<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QS.B.
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Period Ended March 31, 1996
-----------------------------------------------------
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------- ----------------------
Commission File Number 0-19167
------------------------------------------------------
TOPRO, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1042227
- ---------------------------------------- -------------------------------
(State of Incorporation) (IRS Employer ID Number)
2525 West Evans Avenue Denver, Colorado 80219
- ---------------------------------------- --------------------------------
(Address of principle executive offices) (city) (state) (zip code)
(303) 935-1221
-------------------------------------------------
Registrant's telephone number including area code
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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. (See Item 6b on page 13 for detailed
explanation)
YES X NO
--------- ---------
Transitional Small Business Disclosure format (check one):
YES NO X
--------- ---------
The number of shares outstanding of the Registrant's $0.0001 par value common
stock on May 17, 1996 was 6,320,554
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
TOPRO INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 180,694 $ 359,408
Cash - certificates of deposit 350,000
Receivables:
Trade, net of allowance for doubtful accounts 2,309,194 3,245,875
Insurance claim 34,144 34,144
Other receivable 163,719 178,088
Cost and estimated earnings in excess of
billings on uncompleted contracts 2,067,738 1,853,357
Inventories 145,297 151,346
Prepaid expense 28,462 256,423
Assets of discontinued operations 1,912,368 740,380
----------- ------------
Total current assets 6,841,616 7,169,021
INVESTMENT 700,147 -
PROPERTY AND EQUIPMENT, AT COST:
Building and land - 850,000
Furniture and equipment 1,068,650 1,631,855
Vehicles 272,782 272,782
Leasehold improvements 117,018 408,344
----------- ------------
1,458,450 3,162,981
Less accumulated depreciation (1,059,469) (1,172,871)
----------- ------------
Net property and equipment 398,981 1,990,110
OTHER ASSETS
Other assets 192,058 336,732
Goodwill - 2,431,082
TOTAL ASSETS $ 8,132,802 $ 11,926,945
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 3
TOPRO INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 MARCH 31
1995 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Line-of-credit $ 314,982 $ 867,795
Current portion of long-term debt:
Related parties 30,000 80,000
Financial institutions and other 141,554 406,140
Bridge loans - 62,500
Accounts payable 3,844,167 3,311,835
Billings in excess of costs and estimated
earnings on
uncompleted contracts 552,789 555,563
Accrued expenses 694,826 831,302
Deferred gain - bldg. 24,342 24,342
------------ -------------
Total current liabilities 5,602,660 6,139,477
LONG-TERM DEBT, NET OF CURRENT PORTION:
Related parties 620,000 -
Financial institutions and other 579,545 3,142,025
------------ -------------
Total long-term debt 1,199,545 3,142,025
DEFERRED GAIN
Sale of bldg. 68,970 50,714
Sale of DMC Investment 297,983
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share;
authorized 10,000,000 shares; no shares issued
Common stock, par value $.0001 per share; authorized
200,000,000 shares; 3,175,628 and 6,042,554 shares
issued and outstanding, respectively 318 604
Additional paid-in capital 4,178,701 6,886,786
Accumulated deficit (2,917,392) (4,590,644)
------------ -------------
Total stockholders' equity 1,261,627 2,296,746
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 8,132,802 $ 11,926,945
=========== ============
</TABLE>
The accompanying notes are an integral party of the consolidated financial
statements.
3
<PAGE> 4
TOPRO INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
MARCH 31 MARCH 31
1995 1996 1995 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Control Systems Integration $ 3,137,833 $ 5,859,049 $ 8,132,422 $ 11,235,777
COST OF SALES:
Control Systems Integration 2,299,530 4,851,477 5,690,267 8,552,439
----------- ----------- ----------- ------------
GROSS PROFIT 838,303 1,007,572 2,442,155 2,683,338
EXPENSES
Sales expense 162,006 394,229 377,039 680,477
General & administrative expense
----------- ----------- ----------- ------------
468,650 937,204 1,433,715 2,135,293
----------- ----------- ----------- ------------
630,656 1,331,433 1,810,754 2,815,770
INCOME (LOSS) FROM SYSTEMS INTEGRATION 207,647 (323,861) 631,401 (132,432)
LOSS FROM DISCONTINUED OPERATIONS - TECH (123,542) (64,460) (293,805) (483,449)
OTHER INCOME (EXPENSE):
Gain on sale of assets 0 6,124 2,023 85,345
Interest expense (26,190) (53,291) (87,962) (147,646)
Other 2,016 46,668 3,305 52,547
----------- ----------- ----------- ------------
(24,174) (499) (82,634) (9,754)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES 59,931 (388,820) 254,962 (625,635)
INCOME TAX BENEFIT (PROVISION): 0 0 0 0
DISCONTINUED OPERATIONS:
Income (Loss) from discontinued
operations - Sharp (419,762) 0 (995,069) 0
Loss on disposal - Sharp Electric 0 (665,392) 0 (1,050,772)
----------- ----------- ----------- ------------
NET INCOME (LOSS) $ (359,831) $(1,054,212) $ (740,107) $ (1,676,407)
=========== =========== ============ ============
NET INCOME (LOSS) PER SHARE:
Continuing Operations 0.03 (0.10) 0.11 (0.16)
Discontinued operations
----------- ----------- ------------ ------------
(0.18) (0.16) (0.42) (0.26)
----------- ----------- ------------ ------------
Net Income (Loss): $ (0.15) $ (0.26) $ (0.31) $ (0.42)
