<PAGE>

===============================================================================


                                  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

      For the fiscal year ended  December 31, 1998

                                        OR

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

          For the transition period from __________ to __________ 

Commission file number 333-2600

                               ALVEY SYSTEMS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) 

         Delaware                                   43-0157210
(STATE OR OTHER JURISDICTION                     (I.R.S. EMPLOYER
    OF INCORPORATION OR                       IDENTIFICATION NUMBER)
        ORGANIZATION)

           9301 Olive Blvd.
          St. Louis, Missouri                           63132
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:  (314) 993-4700

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 26, 1999 was 
1,000 shares.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  None

===============================================================================

<PAGE>

PART I.......................................................................1

       ITEM  1. BUSINESS.....................................................1
       ITEM  2. PROPERTIES...................................................8
       ITEM  3. LEGAL PROCEEDINGS............................................8
       ITEM  4. SUBMISSION OF MATTERS TO 
                  A VOTE OF SECURITY HOLDERS.................................9

PART II......................................................................9

       ITEM  5. MARKET FOR REGISTRANT'S COMMON EQUITY
                  AND RELATED STOCKHOLDER MATTERS............................9
       ITEM  6. SELECTED FINANCIAL DATA......................................9
       ITEM  7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS................................................12
       ITEM  8. FINANCIAL STATEMENTS AND
                  SUPPLEMENTARY DATA........................................21
       ITEM  9. CHANGE IN AND DISAGREEMENTS WITH
                  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE ...............................................22

PART III................................................................... 22

       ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 
                 OF THE REGISTRANT..........................................22
       ITEM 11. EXECUTIVE COMPENSATION......................................25
       ITEM 12. SECURITY OWNERSHIP OF CERTAIN
                 BENEFICIAL OWNERS AND MANAGEMENT...........................27
       ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS..............................................28

PART IV  ...................................................................30

       ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
                  AND REPORTS ON FORM 8-K...................................30


                                       i

<PAGE>

                                    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 three operating subsidiaries, is 
a leading provider of automated materials handling systems for manufacturing 
plants, warehouses and distribution centers. The Company's proprietary 
systems combine palletizers, depalletizers, conveyors, carousels, sorters and 
other equipment manufactured by the Company with advanced software and 
controls designed by the Company. These horizontally integrated systems 
automate the physical acts of loading, unloading, sorting and transporting 
materials and, in addition, collect data, analyze information and provide 
real-time feedback on equipment and systems performance and materials 
processing. Approximately 52% of the Company's net sales in 1998 were derived 
from the manufacture and sale of equipment. The other 48% of revenues were a 
result of system and product service, including engineering, after-market 
support, resale of purchased products, system installation and system 
integration.

     The Company's sales have increased from $138.8 million in 1993 to $299.7 
million in 1998, while earnings before interest, taxes, depreciation and 
amortization ("EBITDA") increased from $9.2 million to $24.6 million over the 
same period. At December 31, 1998, the Company's backlog was $99.4 million. 
The principal factors contributing to the growth in sales and improvement in 
operating performance include the development of new systems, management 
initiatives to increase revenues and reduce costs and acquisitions of 
complementary businesses.

     Alvey operates directly with and through three other operating 
companies: (i) The Buschman Company, located in Cincinnati, Ohio and acquired 
by Alvey in October 1992 ("Buschman"); (ii) White Systems, Inc., located in 
Kenilworth, New Jersey and acquired by Alvey in December 1993 ("White") and 
(iii) Real Time Solutions, Inc., located in Napa, California and acquired by 
Alvey in December 1996 ("RTS"). On October 27, 1998, Alvey's former wholly 
owned subsidiary, McHugh Software International, Inc. ("McHugh"), was 
spun-off from Alvey to Pinnacle and from Pinnacle to its common stockholders 
(the "Spin-Off"). In addition, the decision was made to divest Busse in 1998. 
(See Note 4 to the Consolidated Financial Statements.) Accordingly, McHugh 
and Busse are treated as divested operations for purposes of this report and 
are not incorporated as part of the Company except as discussed under 
Divested Operations in the Business Section of this document. The Company's 
executive offices are located at 9301 Olive Boulevard, St. Louis, Missouri 
63132, and its phone number is (314) 993-4700.

BUSINESS GOALS AND STRATEGIES

     The Company's goal is to build on its position as a leading provider of
materials handling systems and related services. To achieve this goal, the
Company intends to pursue the following strategies:

     - AGGRESSIVE GROWTH IN CORE MARKETS THROUGH ACQUISITIONS. Alvey will 
consider attractive acquisition opportunities within the materials handling 
industry, which remains highly fragmented. The industry includes a 
significant percentage of small- to medium-sized equipment manufacturers 
focusing on highly specific market niches. The Company intends to expand its 
core markets by making selective acquisitions of niche players in the 
industry. Selective acquisitions in the Company's core markets could increase 
its system capabilities as well as broaden its geographic coverage. With a 
solid capitalization and strong equity sponsorship, the Company is in a 
position to capitalize on the continuing consolidation of the materials 
handling industry.

      - SALES FOCUS ON OPEN SYSTEMS INCLUDING BEST-OF-BREED
COMPONENTS AND EXTENSIVE SOFTWARE COMPATIBILITY. After completion of the
Spin-Off, the Company's marketing efforts are no longer constrained by


                                       1

<PAGE>

the need to sell McHugh's software products in conjunction with the Company's 
integrated systems solutions. Instead, the Company offers customers systems 
that are compatible with a full menu of software solutions designed by 
various independent software firms. The Company intends to assemble and 
provide systems that incorporate the best available solution for the project. 
These include equipment and controls manufactured by the Company, management 
information software applications designed by independent software firms, and 
in some cases, certain other components manufactured by outside firms and 
resold by the Company.

     - MARGIN ENHANCEMENT ON EXISTING PRODUCTS. The Company intends to 
continue to improve gross margins by consolidating certain manufacturing 
facilities, reducing production cycle times, redesigning and standardizing 
product lines, eliminating redundant support services, reducing marketing 
costs by identifying synergies between product lines and emphasizing the sale 
of high value-added products.

    -  MANAGEMENT FOCUS ON CORE MARKETS. With the completion of the Spin-Off, 
the Company can now better focus management's time and the Company's 
resources on the remaining business, particularly, in consumer products and 
distribution logistics. Prior to the Spin-Off, significant operating issues 
relating to McHugh diverted considerable executive time and investment away 
from the remainder of the Company. Without the responsibility for McHugh, 
management is now better able to devote its full time efforts to increasing 
efficiencies, enhancing market share and product development in the consumer 
products and distribution logistics markets.

PRODUCTS AND SERVICES

     The Company believes that each of its operating entities is a leading 
supplier in its principal markets. Primary operating entities are described 
below, along with a description of integrated systems that the Company has 
implemented, engineering and support services which the Company provides and 
the Company's Customer One Protection Program.

     OPERATING ENTITIES

     ALVEY SYSTEMS, INC.: Alvey manufactures and sells material flow systems 
comprised of conventional and robotic case palletizers and depalletizers, 
case and pallet conveyors, related custom products and software and controls. 
Alvey distributes these products through an international network of direct 
sales personnel and independent representatives. Palletizers are large 
machines, 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, electronic and other consumer product.

     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 (i) its direct sales force, (ii) independent distributors and systems
integrators and (iii) Alvey's and White's sales forces. 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, include high-speed sortation and sophisticated
control software and involve engineering, project management and installation
services. These systems are often 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


                                       2

<PAGE>

distribution center to a retail store. Buschman also provides case conveyors 
used in systems sold both by Alvey and White (to the extent the conveyors 
used in such Alvey systems are not directly manufactured by Alvey).

     REAL TIME SOLUTIONS: RTS designs and sells paperless inventory picking 
systems to end users through (i) its direct sales force and (ii) Buschman's 
and White's sales forces. Paperless picking systems are used to facilitate 
the retrieval (picking) and storage (putting) 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 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-TM-, EASYput, 
EASYpick-DMS and SORTpro. EASYpick, RTS's order-filling system and software 
(known as a "pick-to-light system"), is currently installed in over 185 sites 
and is its leading product. EASYput 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's current 
customers are also customers of Buschman and White.

     WHITE SYSTEMS, INC.: White manufactures a broad line of horizontal and 
vertical carousels, power columns and related software and controls and sells 
such products through both its direct sales force and a national dealer 
network. Horizontal carousels are rotating storage devices that 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 for these 
carousels is a modular automated vertical lift device within which an 
inserter/extractor retrieves trays from internal shelving and delivers them 
to an accessible location. 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 applications.

     INTEGRATED SYSTEMS

     For integrated systems, where the products and expertise of the 
Company'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 the Company 
include:

     CONSUMER PRODUCT MANUFACTURING LINES: Systems used by beverage 
manufacturers including Coca-Cola, food manufacturers such as Con Agra and 
consumer product manufacturers such as Motorola. These systems could include 
case palletizers, AEC (a division of Alvey) robotic palletizers, Buschman 
conveyors and related software designed by Alvey or Buschman. Revenues per 
system typically exceed $2 million and may reach $10 million.

     WAREHOUSE AND DISTRIBUTION SYSTEMS: Systems used by retailers including 
Sears, Target and Wal-Mart or by independent wholesalers or 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 RTS, Alvey or Buschman. Revenues per system typically 
exceed $2 million and may reach $15 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 and depalletizers, Buschman conveyors, White 
carousels and related software designed by Alvey, McHugh or other third-party 
providers. Such systems typically range in price from $10 million to $15 
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 received 
orders for approximately $40 million of similar systems from ConAgra and 


                                       3

<PAGE>

other industry participants.

     The company provides its customers comprehensive total solutions from 
one single source by integrating (i) study group consulting services for 
industry specific solutions that are "best practice"; (ii) proven 
technologies and software expertise for the integration of material and 
information flow; and (iii) flexible partnerships with its customers over the 
life of their system. The first two of the integrated systems described above 
are examples of horizontal (peer-to-peer) integrations, while the third is a 
vertical (decision support-to-peer) integration.

     ENGINEERING AND SUPPORT SERVICES

     Approximately 48% of the Company's net sales 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, 
after-market services, resale of purchased products and the integration and 
installation of these 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 
identifies or designs a system consisting of the Company's equipment, 
including related software and controls, specifically tailored to meet such 
needs. The Company typically installs the system and works with the customer 
to ensure the system performs to the customer's expectations. After the 
system is operational, the Company continues to provide ongoing support and 
maintenance 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."

     CUSTOMER ONE PROTECTION.

     As part of the support services described above, the Company provides 
substantial ongoing support and maintenance for its installed base of 
equipment and integrated systems through its Company-wide Customer One 
Protection ("COP") program. The COP program provides the Company's customers 
with comprehensive service and support, including 24-hour assistance by 
phone, on-site service, user training, replacement parts, audits, software 
support agreements, equipment remanufacture, maintenance programs and 
equipment and systems upgrades. The COP program generated approximately $35.3 
million of revenues in 1998 (or 11.8% of total net sales).

DIVESTED OPERATIONS

     Following is a brief discussion of the operations that were divested or 
for which a decision was made to divest in 1998 and, therefore, have not been 
included in other discussion throughout this document.

     MCHUGH SOFTWARE INTERNATIONAL, INC.: With and through its subsidiaries, 
Weseley Software Development Corp. ("Weseley" or "WSDC"), Software 
Architects, Inc. ("SAI") and Gagnon & Associates, Inc. ("Gagnon") McHugh 
develops, markets and supports warehouse management software systems, 
transportation management software and labor management and reporting 
software for the logistics execution portion of the supply chain market. To 
prevent future earnings constraints caused by high levels of investments in 
product, system and market development with respect to McHugh, management 
decided to separate McHugh from the Company through the spin-off of McHugh to 
Pinnacle's stockholders. The spin-off was consummated on October 27, 1998. 
(See Note 4 to the Consolidated Financial Statements.)

     BUSSE BROS. INC.: Busse manufactures bulk palletizing and depalletizing 
systems. Its 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. 
Busse's bulk depalletizers accept a pallet of containers and systematically 
sweep each layer of containers off the pallet and onto conveyors that take 
the containers into the production line. During 1998, Pinnacle decided to 
divest Busse since it 


                                       4

<PAGE>

was determined that Busse was not strategically aligned with the supply chain 
focus of the remainder of the business. (See Note 4 to the Consolidated 
Financial Statements.)

INDUSTRY OVERVIEW

     Management believes sales of automated material handling systems, 
integration services and related after-market support in the United States 
will exceed $18 billion in 1999 and will grow by 7% to 10% annually through 
the year 2007, as a result of two principal trends. First, businesses are 
increasingly driven to respond to the demands of their customers for faster, 
more efficient and customized product delivery. This is becoming more 
significant with the emergence of E-Commerce. Second, as competition in many 
industries makes it increasingly difficult to achieve revenue growth, 
businesses are focusing on minimizing logistics costs and invested capital as 
they optimize their productivity and service level.

     Frequent 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 satisfy 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. Companies that 
are able to provide complex, integrated systems to satisfy materials handling 
and logistics management requirements 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 systems and product leadership have resulted in sales to a 
diverse customer base which includes many of the largest U. S. corporations. 
In addition, the Company has successfully forged important value-added 
partnerships with customers such as Anheuser-Busch, ConAgra, Staples, 
McKesson, Target and Wal-Mart. 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 its 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. The 
Company expects to create additional value-added relationships as it extends 
its product offerings and installs new, integrated systems that can serve as 
additional reference sites. Each of the customers listed below (which are 
sorted by industry group) was one of the top 30 customers of one of the 
Company's operating subsidiaries during the last three years. While the 
Company may not currently have an active contract with each of the companies 
listed below, management has no reason to believe that all of the companies 
listed below will not continue to be customers in the future.


                                       5

<PAGE>

<TABLE>
<S>                                <C>                                   <C>

BREWING                            SOFT DRINKS                           GENERAL DISTRIBUTION/RETAIL
  Anheuser-Busch                     Coca-Cola                             AAFES
  Labatt Brewing Company             Pepsi-Cola                            Avon
  Miller Brewing                                                           Consolidated Stores
                                                                           Dollar General
PAPER PRODUCTS                     CONSUMER PRODUCTS                       Dollar Tree
  Fort James                         Char-Broil                            Family Dollar
  Kimberly Clark                     Motorola                              Famous Footwear
  Weyerhaeuser                       Russell Corp                          Footlocker
                                     Procter & Gamble                      Footstar
                                                                           J.C. Penney
FOOD                                                                       Meijer
  Campbell                         INDUSTRIAL DISTRIBUTION                 Michaels Stores
  Con-Agra                          /MANUFACTURING                         Sears
  Dean Foods                         Ball-Foster Glass Container Co.       Staples
  Farmland                           Canadian Tire                         Target Stores
  Hershey Foods                      Chrysler                              Wal-Mart
  Kellogg                            Intel
  M&M Mars                           Kent Electronics                        
  Nestle                             McKesson
  Quaker Oats                        Thomas & Betts
  Tropicana  
             
</TABLE>


     For the years ended December 31, 1998 and 1997, the Company's largest 
customer accounted for 4.7% and 6.7% of total revenues, respectively. The 
Company's ten largest customers represented 29.3% of total revenues in 1998, 
down from 29.5% in 1997. 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, with 
approximately 75 direct salespeople and approximately 215 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 the Company has the strongest 
combination of direct and independent sales networks in the materials 
handling industry. Internationally, the Company utilizes both direct and 
independent sales channels.

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, 1998, the Company's backlog was $99.4 million. While the 
level of backlog at any particular time may be an indication of future sales, 
it is not necessarily indicative of the Company's future operating 
performance. Additionally, certain backlog orders may be subject to 
cancellation in certain circumstances. The Company believes that 
substantially all of its orders in backlog at December 31, 1998 will be 
recorded as revenue within one year.

RESEARCH AND DEVELOPMENT

     Research and development efforts are the basis of the Company's product 
and market leadership. 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. The Company incurred $2.0 million of 
research and development 


                                       6

<PAGE>

expense in 1996, $3.1 million in 1997 and $4.6 million in 1998. In addition 
to these research and development expenses, 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.

INTELLECTUAL PROPERTY

     The Company holds 32 active U.S. patents, 11 active foreign patents, 20 
U.S. registered trademarks and 17 active foreign trademarks with 19 patent 
applications and 10 trademark applications pending. In addition to its 
extensive patent and trademark portfolio, the Company also licenses certain 
intellectual property rights from third parties and utilizes 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, electric motors and reducers. The Company minimizes 
changing prices for 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 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 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, 1998, the Company had approximately 1,700 employees, 
approximately 650 of whom are engineers and other professional staff. The 
Company is subject to collective bargaining at all of its manufacturing 
facilities except the RTS, Alvey St. Peters and Alvey Corsicana facilities.


