial installations of
this new version of TRACS* required greater implementation resources and costs
than previously associated with the sale and implementation of

<PAGE>

earlier versions of TRACS*. Furthermore, the significant increase in the
number of DMPLUS and TRACS* installations has resulted in, and the Company
believes will continue to result in, an increasing demand for software
maintenance and support contracts. To meet this demand, the Company has
invested significantly in staffing and equipping dedicated product support
groups. As revenue from these services grow, management believes that gross
profit margins will increase accordingly.

While no assurance may be made with respect to future
productivity performance, the Company believes the recent productivity gains at
Buschman are sustainable and may be further improved. The ability of the
Company to increase productivity performance depends primarily upon (i) the
ability of White to realize the benefits of new systems and organizational
changes, (ii) the utilization of the addition of capacity at Alvey and Busse
and (iii) the implementation and success of additional programs aimed at
reducing project cycle times and engineering productivity.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $61.5 million
in 1996, representing an increase of $9.8 million, or 19.1% over the $51.6
million in 1995. As a percentage of sales, selling, general and administrative
(SG&A) expenses increased to 18.6% in 1996 compared to 17.9% in 1995. Excluding
Weseley, where due to the nature of its business SG&A is significantly higher as
a percentage of sales, the "same store" increase in SG&A was $5.7 million or a
11.1% increase over 1995. As a percentage of sales, "same store" SG&A was 17.6%
or 0.3 points lower than 1995. The most significant year-over-year increase, in
both dollars and as a percentage of sales, was at MFA and is attributable to the
addition of sales and marketing personnel and professional staff to support
current product demand and to generate future growth in licensee fee revenue and
the international marketing of the SLG DMPLUS and TRACS* products. SG&A
expenses of the DLG increased $2.3 million or 10.9% over 1995 expenses which is
the result of the Company's investment to further develop its "Design and Build"
capabilities, improve its project concepting and estimating resources and open a
direct sales office to replace an independent distributor.

WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT was
$12.7 million in 1996 compared to $0 in 1995. In connection with the
acquisitions of Weseley and RTS during 1996, $11.7 million and $1.0 million,
respectively, of the related purchase price was allocated to purchased
in-process research and development costs at the dates of acquisition and
immediately expensed as write-offs of purchased research and development
costs. (See Note 3 to the Consolidated Financial Statements for further
discussion.)

RESEARCH AND DEVELOPMENT EXPENSES were $4.8 million for 1996,
representing an increase of $2.7 million, or 134%, compared to $2.1 million in
1995. Of this increase, $976,000 is attributable to the inclusion of Weseley in
1996. In addition, substantial increases were recorded (i) at MFA as it
continues to develop and broaden the functionality of its DMPLUS software
product and improve the interface between DMPLUS and TRACS*, (ii) at Buschman as
it develops new conveyor products and applications and (iii) at Busse for the
development of enhanced palletizer and depalletizer offerings.

WRITE-OFF OF GOODWILL was $11.5 million in 1996 compared to $0 in
1995. In 1996, remaining goodwill of one of the Company's subsidiaries was
written-off as it was considered to be impaired due to historical losses and
uncertainty regarding future income and cash flows. (See Note 6 to the
Consolidated Financial Statements for further discussion.)

OTHER EXPENSE (INCOME), NET was $1.4 million of expense in 1996,
representing an increase of $1.5 million over 1995. This increase is almost
entirely attributable to the $1.4 million charge associated with the first
quarter termination of a consulting agreement in connection with the refinancing
and recapitalization transactions, described below in the section entitled
"Liquidity and Capital Resources".

OPERATING INCOME (LOSS) decreased to a loss of $18.5 million in
1996 from income of $15.4 million in 1995. As a percentage of net sales,
operating income decreased to (5.6%) in 1996 from 5.4% in 1995. However,
excluding non-recurring charges of $26.3 million resulting from the $12.7
million write-off of purchased in-process research and development costs
associated with the acquisitions of Weseley and RTS, an $11.5 million write-off
of goodwill, the $1.4 million expense associated with the termination of a
consulting agreement and the $0.7 million related to the write-off of
capitalized software costs (See Note 2 to the Consolidated Financial Statements
for further discussion), operating income would have been $7.8 million,

<PAGE>

representing a decrease of $7.6 million compared to 1995 operating income. As
a percentage of sales, and excluding the non-recurring charges described above,
operating income decreased to 2.3% in 1996 compared to 5.4% for 1995. This
decrease is a result of the increases in SG&A and R&D exceeding the growth in
gross profit, as described above.

INTEREST EXPENSE increased to $12.3 million in 1996, representing
an increase of $5.4 million, or 78.4%, from $6.9 million in 1995. This
increase reflects the higher level of borrowings resulting from the issuance of
the $100 million of 11.375% Senior Subordinated Notes (the "Debt Offering") in
January 1996, the higher interest rate on these notes and the $836,000 increase
in non-cash amortization charges relating to the debt issuance costs associated
with the Debt Offering.

INCOME TAX EXPENSE (BENEFIT) was a benefit of $1.9 million in
1996, representing a change of $6.0 million from an expense of $4.1 million in
1995. The related effective income tax rate decreased to 6.2% in 1996 from 48.3%
in 1995, primarily as a result of the $25.5 million of nondeductible expenses
related to the amortization and write-off of goodwill and the write-off of
purchased in-process research and development.

EXTRAORDINARY LOSS, NET was $2.0 million in 1996 and there was no
extraordinary loss in 1995. This extraordinary loss represents the write-off
of debt issuance cost and related debt prepayment penalties, net of tax,
resulting from the early extinguishment of the Company's debt as part of the
recapitalization. (See the "Liquidity and Capital Resources" section.)

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994

NET SALES were $288.0 million in 1995, representing an increase
of $39.8 million, or 16.1%, over net sales of $248.2 million in 1994. As the
Company did not complete any acquisitions during 1994, this increase in net
sales is due to sales growth at each of the Company's operating subsidiaries.
In particular, the strong demand for Alvey's redesigned mid-range and high-speed
palletizers and its success in providing integrated systems resulted in record
shipments and sales and produced an increase of $17.1 million, or 19.3%, in net
sales over 1994. At MFA, continued strong demand for warehouse management
systems caused sales to grow by $11.9 million, or 42.6%, compared to 1994.
Buschman also realized significant revenue gains from integrated and systems
projects as sales of these systems increased $6.0 million, or 16.6%.

On a consolidated basis, new order bookings were $318.9 million
for 1995, representing an increase of $50.3 million, or 18.7%, over bookings for
1994. Increases in 1995 new order bookings were realized by each of the
Company's operating subsidiaries other than White, with new order bookings at
Alvey and Buschman increasing by $33.5 million and $9.5 million, or 36.4% and
13.7%, respectively. This significant increase in customer demand created a
record year-end sales backlog of $143.9 million at December 31, 1995, which
represents an increase of $29.4 million, or 25.7%, over the backlog at December
31, 1994. The most significant increases in year-end backlog were at Alvey,
which recorded an increase of $20.2 million, or 46.3%, and Buschman, which
recorded an increase of $8.6 million, or 31.1%. Alvey's backlog is driven by
the increasing number and size of integrated and palletizing systems while
Buschman's success has resulted from significant bookings increases in major
warehouse systems.

GROSS PROFIT was $70.7 million for 1995, an increase of $11.6
million, or 19.5%, over 1994. This increase was primarily the result of
increased sales volume offset by a slightly less favorable mix of products
resulting in additional margins of approximately $9.5 million. In addition,
improved operating efficiencies at each manufacturing entity (other than
White) offset somewhat by project cost overruns, produced additional margins
of $1.7 million. The gross profit margin as a percent of sales increased to
24.6% for 1995 from 23.8% for 1994 due to operating efficiencies and the
effects of re-engineering certain major products. These gains were partially
offset by product and project overruns caused by over-committed manufacturing
and engineering resources at Alvey and, to a lesser degree, at Busse, during
portions of 1995. However, management believes the expansion of its
facilities, the integration of the Company's systems and the productivity
enhancement and engineering programs initiated in recent years have resulted
in manufacturing efficiency and productivity gains. Specifically, the gross
margin percentage at Buschman increased 6.7 percentage points in 1995
compared to 1994. This increase is primarily a result of the efficiency and
productivity gains and targeted marketing programs attributable to the
efforts of the new management team

<PAGE>

that was put in place during the second and third quarters of 1994. Since
the second half of 1994, "as sold" margins (the estimated gross margin on a
specific project at the time the contract is executed) on new orders have
improved, resulting in an increase in Buschman's gross profit of
approximately $800,000 during 1995. More importantly, the standardization of
Buschman's product line and manufacturing engineering programs have generated
substantial changes in the manufacturing process and have resulted in
significant improvements in labor efficiencies, product deliveries and
inventory levels. These improvements increased gross profit in 1995 by
approximately $2.5 million over 1994 results.

Gross profit at White decreased 21.6% from 1994. This decrease
is primarily attributable to an under-utilization of the manufacturing and
engineering resources in the first half of 1995, and an over-utilization of the
same resources during the last four months of 1995 as sales significantly
increased. This significant deviation in the demand for these resources caused
an under-absorption of overhead costs during the first half of 1995 and
inefficiencies during the fourth quarter and resulted in various product and
project cost overruns. In response to the difficulties encountered at White
during 1995, the Company has hired or transferred three senior executives and
realigned certain management functions at White to conform to policies and
structures in place and proven to be successful at other operating companies of
the Company.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $51.6 million
for 1995, representing an increase of $8.2 million, or 19.0%, over 1994. This
increase is primarily attributable to expenses associated with increased sales,
the creation of two new marketing and sales support teams responsible for
integrated systems and international sales and approximately $1.7 million of
performance-based incentive compensation and profit sharing distributions. As a
percentage of sales, selling, general and administrative expenses increased to
17.9% for 1995 from 17.5% for 1994. This increase reflects the cost of
increased marketing staff to secure the record bookings and the higher levels of
incentive compensation and profit sharing.

RESEARCH AND DEVELOPMENT EXPENSES were $2.1 million for 1995, a
decrease of $487,000, or 19.2%, compared to $2.5 million for 1994. Research and
development expenses were higher for 1994 as compared to 1995 as a result of
expenses incurred prior to the establishment of technological feasibility
related to the development of a standard warehouse management software system at
MFA.

OTHER EXPENSE (INCOME), NET was income of $108,000 for 1995,
representing a difference of $2.4 million, as compared to $2.3 million in
expense in 1994. The difference is primarily attributable to the one-time
payment of stay bonus to an executive at White during 1994 in connection with
the acquisition of that entity.

OPERATING INCOME increased to $15.4 million for 1995,
representing an increase of $6.3 million, or 69.1%, as compared to $9.1 million
for 1994. As a percentage of net sales, operating income increased to 5.4% for
1995 from 3.7% in 1994. This increase is due primarily to the increase in gross
profit margin in 1995 and the payment of the one-time stay bonus in 1994 as
described above.

INTEREST EXPENSE increased to $6.9 million for 1995, representing
an increase of $1.0 million or 16.5%, as compared to $5.9 million for 1994.
This increase is due primarily to an increase in the base borrowing rate under
the Company's credit facilities, interest incurred with respect to the 11.95%
Notes which were issued in January 1995 and bank fees incurred in the first
quarter of 1995 in connection with an amendment of the Company's credit
facility.

INCOME TAX EXPENSE (BENEFIT) was $4.1 million of expense for 1995,
representing an increase of $2.6 million from $1.5 million of expense for 1994.
The effective income tax rate of 48.3% in 1995 increased from an effective rate
of 47.5% experienced in 1994 due to the absence of foreign tax credits in 1995,
offset by somewhat lesser effects of (i) state income taxes, (ii) nondeductible
goodwill amortization and (iii) certain nondeductible meals and entertainment
expenses.

LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL. During the three years ended December 31, 1996,
the Company generated approximately $42.1 million of cash from operations, which
has been sufficient to fund the Company's

<PAGE>

ongoing working capital, capital expenditures and debt service requirements.
As the Company's business has expanded internally and through acquisitions
during this period, increases in working capital requirements (primarily
related to accounts receivable and inventory) were significantly offset by
funds the Company received from its customers in the form of deposits and
progress billings.

CASH PROVIDED BY OPERATIONS. Cash flows from operations were
$11.3 million, $18.9 million and $11.8 million for the years ended December 31,
1996, 1995 and 1994, respectively.

LEWISTON OPERATION. In connection with the acquisition of
Buschman in 1992, the Company made a decision to close Buschman's carousel
manufacturing plant in Lewiston, Maine. In connection with the acquisition of
White in December 1993, the Company was ordered by the Federal Trade Commission
to hold Buschman's Lewiston operation separate and to find a suitable buyer for
the business. In the course of pursuing a buyer and pursuant to the FTC order,
the Company was required to fund the Lewiston operation and, as a result, has
incurred expenditures of $588,000, $2.3 million and $2.7 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The Lewiston operation was
divested on July 31, 1995, at which time the Company agreed to assist in funding
the operation through July 31, 1997. A third party currently operates the plant.
As of December 31, 1996, the remaining expenditures to assist in the funding are
expected to approximate an aggregate of $531,000. Upon its initial decision to
close the Lewiston plant, the Company accrued losses of $1.4 million at December
31, 1992, net of applicable tax benefits, with respect to plant closure costs
and the write-off of related assets, with an offsetting charge to goodwill. As a
result of the Federal Trade Commission intervention, all subsequent losses,
including those anticipated through ultimate disposal of the facility, were
charged to earnings as an extraordinary loss, net of tax benefits, in 1993.

CAPITAL EXPENDITURES. Capital expenditures, including
capitalized software development costs, for the years ended December 31, 1996,
1995 and 1994 were approximately $11.6 million, $4.5 million and $5.1 million,
respectively. These expenditures were used primarily to finance a new facility
for Alvey (1995 and 1996), plant expansion at Busse (1995 and 1996), the
acquisition of computer and powder paint equipment and the administrative
restructuring at White (1994), plant expansion and reorganization at Buschman
(1994), software development, computer systems and equipment at MFA (1994 and
1995) and normal recurring replacements of machinery and equipment.

RESEARCH AND DEVELOPMENT COSTS. As described in Note 3 to the
Company's Consolidated Financial Statements, approximately $11.7 million of the
Weseley purchase price was allocated to purchased in-process research and
development and charged to expense in the quarter ended March 31, 1996. The
purchased research and development relates to the TRACS* Version 3.0 product of
Weseley. Additionally, $1.0 million of the RTS purchase price was allocated to
purchased in-process research and development and charged to expense in the
quarter ended December 31, 1996.

ACQUISITIONS AND DIVESTITURES. The Company expended $19.0
million of cash for the acquisitions of Weseley and RTS in 1996. These
acquisitions were financed primarily with proceeds from the Debt Offering. The
Company received $0.7 million of proceeds in 1994 from the sale of its closed
facility in Cassville, Missouri.

