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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A No. 2
X Annual report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the fiscal year ended June 30, 1996
Or
Transition report pursuant to section 13 or 15 (d) of the Securities
- --- Exchange Act of 1934
Commission file number: 0 - 19167
TOPRO, INC.
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(Exact name of Registrant as specified in its charter)
Colorado 84-1042227
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(State or other jurisdiction of I.R.S. Employer I. D. Number
incorporation or organization)
2525 West Evans Avenue, Denver, Colorado 80219
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (303) 935-1221
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 Par Value
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Common Stock
Redeemable Purchase
Warrants
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 is not contained herein and will not be included
herein, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-KSB
or any amendment to this Form 10-KSB: X .
---
State issuer's revenues for its most recent fiscal year: $ 20,633,000
Shares of common stock, $.0001 par value, outstanding as of October 10,
1996: 6,639,403 shares. Aggregate market value of voting stock held by
non-affiliates of the registrant on October 10,1996 $11,203,070
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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TOPRO, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Page
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<S> <C> <C> <C>
Item 1 Description of Business 3
Item 2 Description of Property 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
Part II
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Item 5 Market for Common Equity and Related Stockholder Matters 8
Item 6 Management's' Discussion and Analysis or Plan of Operation 8
Item 7 Financial Statements 14
Item 8 Changes in and Disagreements with Accountants on Accounting 15
and Financial Disclosure
Part III
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Item 9 Directors and Executive Officers; Compliance with Section 16(a)
of the Exchange Act 15
Item 10 Executive Compensation 16
Item 11 Security Ownership of Certain Beneficial Owners and Management 19
Item 12 Certain Relationships and Related Transactions 19
Part IV
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Item 13 Exhibits and Reports on Form 8-K 21
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Development of Business - Fiscal 1994 through Fiscal 1996
Topro, Inc. (the "Company"), a leading control systems integrator,
provides software applications, system design and configuration in the
manufacturing process control industry. Process control systems are
sophisticated computer controlled packages of measurement instruments and other
devices that provide automatic control of manufacturing processes while
acquiring, converting and storing process data for use by operators and
management information systems. Manufacturing and process industries utilize
the Company's products and services to realize greater efficiencies in
operation.
From inception through fiscal 1994, the Company operated primarily
through Tech Sales, Inc. ("TI") and its subsidiary Topro Systems Integration,
Inc. ("TSI"). TI was organized in Colorado in 1974. In October 1991 TI was
acquired by the Company, a Colorado corporation which had no prior operations.
Through TI the Company acted as a manufacturer's representative and distributed
components and devices used in process- control applications. Through TSI, the
Company engaged in designing, developing, assembling, marketing, and servicing
integrated process control systems (control systems integration). TSI's
services historically were marketed primarily to governmental and municipal
customers for water and waste-water treatment plants and, to a lesser extent,
to industrial customers in the chemical, petroleum, mining, electric power, and
food processing industries.
During fiscal 1995 the board appointed a new CEO, John Jenkins, as
part of a plan to address and improve the Company's performance. In March 1995,
Mr. Jenkins proposed and the Board approved a new strategic plan based on
re-focusing the Company on its core business of control systems integration.
During fiscal 1995 and 1996, the Company's operations were
re-structured to focus solely on the business of control systems integration.
During this period, the Company discontinued certain non-core activities and
acquired other control system integration companies. Through these strategic
acquisitions, the Company quickly has expanded its system integration business
into new regions and gained access to additional markets in which these
acquired companies had an established presence and customer base.
In parallel, as a critical aspect of this new strategy, in fiscal 1995
the Company discontinued certain activities, specifically those conducted
through TI and through Sharp Electric Construction Company ("SEC").
The Company had acquired SEC, a full service electrical contracting firm, in
August 1993, but was markedly unsuccessful in its attempt to successfully
integrate and manage that business. The Company had expected the acquisition of
SEC to improve the Company's ability to secure process control projects with
electrical construction requirements, and to expand its ability to handle field
installations. However, the synergy expected in the acquisition did not
materialize. In spite of various management changes and attempts to
strategically reposition the business, SEC continued to produce severe losses.
Accordingly, in May 1995 the Company sold certain assets of SEC to Piper
Electric Company ("PEC") and contracted with PEC to provide labor and
management services for the completion of the existing SEC backlog on a cost
plus fee basis. The Company retained financial responsibility for uncompleted
contracts from the discontinued operations with a backlog of $3,425,000 on May
1, 1995. The two largest contracts with an expected completion date August 1996
comprised $2,596,000 of this backlog on May 1, 1995. All projects save one were
completed prior to July 1996 and the one remaining is expected to be completed
October 18, 1996. The SEC operating losses from date of acquisition and
forecasted additional costs of discontinuing the business are reflected in the
Company's financial statements. A charge from discontinued operations of
$2,122,000 was taken in fiscal year 1995. The actual costs of completing
contracts during 1996 greatly exceeded costs forecasted at the close of fiscal
1995, resulting in a loss on disposal of $1,871,000 for fiscal 1996.