                                       7

<PAGE>


ITEM 2. PROPERTIES

     The Company occupies approximately 1,000,000 square feet of 
manufacturing, assembly and office space. Its primary production and 
engineering facilities are located in Cincinnati, Ohio; St. Louis, Missouri; 
and Kenilworth, New Jersey. The Company's primary software development 
facilities are located in Grand Rapids, Michigan and Napa, California. The 
location, size and certain other data of each of the Company's significant 
facilities are set forth below:

<TABLE>
<CAPTION>
OPERATING                               SIZE      OWNED/
COMPANY      LOCATION                 (SQ. FT.)   LEASED      LEASE EXPIRATION
---------    ----------------------   ---------   ------      ----------------
<S>          <C>                      <C>         <C>         <C>
Alvey        St. Louis, Missouri      250,000     Owned          --
Alvey        St. Peters, Missouri      82,000     Owned          --
Alvey        Corsicana, Texas          22,000     Leased      December 2000
Buschman     Cincinnati, Ohio         287,000     Owned          --
Buschman     Cincinnati, Ohio          86,000     Leased      March 2000
RTS          Napa, California          21,000     Leased      July 2003
RTS          Berkeley, California       9,000     Leased      Monthly
White        Kenilworth, New Jersey   202,000     Leased      December 2006
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

     On January 13, 1998, Mitchell J. Weseley, former President and Chief 
Executive Officer of WSDC, commenced an arbitration in Connecticut Superior 
Court against WSDC alleging breach of contract and violation of the 
Connecticut Unfair Trade Practices Act ("CUTPA"). On January 28, 1998, WSDC 
filed counterclaims against Mr. Weseley principally alleging that he had 
breached his contractual obligations and fiduciary duty to WSDC by soliciting 
WSDC employees to resign from WSDC, by disparaging the management of Pinnacle 
and McHugh and by breaching the terms of a covenant not to compete contained 
in Mr. Weseley's employment contract. Arbitration proceedings concluded on 
June 3, 1998 and on August 31, 1998, a decision was rendered in the 
arbitration hearings in favor of Mr. Weseley. McHugh has resumed payments to 
Mr. Weseley of his salary, bonus and benefits, of which future payments will 
total approximately $2.2 million. The liability for such payments was 
previously recorded in the restructuring accrual related to the McHugh 
reorganization as discussed in Note 5 to the Consolidated Financial 
Statements. Effective with the McHugh spin-off, such liability was recorded 
at McHugh and is no longer included in the Company's financial statements. 
Damages, if any, will be determined by the arbitrator either ex parte or as 
part of a second hearing. To the extent such amounts paid pursuant to 
judgements related to lawsuits with Mr. Weseley exceed $3.4 million, Alvey 
has agreed to pay any such excess liability up to a maximum of $4.0 million, 
and McHugh has agreed to deliver a promissory note evidencing McHugh's 
obligation to repay Alvey any amounts so paid by Alvey.

     On April 16, 1998, Mannesmann Dematic Rapistan Corp. ("Rapistan") filed 
suit against Buschman in the United States District Court for the Western 
District of Michigan alleging infringement of three Rapistan patents relating 
to Buschman induction systems (the "Rapistan Dispute"). Rapistan was seeking 
to permanently enjoin Buschman from infringing those patents and both 
compensatory and treble damages. Related to Buschman's counterclaims and 
affirmative defenses raised in this litigation, on June 5, 1998 the Company 
filed a separate suit against Mannesmann Corporation ("Mannesmann") in the 
United States District Court for the Southern District of New York on the 
basis of the representations, warranties and disclosure obligations of 
Mannesmann with respect to the patents subject to the Rapistan Dispute at the 
time the Company acquired Buschman from Mannesmann in 1992. A settlement 
agreement was executed between Alvey, Buschman, Mannesmann and Rapistan on 
January 4, 1999. On January 27, 1999, the court formally entered an order of 
dismissal of the Rapistan litigation.

     In February 1999, the Chapter 7 Trustee for Foxmeyer Corporation, 
Foxmeyer Drug Company, Healthcare Transportation System, Inc., Merchandise 
Coordinator Services Corporation, Foxmeyer Software, Inc., and Health Mart, 
Inc. (collectively, "Foxmeyer") filed suit against Buschman, White, Pinnacle, 
Alvey and 


                                       8

<PAGE>

McHugh in the United States District Court for the District of Delaware 
alleging fraud, negligence and breach of contract relating to conveyor, 
carousel and warehouse management systems delivered and installed in 
Foxmeyer's distribution warehouse at Washington Court House, Ohio. Only 
McHugh and Buschman (with White as its subcontractor) had contracts with 
Foxmeyer. The monetary relief sought by the Foxmeyer complaint is 
unspecified; however compensatory and punitive damages are claimed. At this 
time, the Company has not been served and therefore answers and affirmative 
defenses have not been filed on behalf of the Company. Discovery has not 
commenced and a trial date has not been set, but the Company intends to 
contest the allegations made and vigorously defend the matter.

     The Company is involved in various other 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

     Other than certain actions taken by Pinnacle as the sole stockholder of 
the Company in connection with the spin-off of McHugh, no matters were 
submitted to a vote of security holders during the fourth quarter of the 
fiscal year ended December 31, 1998.

                                   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.

ITEM 6.  SELECTED FINANCIAL DATA

     The selected historical consolidated financial data presented below at 
and for the five years ended December 31, 1998 have been derived from Alvey's 
historical Consolidated Financial Statements which have been audited by 
PricewaterhouseCoopers LLP, independent accountants. Alvey's Consolidated 
Financial Statements as of and for each of the three years ended December 31, 
1998, 1997 and 1996 are included elsewhere in this Form 10-K. The results of 
operations for McHugh, Busse and the loss on sale for one discontinued 
product line at White are included in the table below as operating loss 
(income) from divested operations.

     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 included 
elsewhere in this Form 10-K.


                                      9

<PAGE>

<TABLE>
<CAPTION>

                                                                      YEAR ENDED DECEMBER 31,
                                                  ---------------------------------------------------------------
                                                     1998         1997         1996         1995         1994
                                                  -----------  -----------  -----------  -----------  -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>          <C>          <C>          <C>
RESULTS OF OPERATIONS (1):
  Net sales.....................................  $   299,749  $   287,669  $   267,123  $   231,453  $   206,371
  Cost of goods sold............................      223,277      224,458      212,522      176,447      159,863
                                                  -----------  -----------  -----------  -----------  -----------
      Gross profit..............................       76,472       63,211       54,601       55,006       46,508
  Selling, general and administrative
    expenses....................................       51,654       47,296       46,716       43,487       36,394
  Research and development expenses.............        4,614        3,058        2,029        1,759        1,834
  Amortization expense..........................          780          776          877        1,382        1,362
  Operating loss (income) from divested
    operations(2)...............................       12,934       (2,651)       9,574       (7,083)      (4,323)
  Write-off of goodwill(3)......................           --           --       11,491           --           --
  Restructuring expense(4)......................           --       11,334           --           --           --
  Write-off of purchased in-process research and
    development costs(5)........................           --           --        1,000           --           --
  Other expense (income), net(6)................         (440)          60        1,425           50        2,126
                                                  -----------  -----------  -----------  -----------  -----------
      Operating income (loss)...................        6,930        3,338      (18,511)      15,411        9,115
  Interest expense..............................       12,478       13,756       12,301        6,896        5,921
  Expenses associated with the spin-off of
    McHugh(7)...................................        1,220           --           --           --           --
  Discontinued public offering(8)...............           --          958           --           --           --
                                                  -----------  -----------  -----------  -----------  -----------
  Income (loss) before income taxes and
    extraordinary item..........................       (6,768)     (11,376)     (30,812)       8,515        3,194
  Income tax expense (benefit)..................        1,585       (4,057)      (1,909)       4,109        1,516
                                                  -----------  -----------  -----------  -----------  -----------
  Income (loss) before extraordinary item.......       (8,353)      (7,319)     (28,903)       4,406        1,678
  Extraordinary item, net(9)....................        8,748           --        1,993           --           --
                                                  -----------  -----------  -----------  -----------  -----------
    Net income (loss)...........................  $   (17,101) $    (7,319) $   (30,896) $     4,406  $     1,678
                                                  -----------  -----------  -----------  -----------  -----------
                                                  -----------  -----------  -----------  -----------  -----------
Earnings per share(10)..........................           --           --           --           --           --
</TABLE>
 
<TABLE>
<CAPTION>
                                                                          AT DECEMBER 31,
                                                  ---------------------------------------------------------------
                                                     1998         1997         1996         1995         1994
                                                  -----------  -----------  -----------  -----------  -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                               <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA(1):
  Working capital (deficit)(11).................  $   (13,173) $   (10,239) $    (7,475) $    (3,865) $     6,945
  Total assets(11)..............................      121,004      137,436      141,607      129,270      122,573
  Long-term debt, less current maturities(11)...       76,696      106,758      100,493       42,405       54,607
  Redeemable preferred stock(12)................           --           --           --       27,322       23,435
  Net investment of Parent(13)..................      (47,082)     (48,528)     (41,129)     (15,719)     (16,332)
</TABLE>


                                      10

<PAGE>

                 SELECTED CONSOLIDATED FINANCIAL DATA OF ALVEY

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------------
                                                            1998       1997       1996       1995       1994
                                                          ---------  ---------  ---------  ---------  ---------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                                       <C>        <C>        <C>        <C>        <C>
OTHER CONSOLIDATED FINANCIAL DATA(1):
  Depreciation expense(11)(14)..........................  $   3,917  $   3,401  $   3,337  $   2,293  $   2,418
  Capital expenditures, net(11)(14).....................      3,673      3,190      7,403      3,189      3,472

OTHER PERFORMANCE MEASURES (NON-GAAP)(15):
  EBITDA(11)(16)........................................     24,561     16,198      9,213     11,753     10,746
  Ratio of EBITDA to cash interest expense(17)(18)......       2.15       1.99       1.16       3.27       2.77
  Ratio of long-term debt to EBITDA(18).................       3.12       4.25       7.68       2.11       3.45
</TABLE>

 (1)   Results include various acquisitions from the date of such
       acquisition, including RTS in 1996. Results of Weseley which was
       acquired in 1996 and SAI and Gagnon which were acquired in 1998 are
       included in operating loss (income) from divested operations from the
       dates of acquisition.

 (2)   Amount represents the operating loss (income) of divested operations.
       See Note 4 to the Consolidated Financial Statements. 

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

 (4)   Amount reflects non-recurring restructuring charges as described in
       Note 5 to the Consolidated Financial Statements.

 (5)   Amount relates to $1.0 million of the purchase price of RTS which was
       allocated to purchased in-process research and development and
       immediately expensed in the fourth quarter of 1996. 

 (6)   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.

 (7)   Amount represents certain expenses incurred in connection with the
       spin-off of McHugh. See Note 4 to the Consolidated Financial Statements.

 (8)   Amount reflects the write-off of legal and accounting costs associated
       with a discontinued public offering as described in Note 5 to the
       Consolidated  Financial Statements.

 (9)   Amount reflects the write-off of unamortized deferred financing fees, net
       of applicable income tax benefits, resulting from the early
       extinguishment of debt during 1998 and 1996. Amount in 1998 also includes
       a consent premium of $2.8 million, a premium related to the repurchase of
       Senior Subordinated Notes of $2.3 million, the write-off of preferred
       stock issuance costs related to stock that was exchanged of $659,000, all
       net of applicable income taxes and all that were incurred in connection
       with the spin-off of McHugh. See Notes 4, 8 and 9 to the Consolidated
       Financial Statements. 

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

(11)   Amounts exclude balances related to divested operations which pertain
       to McHugh and Busse.

(12)   Amount represents previously outstanding redeemable preferred stock of
       Pinnacle. Due to the exchangeable feature of the preferred stock which
       allowed the holder to exchange the preferred stock for subordinated notes
       of Alvey, the preferred stock was pushed down to the financial statements
       of Alvey at December 31, 1995 and 1994. Outstanding redeemable preferred 
       stock of Pinnacle at December 31, 1998, 1997 and 1996 has not been pushed
       down to the financial statements of Alvey as it is not exchangeable into
       debt of Alvey.

(13)   Net investment of Parent 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 items, extraordinary items and aggregate
       accreted/paid preferred stock dividends. The historical amount at
       December 31, 1998 consists of cumulative contributions of capital to
       Alvey by Pinnacle of $10.5 million, cumulative losses of $43.2 million,
       including extraordinary items of $18.3 million, and an aggregate
       accretion/payment of $14.3 million of paid-in-kind dividends on preferred
       stock.

(14)   Capital expenditures and related depreciation expense include amounts
       related to investments in fixed assets and costs of software 


                                     11

<PAGE>

       development. In 1996, this includes $659,000 related to the write-off of
       capitalized software costs (See Note 2 to the Consolidated Financial 
       Statements).

 (15)  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. 

 (16)  EBITDA consists of earnings before interest, income taxes, extraordinary 
       items, divested operations and depreciation and amortization expense. 
       In 1998, EBITDA excluded $1.2 million of costs associated with the 
       spin-off of McHugh. (See Note 4 to the Consolidated Financial 
       Statements.) In 1997, EBITDA excluded $11.3 million of restructuring 
       charges and $958,000 of discontinued IPO costs. (See Note 5 to the 
       Consolidated Financial Statements .) In 1996, EBITDA excluded an $11.5 
       million write-off of goodwill, a $1.4 million one-time charge for the 
       termination of a management agreement which is included in "Other
       expense (income), net" above and a $1.0 million one-time write-off of
       purchased in-process research and development costs. 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. 

 (17)  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.

 (18)  For years prior to 1998, ratios are presented at historical ratios which
       include the EBITDA of divested operations. Such ratios would not be
       meaningful if calculated with adjusted EBITDA levels.

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 in the period ended December 31, 1998.

     Subsequent to the acquisition of Alvey by Pinnacle in August 1988, Alvey,
Pinnacle and their subsidiaries completed a succession of 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. The Company believes that its emphasis on 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
following 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 reviews, the Company has
initiated changes in the operating subsidiaries' production processes that are
targeted at the improvement of production 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.

     On October 27, 1998, McHugh was spun-off from Alvey to Pinnacle and from 
Pinnacle to its common stockholders. In addition, the decision was made to 
divest Busse in 1998. (See Note 4 to the Consolidated Financial Statements.) 
The operating results of divested operations, including McHugh, Busse and the 
loss from the disposition of a product line, are reflected in the Company's 
consolidated statement of operations as operating loss (income) from divested 
operations. Financial information of prior years has been reclassified to be 
consistent with the current year with respect to divested operations.

                                      12

<PAGE>


RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                 ----------------------------------------------------------------------
                                                          1998                    1997                   1996
                                                 -----------------------    ---------------------  --------------------
<S>                                                 <C>           <C>       <C>           <C>        <C>          <C>
Net sales......................................     $299,749      100.0%    $287,669      100.0%    $267,123      100.0%
Cost of goods sold.............................      223,277       74.5      224,458       78.0      212,522       79.6
                                                    --------      -----     --------      -----     --------      -----
Gross profit...................................       76,472       25.5       63,211       22.0       54,601       20.4
Selling, general & administrative expenses.....       51,654       17.2       47,296       16.4       46,716       17.5
Research & development expenses................        4,614        1.5        3,058        1.1        2,029        0.8
Amortization expense...........................          780        0.3          776        0.3          877        0.3
Operating loss (income) from divested
  operations...................................       12,934        4.3       (2,651)      (0.9)       9,574        3.6
Write-off of goodwill..........................           --        0.0           --        0.0       11,491        4.3
Restructuring expense..........................           --        0.0       11,334        3.9           --        0.0
Write-off of purchased in-process research &
  development costs............................           --        0.0           --        0.0        1,000        0.4
Other expense (income), net....................         (440)      (0.1)          60        0.0        1,425        0.5
                                                    --------      -----     --------      -----     --------      -----
Operating income (loss)........................        6,930        2.3        3,338        1.2      (18,511)      (7.0)
Interest expense...............................       12,478        4.2       13,756        4.8       12,301        4.6
Expenses associated with the spin-off of
  McHugh.......................................        1,220        0.4           --        0.0           --        0.0
Discontinued public offering...................           --        0.0          958        0.3           --        0.0
                                                    --------      -----     --------      -----     --------      -----
Loss before income taxes and extraordinary
  item.........................................       (6,768)      (2.3)     (11,376)      (3.9)     (30,812)     (11.6)
Income tax expense (benefit)...................        1,585        0.5       (4,057)      (1.4)      (1,909)      (0.7)
                                                    --------      -----     --------      -----     --------      -----
Loss before extraordinary item.................       (8,353)      (2.8)      (7,319)      (2.5)     (28,903)     (10.9)
Extraordinary item, net........................        8,748        2.9           --        0.0        1,993        0.7
                                                    --------      -----     --------      -----     --------      -----
Net loss.......................................     $(17,101)      (5.7)%   $ (7,319)      (2.5)%   $(30,896)     (11.6)%
                                                    --------      -----     --------      -----     --------      -----
                                                    --------      -----     --------      -----     --------      -----
</TABLE>

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE YEAR ENDED DECEMBER 31, 
1997

         NET SALES were $299.7 million for the year ended December 31, 1998, 
representing an increase of $12.1 million, or 4.2%, over net sales of $287.7 
million for the year ended December 31, 1997. Volume levels for distribution 
systems and paperless picking systems increased substantially, while sales of 
palletizing systems and storage and retrieval systems decreased somewhat. 
Volume increases were adversely affected by a four-week work stoppage at 
Buschman during the third quarter of 1998.