----------- =========== ============ ============
WEIGHTED AVERAGE SHARES
OUTSTANDING $ 2,364,421 $ 4,015,528 $ 2,364,421 $ 4,015,528
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
TOPRO, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31
-------------------------------------
1995 1996
-------------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (Loss) from continuing operations $ 254,962 $ (625,635)
Adjustments to reconcile net cash provided by (used in) operating
activities
Depreciation 264,392 141,374
Goodwill 37,922
Allowance for Doubtful accounts (116,894) 34,497
Gain on sale of assets (85,345)
Changes in operating assets and liabilities: (Increase) decrease in:
Accounts receivables - trade (407,016) (110,608)
Other receivables 0 54,631
Insurance claim receivable 251,157 0
Cost & estimated earnings in excess of billing (398,320) 329,550
Inventories (84,893) 69,863
Prepaid expenses (101,085) (168,405)
Deferred note costs (171,786)
Other assets (82,647) (223,930)
Increase (decrease) in:
Accounts payables 725,888 (1,158,593)
Accrued expenses (444,474) (330,256)
Billings in excess of costs & estimated earnings 298,745 (184,413)
Income (loss) from discontinued operations (995,069) (1,050,772)
Change in assets - from discontinued operations - Sharp Electric 0 1,280,991
------------ ------------
Net cash provided by (used in) operating activities (835,254) (2,160,915)
CASH FLOW FROM INVESTING ACTIVITIES:
Cash acquired in acquisition of ACT 190,964
Purchase of equipment (100,089) (304,470)
Purchase of investment (400,000)
Proceeds from notes receivable 0 41,713
Purchase of certificate of deposit 0 (350,000)
Proceeds from the sale of investment 0 350,000
------------ ------------
(500,089) (71,793)
</TABLE>
Continued next page
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
TOPRO, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31
1995 1996
<S> <C> <C>
Continued from previous page:
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short term debt 10,215,393 8,276,433
Principal payment on short term (9,657,003) (8,813,450)
Proceeds from long term debt 525,000 2,500,000
Principal payment on long term debt (175,740) 0
Proceeds from sale of stock 441,486 458,239
----------------- ----------------
Net cash provided by financing activities 1,349,136 2,421,222
INCREASE (DECREASE) IN CASH 13,793 188,514
CASH: BEGINNING OF PERIOD 117,499 170,894
----------------- ---------------
CASH: END OF PERIOD $ 131,292 $ 359,408
================= ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
1. INTERIM FINANCIAL INFORMATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the financial position as of March 31, 1996 and June 30, 1995, and the
results of operations and statement of cash flows for the periods
presented. Management believes all such adjustments are of a normal and
recurring nature The statements presented reflect the pooling of interest
of MDCS, Inc., a wholly owned subsidiary, acquired in July 1995 and the
purchase of Advanced Control Technology, Inc. (ACT) as of January 1, 1996.
The acquisition of ACT was recorded as a purchase method accounting for the
transaction recording three months of operation for the period ending March
31, 1996.. The March 31, 1995 financial results have been restated to
account for the acquisition of MDCS purchase as a pooling of interest
method of accounting. The results of operations for the nine month period
ending March 31, 1996 and 1995 are not necessarily indicative of the
results to be expected for the full year.
2. TRADE RECEIVABLES
The following information summarizes trade receivables:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
----------------------------------------
1995 1996
---------- ----------
<S> <C> <C>
Contract receivables:
Completed contracts $ 186,071 $ 708,532
Uncompleted contracts 1,496,107 2,253,366
Retainage 301,501 420,642
-------------- ---------------
1,983,679 3,382,540
Other trade receivables 262,402 11,833
-------------- ----------------
Less allowance for doubtful accounts 2,246,081 3,394,373
(100,000) (148,497)
-------------- ---------------
$ 2,146,081 $ 3,245,876
============ ==============
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
The following information is applicable to uncompleted contracts:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
----------------------------------------
1995 1996
---------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 16,130,741 $ 21,622,279
Estimated earnings (769,123) 1,899,825
--------------- --------------
15,361,618 23,522,104
Less billings to date (13,807,891) (22,224,309)
--------------- --------------
$ 1,553,727 $ 1,297,795
=============== ==============
These amounts are included in accompanying
balance sheets under the following captions:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,892,373 $ 1,853,357
Billings in excess of costs and estimated
earnings on uncompleted contracts (338,646) (555,563)
--------------- --------------
$ 1,553,727 $ 1,297,794
=============== ==============
</TABLE>
7
<PAGE> 8
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
4. LINE-OF-CREDIT AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
-----------------------------------
Line-of-credit: 1995 1996
-------------- ---------- -----------
<S> <C> <C>
The Company has a $475,000 line-of-credit pursuant to a loan
agreement with a financial institution. Outstanding
borrowings bear interest at prime rate plus 2.00% (9.00% at
June 30, 1995 and 8.75% on December 31, 1995). The line-of-
credit agreement has a maturity date of December 31, 1995.