DEBT AND EQUITY INFUSIONS. On January 3, 1995, the Company issued
$2.0 million principal amount of 11.95% Unsecured Subordinated Notes to certain
shareholders of Pinnacle. The 11.95% Unsecured Subordinated Notes were repaid
in January 1996 with a portion of the proceeds received in the Debt Offering
discussed below.

DEBT OFFERING AND RECAPITALIZATION OF PINNACLE. Concurrently
with the Debt Offering in January 1996, the Company entered into a senior bank
credit agreement with NationsBank, N.A. consisting of a $30 million revolving
credit facility which matures in 2001 (the "Revolving Credit Facility").
Borrowings under the Revolving Credit Facility bear interest at a rate based
upon, at Alvey's option, the Base Rate (as defined in the Revolving Credit
Facility) plus 1.50% or the Euro-dollar Rate (as defined in the Revolving Credit
Facility) plus 2.50%, with a step down in rates based upon achieving predefined
earnings objectives. Borrowings under the Revolving Credit Facility are
guaranteed by Pinnacle and subsidiaries of Alvey and

<PAGE>

secured by substantially all of the assets of Alvey and its subsidiaries. At
December 31, 1996, there were no borrowings outstanding under the Revolving
Credit Facility.

In the Debt Offering, Alvey issued $100 million of 11.375% Senior
Subordinated Notes which are due in January 2003. In accordance with the terms
of the Debt Offering, Alvey filed a registration statement with the Securities
and Exchange Commission with respect to an offer to exchange the 11.375% Senior
Subordinated Notes for a new issue of debt securities of Alvey registered under
the Securities Act of 1933, as amended, with terms substantially identical to
those of the 11.375% Senior Subordinated Notes. Such registration statement was
declared effective on May 9, 1996 and the exchange of $100 million in principal
amount of the original notes for $100 million in principal amount of registered
notes was completed on June 11, 1996. Interest payments on such notes, which
are payable semiannually, commenced in July 1996.

Concurrent with the Debt Offering, Pinnacle sold $23 million of
Pinnacle Series A Preferred Stock, $7.0 million of Pinnacle Series C Preferred
Stock and approximately $11.3 million of Pinnacle Series B Preferred Stock,
together with warrants to purchase up to 256,075 shares of Pinnacle Common Stock
(the "Preferred Stock Offering"). Dividends on the Pinnacle Series A, B and C
Preferred Stock are payable quarterly. While Alvey has not guaranteed nor is it
contingently obligated with respect to any such series of Preferred Stock,
Pinnacle has no financial resources, other than from Alvey and Alvey's operating
subsidiaries, to satisfy cash requirements relative to these preferred shares.

USE OF PROCEEDS. The Company applied the net proceeds of the
Debt Offering in the following manner: (i) approximately $46.2 million was used
to repay the Company's outstanding senior indebtedness; (ii) approximately $2.3
million was used to repay the Company's outstanding 11.95% subordinated debt;
(iii) approximately $21.6 million was distributed as a dividend from Alvey to
Pinnacle which, together with the net proceeds from the Pinnacle Preferred Stock
Offering, was used by Pinnacle to fund, in part, the cash necessary to buy back
certain shares of Pinnacle's outstanding common stock ($23.8 million) and to
redeem certain shares of Pinnacle's outstanding preferred stock ($25.3 million);
(iv) approximately $7.5 million was used to pay transaction costs; and (v)
approximately $8.9 million was used for general corporate purposes (including
capital expenditures) in 1996. Prepayment penalties of $371,000 were incurred in
connection with the repayment of the subordinated debt. In addition, the Company
used $15.0 million of the proceeds of the Debt Offering to consummate the
Weseley acquisition in January 1996.

ONGOING CASH FLOWS FROM OPERATIONS. Based on its ability to
generate funds from operations, the Company believes that it will have
sufficient funds available to meet its currently anticipated operating, debt
service and capital expenditure requirements with minimal additional borrowings.
In addition, the Company expects to continue to evaluate and consider business
acquisition candidates, although no acquisitions are pending or contemplated.
The Company believes that its funds from operations will be sufficient to meet
its short-term capital requirements and that such funds, together with available
funds under the Revolving Credit Facility, will be sufficient to meet its
capital requirements for the forseeable future. The Company's belief regarding
its capital requirements is forward-looking and involves risks and uncertainties
that could significantly impact the Company's expected liquidity requirements in
the short and long term.

<PAGE>

BACKLOG. As of December 31, 1996, the Company had a backlog of
$136.1 million, as compared to $143.9 million as of December 31, 1995. The
Company's backlog is based upon firm customer commitments that are supported by
purchase orders, other contractual documents and cash payments. While the
level of backlog at any particular time may be an indication of future sales, it
is not necessarily indicative of the future operating performance of the
Company. Additionally, certain backlog orders may be subject to cancellation in
certain circumstances. The Company believes that virtually all orders in
backlog at December 31, 1996 will be converted to revenue within one year.

SEASONALITY AND QUARTERLY RESULTS

The price of certain of the Company's systems can exceed several
million dollars, and therefore a relatively small number of orders can
constitute a significant percentage of the Company's revenues in any one period.
Similarly, a relatively small reduction in the number of large orders can have a
material impact on the Company's revenues in any one quarter or year. The timing
of shipments and product revenue recognition could affect the Company's
operating results for a particular period. In addition, most of the Company's
revenues come from fixed price contracts. To the extent that the original cost
estimates prove to be inaccurate, profitability from a particular contract may
be adversely affected. As a result, the Company's operating results can vary
significantly from quarter to quarter, and the financial results for any
particular quarter are not necessarily indicative of results in any subsequent
quarter or fiscal year.

EFFECT OF INFLATION

Fluctuations in commodity prices may periodically affect the
results of the Company's operations. However, inflation has not had a
material effect on the Company's business or results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements required in response to
this item are included on pages F-1 through F-24 hereof.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information concerning
Alvey's directors and executive officers.

YEARS IN
NAME AGE INDUSTRY POSITION WITH ALVEY
---- --- -------- -------------------

William R. Michaels (1) 62 22 Chairman of the Board,
Chief Executive Officer
and Director
Stephen J. O'Neill 55 26 President
Michael J. Tilton 47 17 Senior Vice President
and Secretary
James A. Sharp 49 13 Senior Vice President,
Chief Financial Officer,
Assistant Treasurer
and Assistant Secretary
Frederick R. Ulrich, Jr. (1) 53 -- Director
Prakash A. Melwani (1) 38 -- Director
Daniel S. O'Connell (2) 43 -- Director
Charles A. Dill (2) 57 -- Director

<PAGE>

The following table sets forth certain information concerning
certain executive officers and directors of Pinnacle and the Company. Each of
Alvey and its seven subsidiaries are managed by Pinnacle.

YEARS IN
NAME AGE INDUSTRY PRINCIPAL POSITION IN PINNACLE ORGANIZATION
- ---- --- -------- -------------------------------------------
<S> <C> <C> <C>
William R. Michaels (1) 62 22 Chairman of the Board, President, Chief Executive
Officer and Director of Pinnacle
Michael J. Tilton 47 17 Executive Vice President-Operations & Finance and
Secretary of Pinnacle
James A. Sharp 49 13 Vice President, Chief Financial Officer, Treasurer and
Assistant Secretary of Pinnacle
Christopher C. Cole 41 7 Executive Vice President of Pinnacle and Chief
Executive Officer and Director of Buschman
Ritch J. Durheim 49 25 Executive Vice President of Pinnacle and Chief
Executive Officer and Director of MFA
Stephen J. O'Neill 55 26 Executive Vice President of Pinnacle and President of
Alvey
Frederick R. Ulrich, Jr. (1) 53 -- Director of Alvey and Pinnacle
Prakash A. Melwani (1) 38 -- Director of Alvey and Pinnacle
Daniel S. O'Connell (2) 43 -- Director of Alvey and Pinnacle
Charles A. Dill (2) 57 -- Director of Alvey and Pinnacle

</TABLE>
- ------------------

(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

WILLIAM R. MICHAELS has served as Chairman of the Board, Chief
Executive Officer and Director of Alvey since September 1988; as Chairman of
the Board, President, Chief Executive Officer and Director of Pinnacle since
September 1988; and as Chairman of the Board and Director of each of Alvey's
subsidiaries. From 1984 to 1988, Mr. Michaels served as the President and
Chief Executive Officer of Rapistan Corp., a manufacturer of distribution
conveyor systems. Mr. Michaels is Vice Chairman of the Board of Governors of
the Material Handling Institute of America, the materials handling industry's
trade association. In addition to his Pinnacle duties, from July 1989 to
January 1992 Mr. Michaels was the Chairman of the Board of Holophane Company,
Inc., a Columbus, Ohio company in the lighting industry. Mr. Michaels
continues as a director of Holophane. Mr. Michaels is a graduate of the
State University of New York.

STEPHEN J. O'NEILL has served as President of Alvey since
November 1992, as Executive Vice President of Pinnacle since September 1988, as
Vice President and Director of MFA since May 1989, as Director of Weseley since
January 1996 and as Director of Busse since May 1996. Previously, Mr. O'Neill
served as Senior Vice President of Alvey from September 1988 to November 1992.
Prior to joining Alvey, Mr. O'Neill served as a Vice President of Rapistan
Corp. from April 1986 to September 1988. Mr. O'Neill earned a B.S. degree in
Electrical Engineering from Rose Polytechnic Institute. Mr. O'Neill currently
serves on the board of directors of AAIM, a Quality Institute and Education
Center in Missouri.

MICHAEL J. TILTON has served as Senior Vice President and
Secretary of Alvey and as Executive Vice President of Operations & Finance and
Secretary of Pinnacle since April 1994 and as Vice President and Director of
each of Alvey's subsidiaries. On an operating basis, Alvey and its subsidiaries
historically have reported to Mr. Tilton in his position as Executive Vice
President of Pinnacle. Previously, Mr. Tilton served as Senior Vice President
and Chief Financial Officer from September 1988 to April 1994. Mr. Tilton
served as a Vice President of Rapistan Corp. from 1985 to 1988. Mr. Tilton
graduated from the University of Iowa with a B.B.A. degree in Finance and earned
a M.B.A. degree from Drake University.

<PAGE>

JAMES A. SHARP has served as Vice President, Chief Financial
Officer, Assistant Treasurer and Assistant Secretary of Alvey since April 1994;
as Vice President, Chief Financial Officer, Treasurer and Assistant Secretary of
Pinnacle since April 1994; and as Chief Financial Officer of each of Alvey's
subsidiaries. Previously, Mr. Sharp held various accounting and financial
positions with Pinnacle and its subsidiaries, including Controller and Treasurer
of Alvey, since 1983. Mr. Sharp graduated from Southern Illinois University with
a B.S. degree in Accounting and is a Certified Public Accountant in the state of
Missouri.

FREDERICK R. ULRICH, JR. has been a Director of Alvey and
Pinnacle since August 1988. Mr. Ulrich has served as Chief Executive Officer
of Buttonwood Capital, Inc. since 1992 and as Chief Executive Officer of Mammoth
Capital, Inc. since 1996. Previously, Mr. Ulrich served as Chairman of the
Board and Chief Executive Officer of Raebarn Corporation from 1988 to 1995. Mr.
Ulrich is a director of Paul Sebastian, Incorporated and RC Distribution, Inc.
Mr. Ulrich is a graduate of the United States Military Academy and holds a
M.B.A. degree from Harvard University.

PRAKASH A. MELWANI has served as a director of Alvey and Pinnacle
since January 1996. He is a Managing Director of Vestar Capital
Partners ("Vestar"), an affiliate of which is a significant stockholder of
Pinnacle and with whom Mr. Melwani has been associated since its founding in
1988. Mr. Melwani is a director of Argo-Tech Corporation and International
AirParts Corporation. Mr. Melwani graduated from Cambridge University with a
B.A. degree and received a M.B.A. degree from Harvard University.

DANIEL S. O'CONNELL has served as a director of Alvey and
Pinnacle since January 1996. Mr. O'Connell has served as the Chief Executive
Officer of Vestar since its founding in 1988. Mr. O'Connell also serves as a
Director of Aearo Corporation, Anvil Knitwear, Inc., Clark-Schwebel, Inc.,
Prestone Products Corporation, Remington Products Corporation, L.L.C., and
Russell-Stanley Corporation. Mr. O'Connell graduated from Brown University with
an A.B. degree and Yale University School of Management with an M.P.P.M. degree.

CHARLES A. DILL became a director of Alvey and Pinnacle on
February 28, 1996. Mr. Dill is currently a General Partner in Gateway
Associates, L.P., a leading St. Louis-based equity management partnership.
Previously, from April 1991 through April 1995, Mr. Dill was President and, from
October 1992 through April 1995, Chief Executive Officer of Bridge Information
Systems, Inc. (a leading provider of on-line financial information and databases
to institutional securities markets). From February 1988 to September 1990, he
was President and a Director of AVX Corporation (a ceramic electronic devices
manufacturer). Mr. Dill serves as a director of Stifel Financial, a securities
brokerage and investment banking firm, of Zoltec, a specialty producer of carbon
fiber composite materials, of Transact Technologies, a manufacturer of
transaction-based printers for point-of-sale terminals and of Kennedy Capital
Management, a private money manager. Mr. Dill graduated from Yale University
with a B.S. degree in mechanical engineering and received a M.B.A. degree from
Harvard University.

CHRISTOPHER C. COLE has served as Chief Executive Officer and
Executive Vice President of Buschman since March 1994, as Director of Buschman
since February 1996, as Executive Vice President and Director of White since
October 1996, as Executive Vice President of Pinnacle since 1994 and as Chief
Executive Officer and Director of RTS since its acquisition. Previously, Mr.
Cole served as President of Buschman from March 1994 to January 1997. Prior to
joining Buschman, Mr. Cole served in a variety of executive positions at
Cincinnati Milacron, Inc. since 1979 and was Vice President since 1987. Mr. Cole
graduated from Wesleyan University with a B.A. degree and received a M.B.A.
degree from Harvard University. Mr. Cole has served on the board of directors of
the Cincinnati chapter of the American Red Cross since 1989 and is currently a
member of the executive committee of such board.

RITCH J. DURHEIM has served as Chief Executive Officer of MFA
since May 1995, as Director of MFA since May 1989, as Executive Vice President
of Pinnacle since May 1995 and as Senior Vice President and Director of Weseley
since January 1996. Previously, Mr. Durheim served as President of MFA from May

<PAGE>

1995 to December 1996. From April 1994 to May 1995 Mr. Durheim served as
President and Chief Operating Officer of MFA. Prior to 1994, Mr. Durheim
held various positions with MFA since 1977. Mr. Durheim graduated from
Marquette University with a B.S. degree.

ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth, for the years ended December 31,
1996 and 1995, the earned compensation of the Chief Executive Officer and the
next four highly compensated executive officers of Alvey (the "Named Executive
Officers"):

<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
------------------------------------------------------------------------
ANNUAL COMPENSATION
----------------------------------------------------
COMPENSATION
AWARDS - STOCK
OTHER ANNUAL OPTIONS (# OF
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (A) COMPENSATION (B) SHARES) (C)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
WILLIAM R. MICHAELS
Chairman and Chief Executive Officer of Pinnacle 1996 $317,650 $ - $ - -
and Alvey 1995 302,500 301,200 - -

RITCH J. DURHEIM
Chief Executive Officer of MFA 1996 194,500 202,353 - 15,000
1995 173,750 185,905 - -

STEPHEN J. O'NEILL
President of Alvey 1996 210,000 100,000 - -
1995 191,750 187,040 - -

CHRISTOPHER C. COLE
Chief Executive Officer of Buschman 1996 194,250 112,000 - -
1995 185,000 216,800 - -

MICHAEL J. TILTON
Executive Vice President of Pinnacle and 1996 210,000 - - -
Senior Vice President and Secretary of Alvey 1995 191,750 205,500 - -
- ------------------
</TABLE>

(a) Reflects amount earned in 1996 and 1995, respectively, of which amount
portions have been paid in 1997 and 1996, respectively.
(b) Perquisites or other personal benefits which in the aggregate were less
than the lesser of $50,000 and 10% of an officer's annual salary and bonus
in 1996 and 1995, respectively, have been omitted.
(c) The figures set forth in this column represent the number of options
granted in 1996 and 1995, respectively, to purchase the Common Stock of the
Company's parent, Pinnacle.

PENSION PLAN

The Company maintains 401(k) savings plans for virtually all
employees who meet certain eligibility requirements, except certain union
employees who participate in multi-employer pension plans. Under the plans, the
employees may defer receipt of a portion of their eligible compensation, with
the Company matching a defined percentage of the employees' deferral. The
Company's matching contributions were $701,000, $614,000 and $429,000 for the
years ended 1996, 1995 and 1994, respectively. The Company

<PAGE>

may also elect to make discretionary profit sharing contributions for virtually
all employees, except those union employees who participate in multi-employer
pension plans.

EMPLOYMENT AGREEMENTS

On May 31, 1995, Alvey, Pinnacle and William R. Michaels entered
into an amended and restated employment agreement pursuant to which Mr. Michaels
will serve as Chairman of the Board and Chief Executive Officer of Alvey and
Chairman of the Board, President and Chief Executive Officer of Pinnacle at a
base annual salary of $302,500. Mr. Michaels' base salary will be reviewed
annually to consider an upward adjustment for each subsequent year during the
term of the agreement. The agreement entitles Mr. Michaels to an automobile,
club membership, an annual bonus, disability and health insurance and to other
benefit plans provided by Alvey and Pinnacle to their employees. The agreement
also provides for deferred compensation, whereby following termination of Mr.
Michaels' employment with Pinnacle and Alvey because of death, disability or
retirement or upon Mr. Michaels having attained age 65, or for any other reason
excluding voluntary resignation to accept a comparable position before Mr.
Michaels attains age 65, Pinnacle and Alvey will pay to Mr. Michaels, for at
least 10 years and during the remainder of his life, an annual amount calculated
by (a) dividing Mr. Michaels' total compensation from Alvey and Pinnacle over
the thirty-six (36) month period prior to the termination of his employment by
three and (b) multiplying the result by twenty percent (20%) plus an additional
two percent (2%) for each year between September 1988 (the date of the original
employment agreement) and the termination of his employment. In addition, the
agreement requires Pinnacle and Alvey to provide to Mr. Michaels a $3,000,000
life insurance policy for the remainder of his lifetime, unless he voluntarily
terminates his employment with Pinnacle and Alvey to accept a comparable
position, at which time Pinnacle and Alvey's obligation to pay premiums will
cease.

On May 10, 1989, MFA entered into an employment agreement with
Ritch Durheim. Pursuant to the agreement, Mr. Durheim serves as President and,
subsequently, Chief Executive Officer of MFA for an annual base salary of
$172,250. The base salary will be reviewed annually to consider an upward
adjustment for each subsequent year. The agreement entitles Mr. Durheim to an
automobile allowance, club membership, an annual bonus, life, disability and
health insurance and to other benefit plans provided by MFA to its other
employees. The agreement contains a non-disclosure and non-competition
provision which is effective for the term of Mr. Durheim's employment with MFA.

On June 27, 1995, Alvey and Pinnacle entered into an amended and
restated employment agreement with Michael J. Tilton and Alvey entered into an
amended and restated employment agreement with Stephen J. O'Neill. Pursuant to
the agreements, Mr. Tilton will continue to serve as Senior Vice President and
Secretary of Alvey and Executive Vice President - Operations and Finance of
Pinnacle at a base salary of $191,750 and Mr. O'Neill will continue to serve as
President of Alvey at a base salary of $191,750. The base salaries of each will
be reviewed annually to consider an upward adjustment for each subsequent year.
Each of the agreements entitles Messrs. Tilton and O'Neill to an automobile,
club membership, an annual bonus, life, disability and health insurance and to
other benefit plans provided by Alvey and Pinnacle to their other employees. In
addition, Pinnacle and Alvey are obliged to provide a $1,000,000 life insurance
policy for each of Messrs. Tilton and O'Neill for the remainder of their
lifetimes, unless they voluntarily terminate their employment with Alvey and
Pinnacle to accept a comparable position, at which time Alvey and Pinnacle's
obligation to pay such premiums will cease.

On March 9, 1994, Buschman entered into an employment agreement
with Christopher C. Cole, pursuant to which Mr. Cole agreed to serve as
President and Chief Executive Officer of Buschman and Executive Vice President
of Pinnacle at a base annual salary of $175,000. Mr. Cole's base salary will be
reviewed annually to consider an upward adjustment for each subsequent year
during the term of the agreement. The agreement entitles Mr. Cole to an
automobile, club membership, an annual bonus, life, disability and health
insurance, reimbursement of legal and accounting services and to other benefit
plans provided by Buschman to its other employees. The agreement with Mr. Cole
contains a non-disclosure and non-competition provision which is effective for
the term of his employment with Buschman. Upon execution

<PAGE>

of the agreement, Mr. Cole was granted an option to purchase 18,700 shares of
Pinnacle Common Stock at an exercise price of $31.28 per share.

BOARD OF DIRECTORS COMMITTEES AND COMPENSATION

Alvey and Pinnacle each have a Compensation Committee and an
Audit Committee. During 1996, Alvey and Pinnacle paid to non-employee directors,
except directors elected or nominated by certain significant investors in
Pinnacle, an annual fee of $25,000, and reimbursed each of its directors for
their out-of-pocket expenses incurred in connection with serving as a director.
Directors who are employed by Pinnacle or the Company do not receive a fee for
serving as directors.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Pinnacle owns 100% of the outstanding capital stock of Alvey. The
following table sets forth certain information regarding the beneficial
ownership of Pinnacle Common Stock as of March 25, 1997 (i) by each person who
is known by the Company to own beneficially more than 5% of Pinnacle Common
Stock, (ii) by each of the directors of Alvey and Pinnacle, (iii) by each Named
Executive Officer and (iv) by all directors and executive officers as a group.

PINNACLE COMMON STOCK
FULLY-DILUTED
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) SHARES OWNED PERCENTAGE (3) PERCENTAGE (4)
- ------------------------------------------ ------------ ------------- --------------
EXECUTIVE OFFICERS AND DIRECTORS
<S> <C> <C> <C>
Prakash A. Melwani (5)(6).................. 179,252 27.0% 22.4%
Daniel S. O'Connell (5)(6)................. 179,252 27.0 22.4
William R. Michaels (7).................... 72,187 14.8 9.0
Frederick R. Ulrich, Jr. (8)............... 27,517 5.7 3.4
Charles A. Dill............................ 0 0 0
Christopher C. Cole (9).................... 20,000 4.0 2.5
Ritch J. Durheim (10)...................... 5,407 1.1 0.7
Stephen J. O'Neill (11).................... 48,902 10.1 6.1
Michael J. Tilton (12)..................... 47,170 9.7 5.9

OTHER BENEFICIAL OWNERS

Vestar Equity Partners, L.P. (6)(13)....... 179,252 27.0 22.4
Chase Equity Associates, A California
Limited Partnership (13)(14).............. 57,617 10.6 7.2
Mark R. Allison (15)....................... 33,678 6.9 4.2

All Executive Officers and Directors as a
Group (10 Persons)...................... 407,795(16) 57.8 51.0

</TABLE>

_________________
(1) Unless otherwise noted, the address of each of the foregoing is c/o
Pinnacle at 101 S. Hanley, Suite 1300, St. Louis, Missouri 63105.

(2) Unless otherwise noted, sole voting and dispositive power are possessed
with respect to all shares shown.

(3) The percentages under the heading "Percentages" are based upon 485,516
shares of Pinnacle Common Stock outstanding and takes into account all
derivative securities held by such Beneficial Owner that are exercisable
for shares of Pinnacle Common Stock within 60 days.

(4) The percentages under the heading "Fully-Diluted Percentages" are based
upon 798,853 shares of Pinnacle Common Stock outstanding, which gives
effect to the exercise of outstanding (i) options exercisable within 60
days to purchase 42,446 shares of Pinnacle Common Stock and (ii) warrants
exercisable within 60 days to purchase 270,891 shares of Pinnacle Common
Stock.

(5) Includes 179,252 shares issuable upon exercise of warrants held by Vestar
Equity Partners, L.P., as to which Messrs. Melwani and O'Connell disclaim
beneficial ownership.

(6) Address is c/o Vestar Capital Partners, 245 Park Avenue, 41st Floor, New
York, New York 10167-4098.

(7) Includes 601 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.

(8) Includes 401 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants. Includes the following number of shares held by
or in trust for Mr. Ulrich's children: 505 shares of Pinnacle Common
Stock; 705 shares of Pinnacle Common Stock held by the Lauren T. Ulrich
Trust '89; 706 shares of Pinnacle Common Stock held by the Farrell
Ulrich Trust '89; 700 shares of Pinnacle Common Stock held by the
Frederick Ulrich III Trust '92; and 505 shares of Pinnacle Common Stock
held by Amy C. Ulrich.

(9) Includes 18,700 shares of Pinnacle Common Stock issuable upon exercise of
outstanding options.

(10) Includes 235 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.

(11) Includes 902 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.

(12) Includes 2,800 shares held by the Julie C. Tilton Trust and 2,800
shares held by the Tracy L. Tilton Trust.

(13) All of such shares are issuable upon exercise of warrants.

(14) c/o Chase Venture Partners, 270 Park Avenue, New York, New York
10017.

(15) Includes 501 shares of Pinnacle Common Stock issuable upon exercise of
outstanding warrants.

(16) The 179,252 shares of Pinnacle Common Stock issuable upon exercise of
warrants held by Vestar Equity Partners, L.P., as to which Messrs.
Melwani and O'Connell disclaim beneficial ownership, are counted once
in this total.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS

In connection with the 1988 acquisition of Alvey by Pinnacle (the
"1988 Acquisition"), entities affiliated with Acadia (the "Acadia
Stockholders"), individuals affiliated with Raebarn Corporation (the "Raebarn
Stockholders"), certain management stockholders and Pinnacle entered into a
Stock Purchase and Stockholders Agreement which has been amended and restated
several times through the date hereof (the "Initial Stockholders Agreement"). In
January 1996, the Initial Stockholder Agreement was amended and restated again
pursuant to the Amended and Restated Stockholders Agreement by and among
Pinnacle, the Management Stockholders (as defined therein), the Raebarn
Stockholders (as defined therein) and the Investors (the "Amended and Restated
Stockholders Agreement").

The following is a summary of the Amended and Restated
Stockholders Agreement (certain terms used herein are defined therein):

VESTING OF MANAGEMENT STOCKHOLDER SHARES. Shares of Pinnacle
Common Stock issued to Management Stockholders (as defined in the Amended and
Restated Stockholders Agreement) vest in equal installments over a period
generally ranging between three and five years (depending on the terms set by
the Board of Directors at the time of issuance). Any shares of Pinnacle Common
Stock held by a Management Stockholder that are unvested at the time of
death, permanent disability, resignation or termination (for whatever reason) of
such Management Stockholder will remain unvested and will not vest; provided,
however, that in the event of the death or permanent disability of the holder,
50% of the shares which are unvested at that time will become vested. In
addition, all unvested shares will become vested upon the acquisition of all of
the outstanding shares of Pinnacle by any third party or upon the sale of all of
the assets of Pinnacle.

REPURCHASE OF MANAGEMENT STOCKHOLDER SHARES. In the event of the
termination of any Management Stockholder's employment with Pinnacle, whether by
reason of death, permanent disability, termination for cause or without cause,
retirement or for any other reason, Pinnacle will have the right to repurchase
all or any portion of the unvested shares. To the extent that Pinnacle elects
not to repurchase all of

30
<PAGE>

the unvested shares held by a terminated Management Stockholder, the other
stockholders will have the right to purchase the remaining shares on a PRO
RATA basis.

RESTRICTIONS ON TRANSFER; RIGHT OF FIRST REFUSAL. Unvested
shares may not be transferred under any circumstances. With respect to vested
shares, Pinnacle and, to the extent that Pinnacle fails to exercise its first
refusal right in full, the other Management Stockholders and Raebarn
Stockholders, have a right of first refusal if any Management Stockholder or
Raebarn Stockholder receives a bona fide offer from an independent unrelated
third party that such stockholder wishes to accept. Despite the general
restrictions on transfers by Management Stockholders and Raebarn Stockholders,
transfers to affiliates, officers, directors, certain family members or family
trusts and pledges of the shares to a bank as security for a loan used to buy
the shares are expressly permitted.

TAG-ALONG RIGHTS. The Amended and Restated Stockholders
Agreement provides that stockholders have a right to "tag along" upon the
sale of Pinnacle Common Stock or Pinnacle Warrants by any stockholder or
holder of Pinnacle Warrants prior to an initial public offering by Pinnacle
and provides the stockholders with "tag-along" rights with respect to a sale
of a significant amount of Pinnacle Common Stock or Pinnacle Warrants after
an initial public offering by Pinnacle. In addition, in the event any such
sales would result in a change of control of Pinnacle, the holders of the
Pinnacle Investor Preferred Stock and the Pinnacle Series B Preferred Stock
have the right to cause any such stock which is not redeemed by Pinnacle in
accordance with its terms to be purchased by the purchaser of such Pinnacle
Common Stock or Pinnacle Warrants.