         New order bookings were $288.3 million for 1998, a decrease of $16.2 
million or 5.3% from 1997. Decreases in palletizing systems bookings and 
storage and retrieval systems bookings totaling $27.3 million were offset in 
part by increases in distribution systems bookings and paperless picking 
systems bookings. Lower booking levels for palletizing systems and storage 
and retrieval systems generally reflect a lower level of customer demand 
combined with the impacts of discontinuing a product line at White in 1998 
and the discontinuance of certain product offerings in connection with the 
1997 restructuring efforts.

         Consolidated backlog at year-end 1998 decreased $16.1 million 
compared to year-end 1997. Such decrease is primarily attributable to 
decreased backlog levels for distribution and storage and retrieval systems, 
offset in part by increases in the backlog of palletizing systems and 
paperless picking systems. This year-over-year decrease reflects the overall 
industry weakness experienced in the last half of 1998.


                                     13

<PAGE>

         GROSS PROFIT was $76.5 million in 1998, an increase of $13.3 
million, or 21.0%, over $63.2 million of gross profit in 1997. Gross margins, 
as a percentage of sales, increased to 25.5% from 22.0% in 1997. Gross profit 
increases were particularly strong for distribution systems and storage and 
retrieval systems which experienced increases of $6.3 million and $5.4 
million, respectively. Such increases were primarily attributable to (i) 
increased volume and productivity, (ii) the significant year-over-year 
improvement in project execution virtually eliminating project overruns and 
(iii) the absence of $2.2 million of asset write-down and related 
non-recurring charges recorded in the second quarter of 1997. Gross profit 
increases at Buschman were adversely affected by the impacts of a four-week 
work stoppage, but continue to show substantial increases over 1997.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $51.7 million in 
1998, representing an increase of $4.4 million, or 9.2%, over $47.3 million 
of such expenses in 1997. As a percentage of sales, selling, general and 
administrative (SG&A) expenses were 17.2% in 1998 as compared to 16.4% in 
1997. This increase is primarily attributable to increased staffing, 
primarily related to distribution systems where new direct sales offices have 
been established to support current and future sales volumes, and incentives 
reflecting improved performance.

         RESEARCH AND DEVELOPMENT EXPENSES were $4.6 million for 1998, 
representing an increase of $1.6 million, or 50.9%, compared to $3.1 million 
in 1997. This increase is primarily the result of increased activities 
related to the development of the next generation of sortation equipment and 
systems development to automate various aspects of the order/production 
cycle, both related to distribution systems.

         OPERATING LOSS (INCOME) FROM DIVESTED OPERATIONS was a loss of $12.9 
million in 1998 as compared to income of $2.7 million in 1997. This decrease 
is primarily attributable to a loss on impaired assets at Busse of $3.2 
million in the fourth quarter of 1998, a write-off of $2.8 million of 
purchased research and development costs in the second quarter of 1998 
related to the acquisitions of SAI and Gagnon and a $798,000 loss on a 
discontinued product line recorded in the fourth quarter of 1998. These 
one-time charges were combined with a lower level of high-margin license fee 
revenues at McHugh in 1998, lower sales volumes at Busse in 1998, and 
increasing SG&A and research and development costs to support McHugh's 
growing infrastructure. Those impacts were partially offset by the absence in 
1998 of $4.0 million of restructuring charges that were recorded in 1997. 
(See explanation of restructuring costs below.)

         RESTRUCTURING EXPENSE totaling $11.3 million was recorded in the 
second quarter of 1997 as described in the comparison of the year ended 
December 31, 1997 to the year ended December 31, 1996.

         OTHER EXPENSE (INCOME), NET was income of $440,000 in 1998, compared 
to expense of $60,000 in 1997. This improvement of $500,000 is almost 
entirely attributable to income recognized from the proceeds of a life 
insurance settlement in the first quarter of 1998.

         OPERATING INCOME was $6.9 million in 1998, an increase of $3.6 
million, or 108%, over $3.3 million in 1997. As a percentage of net sales, 
operating income increased to 2.3% in 1998 from 1.2% in 1997. However, 
excluding divested operations and $13.6 million of 1997 non-recurring charges 
comprised of the restructuring charges of $11.3 million and $2.3 million of 
asset write-down and other non-recurring charges, operating income increased 
from $14.3 million in 1997 to $19.9 million in 1998, representing a 38.9% 
increase. As a percentage of sales, operating income excluding non-recurring 
charges and divested operations increased from 5.0% in 1997 to 6.6% in 1998. 
The increase in operating income reflects the various factors described above.

         INTEREST EXPENSE was $12.5 million in 1998 representing a decrease 
of $1.3 million, or 9.3%, from $13.8 million in 1997. This decrease reflects 
decreased average borrowings under the Company's credit facility, a decrease 
in interest expense related to the Senior Subordinated Notes attributable to 
the repurchase of $30.0 million of such Notes in November 1998 (See Note 8 to 
the Consolidated Financial Statements) and a decrease in non-cash charges 
related to the amortization of debt issuance costs attributable to the 
refinancing in 1998 (See Note 8 to the Consolidated Financial Statements).

         EXPENSES ASSOCIATED WITH THE SPIN-OFF OF MCHUGH were $1.2 million in 
1998 compared to $0 in 1997. In the fourth quarter of 1998, legal, accounting 
and other costs associated with the spin-off of McHugh were charged to income 
when the spin-off occurred. (See Note 4 to the Consolidated Financial 
Statements.)

                                      14

<PAGE>

         DISCONTINUED PUBLIC OFFERING was $0 in 1998 compared to $958,000 in 
1997. In the fourth quarter of 1997, legal, accounting and various other 
charges related to a planned initial public offering of common stock by 
McHugh were charged to income as the Company decided not to proceed with the 
initial public offering. (See Note 5 to the Consolidated Financial 
Statements.)

         INCOME TAX EXPENSE (BENEFIT) was expense of $1.6 million in 1998, an 
increase of $5.6 million from $4.1 million of tax benefit in 1997. The 
significant differences between the effective tax rate on loss before income 
taxes and the expected statutory rates are attributable to the 
non-deductibility of expenses related to the write-off of purchased research 
and development costs related to the divested operations, a valuation 
allowance recorded in 1998 related to the loss on impairment of assets at a 
divested operation, non-deductible expenses related to the spin-off of 
McHugh, a taxable distribution to a shareholder that occurred in connection 
with the spin-off of McHugh and the amortization of goodwill.

         EXTRAORDINARY ITEM, NET was $8.7 million in 1998 and there was no 
extraordinary item in 1997. This extraordinary item represents costs 
associated with the spin-off of McHugh which include the write-off of debt 
and preferred stock issuance costs totaling $3.6 million; a consent premium 
paid to the bondholders of $2.8 million; and a premium paid on the repurchase 
of Senior Subordinated Notes of $2.3 million, all net of related tax benefits.

COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 
1996

         NET SALES were $287.7 million for the year ended December 31, 1997, 
representing an increase of $20.5 million, or 7.7%, over net sales of $267.1 
million for the year ended December 31, 1996. Excluding RTS, which was 
acquired in December 1996, "same store" sales increased $4.4 million or 1.6% 
over 1996. Sales of distribution systems increased $8.6 million, which was 
offset primarily by decreased volume related to storage and retrieval systems 
and, to a much lesser degree, a decrease in volume related to palletizing 
systems.

         New order bookings were $304.5 million for 1997, an increase of 
$62.5 million or 25.8% from 1996. RTS contributed $19.0 million to the 
overall growth in bookings in 1997. Bookings of distribution systems and 
palletizing systems drove the remainder of the change, up 26.4% and 20.0%, 
respectively, over 1996. Increases in palletizing systems are attributable to 
numerous new and enhanced products introduced in late 1996, cycle-time 
reductions and improved worldwide sales coverage resulting in record 
bookings in terms of dollars and units.

         The Company realized a $16.4 million increase in consolidated 
backlog to $115.5 million at year-end 1997 compared to $99.1 million at 
year-end 1996. Backlog of distribution systems and paperless picking systems 
increased $9.7 million and $2.8 million, respectively, while, to a lesser 
degree, increases were realized in each of the remaining product lines. 
Increased backlog at December 31, 1997 as compared to December 31, 1996 is 
primarily attributable to record 1997 bookings for most product lines.

         GROSS PROFIT was $63.2 million in 1997, an increase of $8.6 million, 
or 15.8%, over $54.6 million of gross profit in 1996. The gross profit 
margin, as a percentage of sales, increased to 22.0% from 20.4% in 1996. 
Excluding the effects of the first-time inclusion of RTS, gross profit 
increased $3.8 million and as a percentage of sales, was 21.5%. Additionally, 
gross margins were adversely affected by project overruns primarily 
attributable to supporting customer production during the start-up and 
commissioning phase of a number of major projects. Despite the high level of 
project overruns and excluding the one-time asset write-down and other 
non-recurring charges described below, "same store" gross profit for 1997 was 
$60.5 million, or 22.3% of sales. This represents an increase of 10.9% and 
1.9 percentage points, as a percent of sales, over 1996. Gross margins 
related to storage and retrieval systems were adversely affected by asset 
write-down and other non-recurring 


                                     15


<PAGE>

charges totaling $2.2 million, which primarily included a write-down in the 
carrying value of inventory at a restructured subsidiary, employee relocation 
costs associated with exiting certain product offerings and the costs 
associated with bringing restructured production facilities up to Company 
standards. Margins related to distribution systems increased $3.3 million or 
15.6% over 1996 due primarily to increased volume combined with continuing 
engineering and productivity gains.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES were $47.3 million in 
1997, representing an increase of $580,000, or 1.2%, over $46.7 million of 
such expenses in 1996. As a percentage of sales, SG&A expenses decreased to 
16.4% in 1997 from 17.5% in 1996. Excluding RTS, "same store" SG&A decreased 
by $2.4 million from 1996, and as a percentage of sales, was 16.3% or 1.2 
percentage points lower than 1996. Such decreases are primarily attributable 
to lower charges for annual bonus and profit sharing expense combined with 
favorable impacts from the June 1997 restructuring.

         RESEARCH AND DEVELOPMENT EXPENSES were $3.1 million for 1997, 
representing an increase of $1.0 million, or 50.7%, compared to $2.0 million 
in 1996. This increase is primarily due to the first-time inclusion of 
the results of RTS and increased development activities related to 
distribution systems.

        OPERATING LOSS (INCOME) FROM DIVESTED OPERATIONS was income of $2.7 
million in 1997 as compared to a loss of $9.6 million in 1996. This increase 
is primarily attributable to the absence in 1997 of a write-off of $11.7 
million of purchased in-process research development costs related to the 1996 
acquisition of Weseley, partially offset by $4.0 million of restructuring 
charges that were recorded in 1997. (See explanation of restructuring costs 
below.) Additionally, 1997 profitability improved due to increased levels of 
high margin license fee revenues at McHugh, the impacts of which were 
constrained by increasing SG&A and research and development costs to support 
McHugh's growing infrastructure.

         WRITE-OFF OF GOODWILL was $0 in 1997 compared to $11.5 million in 
1996. 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.

         RESTRUCTURING EXPENSE totaling $11.3 million was recorded in the 
second quarter of 1997. During this quarter, the Board of Directors initiated 
a plan to reorganize and streamline the Company's corporate structure and to 
restructure certain business entities within Pinnacle. In connection with 
this plan, the Board established management priorities as (1) satisfactory 
completion and elimination of specific projects with continuing cost overruns 
primarily related to products to be discontinued, (2) restructuring or 
elimination, when appropriate, of products that are not strategic or 
profitable, (3) restructuring and streamlining the Company's corporate 
organization and (4) elimination of redundancies and streamlining of the 
organizational structure of McHugh by further consolidation of the operations 
of McHugh and Weseley. The restructuring charge included costs to discontinue 
offering certain proprietary systems software products at one subsidiary, to 
reorganize and reduce the size of the Company's corporate organization and to 
restructure and streamline the executive and marketing functions at McHugh. 
Costs to discontinue certain proprietary software products consist primarily 
of costs to complete specific projects incorporating this software, payroll 
and facility charges during the phase-out of the product, severance charges, 
sales returns and allowances (relative to prior period sales) anticipated as 
a result of the discontinuance, the write-off of assets that became obsolete 
or slow-moving as a result of the discontinuance and other miscellaneous 
restructuring costs. The corporate reorganization and McHugh reorganization 
charges are primarily severance costs. It is anticipated that costs accrued 
as restructuring by non-divested operations will be fully paid by December 
31, 1999, and costs accrued as restructuring by divested operations will be 
fully paid by April 30, 2004. (See Note 5 to the Consolidated Financial 
Statements for further discussion.) Restructuring costs related to the McHugh 
restructuring of $4.0 million are classified in operating loss (income) from 
divested operations in the Consolidated Financial Statements.

         WRITE-OFF OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS was 
$0 in 1997 as compared to $1.0 million in 1996. In connection with the 
acquisition of RTS during 1996, $1.0 million of the purchase price was 
allocated to purchased in-process research and development costs at the date 
of acquisition and immediately expensed as a write-off of purchased 
in-process research and development costs. (See Note 3 to the Consolidated 
Financial Statements for further discussion.)

         OTHER EXPENSE (INCOME), NET was expense of $60,000 in 1997, compared 
to expense of $1.4 million in 1996. This improvement of $1.4 million is 
primarily attributable to a one-time charge related to the termination of a 
management agreement in 1996. (See Note 12 to the Consolidated Financial 
Statements for further discussion.)

         OPERATING INCOME (LOSS) improved to income of $3.3 million in 1997 
from a loss of $18.5 million in 1996. As a percentage of net sales, operating 
income increased to 1.2% in 1997 from (6.9%) in 1996. However, 


                                      16

<PAGE>

excluding divested operations and $13.6 million of 1997 non-recurring charges 
comprised of the $11.3 million restructuring charge and $2.3 million of asset 
write-down and other non-recurring charges, 1997 operating income was $14.3 
million. Additionally, excluding divested operations and $14.6 million of 
non-recurring charges resulting from an $11.5 million write-off of goodwill, 
the $1.4 million expense associated with the termination of a consulting 
agreement, the $1.0 million write-off of purchased in-process research and 
development costs associated with the acquisition of RTS 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), 1996 operating 
income was $5.7 million. Operating income in 1997, after exclusions, 
represents an increase of $8.6 million, or 153%, compared to operating income 
after exclusions in 1996. As a percentage of sales, and excluding divested 
operations and the non-recurring charges, operating income increased to 5.0% 
in 1997 compared to 2.1% in 1996. The increase in operating income reflects 
the various factors described above.

         INTEREST EXPENSE was $13.8 million in 1997 representing an increase 
of $1.5 million, or 11.8%, from $12.3 million in 1996. This increase reflects 
the issuance of the Company's $100 million Senior Subordinated Notes (the 
"Notes") on January 24, 1996 (the "Debt Offering"), the higher interest rate 
on these notes for an additional month in 1997 as compared to 1996, the 
increase in non-cash charges related to the amortization of debt issuance 
costs and increased borrowings under the Company's credit facility.

         DISCONTINUED PUBLIC OFFERING, as described in the comparison of the 
Year Ended December 31, 1998 to the Year Ended December 31, 1997 was $958,000 
in 1997 compared to $0 in 1996.

         INCOME TAX BENEFIT was $4.1 million in 1997, representing an 
increase of $2.1 million from $1.9 million in 1996. The related effective 
income tax rate increased to 35.7% in 1997 from 6.2% in 1996, primarily as a 
result of the absence of the $25.5 million of non-deductible expenses related 
to the amortization and write-off of goodwill and the write-off of purchased 
in-process research and development costs incurred in 1996.

         EXTRAORDINARY ITEM, NET was $2.0 million in 1996 and there was no 
extraordinary item in 1997. This extraordinary item 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.)

LIQUIDITY AND CAPITAL RESOURCES

         WORKING CAPITAL. During the three years ended December 31, 1998, the 
Company generated $22.0 million of cash from operations, which when combined 
with funds from the revolving line of credit, has been sufficient to fund the 
Company's ongoing working capital, capital expenditures and debt service 
requirements. In recent years, the Company has reduced working capital and 
improved cash flow through management initiatives to reduce inventory levels, 
focus on timely billings and emphasize the collection of aged receivables as 
well as other enhanced cash management techniques.

         CASH PROVIDED (USED) BY OPERATIONS. Cash flows from (for) operations 
were $12.4 million, ($1.3) million and $10.8 million for the years ended 
December 31, 1998, 1997 and 1996, respectively. The $13.7 million increase in 
cash provided by operations during 1998 is primarily attributable to a focus 
on timely billings and the collection of aged receivables combined with 
decreased spending related to restructuring efforts, offset by cash used by 
divested operations. The $12.1 million increase in the use of cash during 
1997 as compared to 1996, is primarily attributable to an interest payment of 
$5.7 million on the $100 million Senior Subordinated Notes, the payment of 
$4.5 million associated with the previously described 1997 restructuring and 
the payment of a $625,000 stay bonus at McHugh, all of which occurred in 
1997, but were not present in 1996. First quarter funding of annual profit 
sharing plan contributions, incentive compensation and bonus plans, 
disproportionate tax withholding requirements and certain professional 
services historically result in a significant use of cash in the first 
quarter.