$ 314,982 $ -
ACT has a $1,000,000 line-of-credit pursuant to a loan
agreement expiring April 17, 1996 with a financial
institution. Outstanding borrowings bear interest at prime
rate plus 2.5%. The line of credit is collateralized by a
first security interest in all receivables The line of
credit can not exceed 80% of eligible receivables. The loan
is currently being renegotiated with the financial
institution. The financial institution agreed in principle
to a work-out arrangement under which the outstanding debt
will be extended and split to an operating line of $500,000
expiring February 28, 1997 and a term loan of $500,000,
expiring August 31, 1997 secured by a first position in all
receivables, inventory, equipment and a deed of trust on the
real property. The new agreement has not been finalized as
of May 15, 1996. 867,795
The Company has a long term 9% convertible debenture dated
February 21, and March 7, 1996 with a small business
investment fund. Outstanding borrowings bear interest at 9%
and interest is payable monthly. If the debenture is not
sooner redeemed or converted a mandatory principal
redemption is due beginning March 1, 1999 in the amount of
ten dollars ($10) per thousand dollars ($1,000) of the then
remaining principal amount outstanding. The convertible
debenture is convertible in the Company's common stock at
$1.50 per share. The loan is collateralized by all the
assets of Topro, ACT, and MDCS. The loan has certain
restrictive covenants described below. 2,500,000
Long term debt payable to related parties consist of:
Note payable to the brother of an officer, interest at prime
plus 3% payable quarterly, (9.00% at June 30, 1995 and 8.75%
December 31, 1995). Payment of principal will be due as
follows: commencing August 31, 1996, four quarterly
principal payments of $7,500; commencing August 31, 1997,
four quarterly principal payments of $18,750; commencing
August 31, 1998, seven quarterly principal payments of
$22,500. The balance is due June 1, 2000, collateralized by
securities. 570,000 -
</TABLE>
8
<PAGE> 9
4. LINE-OF-CREDIT AND LONG-TERM DEBT - continued:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
---------- --------------
<S> <C> <C>
ACT has a mortgage note payable to a bank, due in monthly
installments of $2,941 including interest at 11%, a balloon
payment of remaining balance is due November 1, 1996,
collateralized by a first deed of trust on land and 263,502
building.
ACT has a four year promissory note bearing interest at 8%
payable to ElectroCom Automation. Monthly payments of
$6,103 are due beginning May 1, 1996. The promissory note
is secured by a second position on the real estate of ACT. 250,000
ACT has a non-interest bearing note payable to legal counsel
payable over 30 months at $5,000 monthly beginning April 1,
1996. The note has been discounted using an effective
interest rate of 10.25%. 131,830
Notes payable to two officers and directors, 10% due on
demand, unsecured. 80,000 80,000
Various notes payable, due in maximum monthly installments
totaling $1,526 through March 1998, collateralized by
equipment and vehicles. 44,988 22,388
Note payable to a former employee at, an interest rate of
12%, payable $10,000 on January 1, 1996 and 6 monthly
installments of $ 8,547. The note is unsecured. 30,446
Note payable, financial institution, prime plus 2.00% (9.00%
at June 30, 1995 and 8.75% on December 31, 1995,
respectively), due April 1996, payable in monthly
installments of $13,889 plus interest, collateralized by
receivables and other assets and personally guaranteed by
certain officers and directors. 111,111 -
Senior convertible notes, 10% interest payable semiannually
on December 31 and March 31. Due in March 2000,
collateralized by securities at June 30, 1995 and cash
equivalent instrument at March 31, 1996. The notes are
convertible into units consisting of one share of common
stock and one warrant at the rate of $.67 per unit. The
warrants are exercisable to purchase one share of common
stock at $1.00, expiring the earlier of 3 years from date of
conversion or December 31, 2001. 375,000 350,000
Note payable to an individual, interest at prime plus 3%
payable quarterly, (9.00% at June 30, 1995 and 8.75%
December 31, 1995, respectively). Payment of principal will
be due as follows: commencing August 31, 1996, four
quarterly principal payments of $2,500; commencing August
31, 1997, four quarterly principal payments of $6,250;
commencing August 31, 1998, seven quarterly principal
payments of $7,500. The balance is due June 1, 2000,
collateralized by securities. 190,000 -
</TABLE>
9
<PAGE> 10
4. LINE-OF-CREDIT AND LONG-TERM DEBT - continued:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1995 1996
---------- ----------
<S> <C> <C>
12% Subordinated 180-day promissory note - Series 1995-B is
due along with accrued interest due on June 25, 1996. The
note is collateralized by all the assets of the corporation
junior to the first security interest of the financial
institution. The note can be converted at the option of the
holder into any subsequent equity offering. In the event of
default, the note will convert at a rate of $.50 per share. - 62,500
-------------- ----------------
-
Total $ 1,686,081 $ 4,558,461
------------- ----------------
Less current portion (486,536) (1,416,435)
------------- ----------------
Long-term portion $ 1,199,545 $ 3,142,026
============= ================
</TABLE>
10
<PAGE> 11
TOPRO, INC. SUBSIDIARIES
CONSOLIDATED
NOTES TO FINANCIAL STATEMENTS
5. DISCONTINUED OPERATIONS