PRIORITY SUBSCRIPTION RIGHTS. If Pinnacle decides to effect a
private placement of shares of Pinnacle Common Stock or securities convertible
into Pinnacle Common Stock for less than Fair Market Value (as defined in the
Amended and Restated Stockholders Agreement) at any time prior to its initial
public offering, the stockholders will have a right, subject to certain
exceptions including the issuance of financing warrants to institutional
lenders), to purchase their respective pro rata portions of the shares to be
sold by Pinnacle.

VOTING AGREEMENT. The Amended and Restated Stockholders
Agreement provides that the Board of Directors of Pinnacle shall initially
consist of seven members, subject to increase or decrease upon certain specified
events. The stockholders are required to vote their shares to elect specified
nominees to the Board of Directors.

On and after the eighth anniversary of the date of issuance of
the Pinnacle Investor Preferred Stock and Pinnacle Warrants, if any shares of
Pinnacle Series A Preferred Stock and any Pinnacle Warrants are outstanding, the
number of directors of Pinnacle shall be increased by the Control Number (as
defined below), with such additional directors to be nominated by the holders of
the Pinnacle Warrants. In addition, if such directors are required to be
elected, from and after such date, each stockholder party to the Amended and
Restated Stockholders Agreement has agreed to (i) vote all shares held by such
stockholder to ratify, approve and adopt all actions adopted or approved by the
Board of Directors of Pinnacle and (ii) subject to certain conditions, be
"dragged along" in the event that the holders of the Pinnacle Warrants desire to
accept a third party offer for all of the outstanding shares of Pinnacle Common
Stock.

REGISTRATION RIGHTS. Management Stockholders shall be entitled
to a single "demand" and certain "piggyback" registration rights, subject to
customary conditions.

TERMINATION AGREEMENT WITH LAFARICK

Alvey, Pinnacle and Raebarn terminated a consulting agreement
with Raebarn Corporation or a predecessor entity ("Raebarn"), each of which is
or was beneficially owned by Mr. Ulrich and a former director of Pinnacle, in
its entirety in January 1996. In connection with such termination, Pinnacle and
Alvey agreed to make termination payments to Raebarn or its designees in the
amount of $250,000 per year through January 2004. In April 1995, Raebarn changed
its name to Lafarick, Inc. Pinnacle and Alvey expensed the

<PAGE>

payments of $2.0 million ($1.2 million net of tax), less $555,000 already
accrued at December 31, 1995, in the first quarter of 1996.

CONSULTING AGREEMENT WITH MAMMOTH CAPITAL INC.

On December 31, 1995, Pinnacle and Alvey entered into a
consulting agreement with Mammoth Capital Inc., a corporation owned by Mr.
Ulrich, pursuant to which Pinnacle and Alvey agreed to pay an annual fee of
$200,000, subject to an annual increase at a rate of 3%, in addition to the
reimbursement for its out-of-pocket expenses (the "Mammoth Agreement"). The
Mammoth Agreement also provides for the payment of a transaction fee in the
amount of 1% of the aggregate consideration paid or received in connection
with specified merger and acquisition transactions (the "M&A Fee") and 1/2
of 1% of the gross proceeds received in connection with financing
transactions involving the public or private offering of debt or equity
securities of Pinnacle and Alvey or the incurrence of bank debt, other than
financing transactions solely involving amendments, modifications or
extensions of the Credit Agreement or the Notes (the "Financing Fee");
provided, however, that the Financing Fee shall not exceed $250,000. Pinnacle
and Alvey are not obliged to pay duplicate M&A Fees and Financing Fees in
connection with any single transaction or series of related transactions. The
Mammoth Agreement will terminate on the earlier to occur of (i) January 24,
2004, (ii) the sale of all or substantially all of the capital stock or
assets of either Pinnacle or Alvey or (iii) the death or retirement of Mr.
Ulrich. In addition, the Mammoth Agreement will be terminable by Pinnacle and
Alvey in the event that Mr. Ulrich fails, or is otherwise unwilling, to
perform the services required by such agreement in a manner reasonably
acceptable to Pinnacle and Alvey and consistent with past practices.

CONSULTING AGREEMENT WITH VESTAR

On January 24, 1996, Pinnacle and Alvey entered into a consulting
agreement with Vestar Capital Partners ("Vestar Capital"), an affiliate of
Vestar, pursuant to which Pinnacle and Alvey agreed to pay an annual fee of
$150,000 to Vestar Capital (the "Vestar Agreement"). The Vestar Agreement
terminates on the earlier to occur of (i) the completion of an initial public
offering by Pinnacle of the Pinnacle Common Stock, (ii) the occurrence of a
change of control (as defined) or (iii) the date on which the Investors or
certain specified transferees cease to meet a certain minimum investment level.
In addition, upon consummation of the Pinnacle Preferred Stock and Warrants
Offering, Pinnacle paid to Vestar Capital a one-time fee of $750,000 and
reimbursed the Investors for all reasonable out-of-pocket costs and expenses
(including reasonable attorneys' fees and related expenses) incurred by the
Investors in connection with the Pinnacle Preferred Stock and Warrants Offering.

LEASE OF WHITE FACILITIES

The Company leases the manufacturing facility used by White in
Kenilworth, New Jersey from a partnership controlled by Donald J. Weiss,
formerly a director of Pinnacle and Alvey. Pursuant to the terms of the lease,
the Company paid rent in the amount of $900,000 in 1996. The term of the lease
extends through December 2006. The Company believes that the terms of the lease
are substantially similar to terms that would have been obtained from a third
party in an arms'-length negotiation.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) LIST OF DOCUMENTS FILED AS PART OF THIS ANNUAL REPORT
ON FORM 10-K

1. FINANCIAL STATEMENTS. The consolidated financial statements
identified on the index to consolidated financial statements and schedules on
page F-1 hereof are filed as part of this Annual Report on Form 10-K.

2. FINANCIAL STATEMENT SCHEDULES. Rule 12-09 Valuation and
Qualifying Accounts and Reserves of Registrant. See the Report of Independent
Accountants on Financial Statement Schedules.

All other schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.

3. EXHIBITS. The following are filed as exhibits to this
Annual Report on Form 10-K:

Exhibit
Number Description
- ------- -----------

*3.1 Certificate of Incorporation of Alvey Systems, Inc.
*3.2 Bylaws of Alvey Systems, Inc.
*10.1 Recapitalization Agreement, dated as of September
28, 1995, by and among Pinnacle Automation, Inc.,
Alvey Systems, Inc. and the Selling Stockholders
listed on Schedule A thereto
*10.2 Equity Purchase and Sale Agreement, dated as of
December 13, 1995, by and among Pinnacle Automation,
Inc., Alvey Systems, Inc., James M. Schloeman and
each of the other persons or entities listed on
Schedule A thereto
*10.3 Equity Purchase and Sale Agreement, dated as of
January 24, 1996, by and among Pinnacle Automation,
Inc., Alvey Systems, Inc. and Atlantic Equity
Corporation
*10.4 Amended and Restated Stockholders Agreement, dated
as of January 11, 1996, by and among Pinnacle
Automation, Inc., each of the Management Stockholders
(as defined therein), the Raebarn Stockholders
(as defined therein), the Series C Holders (as defined
therein) and the Warrantholders (as defined therein)
*10.5 Consulting Agreement, dated as of December 31, 1995,
by and among Pinnacle Automation, Inc., Alvey Systems,
Inc. and Mammoth Capital Inc.
*10.6 Termination Agreement, dated as of December 31, 1995,
by and among Pinnacle Automation, Inc., Alvey Systems,
Inc., and Lafarick, Inc.
*10.7 Investment Agreement, dated as of December 12, 1995,
by and among Pinnacle Automation, Inc., Vestar Equity
Partners, L.P., Chemical Equity Associates and Hancock
Venture Partners IV--Direct Fund, L.P., as amended
*10.8 Registration Rights Agreement, dated as of January 24,
1996, by and among Pinnacle Automation, Inc., Vestar
Equity Partners, L.P., Chemical Equity Associates,
Hancock Venture Partners IV--Direct Fund, L.P., and
the other persons listed on the schedules thereto
*10.9 Consulting Agreement, dated as of January 24, 1996,
by and among Pinnacle Automation, Inc., Alvey Systems,
Inc. and Vestar Capital Partners
*10.10 Purchase Agreement, dated January 19, 1996, by and
among Alvey Systems, Inc., Pinnacle Automation, Inc.
and NationsBanc Capital Markets, Inc.
*10.11 Indenture, dated as of January 24, 1996, by and
between Alvey Systems, Inc. and The Bank of New York

<PAGE>

Exhibit
Number Description
- ------- -----------

*10.12 Registration Rights Agreement, dated as of January
24, 1996 by and among Alvey Systems, Inc., Pinnacle
Automation, Inc. and NationsBanc Capital Markets,
Inc.
*10.13 Credit Agreement, dated as of January 24, 1996,
among Alvey Systems, Inc., the lenders named therein
and NationsBank N.A.
10.14 Amendment No. 1 dated May 15, 1996 to the Credit
Agreement, dated as of January 24, 1996, among Alvey
Systems, Inc., the lenders named therein and
NationsBank N.A.
10.15 Amendment No. 2 dated March 14, 1997 to the Credit
Agreement, dated as of January 24, 1996, among
Alvey Systems, Inc., the lenders named therein and
NationsBank N.A.
*10.16 Pledge and Security Agreement, dated as of January
24, 1996, by Alvey Systems, Inc., as pledgor, in favor
of NationsBank, N.A.
*10.17 Pledge and Security Agreement, dated as of January
24, 1996, by Pinnacle Automation, Inc., as pledgor,
in favor of NationsBank, N.A.
*10.18 Security Agreement, dated as of January 24, 1996,
by Alvey Systems, Inc., and its subsidiaries, in
favor of NationsBank, N.A.
*10.19 Non-Competition, Working Capital Guarantee and
Security Agreement, dated April 15, 1992, by and
among the Company, Busse Bros, Inc., Eugene H. Busse
and First Wisconsin Trust Company
*10.20 Non-Competition, Working Capital Guarantee and
Security Agreement, dated April 15, 1992, by and
among the Company, Busse Bros, Inc., Sheldon C. Busse
and First Wisconsin Trust Company
*10.21 Non-Competition, Working Capital Guarantee and
Security Agreement, dated April 15, 1992, by and
among the Company, Busse Bros, Inc., Lois B. Biel
and First Wisconsin Trust Company
*10.22 Stock Purchase Agreement by and among Pinnacle
Automation, Inc., Alvey Systems, Inc., McHugh,
Freeman & Associates, Inc., Weseley Software
Development Corp. and the other signatories thereto,
dated December 20, 1995 as amended by Amendment
No. 1 thereto dated January 29, 1996.
10.23 Stock Purchase Agreement dated as of December 16,
1996 by and between Alvey Systems, Inc. and
UNR Industries, Inc.
*10.24 Asset Purchase Agreement dated as of May 9, 1995
by and among Pinnacle Automation, Inc., Alvey
Systems, Inc., The Buschman Company, Diamond Machine
Co. and IMH of Lynchburg, Inc.
*10.25 Lease Agreement, dated December 31, 1986, by and
among Boright Realty and White Storage & Retrieval
Systems, Inc.
*10.26 Amended and Restated Employment Agreement, dated
May 31, 1995, by and among Pinnacle Automation, Inc.
and William R. Michaels
*10.27 Amended and Restated Employment Agreement, dated
June 27, 1995, by and among Pinnacle Automation, Inc.
and Michael J. Tilton
*10.28 Amended and Restated Employment Agreement, dated
June 27, 1995, by and among Pinnacle Automation, Inc.
and Stephen J. O'Neill
*10.29 Employment Agreement, dated March 9, 1994, by and
among The Buschman Company and Christopher C. Cole
*10.30 Employment Agreement, dated December 14, 1993, by and
among White Storage & Retrieval Systems, Inc. and
Donald J. Weiss
21 List of Subsidiaries
27 Financial Data Schedule
- -----------------
* Filed as an exhibit to the Company's Registration Statement on Form S-4 (No.
333-2600) and incorporated herein by reference.

<PAGE>

(b) REPORTS ON FORM 8-K. The Company did not file any Reports on
Form 8-K during 1996.

(d) Refer to (a)(2) above.

<PAGE>

INDEX TO ALVEY SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Accountants F-2
Consolidated Balance Sheet as of December 31, 1996 and 1995 F-3
Consolidated Statement of Operations for the fiscal years ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Cash Flows for the fiscal years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statement of Net Investment of Parent for the fiscal
years ended December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholder and
Board of Directors of
Alvey Systems, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of net
investment of parent present fairly, in all material respects, the
financial position of Alvey Systems, Inc. and its subsidiaries at December
31, 1996 and 1995 and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
St. Louis, Missouri
February 7, 1997, except for
Note 7 which is as of March 19, 1997

F-2

<PAGE>

ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 5,025 $ 3,405
Receivables:
Trade (less allowance for doubtful accounts of $1,206 and $824, respectively) 53,189 42,567
Unbilled and other 7,909 6,211
Accumulated costs and earnings in excess of billings ($47,194 and $54,279,
respectively) on uncompleted contracts 15,647 8,317
Inventories:
Raw materials 14,634 13,966
Work in process 3,909 5,720
Deferred income taxes 8,509 4,699
Prepaid expenses and other assets 3,189 1,665
---------- ----------
Total current assets 112,011 86,550

Property, plant and equipment, net 34,367 25,675
Other assets 8,963 6,031
Goodwill (net of amortization of $4,946 and $3,613 respectively) 26,510 32,029
---------- ----------

$ 181,851 $ 150,285
---------- ----------
---------- ----------
LIABILITIES, REEDEEMABLE PREFERRED STOCK, AND NET INVESTMENT OF PARENT:
Current liabilities:
Current portion of long-term debt $ 280 $ 6,915
Accounts payable 34,405 24,368
Accrued expenses 40,377 27,764
Customer deposits 11,232 12,107
Billings in excess of accumulated costs and earnings ($91,902 and $21,233,
respectively) on uncompleted contracts 20,426 13,904
Deferred revenues 4,379 899
Taxes payable 308 994
---------- ----------
Total current liabilities 111,407 86,951

Long-term debt 100,493 42,460
Other long-term liabilities 9,125 5,075
Deferred income taxes 1,955 4,196

Commitments and contingencies (Notes 3, 4 and 12)

Redeemable preferred stock:
Redeemable preferred stock of $.01 par value per share, authorized 500,000 shares:
Series A Senior Cumulative Exchangeable Preferred Stock of Pinnacle
Automation, Inc., 0 and 250,000 shares designated, 0 and 210,770 shares issued,
0 and 210,697 shares outstanding, respectively 21,077
Cumulative Exchangeable Preferred Stock of Pinnacle Automation, Inc.,
0 and 100,000 shares designated, 0 and 62,524 shares issued and
outstanding, respectively 6,252
Preferred stock in treasury, 0 and 73 shares of Series A Senior Cumulative
Exchangeable Preferred Stock of Pinnacle Automation, Inc. (7)
---------- ----------
Total redeemable preferred stock 0 27,322
---------- ----------
Net investment of Parent (41,129) (15,719)
---------- ----------
$ 181,851 $ 150,285
---------- ----------
---------- ----------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3