                                       17


<PAGE>

         CAPITAL EXPENDITURES. Capital expenditures for the years ended 
December 31, 1998, 1997 and 1996 were approximately $3.7 million, $3.2 
million and $7.2 million, respectively. These expenditures were used 
primarily to finance a new facility for Alvey in 1996 and normal recurring 
replacements of machinery and equipment.

         ACQUISITIONS AND DIVESTITURES. The Company expended $3.4 million of 
cash for the acquisitions of SAI and Gagnon in 1998 and $19.0 million of cash 
in 1996 for the acquisitions of Weseley and RTS. Acquisitions in 1998 were 
financed through the Company's working capital facility. Acquisitions in 1996 
were financed primarily with proceeds from the Debt Offering.

         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 1.0% or the Euro-dollar Rate (as defined in the Revolving 
Credit Facility) plus 2.0%, subject to 0.25% adjustments upward or downward 
based upon Alvey's achievement of predefined earnings objectives. Borrowings 
under the Revolving Credit Facility are guaranteed by Pinnacle and 
subsidiaries of Alvey and secured by substantially all of the assets of Alvey 
and its subsidiaries. At December 31, 1998, there was $6.4 million 
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 registered debt 
securities of Alvey 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 (collectively, the "Pinnacle 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.

         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). 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.

         SPIN-OFF OF MCHUGH AND RELATED DEBT AND EQUITY TRANSACTIONS. During 
October 1998, the Company issued as a dividend its previously held shares in 
McHugh to Pinnacle. On October 27, 1998, Pinnacle effected a spin-off of the 
common stock of McHugh to Pinnacle's stockholders. Subsequent to the spin-off 
and a sale of a minority interest in McHugh for $50 million in cash, Alvey 
received a cash payment from McHugh of 


                                    18


<PAGE>


approximately $36.5 million for full payment of a note established at the 
time of the spin-off representing McHugh's intercompany debt to Alvey 
totaling approximately $34.8 million and the payment of a tax free dividend 
from McHugh to Alvey of approximately $1.7 million.

         In connection with the spin-off of McHugh, the holders of the Notes 
consented to an amendment of the indenture for the Notes to, among other 
things, (i) permit the spin-off of McHugh, (ii) permit Alvey to increase 
borrowings under the Revolving Credit Facility by $10 million, and (iii) make 
modifications to certain covenants. Alvey and the trustee for the bondholders 
entered into the First Supplemental Indenture evidencing such terms on 
September 30, 1998. To obtain the consent of its bondholders, among other 
things, Alvey (i) paid a consent premium of $46.00 in cash for each $1,000 
principal (approximately $4.6 million) and (ii) purchased $30 million in 
aggregate principal amount of the Notes for $33.9 million (113% of the 
principal amount thereof representing a premium of $3.9 million).

         Effective October 26, 1998, the Revolving Credit Facility was 
amended to (i) allow the spin-off of McHugh, (ii) allow a $10 million 
increase in the commitment amount of the facility within 60 days of the 
consummation of the spin-off with certain restrictions, and (iii) amend 
certain debt covenants. Effective December 3, 1998, the Company increased the 
commitment amount under the Revolving Credit Facility to $35 million.

         During October 1998, the Company purchased 343,545 shares of newly 
issued McHugh common stock for $3,435 which were issued as a dividend by 
Alvey to Pinnacle. As part of the spin-off of McHugh, the holders of Pinnacle 
Preferred Stock exchanged 18,600 shares of Pinnacle Preferred Stock for 
343,514 shares of newly created classes of common stock of McHugh. 
Additionally, all of the outstanding warrants from the Preferred Stock 
Offering were exercised in connection with the spin-off of McHugh.

         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. The Company believes that its funds from operations, 
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.

         BACKLOG. As of December 31, 1998, the Company had a backlog of $99.4 
million, as compared to $115.5 million as of December 31, 1997. 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 Company's future operating 
performance. Additionally, certain backlog orders may be subject to 
cancellation in certain circumstances. The Company believes that 
substantially all orders in backlog at December 31, 1998 will be recognized 
as revenue within one year.

         YEAR 2000. The Company utilizes computer information systems to 
internally record and track information and interact with customers, 
suppliers, financial institutions and other organizations. The Company also 
incorporates software and computerized functions in products sold throughout 
the Company. The Company has appointed a Director of Year 2000 Issues to 
coordinate and lead the Year 2000 ("Y2K") project. Each Alvey subsidiary has 
appointed a Year 2000 Coordinator who reports to the Director of Year 2000 
and will lead the Y2K effort for that subsidiary. Additionally, the Company 
has selected a law firm to consult on Y2K issues. The Company has established 
a corporate definition of Y2K Readiness, and incorporated it into a position 
statement now being used in response to customers' Y2K inquiries as well as 
in new business proposals.


                                      19

<PAGE>

         All subsidiaries have developed detailed implementation plans based 
on a five phase resolution process that includes Phase I (Awareness), Phase 
II (Assessment), Phase III (Renovation), Phase IV (Validation) and Phase V 
(Contingency Planning). Company systems have been separated into three areas: 
1) internal, 2) business partners and 3) external customers. These areas have 
been subdivided to address specific issues with: A) internally engineered 
systems, B) purchased systems and C) embedded systems.

         Phase I is complete at all companies. Phase II is essentially 
complete, with the exception of completion of assessment of some of the field 
office operations, which consist primarily of small engineering and sales 
functions. Throughout the assessment phase, several of the subsidiaries have 
found that the types of equipment supplied to their customers typically do 
not utilize date functions and therefore present only minimal Y2K issues. The 
exceptions are the computer-based systems supplied with commercially 
available and custom designed software packages.

         Phase III work is underway, and while each subsidiary has unique 
issues, on average the Company believes this phase is approximately 60% 
complete. Renovations to many of the custom software packages are complete 
and customer upgrades are underway or being scheduled. The Company expects 
completion of all renovation to custom software packages to be complete by 
the end of the second quarter 1999 and for customer upgrades to continue 
through the third quarter. Renovations to personal computers will most likely 
continue throughout 1999 as many "off the shelf" software manufacturers 
continue to review and upgrade their products.

         Phase IV testing is underway and significant progress has been made 
on custom designed software packages supplied to our customers. Testing of 
hardware devices, such as Programmable Logic Controllers and Human/Machine 
Interfaces, utilized on the majority of our systems, is underway and has been 
completed on numerous units. This testing will be ongoing throughout the year 
as new and different versions of hardware are utilized. Testing of several 
customer systems has also been completed with favorable results. Completion 
of testing on internal systems, to the extent possible, is planned for June 
1999. This will provide the second half of 1999 for re-testing and 
unanticipated renovations.

         Phase V has begun at several subsidiaries and it is anticipated that 
much of this planning will be shared by some or all of the subsidiaries, 
reducing the overall Company effort. Completion by the end of the third 
quarter of 1999 is expected for all subsidiaries.

         Alvey and its subsidiaries are actively pursuing compliance 
statements from suppliers and business partners. Questionnaires have been 
mailed to all critical vendors and responses have been received from most. 
Where no response was received or the response was unacceptable second 
requests have or are being mailed.

         Based on our findings to-date, the Company believes its costs for 
the Year 2000 project will be between $2.0 million and $2.5 million all of 
which has been or is expected to be charged to operations. Approximately 40% 
of these costs are considered incremental, while the remaining 60% are a 
utilization of current Company employees or expenditures that would have been 
made in the normal course of business but may be accelerated due to Y2K 
issues.

         Alvey is dependent upon its own internal computer technology, relies 
upon timely performance by its business partners and provides computerized 
functions to customers. A large-scale internal Year 2000 failure could, while 
believed to be remote, impair the Company's ability to timely deliver 
products and services to customers, resulting in potential lost sales 
opportunities and additional expenses. Significant computer failures by 
critical vendors could disrupt the Company's ability to produce and timely 
deliver products or services. However, given the nature of the products and 
services provided, the Company believes any such disruption can be minimized 
through the utilization of readily available alternative sources. In the 
event computerized functions provided by Alvey to its customers encounter a 
Y2K failure, those customers may look to Alvey to provide assistance or 
services. A large scale failure could exceed the Company's ability to timely 
respond to the needs of these customers, resulting in additional expenses and 
potential loss of customers. The Company's Y2K program 


                                      20

<PAGE>

seeks to identify and minimize this risk and includes testing of its systems 
to ensure, to the extent feasible, all such systems will function properly 
before and after the Year 2000. Alvey is continually refining its 
understanding of the risks posed by the Year 2000, and will continue to do so 
throughout 1999.

         While no assurances can be given, because of Alvey's extensive 
efforts to formulate and carry-out an effective Y2K program, the Company 
believes its program will be completed on a timely basis and should 
effectively minimize disruption to Alvey's operations due to Year 2000 issues 
and that such issues will not have a material adverse effect on the Company's 
consolidated results of operation.

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.

NEW ACCOUNTING STANDARDS:

         In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards No. 133, "Accounting for 
Derivative Instruments and Hedging Activities" (FAS 133), which establishes 
accounting and reporting standards for derivative instruments as well as for 
hedging activities. FAS 133 requires the recognition of all derivatives (both 
assets and liabilities) in an entity's balance sheet to be measured at fair 
value. The Company does not anticipate that FAS 133, which is first effective 
for the Company's third quarter of 1999, will affect the Company's financial 
reporting.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         In the ordinary course of business and to the extent short term 
borrowings are utilized, the Company is exposed to interest rate risks by way 
of changes in short-term interest rates. The Company does not have any 
significant amount of export sales denominated in foreign currencies, and 
acquires its raw material supply needs in U. S. dollar denominated 
transactions. Therefore, the Company is not viewed as being exposed to 
foreign currency fluctuation market risks.

         The Company has no material derivative financial instruments as of 
December 31, 1998, and does not enter into derivative financial instruments 
for trading purposes. Market risks that the Company has currently elected not 
to hedge primarily relate to its floating rate debt.

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-26 hereof.


                                      21
<PAGE>

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.

<TABLE>
<CAPTION>
                                        YEARS IN
NAME                             AGE    INDUSTRY         POSITION WITH ALVEY
----                             ---    --------         -------------------
<S>                              <C>    <C>       <C>
Stephen J. O'Neill(1)             57       28     President, Chief Executive Officer and
                                                  Director
Christopher C. Cole               43        9     Executive Vice President and Director
James A. Sharp                    51       15     Senior Vice President, Chief Financial
                                                  Officer, Secretary and Assistant Treasurer
William R. Michaels(1)            64       24     Chairman of the Board
Frederick R. Ulrich, Jr.(1)       55       -      Director
Prakash A. Melwani(1)             40       -      Director
James L. Elrod, Jr.(2)            44       -      Director
Charles A. Dill(2)                59       -      Director
</TABLE>

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

<TABLE>
<CAPTION>
                                        YEARS IN   PRINCIPAL POSITION IN PINNACLE
NAME                             AGE    INDUSTRY            ORGANIZATION
----                             ---    --------  -------------------------------------
<S>                              <C>    <C>       <C>
Stephen J. O'Neill(1)             57       28     President, Chief Executive Officer and
                                                    Director
Christopher C. Cole               43        9     Senior Executive Vice President and Chief
                                                    Operating Officer; Director
James A. Sharp                    51       15     Executive Vice President, Chief Financial
                                                    Officer, Treasurer and Secretary
William R. Michaels(1)            64       24     Chairman of the Board
Frederick R. Ulrich, Jr.(1)       55       -      Director
Prakash A. Melwani(1)             40       -      Director
James L. Elrod, Jr.(2)            45       -      Director
Charles A. Dill(2)                59       -      Director
</TABLE>
-----------

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


                                    22

<PAGE>

         STEPHEN J. O'NEILL has served as Chief Executive Officer and 
Director of both Alvey and Pinnacle since June 1997; as President of Pinnacle 
since June 1997; as President of Alvey since November 1992; as Executive Vice 
President of Pinnacle from September 1988 until June 1997; as Vice President 
and Director of McHugh since May 1989; as Director of Weseley and Busse since 
1996; and as Director for each of the other subsidiaries of the Company since 
June 1997. 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 and of McHugh 
Software International, Inc.

         CHRISTOPHER C. COLE has served as Senior Executive Vice President, 
Chief Operating Officer and Director of Pinnacle since June 1997; as 
Executive Vice President of Alvey since February 1999; as Chief Executive 
Officer of Buschman since March 1994; as Executive Vice President of Buschman 
from March 1994 until June 1997; as Director of Buschman since February 1996; 
as Chief Executive Officer of White since February 1998; as Executive Vice 
President of White from October 1996 through February 1998; as Director of 
White since October 1996; as Secretary of White since June 1997; as Executive 
Vice President of Pinnacle from 1994 until June 1997; as Chief Executive 
Officer and Director of RTS since its acquisition and as Director for each of 
the other subsidiaries of the Company since June 1997. 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. 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 Chairman of 
such board.

         JAMES A. SHARP has served as Secretary and Senior Vice President of 
Alvey since June 1997; as Secretary and Executive Vice President of Pinnacle 
since June 1997; as Chief Financial Officer of Alvey since April 1994; as 
Chief Financial Officer and Treasurer of Pinnacle since April 1994; as 
Assistant Treasurer of Alvey since April 1994; as Vice President and 
Assistant Secretary of Alvey from April 1994 until June 1997; as Vice 
President and Assistant Secretary of Pinnacle from April 1994 through June 
1997; as Chief Financial Officer of each of Alvey's subsidiaries; as 
Treasurer of Busse, White and Weseley since June 1997; as Secretary and 
Senior Vice President of Buschman since June 1997; as Vice President of RTS 
from June 1997 to February 1998 and as director of Weseley since February 
1998; as Director of McHugh from June 1997 to February 1998 and as Director 
of Weseley since February 1998. 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 Missouri.

         WILLIAM R. MICHAELS has served as Chairman of the Board of both 
Alvey and Pinnacle since September 1988; as Chief Executive Officer of Alvey 
from 1988 until June 1997; as President and Chief Executive Officer of 
Pinnacle from 1988 until June 1997; and as Chairman of the Board and Director 
of each of Alvey's subsidiaries until June 1997. 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 and 
also serves as director of McHugh Software International, Inc. which was 
previously a subsidiary of the Company. Mr. Michaels is a graduate of the 
State University of New York.

     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, Oz Entertainment Corporation 
and Fresh Point, Inc. Mr. Ulrich is a graduate of the United States Military 
Academy and holds an M.B.A. degree from Harvard University.

                                     23


<PAGE>

     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 Insight Communications Company L. P., International 
AirParts Corporation and McHugh Software International, Inc. and a member of 
the Advisory Board of Insight Communications Company, L.P. Mr. Melwani 
graduated from Cambridge University with a B.A. degree and received an M.B.A. 
degree from Harvard University.

     JAMES L. ELROD, JR. has served as a director of Alvey and Pinnacle since 
May 1998. Mr. Elrod has served as a Managing Director of Vestar from 1998 to 
the present. From 1994 through 1997, he served as the Chief Financial Officer 
and Chief Operating Officer of Physicians Health Services. From 1980 to 1994, 
he served as Managing Director of Dillon, Read & Co. Inc. Mr. Elrod is a 
director of D. D. S. Partners, a dental practice management company. Mr. 
Elrod graduated with an A.B. from Colgate University and with an M.B.A. from 
Harvard University.

     CHARLES A. DILL became a director of Alvey and Pinnacle in February 
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 Zoltek, a specialty 
producer of carbon fiber composite materials; of Transact Technologies, a 
manufacturer of transaction-based printers for point-of-sale terminals and of 
D. T. Industries, a manufacturer of automated production equipment. Mr. Dill 
graduated from Yale University with a B.S. degree in mechanical engineering 
and received an M.B.A. degree from Harvard University.


                                    24

<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION 

         The following table sets forth, for the three years ended December 31,
1998, the earned compensation of the Chief Executive Officer and the executive
officers of Alvey (the "Named Executive Officers"):

<TABLE>
<CAPTION>

                                                     ANNUAL COMPENSATION
                                      -------------------------------------------------
                                                                                            COMPENSATION
                                                                         OTHER ANNUAL          AWARDS -
                                                                         COMPENSATION       STOCK OPTIONS
NAME AND PRINCIPAL POSITION            YEAR      SALARY     BONUS(a)          (b)         (# OF SHARES)(c)
---------------------------------      ----     -------     --------     --------------   ----------------
<S>                                    <C>      <C>         <C>          <C>              <C>
WILLIAM R. MICHAELS                    1998     $100,000    $   -          $246,222             -
   Chairman of the Board               1997      333,550        -            46,837             -
                                       1996      317,650        -            47,062             -

STEPHEN J. O'NEILL                     1998      300,000     268,300           -                -
   President and Chief Executive       1997      253,625     180,000           -                -
   Officer                             1996      205,675     100,000           -                -

CHRISTOPHER C. COLE                    1998      260,000     236,700           -              5,000
   Executive Vice President            1997      236,958     180,000           -                -
                                       1996      194,250     168,000           -                -

JAMES A. SHARP                         1998      175,000     160,000           -                -
   Senior Vice President, Chief        1997      157,500     125,000           -                -
   Financial Officer and Secretary     1996      150,000        -           18,982            4,000
</TABLE>

-----------
(a)    Reflects amount earned in 1998, 1997 and 1996, respectively. All
       amounts are paid in subsequent years, including portions which are
       deferred subject to continued employment.