Sharp Electric Construction Co. Inc.- When Sharp Electric was
discontinued in the Company's fiscal 1995, a remaining contract
backlog of $2,800,000 remained and a subcontractor was hired to
complete the backlog. Reserves were then established to cover the
estimated net costs of executing the backlog. Current forecast costs
of completing that backlog exceed the original estimates, resulting in
the current loss on disposal of $1,050,072. As of March 31, 1996, the
remaining contract backlog is $886,000 with all work scheduled for
substantial completion by July 30, 1996. While the current charge to
loss on disposal is estimated to cover future cost to complete these
projects, these costs are estimated and there is some risk they could
again be over-run. The uncertainty exists because the cost estimated
are provided by the subcontractor which have proven inaccurate with
past estimates. The subcontractor estimates provided in December were
exceeded resulting in the present loss recognized
Tech Sales, Inc.- In December 1995, the board of directors formally
approved the discontinuance of Tech Sales, Inc.("Tech Sales"). On
January 30, 1996, the Company, formally discontinued the Tech Sales
operations. The Company operated its distributorship and
manufacturer's representation business through Tech Sales offering a
number of products in the instrument and control-valve markets in the
Rocky Mountain states. These products were sold through
representation contracts with more than 20 original equipment
manufacturers. These contracts could be canceled, upon thirty days
notice, given by either party. The thirty-day notice was given to all
manufactures on January 30, 1996 of the Company's decision to cancel
all contracts. This required Tech Sales operations continued through
February 28, 1996 to meet its thirty-day obligation to the
manufactures. The Company also incurred additional severance and
material costs in the discontinuance of Tech Sales.
Prior to the discontinuance of Tech Sales, the Company, in June of
1995, sold the assets of its Utah office to the local management
group. The Company had determined the Utah operations were of little
strategic value and historic profit contribution was negative. Also,
the Company terminated its distribution agreement for DMC products
effective December 1, 1995. This was a product line supported by Tech
Sales through its contacts in the industry. The Company had
determined the margin opportunity in this activity was not consistent
with its profit objectives.
6. SALE OF INVESTMENT IN DMC SHARES
On November 8, 1995, Company completed the sale of its remaining 3,255
share interest in Direct Measurement Corporation ("DMC"), a
privately-held Colorado corporation, to three parties, including J.
Neal Ethridge. Mr. Ethridge is a former director of the Company and
is the brother of the Company's Chairman. The purchase price of
$1,110,000 (approximately $341 per share) was paid with $350,000 in
cash, and exchange of the aggregate of $760,000 of the Company's
promissory notes held by Mr. Ethridge and one of the other parties to
the transaction. The purchase price, which is greater than the
Company's book value of the shares, was determined by negotiation
between the parties and reflects their consideration of the potential
realizable value of the investment in DMC.
The shares were sold subject to the agreement that in the event a bona
fide offer is made prior to March 1, 1997 which results in the sale of
the DMC shares, the Company will be entitled to receive one-half of
any consideration in excess of $341 per share (less interest) and will
be obligated to pay to the purchasers the difference (but no more than
$105 per share) between the $341 per share purchase price and a lower
subsequent sale price. This equates to a guaranteed minimum being
paid to Topro of $236 per share or $768,180. The remaining portion of
the sale price of $341,775 has been deferred until a determination of
future sale price is consummated. Also, an amount equal to 10% per
annum on the initial purchase price of $1,110,000 will accrue from the
closing date of this transaction until payment is received from a
subsequent purchaser of the shares, and such amount will be added to
the $341 per share to be retained by sellers prior to calculating the
50% share of the excess consideration payable to Company. No interest
will be owed should the final closing price not exceed the guaranteed
minimum payment to Topro. The interest accruing on this note reduced
the gain on the sale by $43,792 for the period ending March 31, 1996.
11
<PAGE> 12
As described above, payment of the purchase price included exchange of
promissory notes held by Mr. Ethridge and another party. On October
20, 1993, prior to becoming a director of the Company, Mr. Ethridge
loaned $750,000 to a subsidiary of the Company. During fiscal 1995, at
a time when Mr. Ethridge was a director of the Company, this note was
canceled and Mr. Ethridge and a non-affiliated party extended loans of
$570,000 and $190,000, respectively, to the Company in exchange for
promissory notes secured by a pledge of DMC shares, subordinated to
prior rights of holders of the Company's 10% Senior Convertible Notes.
The Company had pledged the DMC shares as collateral to secure
repayment of its outstanding 10% Senior Convertible Notes. As
substitution for the DMC shares sold on November 8, 1995, the Company
pledged $350,000 in cash equivalent instruments to secure repayment of
the 10% Senior Convertible Notes.