<PAGE>

ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 331,247 $ 288,018 $ 248,177
Cost of goods sold 256,218 217,297 189,007
---------- ---------- ----------

Gross profit 75,029 70,721 59,170
Selling, general and administrative expenses 61,471 51,630 43,402
Write-off of purchased in-process research and development costs 12,700
Research and development expenses 4,797 2,051 2,538
Write-off of goodwill 11,491
Amortization expense 1,703 1,737 1,836
Other expense (income), net 1,378 (108) 2,279
---------- ---------- ----------

Operating income (loss) (18,511) 15,411 9,115
Interest expense 12,301 6,896 5,921
---------- ---------- ----------

Income (loss) before income taxes and extraordinary loss (30,812) 8,515 3,194
Income tax expense (benefit) (1,909) 4,109 1,516
---------- ---------- ----------

Income (loss) before extraordinary loss (28,903) 4,406 1,678
Extraordinary loss, net of income tax benefit of $1,328 (Note 7) 1,993
---------- ---------- ----------

Net income (loss) $ (30,896) $ 4,406 $ 1,678
---------- ---------- ----------
---------- ---------- ----------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4

<PAGE>

ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (30,896) $ 4,406 $ 1,678
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 4,259 2,952 2,752
Amortization 1,703 1,737 1,836
Other (173)
Write-off of purchased in-process research and development
costs 12,700
Write-off of goodwill 11,491
Deferred taxes, net of effect of acquisitions (2,616) 2,660 571
Write-off of unamortized debt issue costs included in
extraordinary loss 2,963
(Increase) decrease in current assets, excluding effect
of acquisitions:
Receivables (10,745) (5,979) (6,483)
Accumulated costs and earnings in excess of billings on
uncompleted contracts (7,330) (1,732) (1,070)
Inventories 2,146 (5,636) 1,134
Other assets (384) (259) 1,409
(Decrease) increase in current liabilities, excluding effect
of acquisitions:
Accounts payable 9,447 4,983 3,773
Accrued expenses 10,912 5,201 3,429
Customer deposits (929) 5,469 8
Billings in excess of accumulated costs and earnings on
uncompleted contracts 6,522 4,911 2,837
Deferred revenues 1,641 (681) 108
Taxes payable (1,773) 452 (201)
Other liabilities 2,178 455 217
------------ ---------- ----------

Net cash provided by operating activities 11,289 18,939 11,825
------------ ---------- ----------

INVESTING ACTIVITIES:
Acquisition of subsidiaries, net of cash acquired of $61 and $106,
respectively (18,997) (101)
Cash proceeds on sale of Cassville plant 698
Payments for agreements not to compete (300) (300) (300)
Cash payments to dispose of Lewiston (588) (2,347) (2,683)
Software development costs (237) (582) (1,106)
Additions to property, plant and equipment, net (11,396) (3,914) (3,985)
------------ ---------- ----------

Net cash used for investing activities (31,518) (7,143) (7,477)
------------ ---------- ----------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-5

<PAGE>

ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds of borrowings $ 132,319 $ 27,728 $ 42,600
Payments of debt and capital leases (80,921) (38,538) (46,317)
Redemption of preferred stock (27,593)
Investment of Parent 5,757 59 309
Treasury preferred stock issuances (purchases) 35 (1)
Payments of debt issuance costs (7,713) (255) (89)
--------- -------- --------

Net cash provided by (used for) financing activities 21,849 (10,971) (3,498)
--------- -------- --------

Net increase in cash and cash equivalants 1,620 825 850
Cash and cash equivalents, beginning of year 3,405 2,580 1,730
--------- -------- --------

Cash and cash equivalents, end of year $ 5,025 $ 3,405 $ 2,580
--------- -------- --------
--------- -------- --------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on financings $ 6,777 $ 6,851 $ 5,534
Income taxes 1,281 997 1,161

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Alvey Systems, Inc. purchased Automation Equipment Corporation in
1994 and Weseley Software Development Corp. and Real Time
Solutions, Inc. in 1996. In conjunction with the acquisitions,
liabilites were assumed as follows:
Fair value of assets acquired $ 17,359 $ 215
Fair value assigned to goodwill 7,329 810
Cash paid concurrent with acquisitions, including payments of
debt of acquired companies and excluding cash acquired (18,997) (101)
--------- --------

Liabilities assumed $ 5,691 $ 924
--------- --------
--------- --------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6

<PAGE>

ALVEY SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF NET INVESTMENT OF PARENT
(DOLLARS IN THOUSANDS)

NET INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 OF PARENT
---------

Balance December 31, 1993 $ (15,015)
Net income 1,678
Net investment of Parent 309
Preferred stock dividend declared (Note 8) (3,304)
------------

Balance December 31, 1994 (16,332)
Net income 4,406
Net investment of Parent 59
Preferred stock dividend declared (Note 8) (3,852)
------------

Balance December 31, 1995 (15,719)
Net loss (30,896)
Net investment of Parent 5,757
Preferred stock dividend declared (Note 8) (271)
------------

Balance December 31, 1996 $ (41,129)
------------
------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F-7

<PAGE>

ALVEY SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Alvey Systems, Inc. ("Alvey") is a wholly-owned subsidiary of Pinnacle
Automation, Inc. ("Pinnacle" or "Parent"). Pinnacle has no operations and
no assets other than its investment in Alvey. Alvey, with its subsidiaries
(the "Company"), is a leading materials handling and information systems
company which provides integrated solutions to a wide range of
manufacturing and distribution applications. The Company develops software
and controls for materials handling systems and manufactures a broad range
of industrial equipment such as conveyors, pelletizers, depelletizers,
carousels, sorters and robotics which carry out the physical acts of
loading and unloading, sorting and transporting raw materials and finished
products.

The accompanying financial statements of the Company include the
accounts of Alvey and its six operating subsidiaries which include: McHugh
Freeman & Associates, Inc. ("MFA"), located in Waukesha, Wisconsin, which
was acquired in May 1989; Busse Bros., Inc. ("Busse"), located in Randolph,
Wisconsin, which was acquired in April 1992; The Buschman Company
("Buschman"), located in Cincinnati, Ohio, which was acquired in October
1992; White Systems, Inc. ("White") located in Kenilworth, New Jersey,
which was acquired in December 1993; Weseley Software Development Corp.
("Weseley"), located in Shelton, Connecticut, which was acquired in January
1996 and Real Time Solutions, Inc. ("RTS"), located in Napa, California,
which was acquired in December 1996. See Note 3 for additional information
on the Weseley and RTS acquisitions. All of the above transactions were
accounted for under the purchase method of accounting.

Effective January 16, 1996, Alvey reincorporated in the State of
Delaware under the name Alvey Systems, Inc. The Company historically
conducted business as a Missouri corporation under the name Alvey, Inc.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The policies utilized by the Company in the preparation of the
consolidated financial statements conform to generally accepted accounting
principles, and require management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from these
estimates.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Alvey
and Alvey's wholly-owned subsidiaries: MFA, Busse, Buschman, White, Weseley
and RTS. All significant intercompany transactions, which primarily
consist of sales, have been eliminated.

NET INVESTMENT OF PARENT

Net investment of Parent represents the net capital contributed by
Pinnacle as a result of the sales of its common stock, options and warrants
or awards of its common stock and options to certain employees of the
Company as well as cumulative results of operations and payment of
preferred stock dividends. The basis of Pinnacle's investment in Alvey has
been pushed down to the accompanying consolidated financial statements of
Alvey. The redeemable preferred stock of Pinnacle was pushed down to
the accompanying consolidated financial statements of Alvey at December 31,
1995 as it was exchangeable for debt of Alvey. Subsequent to the January
1996 recapitalization described in Note 8, the outstanding preferred stock
of Pinnacle is no longer exchangeable into debt of Alvey and is not pushed
down to the accompanying financial statements of Alvey.

F-8

<PAGE>

At December 31, 1996, the net investment of Parent consists of
cumulative contributions of capital to Alvey by Pinnacle of $8.8 million,
cumulative losses before extraordinary losses of $26.0 million,
extraordinary losses of $9.5 million and an aggregate accretion/payment of
$14.4 million of paid-in-kind dividends on preferred stock. At December
31, 1995, the net investment of Parent consists of cumulative contributions
of capital to Alvey by Pinnacle of $3.0 million plus cumulative income
before extraordinary losses of $2.9 million, offset by extraordinary losses
of $7.5 million and an aggregate accretion/payment of $14.1 million of
paid-in-kind dividends on preferred stock.

FAIR VALUE OF FINANCIAL INSTRUMENTS

For purposes of financial reporting, the Company has determined that
the fair value of financial instruments approximates book value at December
31, 1996 and 1995, based on terms available to the Company in financial
markets.

REVENUE RECOGNITION

The Company utilizes the percentage-of-completion method of accounting
to recognize revenue and profits on virtually all customer contracts. For
certain contracts related to equipment sales, the percentage of completion
is determined based on the ratio of the cost of equipment shipped to date
to the total estimated cost of the equipment to be shipped under the
contract. For other equipment contracts and all consulting contracts,
typically for larger machines and integrated systems, as well as the
installation phase of contracts, the percentage of completion is determined
based on the ratio of total costs incurred to date to the estimated total
costs to be incurred under the contracts. Any revisions in the estimated
total costs of the contracts during the course of the work are reflected
when the facts that require the revisions become known. Provisions for
estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Revenues from maintenance and support
contracts are deferred and recognized ratably over the life of the related
contract.

The Company recognizes software license fee revenue upon the later to
occur of (i) the execution of a software license agreement and (ii)
delivery of the standardized software to the customer. The Company
licenses its software to customers on a perpetual, non-exclusive basis.
Implementation, training and consulting revenues are recognized as the
services are rendered (fixed-fee revenues are recognized on a
percentage-of-completion basis). Annual maintenance and support revenues
consist of ongoing support and product updates and are recognized ratably
over the term of the particular maintenance agreement in place with a
customer. Revenues for the Company's hardware and peripheral sales are
recognized upon shipment.

SOFTWARE DEVELOPMENT COSTS

Certain costs incurred in developing software products are capitalized
and amortized on a product-by-product basis using the greater of the ratio
that current gross revenues for a product bear to the current and
anticipated future gross revenues for that product or the straight line
method over the estimated five year economic life of the product. The
costs consist of salaries, computer expenses and other overhead costs
directly related to the development and/or major enhancement of software
products. Such costs are capitalized, to the extent they are recoverable
through future sales, from the time the product's technological
feasibility is established up to its general release to customers. Costs
incurred before or after this period are expensed as incurred except for
major product improvements, which are capitalized as described above. Net
unamortized capitalized software costs were $603,000 and $1,419,000 at
December 31, 1996 and 1995, respectively. Amortization of capitalized
software development costs totaled $1,053,000, $257,000 and $12,000 in
1996, 1995 and 1994, respectively, and is included in cost of goods sold
in the accompanying financial statements. In 1996, the amortization of
software costs includes the write-off of $659,000 of capitalized software
development costs that are not expected to be recoverable through future
sales.

F-9

<PAGE>

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are expensed as incurred.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include demand deposit accounts, cash on
hand and time deposits with original maturities of less than 90 days. Such
amounts are carried at cost, which approximates market.

INVENTORY VALUATION

Work-in-process inventories consist principally of in-process
palletizing and depalletizing machines, conveyor and carousel systems,
other materials handling equipment and parts manufactured by the Company
for use in these products. Raw materials include steel, purchased parts
and other materials used in the manufacturing process. These inventories
are valued at the lower of cost (first-in, first-out) or market. Obsolete
or unsalable inventories are reflected at their estimated realizable
values.

PROGRESS BILLINGS

The Company bills its customers based on the terms set forth in a
sales contract. The billing schedule does not necessarily match the stage
of completion of a customer's order for installation. As such, costs,
earnings and billings are accumulated for jobs in progress at period end
and the extent to which costs and earnings exceed billings and billings
exceed costs and earnings for such jobs, an asset or liability is recorded.

Unbilled receivables are those amounts recognized in revenues for
completed portions of manufacturing contracts and software license fees
which have not been billed to the customer under the specific billing terms
of the contract or license agreement. Customer deposits represent cash
received from customers in payment of billings for equipment for which no
associated revenue or cost has been recognized.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. Costs assigned to
property, plant and equipment are based on estimated fair value at the date
of acquisition. Upon sale, retirement or other disposition, the cost and
related accumulated depreciation are removed from the respective accounts
and any resulting gain or loss is included in income.

Depreciation of property, plant and equipment, including equipment
under capital lease agreements, is charged to expense over the estimated
useful lives of the related assets using the straight-line method.

Useful lives by major asset category are as follows:

Building and improvements..................... 7 to 25 years
Machinery and equipment....................... 3 to 12 years
Office furniture and equipment................ 3 to 7 years

F-10

<PAGE>

GOODWILL AND OTHER INTANGIBLE ASSETS

The excess of cost over the fair market value of net assets acquired
in purchase business transactions has been recorded as goodwill to be
amortized over a period of 40 years, except for goodwill related to RTS and
Weseley which is amortized over 10 years. The carrying value of goodwill
is assessed for recoverability by management based on an analysis of future
expected undiscounted cash flows from the underlying operations. At
December 31, 1996 the Company recorded a charge of $11.5 million for the
write-off of goodwill at one of its subsidiaries. This write-off
represents the entire amount of remaining goodwill at December 31, 1996
recorded by that subsidiary which is considered to be impaired due to
historical losses and uncertainty regarding future income and cash flows.
See Note 6 for further discussion.

In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 specifies than
an impairment review be performed, using undiscounted cash flows
resulting from the use of long-lived assets, whenever events or changes in
circumstances indicate that the amount of a long-lived asset may not be
recoverable. SFAS 121 was adopted by the Company in 1996 and had no
material effect on the Company's financial position or results of
operations because the Company's prior impairment recognition practice was
consistent with the major provisions of the Statement.

Debt issuance costs and agreements not to compete are amortized over
the life of the related agreements. All intangible assets are amortized
using the straight-line method.

INCOME TAXES

As a subsidiary of Pinnacle, the Company's results of operations are
included in consolidated federal income tax returns which include the
Company and its subsidiaries; the Company could be considered jointly and
severally liable for assessments of additional tax on the consolidated
group. The Company's provision for income taxes has been presented based
on income taxes the Company would have provided on a separate company basis
which approximate those of Pinnacle as a consolidated entity.