(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 1998, 1997 and 1996, respectively, have been omitted. When
       listed, these items include costs for insurance, auto, accounting fees,
       club dues, spousal travel and gross ups for income tax purposes. The 1998
       total for Mr. Michaels includes $237,500 of deferred compensation.

(c)    The figures set forth in this column represent the number of options
       granted in 1998, 1997 and 1996, 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. 
For non-divested operations, the Company's matching contributions were 
$592,000, $541,000 and $478,000 for the years ended 1998, 1997 and 1996, 
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.

EMPLOYMENT AGREEMENTS

         On June 2, 1997, Alvey, Pinnacle and William R. Michaels entered 
into a second amended and restated employment agreement pursuant to which Mr. 
Michaels serves as Chairman of the Board. The agreement entitled 


                                       25

<PAGE>

Mr. Michaels to an automobile through March 1998; an annual bonus for 1997; 
and club membership, disability, health insurance and other benefit plans 
provided by Alvey and Pinnacle to their employees through December 31, 1997. 
The agreement also provides for deferred compensation, whereby Pinnacle and 
Alvey will pay to Mr. Michaels, for at least 10 years and during the 
remainder of his life, an annual amount of $237,500, the payment of which 
commenced on January 31, 1998. 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.

         On June 27, 1995, Alvey entered into an amended and restated 
employment agreement with Stephen J. O'Neill. Pursuant to the agreement, Mr. 
O'Neill serves as President of Alvey at a base salary of $191,750. His base 
salary is reviewed annually to consider an upward adjustment for each 
subsequent year. The agreement entitles Mr. O'Neill to an automobile, club 
membership, an annual bonus, life, disability and health insurance and to 
other benefit plans provided by Alvey to their other employees. In addition, 
Alvey is obliged to provide a $1,000,000 life insurance policy for Mr. 
O'Neill for the remainder of his lifetime, unless he voluntarily terminates 
his employment with Alvey to accept a comparable position, at which time 
Alvey'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 serves 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 is 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.

         On September 28, 1995, Pinnacle and Alvey entered into an amended 
and restated employment agreement with James A. Sharp. Pursuant to the 
agreement, Mr. Sharp serves as Vice President and Chief Financial Officer of 
Pinnacle at a base salary of $127,500. His base salary is reviewed annually 
to consider an upward adjustment for each subsequent year. The agreement 
entitles Mr. Sharp to a car allowance, an annual bonus, disability and health 
insurance and to other benefit plans provided by Pinnacle to its other 
employees.

BOARD OF DIRECTORS COMMITTEES AND COMPENSATION

         Alvey and Pinnacle each have a Compensation Committee and an Audit 
Committee. During 1998, Alvey and Pinnacle paid 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.


                                       26
<PAGE>

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 26, 1999 (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.

<TABLE>
<CAPTION>

NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2)
-------------------------------------------                                               FULLY-DILUTED
                                                     SHARES OWNED        PERCENTAGE (3)   PERCENTAGE (4)
                                                     ------------        --------------   --------------
<S>                                                  <C>                 <C>              <C>
EXECUTIVE OFFICERS AND DIRECTORS
--------------------------------
   Prakash A. Melwani (5)(6).......................     179,243               23.9%            21.3%
   James L. Elrod, Jr. (5)(6)......................     179,243               23.9             21.3
   William R. Michaels ............................      72,187                9.6              8.6
   Frederick R. Ulrich, Jr. (7)....................      27,516                3.7              3.3
   Charles A. Dill (8).............................         667                0.1              0.1
   Christopher C. Cole (9).........................      21,667                2.8              2.6
   Stephen J. O'Neill .............................      48,902                6.5              5.8
   James A. Sharp (10) ............................      10,493                1.4              1.2

OTHER BENEFICIAL OWNERS
-----------------------
   Vestar Equity Partners, L.P. (5)................     179,243               23.9             21.3
   Chase Equity Associates,
      A California Limited Partnership (11)........      57,614                7.7              6.8
   Michael J. Tilton (12) .........................      47,170                6.3              5.6

   All Executive Officers and Directors as a
     Group (9  Persons)............................     360,674 (13)          46.3             42.8

</TABLE>

(1)    Unless otherwise noted, the address of each of the foregoing is c/o
       Pinnacle at 9301 Olive Blvd., St. Louis, Missouri 63132.

(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 749,676
       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 843,154 shares of Pinnacle Common Stock outstanding, which gives
       effect to the exercise of outstanding options exercisable within 60 days
       to purchase 93,477 shares of Pinnacle Common Stock.

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

(6)    Includes 179,243 shares held by Vestar Equity Partners, L.P., as to which
       Messrs. Melwani and Elrod disclaim beneficial ownership.

(7)    Includes the following number of shares held by or in trust for Mr.
       Ulrich's children: 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; 1000 shares of Pinnacle Common Stock held by 
       the Frederick Ulrich III Trust '92; and 605 shares of Pinnacle Common 
       Stock held by Amy C. Ulrich.

(8)    Includes 667 shares of Pinnacle Common Stock issuable upon exercise of
       outstanding options.

(9)    Includes 20,367 shares of Pinnacle Common Stock issuable upon exercise
       of outstanding options.

(10)   Includes 5,400 shares of Pinnacle Common Stock issuable upon exercise
       of outstanding options.

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

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

(13)   The 179,243 shares of Pinnacle Common Stock held by Vestar Equity
       Partners, L.P., as to which Messrs. Melwani and Elrod disclaim beneficial
       ownership, are counted once in this total.

                                       27

<PAGE>

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 mAended 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 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.

                                       28

<PAGE>

         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. As
set forth in the Certificate of Designations for the Pinnacle 9% Cumulative
Series A Preferred Stock (the "Series A Preferred"), in the event Pinnacle fails
to achieve a certain level of EBITDA for a given year, the holders of the Series
A Preferred will have the right to appoint a majority of Pinnacle's board of
directors, with such newly appointed directors remaining on the board until such
time as Pinnacle achieves the threshold EBITDA level for a subsequent year.
Pinnacle did not attain the threshold EBITDA level for the years ended December
31, 1997 or 1998. The holders of the Series A Preferred waived their right to
appoint a majority of the Pinnacle directors at this time, but they retain the
right to appoint a majority of the Pinnacle directors. Pursuant to the Amended
and Restated Stockholders Agreement, Pinnacle's stockholders are required to
vote their shares to elect specified nominees to the board of directors.

         On and after January 24, 2004, if any shares of Pinnacle Series A
Preferred Stock and any Pinnacle Warrants or Warrant Shares are outstanding, the
number of directors of Pinnacle shall be increased by the Control Number (as
defined below), with such additional directors to be designated by Vestar's
representatives on Pinnacle's board of directors (as long as Vestar or one of
its affiliates holds Series A Preferred or Warrant Shares at such time). From
and after the date (if any) on which a Control Number of directors are required
to be nominated and elected to the board as a result of the foregoing, if a
third party offers to acquire all outstanding shares of Pinnacle common stock,
the Required Warrantholders (as defined in the agreement) may, subject to
certain conditions, cause the other Stockholders to accept the third-party offer
and, along with the Required Warrantholders, sell all shares of Pinnacle common
stock held by them to the third party.

     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 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 transaction (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

                                       29

<PAGE>

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. In 
connection with the spin-off and related transactions as described in Note 4 
to the Consolidated Financial Statements, Mammoth Capital Inc. received 
$400,000 in fees for services rendered to Pinnacle and Alvey pursuant to such 
consulting agreement.

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.
In connection with the spin-off and related transactions as described in Note 4
to the Consolidated Financial Statements, Vestar Capital Partners received
$900,000 in fees for services rendered to Pinnacle and Alvey pursuant to such
consulting agreement. In addition, pursuant to an agreement between Vestar and
the placement agent for a minority investment in McHugh, which was consummated
immediately after the spin-off, Vestar received $500,000 of the fee payable by
McHugh to the placement agent for additional services Vestar rendered to McHugh.
McHugh paid this fee to Vestar after the spin-off was consummated.
                                       
                                     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:

<TABLE>
<CAPTION>

  EXHIBIT
   NUMBER                                     DESCRIPTION                                     REFERENCE
  -------                                     -----------                                     ---------
<S>          <C>                                                                              <C>
    3.1      Certificate of Incorporation of Alvey Systems, Inc.                                 (i)
    3.2      Bylaws of Alvey Systems, Inc.                                                       (i)
   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                                                        (i)
</TABLE>
                                       30

<PAGE>

<TABLE>
<CAPTION>
<S>          <C>                                                                              <C>
   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                                                                  (i)
   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                                                                         (i)
   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 Warrant holders (as defined therein) (i)
   10.5      Consulting Agreement, dated as of December 31, 1995, by and among Pinnacle
             Automation, Inc., Alvey Systems, Inc. and Mammoth Capital Inc.                      (i)
   10.6      Termination Agreement, dated as of December 31, 1995, by and among Pinnacle
             Automation, Inc., Alvey Systems, Inc., and Lafarick, Inc.                           (i)
   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                      (i)
   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                                             (i)
   10.9      Consulting Agreement, dated as of January 24, 1996, by and among Pinnacle
             Automation, Inc., Alvey Systems, Inc. and Vestar Capital Partners                   (i)
   10.10     Purchase Agreement, dated January 19, 1996, by and among Alvey Systems,
             Inc., Pinnacle Automation, Inc. and NationsBanc Capital Markets, Inc.               (i)
   10.11     Agreement, dated as of June 1, 1998, between Vestar Capital Partners and
             Pinnacle Automation, Inc.                                                          (vi)
   10.12     Indenture, dated as of January 24, 1996, by and between Alvey Systems, Inc.
             and The Bank of New York                                                            (i)
   10.13     First Supplemental Indenture, dated as of September 30, 1998, between Alvey
             Systems, Inc. and the Bank of New York, as trustee.                                 (v)
   10.14     Registration Rights Agreement, dated as of January 24, 1996, by and among
             Alvey Systems, Inc., Pinnacle Automation, Inc. and NationsBanc Capital
             Markets, Inc.                                                                       (i)
   10.15     Credit Agreement, dated as of January 24, 1996, among Alvey Systems, Inc.,
             the lenders named therein and NationsBank N.A.                                      (i)
   10.16     Amendment No. 1 to the Credit Agreement, dated May 15, 1996, among Alvey
             Systems, Inc., the lenders named therein and NationsBank N.A.                      (ii)
   10.17     Amendment No. 2 to the Credit Agreement, dated March 14, 1997, among Alvey
             Systems, Inc., the lenders named therein and NationsBank N.A.                      (ii)
   10.18     Amendment No. 3 to the Credit Agreement, dated August 12, 1997, among Alvey
             Systems, Inc., the lenders named therein and NationsBank, N.A.                     (iii)
   10.19     Fourth Amendment, Consent, Waiver and Release, dated as of October
             26, 1998, among Alvey Systems, Inc., the Guarantors and Credit
             Parties thereto and (v) NationsBank, N. A., as Agent.                               (v)
   10.20     Pledge and Security Agreement, dated as of January 24, 1996, by Alvey
             Systems, Inc., as pledgor, in favor of NationsBank, N.A.                            (i)
   10.21     Pledge and Security Agreement, dated as of January 24, 1996, by Pinnacle
             Automation, Inc., as pledgor, in favor of NationsBank, N.A.                         (i)
   10.22     Security Agreement, dated as of January 24, 1996, by Alvey Systems, Inc.,
             and its subsidiaries, in favor of NationsBank, N.A.                                 (i)

</TABLE>

                                       31

<PAGE>

<TABLE>
<CAPTION>

<S>          <C>                                                                              <C>
   10.23     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                                                   (i)
   10.24     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                                                   (i)
   10.25     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                                                       (i)
   10.26     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                  (i)
   10.27     Stock Purchase Agreement dated as of December 16, 1996 by and between Alvey
             Systems, Inc. and UNR Industries, Inc.                                             (ii)
   10.28     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.                                                      (i)
   10.29     Distribution Agreement, dated as of October 27, 1998, among Pinnacle
             Automation, Inc., Alvey Systems, Inc. and McHugh Software International, Inc.       (v)
   10.30     Tax Sharing Agreement, dated as of October 27, 1998, among Pinnacle
             Automation, Inc., Alvey Systems, Inc. and McHugh Software International, Inc.       (v)
   10.31     Second Amended and Restated Employment Agreement, dated June 2, 1997, by and
             among Pinnacle Automation, Inc., Alvey Systems, Inc. and William R. Michaels.      (iii)
   10.32     Separation Agreement and General and Special Release dated June 2, 1997, by
             and among Pinnacle Automation, Inc., Alvey Systems, Inc. and Michael J.
             Tilton                                                                             (iii)
   10.33     Amended and Restated Employment Agreement, dated June 27, 1995, by and among
             Pinnacle Automation, Inc. and Stephen J. O'Neill                                    (i)
   10.34     Employment Agreement, dated March 9, 1994, by and among The Buschman Company
             and Christopher C. Cole                                                             (i)
   10.35     Termination Agreement with Donald J. Weiss, dated April 26, 1996, by and
             among Pinnacle Automation, Inc., Alvey Systems, Inc., White Storage &
             Retrieval Systems, Inc. and Donald J. Weiss                                        (iv)
   21        List of Subsidiaries
   27        Financial Data Schedule

</TABLE>

--------------------------------
(i) Filed as an exhibit to the Company's Registration Statement on Form S-4 (No.
333-2600) and incorporated herein by reference.

(ii) Filed as an exhibit to the Company's Annual Report on Form 10K filed for
the year ended December 31, 1996 (No. 333-2600) and incorporated herein by
reference.

(iii)  Filed as an exhibit to the Company's Form 10Q filed for the quarter 
ended June 30, 1997 (No. 333-2600) and incorporated herein by reference.

(iv) Filed as an exhibit to the Company's Form 10Q filed for the quarter 
ended March 31, 1996 (No. 333-2600) and incorporated herein by reference.

                                       32

<PAGE>

(v) Filed on an exhibit to the Company's Form 8-K filed on October 27, 1998 
(No. 333-2600) and incorporated herein by reference.

(vi) Filed as an exhibit to the Company's Form 10Q filed for the quarter 
ended September 30, 1998 (No. 333-2600) and incorporated herein by reference.

(b)  REPORTS ON FORM 8-K. The Company filed a current report on Form 8-K on 
October 27, 1998.

(c)  Refer to (a)(3) above.
(d)  Refer to (a)(2) above.







                                       33


<PAGE>

                            INDEX TO ALVEY SYSTEMS, INC.
                         CONSOLIDATED FINANCIAL STATEMENTS


                                                                            PAGE
                                                                            ----
Report of Independent Accountants                                            F-2
Consolidated Balance Sheet as of December 31, 1998 and 1997                  F-3
Consolidated Statement of Operations for the years ended 
  December 31, 1998, 1997 and 1996                                           F-4
Consolidated Statement of Cash Flows for the years ended 
  December 31, 1998, 1997 and 1996                                           F-5
Consolidated Statement of Net Investment of Parent for 
  the years ended December 31, 1998, 1997 and 1996                           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 sheet 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, 1998 and 1997 and 
the results of their operations and their cash flows for each of the three 
years in the period ended December 31, 1998 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.



PRICEWATERHOUSECOOPERS LLP

St. Louis, Missouri
February 11, 1999


                                      F-2

<PAGE>

                        ALVEY SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                                     ----------------------
                                                                       1998         1997
                                                                     --------     ---------
<S>                                                                  <C>          <C>
ASSETS:
Current assets:
  Cash and cash equivalents                                          $  2,499     $  2,752
  Receivables:
    Trade (less allowance for doubtful accounts of $657 and 
      $1,069, respectively)                                            29,782       38,245
    Unbilled and other                                                  3,607        7,340
  Accumulated costs and earnings in excess of billings 
    ($28,577 and $28,261, respectively) on uncompleted 
    contracts                                                           5,910        9,963
  Inventories:
    Raw materials                                                      11,473       13,647
    Work in process                                                     5,217        2,881
  Deferred income taxes                                                11,792        8,441
  Net assets of divested operations                                     2,831       24,227
  Prepaid expenses and other assets                                     2,056          862
                                                                     --------     --------
      Total current assets                                             75,167      108,358

Property, plant and equipment, net                                     27,058       27,431
Other assets                                                            3,229        6,729
Goodwill                                                               18,381       19,145
                                                                     --------     --------
                                                                     $123,835     $161,663
                                                                     --------     --------
                                                                     --------     --------

LIABILITIES AND NET INVESTMENT OF PARENT:
Current liabilities:
  Current portion of long-term debt                                  $   185      $    230
  Accounts payable                                                    24,288        26,406
  Accrued expenses                                                    35,382        36,455
  Customer deposits                                                    5,399         7,068
  Billings in excess of accumulated costs and earnings 
    ($81,784 and $80,586, respectively) on uncompleted 
    contracts                                                         18,029        21,895
  Deferred revenues                                                    1,516         1,483
  Taxes payable                                                          710           833
                                                                    --------      --------
      Total current liabilities                                       85,509        94,370

Long-term debt                                                        76,696       106,758
Other long-term liabilities                                            8,246         8,777
Deferred income taxes                                                    466           286

Commitments and contingencies (Notes 4 and 12)

Net investment of Parent                                             (47,082)      (48,528)
                                                                    --------      --------
                                                                    $123,835      $161,663
                                                                    --------      --------
                                                                    --------      --------
</TABLE>
              See accompanying Notes to Consolidated Financial Statements.