7. ACQUISITION OF ADVANCED CONTROL TECHNOLOGY, INC
On February 21, 1996, the Company, through a merger undertaken by a
newly formed subsidiary, acquired all the outstanding capital stock of
Advanced Control Technology, Inc.("ACT") an independent Control
Systems Integrator located in Albany, Oregon. ACT's core business
parallels that of the Company's, with emphasis on some
different/additional markets and a generally more technically
sophisticated product offering. ACT is focused on the following
vertical markets: aerospace: food processing, grain handling; wood
products; petrochemical processing; power generation; and mobile fleet
management. The Company acquired all of the outstanding capital stock
of ACT, in exchange for a maximum of 1,657,000 restricted shares of
the Company's Common Stock of which 414,251 shares have been escrowed,
to be released to the shareholders of ACT upon review of the December
31, 1995 balance sheet of ACT, Inc. and acceptance of proposed
adjustments, if any. An additional 65,000 restricted shares were
issued to a creditor of ACT in settlement of debt owing.
The acquisition of ACT, a wholly owned subsidiary, is accounted for as
a purchase method. The Company has incorporated the three months
results ending March 31, 1996 for ACT in its present financial
statements. The Company was active in the management of the ACT
beginning in December 1995. The Company provided services in the form
of required overhead reduction cuts, provided cash for operating
activities and the negotiated workout with ElctromCom settlement and
the bank lending institution beginning in December 1995.
8. EARNINGS PER SHARE
Earnings per share are computed on the basis of the weighted average
number of common shares outstanding during the period.
12
<PAGE> 13
PART 1 - FINANCIAL INFORMATION - CONTINUED
ITEM 2 - Management's Discussion And Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter in conjunction with the acquisition of ACT, the
Company on February 21, 1996 issued $1,500,000 and on March 5, 1996 issued
$1,000,00 of 9% convertible debentures to Renaissance Capital Growth & Income
Fund III, Inc. to provide working capital funding. This indebtedness is
collateralized by a security interest in all the assets of the Company
including assets of ACT, Inc and MDCS, Inc. Interest on the unpaid principal
balance will be paid monthly beginning April 1, 1996. Mandatory monthly
principal installments, if the debenture is not sooner redeemed or converted,
are due commencing on March 1, 1999, in principal installments of $10,000 per
$1,000 of the then remaining principal amount. The outstanding principal
amount of this debenture is redeemable at 120% of par if the closing bid price
for the Company's common stock averages at least $5.00 for 20 consecutive
trading days and is supported by a minimum of $0.25 in net earnings per share.
The conversion price for the convertible debentures shall be $ 1.50 per share.
In addition, the Company issued to Renaissance 375,000 warrants exercisable to
purchase 375,000 shares of the Company's common stock at $2.00 per share
expiring on March 31, 1999. The convertible debenture requires certain
financial covenants of debt to equity of 3.6 to 1, current ratio of 1.1 to 1,
minimum tangible net worth of $300,000, and times interest earned of 2 to 1 to
be met. The Company is not in compliance with minimum tangible net worth of
$300,000 and times interest earned of 2 to 1 as of March 31, 1996.
During the quarter ended March 31, 1996, the Company borrowed an
additional $226,500 through the issuance of 12% Subordinated 180-Day Promissory
Notes - Series 1995-B due along with accrued interest in July 1996. The notes
are collateralized by all the assets of the corporation junior to the first
security interest of the financial institution. The notes can be converted at
the option of the holder into any subsequent equity offering. In the event of
default, the note will convert at a rate of $.50 per share. The proceeds of
the notes were used to extend a secured working capital line to ACT, Inc. and
provide working capital needs for the Company. The Company on March 29, 1996
converted $417,500 of the issuance of 12% Subordinated 180-Day Promissory Notes
- - Series 1995-A and B in a subsequent stock offering. Subsequent to March 31,
1996, an additional $32,500 of the notes were converted in this subsequent
stock offering. As of May 17, 1996, $30,000 of the notes remain outstanding.
The Company in March 1996 had a private offering outstanding for up to
$900,000 or 720,000 shares of common stock. The Company closed on a portion of
this offering resulting in net proceeds after commissions of $63,380 through
March 31, 1996 along with the conversion of $417,500 of the 12% Subordinated
180-Day Promissory Notes being converted. Subsequent to March 31, 1996, the
Company closed on an additional $347,500 for this stock offering. This closing
resulted in $32,500 in 12% Subordinated 180-Day Promissory Notes being
converted along with an additional $315,000 in cash resulting in net proceeds
to the company of $270,200 after commissions.