Income taxes are based upon income for financial reporting purposes.
Deferred income taxes are provided for the temporary differences between
the financial reporting bases and the income tax bases of the Company's
assets and liabilities. The tax rates expected to be in effect when such
differences are reflected in the Company's income tax returns are used in
calculating the deferred tax asset or liability. The major temporary
differences that give rise to deferred taxes include retainage,
depreciation, warranty and inventory costs, deferred compensation, plant
closing and various other reserves. See Note 9 for additional information.

CONCENTRATIONS OF CREDIT RISK

The Company sells its products to a wide range of companies in the
food, beverage, national retailing and distribution industries, as well as
certain government entities. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral,
although many customers pay deposits to the Company prior to commencement
of production in accordance with terms of the sales contract. The Company
maintains reserves for potential credit losses based upon factors
surrounding the credit risk of specific customers, historical trends and
other information; historically, such losses have been within management's
expectations.

EARNINGS PER SHARE INFORMATION

Given the historical organization and capital structure of the
Company, earnings per share information is not considered meaningful or
relevant and has not been presented in the accompanying consolidated
financial statements or the notes thereto.

F-11

<PAGE>

3. ACQUISITIONS

WESELEY ACQUISITION

In January 1996, Pinnacle, Alvey and MFA purchased all of the
outstanding capital stock of Weseley for a purchase price of $15 million in
cash. The acquisition, which was recorded pursuant to the purchase method
of accounting, was financed with a portion of the proceeds of the Debt
Offering as described in Note 7. The excess of the cost of the
acquisition over the fair value of net assets acquired (including purchased
in-process research and development, as further described below) of $5.1
million was recorded as goodwill and is being amortized over a period of 10
years. The consolidated financial statements of the Company include the
results of operations and cash flows of Weseley from its date of
acquisition.

Based on the results of an independent appraisal, $11.7 million of the
Weseley purchase price was allocated to in-process research and development
costs at the date of acquisition and was recorded as a write-off of
purchased in-process research and development in the Company's consolidated
statement of operations during the first quarter of 1996. Such amount has
been excluded from the pro forma information below as it represents a
non-recurring charge to income which resulted directly from the Weseley
acquisition.

Under the terms of the purchase agreement, subject to the continued
employment of the former principal shareholder of Weseley and certain other
conditions, certain employees of Weseley have an opportunity to earn stay
bonuses in the aggregate of $625,000 per year for each of eight years
immediately following the acquisition of Weseley which will be charged to
income in the year earned and employee incentive compensation up to an
aggregate maximum of $13 million, based on Weseley's achievement of defined
levels of earnings before interest, income tax, depreciation, amortization,
management fees and extraordinary losses, which will be charged to income
when such amounts are estimable and payment thereof is deemed probable.
Amounts charged to income in 1996 under the stay bonus agreements totaled
$625,000; no expense was recognized related to the employee incentive
compensation agreement.

In the quarter ended December 31, 1995 (prior to the purchase of
Weseley by the Company), Weseley received and recorded as deferred revenue
$2.5 million in fees in connection with a distribution contract with a
large manufacturing company; $2.1 million remains deferred at December 31,
1996. On December 31, 1995 (prior to the purchase of Weseley by the
Company), Weseley paid and charged to income an aggregate of $3.0 million
in bonuses for certain of its employees, which are included in selling,
general and administrative expenses in the pro forma information presented
below.

F-12

<PAGE>

The following table sets forth pro forma information for the Company
as if the Weseley acquisition had taken place on January 1, 1995. This
information is unaudited and does not purport to represent actual operating
results had the acquisition actually occurred on January 1, 1995. The pro
forma results of operations for 1996 would not have been materially
different from reported results had the Weseley acquisition taken place on
January 1, 1996. Pro forma information for the twelve months ended
December 31, 1995 (in thousands) (unaudited) is as follows:

Net sales $ 291,415
Cost of goods sold 218,232
--------------

Gross profit 73,183
Selling, general and administrative expenses 56,793
Research and development expenses 2,666
Amortization expense 2,253
Other expenses (income), net (108)
--------------

Operating income 11,579
Interest expense 8,583
--------------

Income before income taxes
and extraordinary loss 2,996
Income tax expense 2,072
--------------

Income (loss) before extraordinary loss $ 924
--------------
--------------

RTS ACQUISITION

In December 1996, Pinnacle and Alvey purchased all of the outstanding
capital stock of RTS for a purchase price of $4.1 million in cash. The
acquisition, which was recorded pursuant to the purchase method of
accounting, was financed through borrowings under the Credit Agreement (as
defined in Note 7). The excess of the cost of the acquisition over the
fair value of net assets acquired (including purchased in-process research
and development, as further described below) of $2.2 million was recorded
as goodwill and is being amortized over a period of 10 years. The
consolidated financial statements of the Company include the results of
operations and cash flows of RTS from its date of acquisition.

Based on the results of an independent appraisal, $1.0 million of the
RTS purchase price was allocated to in-process research and development
costs at the date of acquisition and was recorded as a write-off of
purchased in-process research and development in the Company's consolidated
statement of operations during the fourth quarter of 1996.

The pro forma results of the Company for 1996 and 1995 would not have
been materially different had the RTS acquisition taken place on January 1,
1996 or 1995, respectively. Accordingly, pro forma financial information
for the RTS acquisition is not presented.

F-13

<PAGE>

4. FTC ORDER TO DISPOSE OF THE LEWISTON, MAINE MANUFACTURING PLANT

As a result of Alvey's acquisition of Buschman in 1992, the Company
made a decision to close Buschman's carousel manufacturing plant in
Lewiston, Maine ("Lewiston"). Alvey was subsequently ordered by the
Federal Trade Commission ("FTC"), beginning December 6, 1993, to hold the
Lewiston operation separate from operations of the Company and to
ultimately dispose of the facility. Until such time as a buyer suitable to
Alvey and the FTC could be found for Lewiston, Alvey was required to fund
all cash requirements of Lewiston. However, pursuant to the FTC order, the
Company had no authority to make operating decisions for Lewiston. Since
its determination to close the Lewiston plant and through December 31,
1996, Alvey has contributed approximately $7.4 million in cash to fund the
operation. Upon its initial decision to close the Lewiston plant, the
Company accrued $1.4 million, net of applicable income taxes, for closing
costs and the write-off of assets; such amount was recorded under purchase
accounting as goodwill during 1992. Operating losses and other costs of
closure incurred subsequent to FTC intervention ($5.4 million, net of
income tax benefits) were accrued and charged to income as an extraordinary
loss in fiscal 1993, including estimates of amounts expected to be incurred
through fiscal 1996 and in future periods, as discussed below.

The sale of this operation was finalized on July 31, 1995. During
1996 and 1995, $588,000 and $2.3 million, respectively, was paid and
charged against the balance sheet accrual for the operations of Lewiston
and related sale agreement obligations. In addition, in 1995, $780,000 of
related asset write-offs were also charged against the balance sheet
accrual. At December 31, 1996, $531,000 is accrued to fund obligations
resulting from the sale agreement which extend through May 1, 1997.
Management believes that the remaining accrual is sufficient to cover
future anticipated charges.

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following (in
thousands):

DECEMBER 31,
---------------------------
1996 1995
---------- ----------

Land $ 3,148 $ 3,140
Buildings and improvements 21,420 15,783
Machinery and equipment 7,417 6,083
Office and other equipment 16,597 12,029
Construction in progress 178
Property held under capital
lease 1,327 1,277
---------- ----------

49,909 38,490
Less: Accumulated depreciation
and amortization, including
$657 and $666, respectively,
related to property held under
capital lease 15,542 12,815
---------- ----------

$ 34,367 $ 25,675
---------- ----------
---------- ----------

F-14

<PAGE>

Depreciation expense for leased equipment was $114,000, $103,000 and
$143,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Future minimum lease payments under the capital leases and
the present value of the net minimum lease payments at December 31, 1996
are as follows (in thousands):

1997 $ 223
1998 209
1999 95
2000 187
---------

Total minimum lease payments 714
Less: Amount representing interest 96
---------
Present value of minimum lease payments at December 31,
1996, including current portion of $178 $ 618
---------
---------

Certain other office equipment, automobiles and office space are
utilized by the Company under operating leases which resulted in rental
expense of $3.9 million, $3.4 million and $2.7 million in 1996, 1995 and
1994, respectively. Commitments under these leases total $4.7 million in
1997, $4.5 million in 1998, $3.8 million in 1999, $3.3 million in 2000,
$3.2 million in 2001 and $10.6 million in the aggregate in years
thereafter.

6. GOODWILL

Goodwill is summarized as follows (in thousands):

DECEMBER 31,
------------------------
1996 1995
--------- ---------

Goodwill $ 42,947 $ 35,642
Less: Write-off of goodwill (11,491)
Less: Accumulated amortization (4,946) (3,613)
--------- ---------
$ 26,510 $ 32,029
--------- ---------
--------- ---------

The write-off of $11.5 million in 1996 represents the full amount of
remaining goodwill at one subsidiary which is considered to be impaired due to
historical losses, uncertainty regarding future income and uncertainty regarding
future cash flows. This impairment was determined by analyzing future expected
undiscounted cash flows from the underlying operations. The amount of the
write-off was determined using future expected discounted cash flows from the
underlying operations.

F-15

<PAGE>

7. LONG-TERM DEBT

The detail of long-term debt follows (in thousands):

DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
11 3/8% Senior Subordinated Notes due
January 31, 2003 $ 100,000 $
Term A Facility - weighted average rate of 9.2%,
scheduled quarterly principal payments
through March 31, 1999; repaid in 1996 24,817
Term C Facility - 13%, quarterly principal payments beginning
March 31, 1999 through September 30, 2000; repaid in 1996 12,382
Working Capital Facility - weighted average rate of 9.2%,
balance due on March 31, 1999; repaid in 1996 9,000
Unsecured Subordinated Debt Agreement - 11.95%,
balance due December 31, 2001; repaid in 1996 2,253
Capital lease obligations and other 773 923
---------- ----------

100,773 49,375
Less: Current portion 280 6,915
---------- ----------

$ 100,493 $ 42,460
---------- ----------
---------- ----------
</TABLE>

On January 24, 1996, Alvey issued and sold $100 million of 11 3/8%
Senior Subordinated Notes due 2003 (the "Debt Offering"). The proceeds of
the Debt Offering were used to repay all of the Company's outstanding
senior indebtedness and certain other indebtedness, fund the acquisition of
Weseley, pay transaction fees, fund a dividend to Pinnacle of $21.6 million
and provide working capital for ongoing operations. As a result of the
repayment of the outstanding senior indebtedness, the Company recorded an
extraordinary loss of approximately $2 million representing the write-off
of related debt issuance costs and debt repayment penalties, net of tax.
In accordance with the terms of the Debt Offering, Alvey filed a
registration statement with the Securities and Exchange Commission with
respect to an offer to exchange the 11 3/8% Senior Subordinated Notes for a
new issue of debt securities of Alvey registered under the Securities
Act of 1933 with terms substantially identical to those of the
11 3/8% Senior Subordinated Notes. Such registration statement was
declared effective on May 9, 1996 and the exchange of $100 million in
principal amount of the original notes for $100 million in principal amount
of registered notes was completed on June 11, 1996.

Concurrent with the consummation of the Debt Offering, Alvey entered
into a credit agreement (the "Credit Agreement") for a $30 million
revolving credit facility (the "Revolving Credit Facility") which is
guaranteed by Pinnacle and each direct and indirect subsidiary of Alvey.
Indebtedness of Alvey under the Credit Agreement is secured by
substantially all of the personal property of Alvey and its subsidiaries,
all capital stock of Alvey and 100% of the capital stock of its domestic
subsidiaries (other than the portion of the shares of capital stock of
Busse which are pledged to secure certain non-compete payments).
Indebtedness under the Revolving Credit Facility bears interest at a rate
based upon, at Alvey's option, (i) the Base Rate (as defined in the
Revolving Credit Facility) plus 1.5% or (ii) the Euro-dollar Rate (as
defined in the Revolving Credit Facility) for one, two, three, six or, if
available, nine or twelve months, plus 2.5%; provided, however, the
interest rate margins are subject to 0.25% reductions in the event Alvey
meets certain performance targets. Commitment fees accrue on the average
daily unused portion of the Revolving Credit Facility at 0.5% per annum and
are payable quarterly. The Revolving Credit Facility expires January 24,
2001. No borrowings were outstanding under the Revolving Credit Facility
at December 31, 1996.

F-16

<PAGE>

Debt issuance costs totaling $7.5 million were incurred in
establishing the $100 million Senior Subordinated Notes and the Revolving
Credit Facility on January 24, 1996 and are being amortized over the
weighted-average life of the facilities.

Under the Credit Agreement, the Company has provided standby letters
of credit at December 31, 1996 in the amount of $2.3 million as security
for payment of the Company's workers' compensation claims. Outstanding
letters of credit bear a 2.5% per annum fee which is payable quarterly.

Virtually all of the tangible assets of the Company are pledged as
collateral under the Credit Agreement. Restrictive covenants of
outstanding debt instruments include the maintenance of certain key ratios
as well as limitations on capital expenditures, incurrence of additional
debt, stock issuances and the payment of cash dividends. The Company was
in compliance with such financial covenants, as amended, at December 31,
1996.

Under a credit agreement among Alvey, Citibank N.A. ("Citibank"),
NationsBank of Texas, N.A. ("NationsBank"), Equitable Capital Private
Income and Equity Partnership II, L.P. ("Equitable") and others (the "Old
Credit Agreement"), Alvey's Working Capital Facility provided for up to
$29.9 million in revolving advances and letters of credit. In addition,
the Working Capital Facility allowed additional borrowings from the
Company's principal owners of $3 million. Of such additional debt, $2
million was funded on January 3, 1995 through an Unsecured Subordinated
Debt Agreement with certain shareholders of Pinnacle at a rate of 11.95%
for which all interest and principal was due on December 31, 2001. Under
the Old Credit Agreement, the Term A Facility, through which Alvey had
borrowings of $34.5 million at December 31, 1995, and Working Capital
Facility were provided and held equally by Citibank and NationsBank. The
Term C Facility, through which Alvey had borrowings of $12.4 million at
December 31, 1995, was provided by Equitable. Virtually all of the
tangible assets of Alvey and its subsidiaries were pledged as collateral
under the Old Credit Agreement.

As discussed above, amounts outstanding under the Term A Facility,
Term C Facility, Working Capital Facility and the Unsecured Subordinated
Debt Agreement were repaid on January 24, 1996.