                                      F-3


<PAGE>

                      ALVEY SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS
                             (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                             ----------------------------------------------------
                                                                                  1998               1997               1996
                                                                             --------------      -------------      -------------
<S>                                                                           <C>                <C>                <C>
     Net sales                                                                $    299,749       $    287,669       $    267,123
     Cost of goods sold                                                            223,277            224,458            212,522
                                                                             --------------      -------------      -------------

     Gross profit                                                                   76,472             63,211             54,601
     Selling, general and administrative expenses                                   51,654             47,296             46,716
     Research and development expenses                                               4,614              3,058              2,029
     Amortization expense                                                              780                776                877
     Operating loss (income) from divested operations                               12,934             (2,651)             9,574
     Write-off of goodwill                                                                                                11,491
     Restructuring expense                                                                             11,334
     Write-off of purchased in-process research and development costs                                                      1,000
     Other expense (income), net                                                      (440)                60              1,425
                                                                             --------------      -------------      -------------

     Operating income (loss)                                                         6,930              3,338            (18,511)
     Interest expense                                                               12,478             13,756             12,301
     Expenses associated with the spin-off of McHugh                                 1,220
     Write-off of costs associated with a discontinued public offering                                    958
                                                                             --------------      -------------      -------------
     Loss before income taxes and extraordinary item                                (6,768)           (11,376)           (30,812)
     Income tax expense (benefit)                                                    1,585             (4,057)            (1,909)
                                                                             --------------      -------------      -------------
     Loss before extraordinary item                                                 (8,353)            (7,319)           (28,903)
     Extraordinary loss, net of income tax benefit of $5,832, $0 and
        $1,328, respectively                                                         8,748                                 1,993
                                                                             --------------      -------------      -------------
     Net loss                                                                 $    (17,101)      $     (7,319)      $    (30,896)
                                                                             --------------      -------------      -------------
                                                                             --------------      -------------      -------------
</TABLE>
                  See accompanying Notes to Consolidated Financial Statements.

                                                F-4


<PAGE>

                                ALVEY SYSTEMS, INC. AND SUBSIDIARIES
                               CONSOLIDATED STATEMENT OF CASH FLOWS
                                       (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                   ---------------------------------------
                                                                                     1998           1997            1996
                                                                                   ---------      ---------      ---------
<S>                                                                                <C>            <C>                <C>
OPERATING ACTIVITIES:
Net loss, excluding operating income (loss) from divested
 operations                                                                        $  (4,167)     $  (9,970)      $ (21,322)
Adjustments to reconcile net loss to net cash provided
 by (used for) operating activities:
  Depreciation                                                                         3,917          3,401           3,337
  Amortization                                                                           780            776             877
  Operating activities of divested operations                                         (3,966)         1,795          (2,013)
  Costs related to the spin-off of McHugh                                              6,628                          2,963
  Write-off of debt and preferred stock issuance costs                                 5,566
  Write-off of purchased in-process research and development costs                                                    1,000
  Write-off of goodwill                                                                                              11,491
  Deferred taxes, net of effect of acquisitions                                       (3,171)        (3,814)         (2,168)
  Other                                                                                                 198
  Decrease (increase) in current assets, excluding effect of
   acquisitions:
    Receivables                                                                       12,196         (1,697)         (3,401)
    Accumulated costs and earnings in excess of billings on 
     uncompleted contracts                                                             4,053          1,905          (7,182)
    Inventories                                                                         (162)         1,360           2,247
    Other assets                                                                         108          1,741           1,079
  (Decrease) increase in current liabilities, excluding effect of
    acquisitions:
     Accounts payable                                                                 (2,118)        (1,925)          7,677
     Accrued expenses                                                                 (1,073)         2,254           8,963
     Customer deposits                                                                (1,669)        (3,351)         (1,108)
     Billings in excess of accumulated costs and earnings on uncompleted
      contracts                                                                       (3,866)         3,048           8,095
     Deferred revenues                                                                    33            285            (400)
     Taxes payable                                                                      (123)           510          (1,773)
     Other liabilities                                                                  (531)         2,200           2,472
                                                                                   ---------      ---------       ---------
      Net cash provided by (used for) operating activities                            12,435         (1,284)         10,834
                                                                                   ---------      ---------       ---------

INVESTING ACTIVITIES:
Cash received from the spin-off of McHugh, net of related costs                       32,278
Additions to property, plant and equipment, net                                       (3,673)        (3,190)         (7,166)
Investing activities of divested operations                                           (6,569)        (3,087)        (19,501)
Acquisition of subsidiary, net of cash acquired of $33                                                               (4,026)
Other                                                                                                  (421)           (825)
                                                                                   ---------      ---------       ---------
    Net cash provided by (used for) investing activities                              22,036         (6,698)        (31,518)
                                                                                   ---------      ---------       ---------
</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)
<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                                   ---------------------------------------
                                                                                     1998           1997            1996
                                                                                   ---------      ---------      ---------
<S>                                                                                <C>            <C>                <C>
FINANCING ACTIVITIES:
Proceeds of borrowings                                                             $  63,410      $ 100,200       $ 132,319
Payments of debt and capital leases                                                  (93,517)       (93,930)        (80,828)
Payments of debt issuance costs and premium to repurchase Notes                       (4,551)                        (7,713)
Financing activities of divested operations                                               (7)           161             (93)
Redemption of preferred stock                                                                                       (27,593)
Net contributions from (to) Parent                                                       (59)           (80)          5,757
                                                                                   ---------      ---------       ---------
    Net cash provided by (used for) financing activities                             (34,724)         6,351          21,849
                                                                                   ---------      ---------       ---------
Net increase (decrease) in cash and cash equivalants                                    (253)        (1,631)          1,165
Cash and cash equivalents, beginning of year                                           2,752          4,383           3,218
                                                                                   ---------      ---------       ---------
Cash and cash equivalents, end of year                                             $   2,499      $   2,752       $   4,383
                                                                                   ---------      ---------       ---------
                                                                                   ---------      ---------       ---------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
  Interest on financings                                                           $ 12,948      $   12,674       $   6,777
  Income taxes                                                                          594             422           1,281

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
 FINANCING ACTIVITIES:
 Alvey Systems, Inc. purchased Real Time Solutions in 1996.  
  In conjunction with the acquisition, liabilities were assumed 
  as follows:
   Fair value of assets acquired                                                                                  $   4,547
   Fair value assigned to goodwill                                                                                    2,192
   Cash paid concurrent with acquisition, including payment of debt of
    acquired company and excluding cash acquired                                                                     (4,026)
                                                                                                                   ---------
   Liabilities assumed                                                                                            $   2,713
                                                                                                                  ---------
                                                                                                                  ---------
</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)
<TABLE>
<CAPTION>
                                                                  NET INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998                 OF PARENT
                                                                  -------------
<S>                                                               <C>
Balance December 31, 1995                                          $   (15,719)
Net loss                                                               (30,896)
Net investment of Parent                                                 5,757
Preferred stock dividend declared (Note 9)                                (271)
                                                                   -----------
Balance December 31, 1996                                              (41,129)
Net loss                                                                (7,319)
Net contribution to Parent                                                 (80)
                                                                   -----------
Balance December 31, 1997                                              (48,528)
Net loss                                                               (17,101)
Spin off of McHugh                                                      17,508
Net investment of Parent                                                 1,039
                                                                   -----------
Balance December 31, 1998                                          $   (47,082)
                                                                   -----------
                                                                   -----------
</TABLE>

         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, palletizers, depalletizers, 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 five operating subsidiaries: McHugh Software 
International, Inc. ("McHugh"), located in Waukesha, Wisconsin, and its 
wholly-owned subsidiaries, Weseley Software Development Corp. ("Weseley" or 
"WSDC"), Software Architects, Inc. ("SAI") and Gagnon & Associates, Inc. 
("Gagnon"); Busse Bros., Inc. ("Busse"), located in Randolph, Wisconsin; The 
Buschman Company ("Buschman"), located in Cincinnati, Ohio; White Systems, 
Inc. ("White") located in Kenilworth, New Jersey and Real Time Solutions, 
Inc. ("RTS"), located in Napa, California. See Note 3 for additional 
information on the Weseley, RTS, SAI and Gagnon acquisitions. See Note 4 for 
discussion of divested operations which include the spin-off of McHugh and 
its subsidiaries which was effected on October 27, 1998, the planned 
divestiture of Busse and the disposition of a product line at White.

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: McHugh, Busse, Buschman, White and RTS. 
All significant intercompany transactions, which primarily consist of sales, 
have been eliminated. The operating results of divested operations, including 
McHugh, Busse and the loss from the disposition of a product line, are 
reflected in the Company's consolidated statement of operations as operating 
loss (income) from divested operations. The net assets of divested operations 
are presented as a separate line item in the Company's consolidated balance 
sheet. The financial statements of prior years have been reclassified to be 
consistent with the current year with respect to divested operations.

     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.

     At December 31, 1998, the net investment of Parent consists of 
cumulative contributions of capital to Alvey by Pinnacle of $10.5 million, 
cumulative losses before extraordinary losses of $25.0 million, extraordinary 
losses of $18.3 million and an aggregate accretion/payment of $14.3 million 
of paid-in-kind dividends on preferred stock. At December 31, 1997, the net 
investment of Parent consists of cumulative contributions of capital to Alvey 
by Pinnacle of $8.7 million, cumulative losses before extraordinary losses of 
$33.4 million, extraordinary losses of $9.5 million and an aggregate 
accretion/payment of $14.3 million of paid-in-kind dividends on preferred 
stock.

                                       F-8

<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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, 
1998 and 1997, 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 non-software 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.

     McHugh recognized 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. McHugh licensed its software to 
customers on a perpetual, non-exclusive basis. Implementation, training and 
consulting revenues were recognized as the services were rendered (fixed-fee 
revenues were recognized on a percentage-of-completion basis). Annual 
maintenance and support revenues consisted of ongoing support and product 
updates and were recognized ratably over the term of the particular 
maintenance agreement in place with a customer. Revenues for McHugh's 
hardware and peripheral sales were recognized upon shipment.

     SOFTWARE DEVELOPMENT COSTS

     Certain costs incurred in developing software products for resale were 
previously 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 consisted of salaries, computer expenses and other 
overhead costs directly related to the development and/or major enhancement 
of software products. Such costs were capitalized, to the extent they were 
recoverable through future sales, from the time the product's technological 
feasibility was established up to its general release to customers. Costs 
incurred before or after this period were expensed as incurred except for 
major product improvements, which were capitalized as described above. Net 
unamortized capitalized software development costs were $414,000 at December 
31, 1997 and are included in net assets of divested operations. Amortization 
of capitalized software costs included in cost of goods sold in the 
consolidated statement of operations totaled $864,000 in 1996, which included 
the write-off of $659,000 of capitalized software development costs that were 
not expected to be recoverable through future sales. Additionally, $158,000, 
$189,000 and $189,000 of software amortization is included in operating loss 
(income) from divested operations in the consolidated statement of operations 
for the years ended December 31, 1998, 1997 and 1996, respectively.

     RESEARCH AND DEVELOPMENT COSTS

     Research and development costs are expensed as incurred.

                                       F-9
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     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 to the 
extent 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 10 years

     GOODWILL AND OTHER INTANGIBLE ASSETS

     The excess of cost over the fair market value of net assets acquired in 
purchase transactions has been recorded as goodwill to be amortized over a 
period of 40 years, except for goodwill related to RTS, which is being 
amortized over 10 years. Management assesses the carrying value of goodwill 
for recoverability 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 was considered to be impaired due to 
historical losses and uncertainty regarding

                                       F-10
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

future income and cash flows. See Note 7 for further discussion.

     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.

     LONG-LIVED ASSETS

     Long-lived assets held and used by the Company are reviewed for 
impairment whenever events or changes in circumstances indicate that the 
carrying amount of such assets may not be recoverable. For purposes of 
evaluating the recoverability of long-lived assets, the recoverability test 
is performed using undiscounted cash flows estimated to be generated by those 
assets and a loss is recorded when such value is less than the assets' 
carrying amount.

     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, restructuring and various other 
reserves. See Note 10 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 specific collateral as 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.

     NEW ACCOUNTING STANDARDS:

     In June 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" 
(FAS 130), which establishes standards for reporting and display of 
comprehensive income and its components (revenues, expenses, gains and 
losses) in a full set of general purpose financial statements. Adoption of 
FAS 130 did not significantly impact the company's financial reporting.

                                       F-11
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In June 1997, the Financial Accounting Standards Board issued Statement 
of Financial Account Standards No. 131, "Disclosures about segments of an 
Enterprise and Related Information" (FAS 131), which requires public entitles 
to report information about operating segments in annual financial statements 
and requires that selected information about operating segments be reported 
in interim financial reports issued to shareholders. Adoption of FAS 131 did 
not significantly impact the Company's financial reporting.

3. ACQUISITIONS

     WESELEY ACQUISITION

     In January 1996, McHugh purchased all of the outstanding capital stock 
of Weseley for $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 8. 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 
through the date of the McHugh spin-off.

     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.

     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 had 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. 
During 1997, the employment of the former principal shareholder of Weseley 
was terminated and another former shareholder of Weseley left the Company. 
See also Note 12 for related discussion. As a result, in 1998 the remaining 
former shareholders of Weseley renegotiated their stay bonus agreement to 
reduce the amount of the annual stay bonuses to approximately $400,000 per 
year for the next four years. During 1998, 1997 and 1996, amounts of 
$400,000, $275,000 and $625,000, respectively, related to the stay bonus were 
charged to operating loss (income) from divested operations in the 
consolidated statement of operations. No payments were made or expense 
recognized in 1998, 1997 or 1996 related to the employee incentive 
compensation agreement.

     RTS ACQUISITION

     In December 1996, Alvey purchased all of the outstanding capital stock 
of RTS for $4.1 million in cash. The acquisition, which was recorded pursuant 
to the purchase method of accounting, was financed through the Company's 
working capital facility. 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.

                                       F-12

<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The pro forma results of operations of the Company for 1996 would not 
have been materially different from reported results had either or both of 
the Weseley and RTS acquisitions taken place on January 1, 1996. Accordingly, 
pro forma financial information for the Weseley and RTS acquisitions is not 
presented.

     SAI ACQUISITION

     On April 1, 1998, McHugh purchased all of the outstanding capital stock 
of SAI for $1.5 million in cash. The acquisition was financed through the 
Company's working capital facility. In addition, subject to their continued 
employment, certain employees of SAI have an opportunity to earn stay bonuses 
in the aggregate of $1.1 million per year for each of the next four years. 
During 1998, $656,000 was charged to operating loss (income) from divested 
operations in the consolidated statement of operations related to such stay 
bonuses. At closing, McHugh also granted options to purchase an aggregate 
number of shares equal to 1.5% of the common stock of McHugh. Additional 
options in an aggregate amount corresponding to 0.5% of the common stock of 
McHugh will be awarded to certain SAI employees on the first through the 
fourth anniversaries of the acquisition date, commencing April 1, 1999. The 
exercise price of all such options is equal to the fair market value of the 
common stock of McHugh on the option grant date. The options vest ratably 
over four years, expire on the eighth anniversary of the date of grant and 
are only exercisable upon the occurrence of certain trigger events set forth 
in the option agreements. The excess of the cost of the acquisition over the 
estimated fair value of net assets acquired (including purchased in-process 
research and development, as further described below) of $49,000 was recorded 
as goodwill and is being amortized over a period of five years. The 
consolidated financial statements of the Company include the results of 
operations and cash flows of SAI from its date of acquisition through the 
date of the McHugh spin-off.

     Based on an independent appraisal, $1.1 million of the SAI 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 (included in operating loss (income) from divested 
operations) in the Company's consolidated statement of operations during the 
second quarter of 1998.