For the nine months ended March 31, 1996, the Company's cash increased
$189,000. LOSSES FROM CONTINUING OPERATIONS totaled $626,000 with operating
charges of $483,000 for the discontinued Tech Sales included in this result and
INCLUSIVE OF CHARGES for depreciation, goodwill, reserve for bad debts, and
gain on sale of assets, totaling $128,000. Decreases in other receivables,
cost & estimated earnings in excess of billings, inventories, and change in
assets of discontinued operations of Sharp Electric, resulted in a change of
$1,735,000 FUNDS WERE USED to finance increases in trade receivables, prepaid
expenses, deferred note costs, other assets, and decreases in accounts
payables, accrued expenses, and billings in excess of costs and estimated
earnings totaling $2,348,000. Funds were used for discontinued operations of
Sharp Electric of $1,051,000. INVESTMENTS were made in capital equipment and
software development costs capitalized in the period of $305,000, proceeds of
$42,000 were received on a note receivable, the sale of the Company's
investment of $350,000 in DMC, purchase of a one year $350,000 CD, and the cash
acquired in the ACT acquisition of $191,000. FINANCING ACTIVITIES from short
and long term debt, net of repayments, required $537,000 and the sale of stock
generated, net of issuance costs $458,000. The Company issued $2,500,000 in
convertible debentures resulting in net proceeds to the company of $2,328,000.
DMC SALE - The Company sold its remaining shares of DMC stock for a
combination of debt and cash for a total purchase price of $1,110,000. Debt of
$760,000 owed to a former director and third party was canceled and additional
cash of $350,000 was received by the company. A guaranteed minimum will be
paid to Topro of $236 per share or $768,180. The remaining portion of the sale
price of $341,775 has been deferred until a determination of future sale price
is consummated. Any future sale price that exceeds the $236 guaranteed minimum
per share will result in interest of 10% on the purchase price accruing. The
deferred gain was reduced this quarter by $44,000 for the accrual of the
interest due on the purchase price.
13
<PAGE> 14
ACCOUNTS RECEIVABLE ISSUE - In calendar year 1994, the Company was
engaged by an electrical contractor ("EC") to supply control system
integration services on a municipal water treatment facility in California.
As the work progressed, the EC fell significantly behind in its payment
obligations and eventually ended up being taken over by its bonding
company. In May of 1995, the EC owed the Company $319,000. The EC's
payment obligations are covered by payment and performance bonds. In June
1995, the Company received indication of a forthcoming settlement offer
from the general contractor on one of the projects for the EC's receivable.
It was felt that the Company had reasonably reserved for the portion of the
receivable that was disputed by the EC. The offer for settlement has since
been withdrawn by the general contractor. The Company has retained legal
counsel in California to review the adequacy of our stop notice filings and
determine the Company's legal standing. Stop notices have been issued to
the appropriate municipalities reserving 125% of these funds from payment
to the contractors. The EC has countered with a back charge of $450,000 on
this project. This claim has been reviewed and evaluated by an independent
third party (ITP) who engages in providing construction/systems dispute
resolution and management services to both owners and
contractor/subcontractors and suppliers on projects similar to the EC's
project. The ITP view is the back charge claims are not valid. The ITP
also believes the Company has back charges of between $200,000 and $250,000
in claims against the EC for excessive cost on the projects directly
attributed to the EC's delays. The ITP also believes the Company has a
direct claim against the municipality for owner-directed changes and
delays. The Company is in the process of perfecting its claims position.
The Company has not made any material resolution to the outstanding issues
with regard to these receivables in the quarter.
The Company has no material commitments for external capital
expenditures.
14
<PAGE> 15
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1995
REVENUES increased by $2,721,000 or 87% to $5,859,000 in the 1996
period versus total sales of $3,138,000 in 1995 for the control system
integration operations. The increase is associated with the acquisition of ACT
resulting in additional sales for the quarter of $2,268,000. The other units
had increased sales of $384,000 for Topro and $69,000 for MDCS compared to the
same period in 1995. The control systems integration operations unbilled
backlog at March 31, 1996 was $7,269,000 for the Topro operation and $345,000
for MDCS, and $2,960,000 for the ACT operation.
GROSS PROFIT MARGINS in the control system integration operation were
$1,008,000 for the period ending March 1996 compared to $838,000 for the three
months ending March 1995. Although gross profit margin had increased, the
gross profit percentage decreased from 27% in 1995 to 17% in 1996. The
decrease is the result of jobs that the Company downgraded in the quarter
resulting in greater costs than will be recognized on the contract. Topro
gross profit margin decreased $434,000 or 58% from the same period in 1995.
Topro reported a gross profit of $750,000 in 1995 compared to a gross profit of
$317,000 in 1996. This is expected to reverse in the up-coming quarter with
better margin jobs and the completion of the lower margin municipal jobs that
affected quarterly earnings. The opportunity for transition to industrial
projects with improved gross margin continues and our analysis of current jobs
in house represents higher profit margins than reflected in the current
results.