8. REDEEMABLE PREFERRED STOCK AND RECAPITALIZATION OF PINNACLE

Concurrent with the consummation of the Debt Offering (see Note 7),
Pinnacle sold redeemable preferred stock and warrants to purchase its
common stock to an investor group for $30 million in cash proceeds (the
"Preferred Stock Offering"). The proceeds of the Preferred Stock Offering,
together with a dividend from Alvey to Pinnacle, were used to repurchase
certain shares of Pinnacle's outstanding common stock and to redeem
Pinnacle's Series A Senior Cumulative Exchangeable Preferred Stock ("Series
A Preferred") and Cumulative Exchangeable Preferred Stock ("Cumulative
Preferred"). While Alvey has not guaranteed, nor is it contingently
obligated with respect to the redeemable preferred stock and warrants
issued in the Preferred Stock Offering, Pinnacle has no financial
resources, other than from its subsidiaries' operations, to satisfy cash
requirements relative to these shares. The redeemable preferred stock and
warrants from the Preferred Stock Offering have not been pushed down to
Alvey's consolidated financial statements as such redeemable preferred
stock and warrants are not exchangeable into securities of Alvey. At
December 31, 1996, accumulated dividends on the redeemable preferred stock
totaled $5.3 million.

Pinnacle's Series A Preferred and Cumulative Preferred were redeemable
by Pinnacle at a liquidation value of $100 per share. At the option of the
holder, the preferred stock could have been exchanged for $100 of senior
subordinated notes to be issued by Alvey. As the redeemable preferred
stock was exchangeable for debt issued by Alvey (under which virtually all
of the assets of Alvey were pledged as collateral), such stock has been
allocated to the financial statements of Alvey. On any dividend payment
date or at any time after October 31, 2000, Pinnacle could redeem, at its
option, in whole or in part, preferred stock at 100% of its liquidation
value plus any accrued and unpaid dividends. The preferred stock was only
exchangeable or redeemable at such time as it would not cause a default
under any of the debt instruments of Alvey.

F-17

<PAGE>

Under terms of the related stockholder agreements, Pinnacle was
required to pay dividends quarterly on the Series A Preferred and the
Cumulative Preferred and could pay such dividends in cash (at 13%) or stock
(at 15.5%) at its option through December 31, 1996. Dividends declared in
1996, 1995 and 1994 were paid in the form of stock. Pinnacle declared
stock dividends of $271,000, $3.9 million and $3.3 million in 1996, 1995
and 1994, respectively (2,705, 38,522 and 33,045 shares, respectively, at a
liquidating value of $100), all of which served to decrease the net
investment of Parent of the Company.

The following table sets forth the changes in redeemable preferred stock
for the years ended December 31, 1994, 1995 and 1996 (dollars in
thousands):

SERIES A CUMULATIVE PREPAID TOTAL
PREFERRED STOCK PREFERRED STOCK COMPENSATION REDEEMABLE
------------------------- ------------------------ FOR PEREFERRED PREFERRED
SHARES AMOUNT SHARES AMOUNT STOCK STOCK
---------- ---------- ---------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 155,183 $ 15,519 46,128 $ 4,613 $ (98) $ 20,034
Compensation expense 98 98
Treasury stock purchases (7) (1) (1)
Stock dividend declared 25,469 2,547 7,576 757 3,304
--------- --------- --------- --------- --------- ---------
Balance December 31, 1994 180,645 18,065 53,704 5,370 0 23,435

Treasury stock sales 350 35 35
Stock dividend declared 29,702 2,970 8,820 882 3,852
--------- --------- --------- --------- --------- ---------
Balance December 31, 1995 210,697 21,070 62,524 6,252 0 27,322

Stock dividend declared 2,086 209 619 62 271
Redemption of stock (212,783) (21,279) (63,143) (6,314) (27,593)
--------- --------- --------- --------- --------- ---------

Balance December 31, 1996 0 $ 0 0 $ 0 $ 0 $ 0
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------

</TABLE>

9. INCOME TAXES

Income tax expense (benefit) relative to income (loss) from continuing
operations (before extraordinary loss) is comprised of (in thousands):

1996 1995 1994
---------- --------- ----------

Current
Federal $ 211 $ 1,001 $ 86
State 496 448 14
--------- --------- ---------

707 1,449 100
Deferred, principally federal (2,616) 2,660 1,416
--------- --------- ---------

$ (1,909) $ 4,109 $ 1,516
--------- --------- ---------
--------- --------- ---------

F-18

<PAGE>

A reconciliation of the income tax expense (benefit) per the statutory
federal income tax rate to the reported income tax expense (benefit) on
income before extraordinary loss is as follows (in thousands):

1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (10,476) $ 2,896 $ 1,086
Expense (benefit) resulting from:
Write-off of nondeductible purchased
in-process research and development 4,318
Write-off of nondeductible goodwill 3,907
State taxes (net of federal tax benefit) (226) 366 258
Nondeductible goodwill amortization 448 282 361
Foreign tax credit utilization (453)
Meals and entertainment 197 216 176
Other (77) 349 88
---------- ---------- ----------

$ (1,909) $ 4,109 $ 1,516
---------- ---------- ----------
---------- ---------- ----------

</TABLE>

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):

1996 1995
---------- ----------

Accrued insurance claims $ 2,437 $ 2,093
Inventory reserves 2,662 2,045
Warranty reserves 2,587 1,021
Employee cost accruals 3,637 2,513
Revenue timing differences 2,511 333
Other 2,214 813
--------- ---------

Total deferred tax assets 16,048 8,818
--------- ---------

Revenue timing differences 3,190 2,993
Property related items 5,402 5,250
Other 902 72
--------- ---------

Total deferred tax liabilities 9,494 8,315
--------- ---------
Net deferred tax asset $ 6,554 $ 503
--------- ---------
--------- ---------

In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", management has determined that based on
expected future operating plans and tax planning strategies available to
the Company, the net deferred tax assets at December 31, 1996 will be
utilized to offset future taxes. Therefore, no valuation reserve related
to such deferred tax assets has been recorded at December 31, 1996 and
1995, respectively.

F-19

<PAGE>

10. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS

The Company maintains 401(k) savings plans for virtually all employees
who meet certain eligibility requirements, except those certain union
employees who participate in multi-employer pension plans. Under the
plans, the employees may defer receipt of a portion of their eligible
compensation with the Company matching a defined percentage of the
employees' deferral. The Company's matching contributions were $701,000,
$614,000 and $429,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company may also elect to make discretionary profit
sharing contributions for virtually all employees, except those union
employees who participate in multi-employer pension plans, for which a
provision of $2.7 million, $2.2 million and $1.4 million is included in
the consolidated financial statements in 1996, 1995 and 1994,
respectively.

Contributions under the multi-employer pension plans are based on
amounts per employee as defined in the union labor agreement. Pension
expense for the union employees' pension plans was $593,000, $629,000 and
$675,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. The Company may be obligated, under the Multi-Employer
Pension Plan Amendment Act of 1980, for a part of these plans' unfunded
vested benefits if there is a withdrawal or partial withdrawal from a plan,
as defined within the Act. There is no intention on the part of management
to withdraw their participation from a plan.

Alvey also provides a deferred compensation plan for its Chief
Executive Officer. Under the plan, upon his termination of employment for
any reason, except voluntary resignation to accept a comparable position,
Alvey will pay a formula-based annual benefit for the remainder of his life
or for at least 10 years. At December 31, 1996, an amount of $1.8 million
is accrued for such benefits and expense of $260,000, $299,000 and $93,000
was recorded in 1996, 1995 and 1994, respectively.

During 1995, certain employees of the Company purchased shares of
Pinnacle common stock at estimated fair value totaling $409,000; these
purchases were effected with cash of $30,000 and employee notes receivable
of $379,000. During 1994, certain employees of the Company purchased and
were issued shares of Pinnacle common stock at the estimated fair value
totaling $316,000; these purchases were effected with cash of $43,000,
employee notes receivable of $185,000 and funding by the Company of
$88,000; amounts funded by the Company are being expensed over the vesting
period of the related shares. Employee notes receivable outstanding to
Pinnacle at December 31, 1996 and 1995 totaled $1,423,000 and $955,000,
respectively, and are reflected as a reduction of the net investment of
Parent.

F-20

<PAGE>

Management employees of the Company have received options to purchase
Pinnacle common stock which were granted at exercise prices which
approximated fair market value of the shares at the dates of grant.
Certain of these shares vest based on performance while others vest over a
period of employment (generally over a period of three years). The option
terms expire eight to ten years subsequent to the grant date. At December
31, 1996, exercise prices of options outstanding generally ranged between
$20 and $40 per share with 11,991 options at $1.20 per share which
approximated estimated fair value at the dates of grant. The weighted
average remaining life to expiration at December 31, 1996 of options
exercisable between $20 and $40 is seven years and for those at $1.20 is
six years. At December 31, 1996, 11,991 of the outstanding options have
vested. Compensation expense in relation to these options is not material
to the consolidated financial statements. These options are summarized as
follows:

WEIGHTED
AVERAGE SHARES
EXERCISE SUBJECT
PRICE TO OPTION
-------- ---------

Outstanding at January 1, 1994 $ 1.20 14,000
Options granted in 1994 31.28 21,700
Options expired in 1994 1.20 (2,009)
--------

Outstanding at December 31, 1994 22.06 33,691
Options granted in 1995 20.00 3,000
--------

Outstanding at December 31, 1995 21.02 36,691
Options granted in 1996 30.73 79,825
Options forfeited in 1996 20.00 (5,000)
--------

Outstanding at December 31, 1996 $ 28.02 111,516
--------
--------

In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), which
addresses accounting for stock option, purchase and award plans. SFAS 123
specifies that companies utilize either the "fair value based method" or
the "intrinsic value based method" for valuing stock options granted. The
Company adopted FAS 123 in 1996, and is continuing to utilize the
"intrinsic value based method" for valuing stock options granted.

Had the Company utilized the "fair value based method" to value stock
options granted , the Company's net income (loss) for 1996 and 1995 would
not have been materially different from reported net income (loss) for
those years. The weighted average fair value of option granted is
estimated on the date of grant using the Black Scholes option-pricing model
with the following assumptions:

1996 1995
--------- ---------

ASSUMPTIONS
Weighted average risk-free interest rate 6.2% 6.2%
Weighted average expected life of option 7 years 7 years

F-21

<PAGE>

The Company also has agreed to provide life insurance policies, in
amounts ranging from $1 million to $3 million, for the remainder of the
lives of five of its executive officers or until such officers voluntarily
resign to accept a comparable position. Costs relative thereto are not
material to the Company's consolidated financial statements.

11. SIGNIFICANT CUSTOMERS

In 1996, 1995 and 1994, no single customer comprised more than 10% of
sales.

12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS

The Company is involved in various litigation consisting almost
entirely of product and general liability claims arising in the normal
course of its business. After deduction of a per occurrence self-insured
retention, the Company is insured at December 31, 1996 for losses up to $27
million per year for product and general liability claims. The Company has
provided reserves for the estimated cost of the self-insured retention;
accordingly, these actions, when ultimately concluded, are not expected to
have a material adverse effect on the financial position, results of
operations or liquidity of the Company.

As of January 24, 1996, the Company established consulting agreements
with two related parties whereby the Company is obligated to make annual
payments of $350,000 plus expenses, with one contract providing for annual
increases of up to 3%. Additionally, the Company is obligated to
compensate one related party for certain merger, acquisition and financing
transactions. At December 31, 1995, the Company had two agreements with
related parties under which the Company received investment banking and
other consulting services. These agreements were to terminate in the years
2000 and 2002, respectively, however, the agreements were terminated in
January 1996, concurrent with the Debt Offering (see Note 7), at a cost of
$1.4 million. The agreements required annual payments by the Company
totaling $500,000 plus expenses. In addition, the Company was required to
pay an aggregate 2% investment banking fee on the total amount of
consideration paid or received through a merger, consolidation or sale of
more than 10% of Alvey's assets or outstanding securities, or the
acquisition of assets or stock of another company. Costs of these
agreements, including the termination fee, are included in other expense
(income), net in the accompanying consolidated financial statements.

In conjunction with the acquisition of Busse, a covenant not to
compete was signed by the former owners of Busse. The covenant requires
the Company to make twelve semi-annual payments of $150,000 to the former
owners commencing October 1992 and continuing through April 1998. A
portion of the Busse shares acquired by Alvey are pledged to secure
payments under the covenant not-to-compete.

White leases its manufacturing facility located in Kenilworth, New
Jersey from a partnership controlled by Donald J. Weiss, who was a director
of the Company until his resignation in April 1996. Pursuant to the terms
of the operating lease, the Company paid $0.9 million, $0.9 million and
$1.1 million in 1996, 1995 and 1994, respectively.

The Company has entered into employment agreements with several
members of executive management. The agreements require the Company to pay
the executive's salary for a period lasting from one to two years should
the executive's employment be terminated. In addition, the agreements
provide for annual bonuses of up to 117% to 189% of the executive's annual
salary based upon the achievement of pre-established performance targets.

F-22

<PAGE>

13. SUPPLEMENTAL BALANCE SHEET INFORMATION

Accrued expenses include the following (in thousands):

DECEMBER 31,
-----------------------
1996 1995
---------- ----------

Project expenses $ 8,476 $ 4,013
Bonuses, incentives and profit sharing 10,642 7,507
Wages and salaries 2,147 2,407
Vacation and other employee costs 8,171 7,064
Interest expense 4,927 431
Plant disposal costs 531 1,119
Other expenses 5,483 5,223
---------- ----------
$ 40,377 $ 27,764
---------- ----------
---------- ----------

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following quarterly financial information for the two years ended
December 31, 1996 is unaudited. However, in the opinion of management,
such information has been prepared on the same basis as the audited
financial statements and includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
results for the periods presented. The quarterly results however, are not
necessarily indicative of results for any future period.

Summarized quarterly financial data for fiscal 1996 and 1995 appear below
(in thousands):

NET INCOME
NET SALES GROSS PROFIT (LOSS)
--------- ------------ ------
1996
First quarter $ 80,717 $ 19,482 $ (14,548)
Second quarter 83,338 20,229 474
Third quarter 79,347 20,009 (217)
Fourth quarter 87,845 15,309 (16,605)
---------- ---------- ---------

$ 331,247 $ 75,029 $ (30,896)
---------- ---------- ---------
---------- ---------- ---------

NET INCOME
NET SALES GROSS PROFIT (LOSS)
--------- ------------ ------
1995
First quarter $ 67,008 $ 15,523 $ 326
Second quarter 72,026 17,479 1,137
Third quarter 68,271 17,610 1,370
Fourth quarter 80,713 20,109 1,573
---------- ---------- ----------

$ 288,018 $ 70,721 $ 4,406
---------- ---------- ----------
---------- ---------- ----------

F-23

<PAGE>

The first quarter net loss includes one-time non-cash charges of
$11.7 million for the write-off of purchased in-process research and
development related to the acquisition of Weseley (see Note 3) and $2.0
million for the write-off of unamortized deferred financing fees, net of
applicable income tax benefits, resulting from the early extinguishment
of debt during January 1996 (see Note 7), as well as a one-time charge
of $840,000, net of applicable income tax benefits, for the termination
of a management agreement (see Note 12). The fourth quarter net loss
includes one-time non-cash charges of $1.0 million for the write-off of
purchased in-process research and development related to the acquisition
of RTS (see Note 3), $11.5 million for the write-off of goodwill (see
Note 6) and $400,000, net of applicable income tax benefits, for the
write-off of capitalized software (see Note 2).