     GAGNON ACQUISITION

     On May 15, 1998, McHugh purchased all of the outstanding capital stock 
of Gagnon for $1.9 million in cash. The acquisition was financed through the 
Company's working capital facility. In addition, subject to their continued 
employment, certain employees of Gagnon have an opportunity to earn stay 
bonuses in the aggregate of $600,000 per year for each of the next three 
years. During 1998, $250,000 was charged to operating loss (income) from 
divested operations in the consolidated statement of operations related to 
such stay bonuses. At closing, McHugh also granted options to purchase an 
aggregate number of shares equal to 0.25% of the common stock of McHugh. 
Additional options in an aggregate amount corresponding to 0.25% of the 
common stock of McHugh will be awarded to certain Gagnon employees on the 
first through the third anniversaries of the acquisition date, commencing May 
15, 1999. The exercise price of all such options is equal to the fair market 
value of the common stock of McHugh on the option grant date. The options 
vest ratably over four years, expire on the eighth anniversary of the date of 
grant and are only exercisable upon the occurrence of certain trigger events 
as set forth in the option agreements. The excess of the cost of the 
acquisition over the estimated fair value of net assets acquired (including 
purchased in-process research and development, as further described below) of 
$370,000 was recorded as goodwill and is being amortized over a period of 
five years. The consolidated financial statements of the Company include the 
results of operations and cash flows of Gagnon from its date of acquisition 
through the date of the McHugh spin-off.

     Based on an independent appraisal, $1.7 million of the Gagnon 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 (included in operating loss (income) from divested 
operations) in the Company's

                                       F-13
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

consolidated statement of operations during the second quarter of 1998.

     The pro-forma results of operations of the Company would not have been 
materially different from reported results had either or both of the SAI and 
Gagnon acquisitions taken place on January 1, 1998, 1997 or 1996, 
respectively. Accordingly, pro forma financial information for the SAI and 
Gagnon acquisitions is not presented.

     As described in Note 4, McHugh and its subsidiaries, including Weseley, 
SAI and Gagnon, were spun-off by Alvey to Pinnacle and from Pinnacle to its 
common stockholders on October 27, 1998. The operating results and net assets 
of McHugh and its subsidiaries are included in the Company's consolidated 
statement of operations as operating loss (income) from divested operations 
and in the consolidated balance sheet as net assets of divested operations.

4.   DIVESTED OPERATIONS

     MCHUGH

     During October 1998, the Company issued as a dividend its 
previously held shares in McHugh to Pinnacle. On October 27, 1998, Pinnacle 
effected a spin-off of the common stock of McHugh to Pinnacle's stockholders. 
Subsequent to the spin-off and a sale of a minority interest in McHugh for 
$50 million in cash, Alvey received a cash payment from McHugh of 
approximately $36.5 million for full payment of a note established at the 
time of the spin-off representing McHugh's intercompany debt to Alvey 
totaling approximately $34.8 million on the date of the spin-off and the 
payment of a tax free dividend from McHugh to Alvey of approximately $1.7 
million. As discussed in Note 8, Alvey used $33.9 million of the proceeds to 
repurchase $30 million of its Senior Subordinated Notes due 2003 ("the 
Notes") at a premium of $3.9 million. Such payment occurred on November 25, 
1998. During October 1998, the Company purchased 343,545 shares of newly 
issued McHugh common stock for $3,435, which were issued as a dividend by 
Alvey to Pinnacle. As discussed in Note 9, the holders of Pinnacle Series A, 
Series B and Series C Preferred Stock (collectively, the "Pinnacle Preferred 
Stock") exchanged 18,600 shares of Pinnacle Preferred Stock for 343,514 
shares of newly created classes of common stock of McHugh.

     The Company also recorded a non-recurring, non-operating charge to 
income in the fourth quarter of 1998 approximating $1.2 million relative to 
costs of the McHugh spin-off.

     BUSSE

     In 1998 the Company decided that Busse was not central to its strategic 
plan, and as a result, management began the process to divest Busse. Based on 
information received as a result of this process, management believes that 
there has been an in impairment of Busse assets for which a charge to 
operations of $3.2 million was recorded in the fourth quarter of 1998.

     WHITE PRODUCT LINE

     On December 28, 1998, a product line at White was sold for approximately 
$1.2 million in cash. Costs incurred by the Company in connection with this 
sale totaled approximately $2.0 million and a loss on sale of the product 
line was recorded in the fourth quarter of 1998 totaling approximately 
$798,000. Such costs incurred by the Company consisted of the book value of 
the related inventory, a rental obligation, severance costs, a fixed asset 
write-down and warranty costs.

     The operating loss (income) of McHugh and Busse as well as the loss on 
sale of the product line are reflected in the Company's consolidated 
statement of operations as operating loss (income) from divested

                                       F-14
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

operations for the years ended December 31, 1998, 1997 and 1996. The net 
assets of McHugh and Busse are reflected in the Company's consolidated 
balance sheet as net assets of divested operations at December 31, 1998 and 
1997, respectively. Primary components of the operating (loss) income from 
divested operations and net assets of divested operations are reflected below.

     Operating (loss) income from divested operations for the three years 
ended December 31 (in thousands):

<TABLE>
<CAPTION>

                                                           1998            1997            1996
                                                        -----------     -----------     -----------
<S>                                                     <C>             <C>             <C>
         Net sales                                        $ 82,716         $85,553       $64,667
         Cost of goods sold                                 59,236          54,939        44,239
                                                        -----------     -----------     -----------
             Gross profit                                   23,480          30,614        20,428

         Selling, general and administrative
             expenses                                       21,156          17,170        14,755
         Research and development
             expenses                                        7,790           6,005         2,768
         Write-off of purchased in-process
             research and development costs                  2,800              --        11,700
         Restructuring expense                                  --           3,950            --
         Amortization expense                                  660             887           826
         Loss on sale of product line                          798              --            --
         Loss due to impairment of assets                    3,200              --            --
         Other expense (income), net                            10             (49)          (47)
                                                        -----------     -----------     -----------
             Operating (loss) income from
                  divested operations                     $(12,934)        $ 2,651       $(9,574)
                                                        -----------     -----------     -----------
                                                        -----------     -----------     -----------
</TABLE>

             Net assets of divested operations at December 31 (in thousands):
<TABLE>
<CAPTION>
                                                              1998                 1997
                                                          -----------           ----------
<S>                                                       <C>                   <C>
         Current assets                                        $3,235             $27,739
         Property, plant and equipment, net                     3,658               8,028
         Goodwill, net                                          1,385               6,006
         Other assets                                             182               2,112

         Less:
         Current liabilities                                    5,472              15,658
         Other liabilities                                        157               4,000
                                                          -----------           ----------
         Net assets of divested operations                     $2,831             $24,227
                                                          -----------           ----------
                                                          -----------           ----------
</TABLE>

                                       F-15
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. RESTRUCTURING AND OTHER CHARGES

     During the second quarter of 1997, the Company recorded a $15.3 million 
restructuring charge ($9.2 million, net of tax), of which $4.0 million is 
included in operating loss (income) from divested operations in the 
accompanying financial statements. The restructuring charge included costs to 
discontinue offering certain proprietary systems software products at one 
subsidiary, to reorganize and reduce the size of the Company's corporate 
organization and to restructure and streamline the executive and marketing 
functions at McHugh. Costs to discontinue certain proprietary software 
products consist primarily of costs to complete certain projects 
incorporating this software, payroll and facility charges during the 
phase-out of the product, severance charges, sales returns and allowances 
(relative to prior period sales) anticipated as a result of the 
discontinuance, the write-off of assets that became obsolete or slow-moving 
as a result of the discontinuance and other miscellaneous restructuring 
costs. The corporate reorganization and the McHugh reorganization charges are 
primarily severance costs. The subsequent reduction of accrued restructuring 
costs consisted primarily of the recording of sales returns and allowances, 
the write-off of obsolete and slow-moving assets, payroll and facility costs 
associated with the discontinued software products, costs to complete 
projects involving the discontinued products, severance and other costs. It 
is anticipated that costs accrued as restructuring by non-divested operations 
will be fully paid by December 31, 1999 and costs accrued as restructuring by 
divested operations (primarily severance) will be fully paid by April 30, 
2004. Costs relative to the McHugh reorganization (included in the table 
below) are included in net assets of divested operations in the consolidated 
balance sheet of the Company. (See Note 4.)

     The following table presents a roll-forward of the liabilities, both 
current and long-term, for restructuring from the initial accrual to December 
31, 1998:

<TABLE>
<CAPTION>
                               COSTS TO DISCONTINUE        CORPORATE             MCHUGH
                                PRODUCT OFFERINGS        REORGANIZATION       REORGANIZATION            TOTAL
                               --------------------      --------------       --------------       ----------------
<S>                            <C>                       <C>                  <C>                  <C>
Initial accrual                    $      8,566           $     2,768           $   3,950            $   15,284
Reductions/payments                      (5,644)               (1,352)               (746)               (7,742)
                                   ------------           ------------          -----------          -----------
December 31, 1997 balance                 2,922                 1,416               3,204                 7,542
Reductions/payments                      (2,515)                 (934)               (840)               (4,289)
Spin-off of McHugh                           --                    --              (2,364)               (2,364)
                                   ------------           ------------          -----------          -----------
December 31, 1998 balance          $        407           $       482           $      --            $      889
                                   ------------           ------------          -----------          -----------
                                   ------------           ------------          -----------          -----------

</TABLE>

     In addition, a one-time asset write-down and other non-recurring charge 
totaling $2.3 million ($1.4 million, net of tax) were recorded in the second 
quarter of 1997. These non-recurring charges to operating income primarily 
include a write-down in the carrying value of inventory at a restructured 
subsidiary, employee relocation costs associated with exiting certain product 
offerings and costs associated with bringing restructured production 
facilities up to Company standards.

     In the fourth quarter of 1997, legal, accounting and other charges 
totaling $958,000 related to a planned initial public offering of common 
stock of McHugh were charged to income as the Company decided not to proceed 
with the initial public offering.

                                       F-16
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. PROPERTY, PLANT AND EQUIPMENT, NET

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

<TABLE> 
<CAPTION>
                                                                          DECEMBER 31,
                                                                ----------------------------
                                                                    1998            1997
                                                                ------------    ------------
<S>                                                             <C>             <C>
      Land                                                      $     3,129     $     3,129
      Buildings and improvements                                     17,773          17,512
      Machinery and equipment                                         9,426           8,605
      Office and other equipment                                     16,007          13,800
      Property held under capital lease                                 949             833
                                                                ------------    ------------
                                                                     47,284          43,879
      Less:  Accumulated depreciation and amortization,
         including $377 and  $266, respectively, related
         to property held under capital lease                       (20,226)        (16,448)
                                                                ------------    ------------
                                                                $    27,058     $    27,431
                                                                ------------    ------------
                                                                ------------    ------------
</TABLE>

     Depreciation expense for leased equipment was $218,000, $126,000 and 
$114,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 
Future minimum lease payments under the capital leases and the present value 
of the net minimum lease payments at December 31, 1998 are as follows (in 
thousands):

<TABLE>
<CAPTION>
     <S>                                                           <C>
     1999                                                          $       203
     2000                                                                  303
                                                                   -----------
     Total minimum lease payments                                          506
       Less:  Amount representing interest                                  56
                                                                   -----------
     Present value of minimum lease payments at December 31,
       1998, including current portion of $185                     $       450
                                                                   -----------
                                                                   -----------
</TABLE>

     Certain other office equipment, automobiles and office space are 
utilized by the Company under operating leases which resulted in rental 
expense for non-divested operations of $3.7 million, $3.4 million and $2.9 
million in 1998, 1997, and 1996, respectively. Commitments under these leases 
total $3.3 million in 1999, $2.9 million in 2000, $2.7 million in 2001, $2.3 
million in 2002, $1.9 million in 2003 and $4.0 million in the aggregate in 
years thereafter.

                                       F-17
<PAGE>
                                       
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. GOODWILL

     Goodwill is summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                       ---------------------------------
                                                           1998                 1997
                                                       ------------         ------------
<S>                                                    <C>                  <C>
Goodwill                                               $    23,208          $    23,208
Less:  Accumulated amortization                             (4,827)              (4,063)
                                                       ------------         ------------
                                                       $    18,381          $    19,145
                                                       ------------         ------------
                                                       ------------         ------------
</TABLE>

     During 1996, the Company wrote-off $11.5 million of goodwill 
representing the full amount of remaining goodwill at one subsidiary which 
was 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.

8. LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                               1998             1997
                                                                            ----------        ----------
<S>                                                                         <C>               <C>
      11 3/8% Senior Subordinated Notes due
         January 31, 2003                                                   $   70,000        $  100,000
      Revolving Credit Facility - weighted average rate of 8.05%
         at December 31, 1998, due January 24, 2001                              6,400             6,500
      Capital lease obligations and other                                          481               488
                                                                            ----------        ----------
                                                                                76,881           106,988
      Less:  Current portion                                                       185               230
                                                                            ----------        ----------
                                                                            $   76,696        $  106,758
                                                                            ----------        ----------
                                                                            ----------        ----------
</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.

                                       F-18


<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In connection with the spin-off of McHugh on October 27, 1998, as 
described in Note 4, the holders of the Notes consented to an amendment of 
the indenture for the Notes to, among other things, (i) permit the spin-off 
of McHugh, (ii) permit Alvey to increase borrowings under the revolving 
credit facility by $10 million, and (iii) make modifications to certain 
covenants. Alvey and the trustee for the bondholders entered into the First 
Supplemental Indenture evidencing such terms on September 30, 1998. To obtain 
the consent of its bondholders, Alvey agreed to, among other things, (i) pay 
a consent premium of $46.00 in cash for each $1,000 principal amount of Notes 
for which a consent was properly delivered prior to the expiration of the 
consent solicitation (approximately $4.6 million) and (ii) immediately after 
the consummation of the spin-off, commence an offer to all of its 
bondholders, on a pro rata basis, to purchase up to $30 million in aggregate 
principal amount of the Notes at a cash purchase price equal to 113% of the 
principal amount thereof plus accrued and unpaid interest thereon, if any, to 
the date of purchase. On November 25, 1998, $30 million of Notes were 
repurchased at a premium of $3.9 million. In connection with obtaining 
bondholder consent, the Company incurred other expenses totaling $518,000. 
The consent premium, the premium on the Notes repurchased and other expenses 
incurred (approximating $9.0 million) along with the write-off of unamortized 
costs remaining from the original indenture totaling $4.5 million, were 
recorded as an extraordinary loss, less related tax benefits of $5.4 million, 
in the fourth quarter of 1998. Debt issuance costs related to the indenture 
amendment totaling $1.6 million are being amortized over the remaining term 
of the Notes.

     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 1.0% 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 2.0%; provided, 
however, the interest rate margins are subject to 0.25% increases or 
decreases based upon Alvey's achievement of 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. Effective October 26, 1998, the 
revolving credit facility was amended to (i) allow the spin-off of McHugh as 
described in Note 4, (ii) allow a $10 million increase in the commitment 
amount of the facility within 60 days of the consummation of the spin-off 
with certain restrictions, and (iii) amend certain debt covenants. Effective 
December 3, 1998, the Company increased the commitment amount under the 
revolving credit facility to $35 million. Debt issuance costs approximating 
$618,000 were incurred in amending the revolving credit facility at October 
26, 1998 and are being amortized with certain other costs over the life of 
the remaining facility. Unamortized costs incurred in 1996 with the original 
issuance of the revolving credit facility totaling $332,000, net of 
applicable income tax benefits of $133,000, were written off during the 
fourth quarter of 1998 and accounted for as an extraordinary loss. At 
December 31, 1998, $28.0 million of borrowing capacity within the current 
debt covenant limitations remained available under the Revolving Credit 
Facility.

     Under the Credit Agreement, the Company has provided standby letters of 
credit at December 31, 1998 in the amount of $621,000 as security for payment 
of the Company's workers' compensation claims. Outstanding letters of credit 
bear a 2.0% 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 at December 31, 1998.


                                      F-19
<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.   REDEEMABLE PREFERRED STOCK AND RECAPITALIZATION OF PINNACLE

     Concurrent with the consummation of the Debt Offering (see Note 8), 
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 and Cumulative Exchangeable Preferred 
Stock. 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, 1998 and 1997, 
accumulated dividends on the redeemable preferred stock totaled $10.3 million 
and $11.6 million, respectively.

     As part of the spin-off of McHugh as described in Note 4, the holders of 
Pinnacle Preferred Stock exchanged 18,600 shares of Pinnacle Preferred Stock 
for 343,514 shares of newly created classes of common stock of McHugh. 
Additionally all of the outstanding warrants from the Preferred Stock 
Offering were exercised in connection with the spin-off of McHugh. A portion 
of the original issuance costs of the Pinnacle Preferred Stock approximating 
$659,000, net of applicable tax benefits, were recorded as an extraordinary 
loss in the fourth quarter of 1998.