S,G&A EXPENSES increased $701,000 from $631,000 in the 1995 period to
$1,331,000 in the 1996 period. SALES EXPENSES increased $232,000 from $162,000
in 1995 to $394,000 in 1996. The most significant increase is associated with
the ACT acquisition resulting in $263,000 additional costs over the previous
three month period in 1995. The selling expense for Topro decreased by $30,000
for the period. This decrease is largely attributed to a reduction in
interdivisional support provided sales and marketing resulting in a reduction
of $20,000. Also salaries have been reduced by $8,000 over the previous period
due to the elimination and realignment of sales personnel. GENERAL AND
ADMINISTRATIVE EXPENSE increased $469,000, from $469,000 in the 1995 period
compared to $938,000 in 1996. Of this increase $264,000 of the increase is
associated with the ACT purchase and the three months result of ACT include in
the current quarter. MDCS operations accounted for $88,000 of the increase in
the quarter ending March 1996. The Topro operation contributed $117,000 to the
increase in the period. Although Topro corporate salaries were down $125,000
over the same period in 1995 other items offset this decline. The main
contributor to the increase was associated with increased travel in the quarter
relating to acquisitions resulting in $13,000 increase over the previous
period. Accounting fees were up $23,000 over the previous period directly
relating to tax returns and the MDCS audit for an 8K filing. Additionally,
debt amortization expense for the quarter was $13,000 associated with debts
incurred over the last twelve months. Outside services increased $33,000
relating to a settlement with a former employee. Shop supplies were up $40,000
over the same period from the previous year.
INTEREST EXPENSE increased $27,000 in 1996 over 1995 due to the
increased borrowings for the funding that took place for the acquisition of
ACT, from the debt acquired in the ACT transaction resulting in an additional
$29,000 of interest expense.
OTHER INCOME increased $51,000 over the same period in 1995. This is
associated with $10,000 recognized from the sale of assets and other income of
Topro. ACT realized a $41,000 of other income from the elimination of old
payables that were subsequently negotiated to a lower amount.
NET LOSS FROM CONTINUING OPERATIONS was $389,000 down from a profit of
$60,000 in 1995. This decline is associated with the completion of low margin
municipal projects that reduced gross profit margin from 34% in 1995 to 20% in
1996 and the remaining lower margin industrial jobs from fiscal 1995 being
completed in this quarter. Also the increased costs associated with the
increased G& A expense as discussed above. Also, additional costs were
incurred in discontinuing Tech Sales, Inc resulting in $64,000 additional
charge for the quarter were included in the net loss from continuing operation.
This was recognized from supporting personnel being maintained through March
1996 to finish existing commitments. MDCS incurred a $111,000 loss on a job
resulting in a reduction of its earnings for the quarter of $61,000. This job
has been downgrade with reserve taken and it is not expected to affect future
quarters' earnings.
DISCONTINUED OPERATIONS losses consist of the results of the
completion of the Sharp Electric backlog. The loss for the quarter was larger
than expected due to continued performance issues on the existing backlog with
the contractor being utilized to finish the projects. The prior cost to
complete estimates provided to Topro by the subcontractor have been unreliable
and significant reserves were taken in the quarter to provide for the
anticipated total future costs of completion of the two remaining contracts
both scheduled for substantial completion in July. Though the contracts are
near completion, given the prior performance of the subcontractor there exists
some possibility of future cost overruns.
15
<PAGE> 16
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE NINE
MONTHS ENDED MARCH 31, 1995.
REVENUES increased by $3,015,000 or 37% to $11,147,000 in the 1996
period versus total sales of $8,132,000 in 1995 for the control system
integration operations. The increase is associated with the acquisition of ACT
resulting in additional sales for the quarter of $2,268,000. The other
entities had increased sales of $306,000 for Topro and $440,000 for MDCS
compared to the same period in 1995. The control systems integration
operations unbilled backlog at March 31, 1996 was $7,269,000 for the Topro
operation and $345,000 for MDCS, and $2,960,000 for the ACT operation.
GROSS PROFIT MARGINS in the control system integration operation were
$2,683,000 for the period ending March 1996 compared to $2,442,000 for the nine
months ending March 1995. Although gross profit margin had increased the gross
profit percentage decreased from 30% in 1995 to 24% in 1996. The decrease is
the result of jobs that the Company downgraded in the quarter resulting in
greater costs than will be recognized on the contract. This is expected to
reverse in the up-coming quarter with better margins jobs and the completion of
the lower margin municipal jobs that Affected quarterly earnings. The
opportunity for transition to industrial projects with improved gross margins
continues.
S,G&A EXPENSES increased $1,005,000 from $1,811,000 in the 1995 period
to $1,816,000 in 1996 period. SALES EXPENSE increased $303,000 from $377,000
in 1995 to $680,000 in 1996. Of this increase $263,000 is associated with the
ACT acquisition for the quarter. Topro's selling expenses increased $41,000
over the corresponding period in 1995. This is associated with increased
commissions expense of approximately $26,000 over the previous period.
Increased marketing expenses of $11,000 were associated with additional
marketing materials and information focused on the industrial market place.
Travel and trade show expenses are up $11,000 over the previous period. Salary
expense decreased $14,000 over the same period due to realignment of sales
personnel. GENERAL AND ADMINISTRATIVE EXPENSE increased $704,000, from
$1,434,000 in the 1995 period compared to $2,137,000 in 1996. Of this increase
$264,000 is associated with the acquisition of ACT not previously reported in
the quarter for the 1995 period. MDCS operation increased expenses by $191,000
over the same nine month period in 1995. This is largely attributed to the
increased operations from the increased sales of 53% year to date. Topro
corporate was up $62,000 over the same period in 1995. Corporate incurred
$28,000 in debt amortization expense associated with debt raised for funding
activities being amortized over the life of the debt. Outside services for
corporate increased $11,000. These increases are associated with $12,000 of
employee training in the engineering section to support changing platforms.