F-24

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Clayton, State of Missouri, on March 25, 1997.

ALVEY SYSTEMS, INC.

By: /s/ WILLIAM R. MICHAELS
-------------------------------
William R. Michaels,
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ WILLIAM R. MICHAELS Chairman of the Board and Chief Executive March 25, 1997
- ------------------------------- Officer (Principal Executive Officer)
William R. Michaels

/s/ JAMES A. SHARP Vice President, Chief Financial Officer,
- ------------------------------- Treasurer and Assistant Secretary (Principal March 25, 1997
James A. Sharp Financial and Accounting Officer)

/s/ FREDERICK R. ULRICH, JR.
- ------------------------------- Director March 25, 1997
Frederick R. Ulrich, Jr.

/s/ PRAKASH A. MELWANI
- ------------------------------- Director March 25, 1997
Prakash A. Melwani

/s/ DANIEL S. O'CONNELL
- ------------------------------- Director March 25, 1997
Daniel S. O'Connell

/s/ CHARLES A. DILL
- ------------------------------- Director March 25, 1997
Charles A. Dill
</TABLE>

<PAGE>

RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)

Column A Column B Column C Column D Column E Column F
--------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Valuation Balance at Charged to Charged to Balance at
and Reserve Beginning Costs and Other End of
Accounts of Period Expenses Accounts Deductions Period

FOR THE YEAR ENDED DECEMBER 31, 1994

Accounts Receivable Reserve $1,275 $88 $(486)(1) ($282) $595

(1) Reflects decrease to Accounts Receivable Reserves due to purchase accounting
adjustments related to the acquisition of White.

Inventory Reserve $1,672 $626 $0 ($824) $1,474

FOR THE YEAR ENDED DECEMBER 31, 1995

Accounts Receivable Reserve $595 $546 $0 ($317) $824

Inventory Reserve $1,474 $1,362 $0 ($784) $2,052

FOR THE YEAR ENDED DECEMBER 31, 1996

Accounts Receivable Reserve $824 $743 $242(1) ($603) $1,206

(1) Reflects increase to Accounts Receivable Reserves due to acquisitions of Weseley
and RTS.

Inventory Reserve $2,052 $557 $176(1) ($386) $2,399

(1) Reflects increase to Inventory Reserves due to acquisition of RTS.

</TABLE>

S-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Stockholder and
Board of Directors of
Alvey Systems, Inc.

Our audits of the consolidated financial statements of Alvey Systems,
Inc. and its subsidiaries, referred to in our report dated February 7,
1997, appearing on page F-2 of this Annual Report on Form 10-K, also
included an audit of the Financial Statement Schedule of Alvey Systems,
Inc. listed at item 14(2) of this Form 10-K. In our opinion, the Financial
Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PRICE WATERHOUSE LLP
St. Louis, Missouri
February 7, 1997

S-2

<PAGE>

FIRST AMENDMENT TO CREDIT AGREEMENT

THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "FIRST AMENDMENT") dated as
of May 15,1996, is to that Credit Agreement dated as of January 23, 1996 (as
amended and modified hereby and as further amended and modified from time to
time hereafter, the "CREDIT AGREEMENT"; terms used but not otherwise defined
herein shall have the meanings assigned in the Credit Agreement), by and among
ALVEY SYSTEMS, INC., a Delaware corporation (the "BORROWER"), THOSE SUBSIDIARIES
AND CREDIT PARTIES party thereto and identified on the signature pages hereof
(together with the Borrower sometimes being referred to as the "CREDIT
PARTIES"), as Guarantors and Credit Parties, the Lenders party thereto, and
NATIONSBANK, N.A., as Agent (the "AGENT").

W I T N E S S E T H
-------------------

WHEREAS, the Lenders have, pursuant to the terms of the Credit Agreement,
made available to the Borrower a $30,000,000 credit facility;

WHEREAS, the Borrower has requested a modification to the Credit Agreement
relating to the purchase of certain promissory notes; and

WHEREAS, the Required Lenders for and on behalf of the Lenders have agreed
to the requested changes on the terms and conditions hereinafter set forth;

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

A. The Credit Agreement is amended in the following respects:

1. The definition of the term "Permitted Investments in Section
1,.01 is amended and restated to read as follows:

"PERMITTED INVESTMENTS" means Investments which are either (i) cash and
Cash Equivalents; (ii) accounts receivable created, acquired or made by any
Credit Party in the ordinary course of business; (iii) Investments consisting
of stock, obligations, securities or other property received by any Credit Party
in settlement of accounts receivable (created in the ordinary course of
business) from bankrupt obligors; (iv) Investments existing as of the Closing
Date and set forth in SCHEDULE 1.1A; (v) Guaranty Obligations permitted by
Section 8.1; (vi) acquisitions permitted by Section 8.4 (c); (vii) transactions
permitted by Section 8.8; (viii) loans made in the ordinary course of business
to directors, officers, employees, agents, customers or suppliers that do not
exceed an

<PAGE>

aggregate principal amount of $1,000,000 at any one time outstanding; (ix)
advances to directors, officers and employees for the purpose of acquiring
capital stock of the Parent that do not exceed $1,000,000; provided,
however, that no more than $500,000 in new advances for such purpose shall be
made after the Closing Date; (x) in connection with the purchase of
promissory notes from Donald J. Weiss in an aggregate principal amount
not to exceed $240,000; (xi) Investments in and to a Domestic Credit Party or
(xii) Intercompany Indebtedness incurred in the ordinary course of business
and consistent with the past practices of the Credit Parties or for cash
management purposes.

B. The Borrower hereby represents and warrants that:

(i) any and all representations and warranties made by the Borrower and
contained in the Credit Agreement (other than those which expressly
relate to a prior period) are true and correct in all material
respects as of the date of this First Amendment; and

(ii) No Default or Event of Default currently exists and is continuing
under the Credit Agreement as of the date of this First Amendment.

C. The Borrower will execute such additional documents as are reasonably
requested by the Agent to reflect the terms and conditions of this First
Amendment.

D. Except as modified hereby, all of the terms and provisions of the Credit
Agreement (and Exhibits) remain in full force and effect.

E. The Borrower agrees to pay all reasonable costs and expenses in connection
with the preparation, execution and delivery of this First Amendment, including
without limitation the reasonable fees and expenses of the Agent's legal
counsel.

F. This First Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and it shall
not be necessary in making proof of this First Amendment to produce or account
for more than one such counterpart.

G. This First Amendment and the Credit Agreement, as amended hereby, shall be
deemed to be contracts made under, and for all purposes shall be construed in
accordance with the laws of the State of New York.

[Remainder of Page Intentionally Left Blank]

-2-

<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this First Amendment to Credit Agreement to be duly executed under seal
and delivered as of the date and year first above written.

BORROWER:
ALVEY SYSTEMS, INC.,
a Delaware corporation

By /s/ W. R. MICHAELS
-----------------------------
Title CEO & Chairman
-------------------------

GUARANTORS:
PINNACLE AUTOMATION, INC.,
a Delaware corporation

By /s/ W. R. MICHAELS
-----------------------------

Title President, CEO & Chairman
-------------------------

M&E INSTALLERS, INC.,
a Delaware corporation

By /s/ MICHELE GIBBONS
-----------------------------
Title Secretary
-------------------------

MCHUGH, FREEMAN & ASSOCIATES, INC.,
a Wisconsin corporation

By /s/ W. R. MICHAELS
-----------------------------
Title V.P. & Asst. Treasurer
-------------------------

NEWALV, INC.,
a Delaware corporation

By /s/ W. R. MICHAELS
-----------------------------
Title President
-------------------------

BUSSE BROS., INC.,
a Wisconsin corporation

By /s/ W. R. MICHAELS
-----------------------------
Title Chairman, CEO & Treasurer
-------------------------

-3-

<PAGE>

THE BUSCHMAN COMPANY,
an Ohio corporation

By /s/ W. R. MICHAELS
-----------------------------
Title Exec. V.P.
-------------------------

WHITE STORAGE AND RETRIEVAL
SYSTEMS, INC.,
a New Jersey corporation

By /s/ W. R. MICHAELS
-----------------------------
Title Exec. V. P.
-------------------------

WESELEY SOFTWARE DEVELOPMENT CORP.,
a Connecticut corporation

By /s/ W. R. MICHAELS
-----------------------------
Title Chairman
-------------------------

-4-

<PAGE>

Signature Pages to
Alvey Systems, Inc. First Amendment

BANKS:
NATIONSBANK, N.A., individually in its
capacity as a Lender and in its capacity as
Agent

By /s/ MIKE PALM
-----------------------------
Title Corporate Finance Officer
-------------------------

BANK OF SCOTLAND

By /s/ CATHERINE M. ONIFFREY
-----------------------------
Title Vice President
-------------------------

HARRIS TRUST AND SAVINGS BANK

By /s/ EMILY L. BURT
-----------------------------
Title Vice President
-------------------------

-5-

<PAGE>

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "SECOND AMENDMENT") dated as
of March 14, 1997, is to that Credit Agreement dated as of January 23, 1996 as
amended by that First Amendment to Credit Agreement dated as of May 15, 1996 (as
amended and modified hereby and as further amended and modified from time to
time hereafter, the "CREDIT AGREEMENT"; terms used but not otherwise defined
herein shall have the meanings assigned in the Credit Agreement), by and among
ALVEY SYSTEMS, INC., a Delaware corporation (the "BORROWER"), THOSE
SUBSIDIARIES AND CREDIT PARTIES party thereto and identified on the signature
pages hereof (together with the Borrower sometimes being referred to as the
"CREDIT PARTIES"), as Guarantors and Credit Parties, the Lenders party thereto,
and NATIONSBANK, N.A., as Agent (the "AGENT").

W I T N E S S E T H

WHEREAS, the Lenders have, pursuant to the terms of the Credit Agreement,
made available to the Borrower a $30,000,000 credit facility;

WHEREAS, the Borrower has requested modifications to the Credit Agreement
relating to the financial covenants set forth therein; and

WHEREAS, the Required Lenders for and on behalf of the Lenders have agreed
to the requested changes on the terms and conditions hereinafter set forth;

NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

A. The Credit Agreement is amended in the following respects:

1. Section 7.11 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:

"7.11 FINANCIAL COVENANTS.

(a) CONSOLIDATED FUNDED INDEBTEDNESS RATIO. There shall be
maintained as of the end of each fiscal quarter a Consolidated Funded
Indebtedness Ratio of not greater than the amount set forth below for the period
indicated:

CONSOLIDATED
DATE FUNDED INDEBTEDNESS RATIO

From October 1, 1996 through
December 31, 1996 7.60 to 1.0

<PAGE>

CONSOLIDATED
DATE FUNDED INDEBTEDNESS RATIO

From January 1, 1997 through
March 31, 1997 9.25 to 1.0

From April 1, 1997 through
June 30, 1997 9.00 to 1.0

From July 1, 1997 through
September 30, 1997 8.00 to 1.0

From October 1,1997 through
December 31, 1997 5.00 to 1.0

From January 1, 1998 through
June 30, 1998 4.67 to 1.0

From July 1, 1998 through
December 31, 1998 4.25 to 1.0

From January 1, 1999 through
June 30, 1999 3.87 to 1.0

From July 1, 1999 and
thereafter 3.50 to 1.0

(b) CONSOLIDATED INTEREST COVERAGE RATIO. There shall be maintained
as of the end of each fiscal quarter a Consolidated Interest Coverage Ratio of
not less than the amount set forth below for the period indicated:

CONSOLIDATED
DATE INTEREST COVERAGE RATIO

From October 1, 1996 through
December 31, 1996 1.10 to 1.0

From January 1, 1997 through
March 31, 1997 1.00 to 1.0

From April 1, 1997 through
June 30, 1997 1.05 to 1.0

From July 1, 1997 through
September 30, 1997 1.10 to 1.0

From October 1, 1997 through
December 31, 1997 1.60 to 1.0

From January 1, 1998 through
June 30, 1998 1.75 to 1.0

From July 1, 1998 through
December 31, 1998 1.90 to 1.0

From January 1, 1999 through
June 30, 1999 2.05 to 1.0

<PAGE>
CONSOLIDATED
DATE FUNDED INDEBTEDNESS RATIO

From July 1, 1999 and
thereafter 2.20 to 1.0

(c) CONSOLIDATED EBITDA. Consolidated EBITDA of the Borrower shall be not less
than (i) $13,000,000 during fiscal year 1996 and (ii) $17,000,000 during all
fiscal years occurring thereafter, in all cases as shown on the audited
financial statements of the Borrower delivered pursuant to Section 7.1(a).

B. In connection with the execution of this Second Amendment, the Borrower
agrees to pay an amendment fee at closing in the amount of $30,000 (representing
10.0 basis points on the total Revolving Committed Amount) for the ratable
benefit of the Lenders.

C. The Borrower hereby represents and warrants that:

(i) any and all representations and warranties made by the Borrower and
contained in the Credit Agreement (other than those which expressly relate to a
prior period) are true and correct in all material aspects as of the date of
this Second Amendment; and

(ii) No Default or Event of Default currently exists and is continuing under the
Credit Agreement as of the date of this Second Amendment.

D. The Borrower will execute such additional documents as are reasonably
requested by the Agent to reflect the terms and conditions of this Second
Amendment.

E. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (and Exhibits) remain in full force and effect.

F. The Borrower agrees to pay all reasonable costs and expenses in
connection with the preparation, execution and delivery of this Second
Amendment, including without limitation the reasonable fees and expenses of the
Agent's legal counsel.

G. This Second Amendment may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original and it
shall not be necessary in making proof of this Second Amendment to produce or
account for more than one such counterpart.

H. This Second Amendment and the Credit Agreement, as amended hereby,
shall be deemed to be contracts made under, and for all purposes shall be
construed in accordance with the laws of the State of New York.

[Remainder of page intentionally left blank]

<PAGE>

IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Second Amendment to Credit Agreement to be duly executed under seal and
delivered as of the date and year first above written.

BORROWER:
ALVEY SYSTEMS, INC.,
a Delaware corporation

By /s/ J. A. SHARP
----------------------------
Title Sr. V.P./CFO
------------------------
GUARANTORS:
PINNACLE AUTOMATION, INC.,
a Delaware corporation

By /s/ J.A. SHARP
----------------------------
Title V.P./C.F.O.
------------------------

M&E INSTALLERS, INC.,
a Delaware corporation

By /s/ MICHELE GIBBONS
----------------------------
Title Secretary
------------------------

McHUGH, FREEMAN & ASSOCIATES, INC.,
a Wisconsin corporation