10.  INCOME TAXES

     Income tax expense (benefit) relative to loss before income taxes and 
extraordinary item is comprised of (in thousands):
<TABLE>
<CAPTION>
                                                         1998            1997            1996
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
Current
   Federal                                           $     1,583     $       243     $       211
   State                                                     785             715             496
   Foreign                                                   146             130
                                                     ------------    ------------    ------------
                                                           2,514           1,088             707
Deferred
   Federal                                                  (116)         (3,108)         (1,645)
   State                                                    (813)         (2,037)           (971)
                                                     ------------    ------------    ------------
                                                     $     1,585     $    (4,057)    $    (1,909)
                                                     ------------    ------------    ------------
                                                     ------------    ------------    ------------
</TABLE>


                                      F-20

<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     A reconciliation of the income tax benefit per the statutory federal 
income tax rate to the reported income tax expense (benefit) on loss before 
income taxes and extraordinary item is as follows (in thousands):
<TABLE>
<CAPTION>
                                                         1998            1997            1996
                                                     ------------    ------------    ------------
<S>                                                  <C>             <C>             <C>
Income tax benefit at statutory rate                 $    (2,301)    $    (3,868)    $   (10,476)
Expense (benefit) resulting from:
   Write-off of nondeductible purchased
      in-process research and development                    952                           4,318
   Valuation allowance on loss on impaired assets          1,120
   Impact of McHugh spin-off                                 806
   Write-off of nondeductible goodwill                                                     3,907
   State taxes, net of federal tax benefit                   (10)           (852)           (226)
   Foreign taxes                                             448             (21)
   Nondeductible goodwill amortization                       423             433             448
   Other                                                     147             251             120
                                                     ------------    ------------    ------------
                                                     $     1,585     $    (4,057)    $    (1,909)
                                                     ------------    ------------    ------------
                                                     ------------    ------------    ------------
</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 (excluding those of divested
operations) are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                        -----------------------------
                                                             1998            1997
                                                        ------------    -------------
<S>                                                     <C>             <C>
Accrued insurance claims                                $     3,085     $      2,518
Inventory reserves                                            1,652            2,696
Warranty reserves                                             1,766            1,579
Employee cost accruals                                        5,614            3,103
Revenue timing differences                                      683            1,325
Accrued professional fees                                     1,255              757
Restructuring costs                                             380            1,778
Net operating loss carryforwards                              3,414            1,833
Other                                                           542              370
                                                        ------------    -------------
   Total deferred tax assets                                 18,391           15,959
                                                        ------------    -------------
Revenue timing differences                                      829            1,418
Property related items                                        5,158            5,262
Other                                                         1,078            1,124
                                                        ------------    -------------
   Total deferred tax liabilities                             7,065            7,804
                                                        ------------    -------------
   Net deferred tax asset                               $    11,326     $      8,155
                                                        ------------    -------------
                                                        ------------    -------------
</TABLE>

     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, 1998 will be utilized to 
offset future taxes. Therefore, no valuation reserve related to such deferred 
tax assets has been recorded at December 31, 1998 and 1997, respectively.


                                      F-21

<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The Company's net operating loss carry forwards expire in 2000 through 
2014.

     During 1997, the Company established a Foreign Sales Corporation 
subsidiary organized under the provisions of the Tax Reform Act of 1984.

11. EMPLOYEE BENEFIT AND STOCK OWNERSHIP PLANS

     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 for non-divested operations were $592,000, 
$541,000 and $478,000 for the years ended December 31, 1998, 1997 and 1996, 
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 $2.1 
million, $2.1 million and $1.8 million related to non-divested operations is 
included in the consolidated financial statements in 1998, 1997 and 1996, 
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 $663,000, $685,000 and $593,000 
for the years ended December 31, 1998, 1997 and 1996, respectively. The 
Company may be obligated, under the Multi-Employer Pension Plan Amendment Act 
of 1980, for a portion of 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 former Chief 
Executive Officer. Beginning January 1998, the Company pays an annual benefit 
to this individual of $237,500 for the longer of the remainder of his life 
and10 years. At December 31, 1998 and 1997, $2.1 million and $2.2 million, 
respectively, was accrued for such benefits. Of the total accrued for this 
plan, $1.9 million was classified as a long-term obligation at each of 
December 31, 1998 and 1997. Expense of $202,000, $373,000 and $260,000 was 
recorded in 1998, 1997 and 1996, respectively.

     Employee notes receivable outstanding related to purchases of Pinnacle 
stock to Pinnacle at December 31, 1998 and 1997 totaled $1.4 million and $1.3 
million, respectively, and are reflected as a reduction of the net investment 
of Parent.

     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. The 
option terms expire eight to ten years subsequent to the grant date. 
Immediately prior to the spin-off of McHugh as described in Note 4, the 
holders of options to purchase common stock of the Company received a like 
number of options to purchase McHugh's common stock. Holders of options 
retained the same number of options in the Company with adjustments made to 
the exercise prices to reflect, in the good faith determination of Pinnacle's 
board of directors, the relative valuations of the Company and McHugh. All 
1998 grants and forfeitures occurred prior to the spin-off of McHugh. Average 
exercise prices below have been adjusted to reflect values as adjusted in 
connection with the spin-off of McHugh. At December 31, 1998, exercise prices 
of options outstanding generally ranged between $6 and $13 per share with 
11,991 options at $.38 per share and 5,000 shares at $25.42 per share. 
Exercise prices approximated estimated fair value at the dates of grant. The 
weighted average remaining life to expiration at December 31, 1998 of options 
exercisable between $6 and $13 is five years, for those at $.38 is four years 
and for those at $25.42 is eight years. At December 31, 1998, options to 



                                      F-22

<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

purchase 60,841 shares of common stock have vested. These options are 
summarized as follows:
<TABLE>
<CAPTION>
                                                       WEIGHTED
                                                        AVERAGE                SHARES
                                                       EXERCISE                SUBJECT
                                                         PRICE                TO OPTION
                                                     --------------         -------------
<S>                                                  <C>                    <C>
Outstanding at January 1, 1996                       $      6.68                 36,691
Options granted in 1996                                     9.41                 78,825
Options forfeited in 1996                                   6.36                 (5,000)
                                                                            ------------
Outstanding at December 31, 1996                            8.64                110,516
Options granted in 1997                                     8.09                  5,500
Options forfeited in 1997                                  12.71                 (3,839)
                                                                            ------------
Outstanding at December 31, 1997                            8.47                112,177
Options granted in 1998                                    25.42                  5,000
Options forfeited in 1998                                   7.15                 (3,427)
                                                                            ------------
Outstanding at December 31, 1998                     $      9.26                113,750
                                                                            ------------
                                                                            ------------
</TABLE>

     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 SFAS 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 loss for 1998 and 1997 would not have been 
materially different from reported net loss for those years. The weighted 
average fair value of options granted is estimated on the date of grant using 
the Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
                                                          1998            1997
                                                      ------------    ------------
<S>                                                     <C>              <C>
ASSUMPTIONS
   Weighted average risk-free interest rate                  6.2%            6.2%
   Weighted average expected life of option               5 years         6 years
</TABLE>

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


                                      F-23

<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 1998 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.

     On January 13, 1998, Mitchell J. Weseley, former President and Chief 
Executive Officer of WSDC, commenced an arbitration in Connecticut Superior 
Court against WSDC alleging breach of contract and violation of the 
Connecticut Unfair Trade Practices Act ("CUTPA"). On January 28, 1998, WSDC 
filed counterclaims against Mr. Weseley principally alleging that he had 
breached his contractual obligations and fiduciary duty to WSDC by soliciting 
WSDC employees to resign from WSDC, by disparaging the management of Pinnacle 
and McHugh and by breaching the terms of a covenant not to compete contained 
in Mr. Weseley's employment contract. Arbitration proceedings concluded on 
June 3, 1998 and on August 31, 1998, a decision was rendered in the 
arbitration hearings in favor of Mr. Weseley. McHugh has resumed payments to 
Mr. Weseley of his salary, bonus and benefits, of which future payments will 
total approximately $2.2 million. The liability for such payments was 
previously recorded in the restructuring accrual related to the McHugh 
reorganization as discussed in Note 5 above. Effective with the McHugh 
spin-off, such liability was recorded at McHugh and is no longer included in 
the Company's financial statements. Damages, if any, will be determined by 
the arbitrator either ex parte or as part of a second hearing. To the extent 
such amounts paid pursuant to judgements related to lawsuits with Mr. Weseley 
exceed $3.4 million, Alvey has agreed to pay any such excess liability up to 
a maximum of $4.0 million, and McHugh has agreed to deliver a promissory note 
evidencing McHugh's obligation to repay Alvey any amounts so paid by Alvey.

     On April 16, 1998, Mannesmann Dematic Rapistan Corp. ("Rapistan") filed 
suit against Buschman in the United States District Court for the Western 
District of Michigan alleging infringement of three Rapistan patents relating 
to Buschman induction systems (the "Rapistan Dispute"). Rapistan was seeking 
to permanently enjoin Buschman from infringing those patents and both 
compensatory and treble damages. Related to Buschman's counterclaims and 
affirmative defenses raised in this litigation, on June 5, 1998 the Company 
filed a separate suit against Mannesmann Corporation ("Mannesmann") in the 
United States District Court for the Southern District of New York on the 
basis of the representations, warranties and disclosure obligations of 
Mannesmann with respect to the patents subject to the Rapistan Dispute at the 
time the Company acquired Buschman from Mannesmann in 1992. A settlement 
agreement was executed between Alvey, Buschman, Mannesmann and Rapistan on 
January 4, 1999. On January 27, 1999, the court formally entered an order of 
dismissal of the Rapistan litigation.

     In February 1999, the Chapter 7 Trustee for Foxmeyer Corporation, 
Foxmeyer Drug Company, Healthcare Transportation System, Inc., Merchandise 
Coordinator Services Corporation, Foxmeyer Software, Inc., and Health Mart, 
Inc. (collectively, "Foxmeyer") filed suit against Buschman, White, Pinnacle, 
Alvey and McHugh in the United States District Court for the District of 
Delaware alleging fraud, negligence and breach of contract relating to 
conveyor, carousel and warehouse management systems delivered and installed 
in Foxmeyer's distribution warehouse at Washington Court House, Ohio. Only 
McHugh and Buschman (with White as its subcontractor) had contracts with 
Foxmeyer. The monetary relief sought by the Foxmeyer complaint is 
unspecified; however compensatory and punitive damages are claimed. At this 
time, the Company has not been served, and therefore, answers and affirmative 
defenses have not been filed on behalf of the Company. Discovery has not 
commenced and a trial date has not been set, but the Company intends to 
contest the allegations made and vigorously defend the matter.

     On 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 


                                      F-24

<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

annual increases of 3%. Additionally, the Company is obligated to compensate 
one related party for certain merger, acquisition and financing transactions. 
In connection with the spin-off and related transactions as described in Note 
4, Vestar Capital Partners ("Vestar") and Mammoth Capital Inc. received 
$900,000 and $400,000 in fees, respectively, for services rendered to 
Pinnacle and Alvey pursuant to such consulting agreements. In addition, 
pursuant to an agreement between Vestar and the placement agent for a 
minority investment in McHugh, which was consummated immediately after the 
spin-off, Vestar received $500,000 of the fee payable by McHugh to the 
placement agent for additional services Vestar rendered to McHugh. McHugh 
paid this fee to Vestar after the spin-off was consummated. Concurrent with 
the Debt Offering (see Note 8) and the Preferred Stock Offering (see Note 9), 
$750,000 was paid to one related party in January 1996. 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 8), 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.

     Pursuant to the terms of an operating lease, the Company paid $0.9 
million in 1996 to a related party.

     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 of up to one year should the executive's 
employment be terminated. In addition, the agreements provide for annual 
bonuses of up to 125% of the executive's annual salary based upon the 
achievement of pre-established performance targets.

13.  SUPPLEMENTAL BALANCE SHEET INFORMATION

     Accrued expenses include the following (in thousands):
<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                             -------------------------------
                                                                  1998              1997
                                                             --------------     ------------
<S>                                                          <C>                <C>
     Project expenses                                        $       6,058      $     6,354
     Bonuses, incentives and profit sharing                          9,244            7,625
     Wages and salaries                                              1,315            1,942
     Vacation and other employee costs                               5,762            6,824
     Interest expense                                                3,367            4,867
     Accrued professional fees                                       2,118              831
     Restructuring costs                                               889            3,627
     Other expenses                                                  6,629            4,385
                                                             --------------     ------------
                                                             $      35,382      $    36,455
                                                             --------------     ------------
                                                             --------------     ------------
</TABLE>

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

     The following quarterly financial information for the two years ended 
December 31, 1998 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.


                                      F-25

<PAGE>
                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Summarized quarterly financial data for fiscal 1998 and 1997 appear below
(in thousands):
<TABLE>
<CAPTION>
                                                                    NET INCOME
                                 NET SALES        GROSS PROFIT        (LOSS)
                               ------------       ------------     ------------
<S>                            <C>                <C>              <C>
1998
First quarter                  $     72,182       $    17,407      $       416
Second quarter                       77,941            19,691             (226)
Third quarter                        70,213            19,797           (1,581)
Fourth quarter                       79,413            19,577          (15,710)
                               -------------      ------------     ------------
                               $    299,749       $    76,472      $   (17,101)
                               -------------      ------------     ------------
                               -------------      ------------     ------------
1997
First quarter                  $     65,922       $    15,148      $      (143)
Second quarter                       69,464            13,644          (10,531)
Third quarter                        73,941            16,978            1,730
Fourth quarter                       78,342            17,441            1,625
                               -------------      ------------     ------------
                               $    287,669       $    63,211      $    (7,319)
                               -------------      ------------     ------------
                               -------------      ------------     ------------
</TABLE>

     The 1998 fourth quarter net loss includes extraordinary losses of $8.7 
million, net of tax benefit, related to the write-off of debt issuance costs, 
preferred stock issuance costs and other costs of the McHugh spin-off, a 
non-recurring, non-operating charge to income approximating $1.2 million 
relative to costs of the McHugh spin-off, a loss on impairment of assets 
totaling $3.2 million and a loss on sale of a product line totaling $798,000. 
Such losses are further discussed in Notes 4, 8 and 9.

     The 1997 second quarter net loss includes a one-time restructuring 
charge of $9.2 million, net of applicable income tax benefits, and one-time 
asset write-down and other non-recurring charges totaling $1.4 million, net 
of applicable income tax benefits (see Note 5).


                                      F-26

<PAGE>

                       ALVEY SYSTEMS, INC. AND SUBSIDIARIES

             RULE 12-09 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
     Column A               Column B      Column C      Column D       Column E      Column F
     ---------              ---------     --------      --------       --------      --------
     Valuation              Balance at    Charged to    Charged to                   Balance at
    and Reserve             Beginning     Costs and       Other                       End of
     Accounts               of Period     Expenses      Accounts      Deductions      Period

<S>                         <C>           <C>           <C>            <C>           <C>

                               FOR THE YEAR ENDED DECEMBER 31, 1996 (a)

Accounts Receivable Reserve  $  658       $  392         $175(1)       ($  463)       $  762
</TABLE>

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

<TABLE>
<S>                          <C>          <C>            <C>           <C>            <C>
Inventory Reserve            $1,924       $  507         $176(1)       ($  360)       $2,247
</TABLE>

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

                               FOR THE YEAR ENDED DECEMBER 31, 1997 (a)
<TABLE>
<S>                          <C>          <C>            <C>           <C>            <C>
Accounts Receivable Reserve  $  762       $2,694         $  0          ($2,387)       $1,069

Inventory Reserve            $2,247       $1,106         $  0          ($  609)       $2,744
</TABLE>


                               FOR THE YEAR ENDED DECEMBER 31, 1998 (a)
<TABLE>
<S>                          <C>          <C>            <C>           <C>            <C>
Accounts Receivable Reserve  $1,069       $  373         $  0          ($  785)       $  657

Inventory Reserve            $2,744       $  818        ($269)(1)      ($  732)       $2,561
</TABLE>

     (1) Reflects decrease to inventory reserves due to sale of product line.

(a) Balances and changes related to divested operations have been excluded from
    this schedule.


                                      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 11, 1999, 
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.


PRICEWATERHOUSECOOPERS LLP
St. Louis, Missouri
February 11, 1999



                                      S-2


<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 Olivette, State of Missouri, on March 26, 1999.

                                        ALVEY SYSTEMS, INC.

                                        By:   /s/  Stephen J. O'Neill
                                            ----------------------------------
                                                   Stephen J. O'Neill
                                                   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/  Stephen J. O'Neill                    President and Chief Executive Officer                 March 26, 1999
--------------------------------           (Principal Executive Officer)
     Stephen J. O'Neill


/s/  James A. Sharp                        Senior Vice President, Chief Financial                March 26, 1999
--------------------------------           Officer, Secretary and Assistant Treasurer
     James A. Sharp                        (Principal Financial and Accounting Officer)


/s/  William R. Michaels                   Chairman of the Board                                 March 26, 1999
--------------------------------
      William R. Michaels


/s/  Stephen J. O'Neill                    Director                                              March 26, 1999
--------------------------------
     Stephen J. O'Neill


/s/  Christopher C. Cole                   Director                                              March 26, 1999
--------------------------------
     Christopher C. Cole


/s/  Frederick R. Ulrich, Jr.              Director                                              March 26, 1999
--------------------------------
      Frederick R. Ulrich, Jr.


/s/  Prakash A. Melwani                    Director                                              March 26, 1999
--------------------------------
      Prakash A. Melwani


/s/  James L. Elrod, Jr.                   Director                                              March 26, 1999
--------------------------------
     James L. Elrod, Jr.


/s/  Charles A. Dill                       Director                                              March 26, 1999
--------------------------------
      Charles A. Dill
</TABLE>