Outside services for engineering increased $42,000 over the same period in 1995
associated with a settlement with a former employee. Non job related travel
expenses was up $23,000 over the same period in 1995. Shop supplies increased
$60,000 over the previous period in 1995 creating a significant unfavorable
variance.
INTEREST EXPENSE increased $60,000 in 1996 over 1995 associated with
the additional debt acquired in the ACT acquisition. Also Topro's interest
expense increased $30,000 over the same period in 1995 largely attributed to
the increased debt incurred from the acquisition of ACT, the issuance of the
12% notes, and the $2,500,000 in convertible debentures.
OTHER INCOME increased $133,000 over the same period in 1995. This is
associated with a $79,000 recognized gain from the sale of the DMC investment
in November 1995 and the recognition of the deferred gain from the sale of the
company's office building in 1995. ACT realized $41,000 of other income from
the elimination of old payables that were subsequently negotiated to a lower
amount.
NET LOSS FROM CONTINUING OPERATIONS were $626,000 in 1996 compared to
a profit of $255,000 in 1995. The decline is attributed to the completion of
low margin municipal projects and the remaining lower margin industrial
projects from fiscal 1996 being completed in the second quarter along with the
increased G& A expense as discussed above. Also a significant reduction in a
MDCS job of $111,000 reduced the overall operations results for the period.
Also, costs from the discontinued operations of Tech Sales, Inc resulted in
$483,000 in operating charges for the nine months of operation ending March
1996 included in the above figure.
DISCONTINUED OPERATIONS losses consist of the results of the
completion of the Sharp Electric backlog. Significant write-downs were taken
on the Sharp Electric backlog in the quarter. The total loss from
discontinued operations was $1,051,000 for the nine months ending March 1996.
Further losses in the two remaining contracts
16
<PAGE> 17
requiring completion is uncertain but possible. The Sharp Electric margin
forecast was significantly downgraded in the quarter based on the experience of
the efforts of the third party contractor in completing the projects. The
estimates provided by the contractor have proven unreliable and with the
contracts being significantly complete have resulted in a clearer picture of
the remaining costs.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
2.1 Agreement and Plan of Merger dated February 21, 1996.
Incorporated by reference to exhibit 2.1 of the Form
8K dated March 6, 1996
10.1 Renaissance Capital Growth & Income Fund III, Inc. -
Loan agreement. Incorporated by reference to exhibit
10.1 of the Form 8K dated March 6, 1996
27 Financial Data Schedule
b) Reports on Form 8-K
During the quarter covered by this report, the Company filed;
1) a current report on Form 8K, dated February 9, 1996,
reporting a disposition of assets pursuant to Item 2. 2)a
current report on Form 8K, dated March 6, 1996, reporting the
acquisition of a company pursuant to Item 2, the filing of
financial statements pursuant to Item 7, and the funding of
convertible debentures pursuant to Item 5. 3) an amended
current report on Form 8K dated March 29, 1996, amended to
include pro forma financial statements for the disposition of
Tech Sales, Inc. 4) an amended current report on From 8K
dated April 22, 1996 amending the financial statements for the
disposition of Tech Sales, Inc.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
TOPRO, INC.
-------------------------------------
(Registrant)
Date: May 20, 1996 /s/ John Jenkins
------------------------ -------------------------------------
John Jenkins
President and Chief Executive Officer
Date: May 20, 1996 /s/ Thomas Tennessen
------------------------ -------------------------------------
Thomas Tennessen
(Principal Accounting Officer)
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description Page No.
- -------- ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated February 21, 1996.
Incorporated by reference to exhibit 2.1 of the Form 8K
dated March 6, 1996
10.1 Renaissance Capital Growth & Income Fund III, Inc. -
Loan agreement. Incorporated by reference to exhibit 10.1
of the Form 8K dated March 6, 1996
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-QSB
FOR THE PERIOD ENDING MARCH 31, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 359,408
<SECURITIES> 350,000
<RECEIVABLES> 3,458,107
<ALLOWANCES> 0
<INVENTORY> 2,004,703
<CURRENT-ASSETS> 7,169,021
<PP&E> 3,162,981
<DEPRECIATION> 1,172,871
<TOTAL-ASSETS> 11,926,945
<CURRENT-LIABILITIES> 6,139,477
<BONDS> 0
<COMMON> 604
0
0
<OTHER-SE> 2,296,142
<TOTAL-LIABILITY-AND-EQUITY> 11,926,945
<SALES> 11,235,777
<TOTAL-REVENUES> 11,235,777
<CGS> 8,552,439
<TOTAL-COSTS> 2,815,770
<OTHER-EXPENSES> 137,892
<LOSS-PROVISION> 34,497
<INTEREST-EXPENSE> 147,646
<INCOME-PRETAX> (625,635)
<INCOME-TAX> 0
<INCOME-CONTINUING> (625,635)
<DISCONTINUED> (1,050,772)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,676,407)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