During fiscal 1995, management determined that the operations of the
Utah regional office of TI, the Company's distribution and manufacturer's
representation subsidiary, were of little strategic value and historic profit
contribution was negative. As part of management's new strategic plan, in
fiscal 1995 the Company sold the assets and business of TI's Utah regional
office to local management. Following this disposition, management reconsidered
the value of the remaining TI operations in light of the Company's renewed
focus on control systems
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integration. As a result, TI and its operations were formally discontinued on
January 30, 1996. The costs of terminating the TI operations are fully absorbed
in the Company's fiscal year ended June 30, 1996.
In fiscal 1993, the Company began to purchase shares of Direct
Measurement Corporation ("DMC"), a privately held corporation organized to
develop, promote and market products utilizing a unique gas flow measuring
method, for which the Company was granted certain distribution rights. In
fiscal 1995 the Company acquired additional shares and sold a portion of its
holding. In November 1995, the Company sold its remaining 3,255 share interest
in DMC (see "Certain Relationships and Related Transactions") and in December
1995 abandoned efforts to distribute and promote DMC products. This decision
was due in part to the Company's shift away from distribution to control
systems integration and due in part to management's reassessment of the
risk-reward potential of this arrangement to the Company. The Company had
incurred significant expense in product introduction in fiscal 1995, and sales
for fiscal year 1995 were only $41,000.
Commencing in fiscal 1995, the Company has expanded its core business
of control system integration through select acquisition of system integrators
in new geographical and application markets. The acquisition strategy is
founded on identifying quality, regional or specific market niche control
systems integrators and then using their established infra-structures to bring
the Company's products and services to new markets. Acquisition of systems
integrators in other regions provides opportunities for the Company to expand
more rapidly and efficiently than it could through development of new regional
markets from infancy. In addition, the acquired integrators bring significant
new vertical market expertise and technologies to the Company that can be
applied in the Company's established geographical markets. The Company believes
this broad geographical coverage and position in multiple vertical markets is a
competitive advantage.
A first step in executing this strategy was the July 1995 acquisition
of Management, Design and Consulting Services, Inc (MDCS), an Atlanta based
system integrator, in exchange for 200,000 shares of the Company's Common
Stock. With the additional personnel and other resources of the Company, MDCS
is able to accept larger projects which it previously turned down. MDCS sales
grew by 45% in the first year after acquisition. Historically, a substantial
portion of MDCS customers have been Original Equipment Manufacturers ("OEMs"),
companies which build or import equipment for use in manufacturing or
processing operations, which have purchased industrial control hardware,
technical design and programming services to adapt the equipment they
manufacture for the end user. MDCS' OEM customers are based in the southeastern
U.S. or in many cases are the U.S. headquarters of a foreign equipment
provider. In addition, corporate customers contract directly with MDCS for
services. Such projects typically involve upgrades of existing factory
automation systems. In these cases, MDCS typically designs new and updated
automation systems to enhance the customer's existing equipment and processes.
The majority of MDCS' end-user customers are located in the southeastern U.S.
During fiscal 1995, the Company opened two satellite sales and
engineering offices in certain regions in an attempt to access and support
specific customers and markets. During fiscal 1996, management determined that
these efforts were not effective in establishing and supporting a market
presence, and returned its focus to expansion through acquisitions.
In February 1996, the Company acquired Advanced Control Technology, Inc.
("ACT"), a leading independent control system integrator headquartered in
Albany, Oregon, in exchange for 1,657,000 "restricted" shares of common stock.
Concurrently with the acquisition of ACT, the Company received $1.5 million in
debt financing through sale of a 9% Convertible Debenture to Renaissance
Capital Growth & Income Fund III, Inc. ("Renaissance Capital"). Proceeds of
that debt financing, as well as proceeds from sale of an additional $1.0
million Convertible Debenture in March 1996 have been used to finance expansion
of the Company's operations following the acquisition of ACT. See "Management's
Discussion and Analysis."
ACT is a leading control system integrator with acknowledged
leadership in certain vertical markets including wood products, aerospace,
grain handling, and computer aided dispatch. ACT annual revenues averaged
approximately $11,000,000 in the three years prior to acquisition.
On May 30, 1996, the Company acquired Vision Engineering Corporation
("VEC"), a leading control systems integrator based in Cypress, California with
sales and engineering offices in Sacramento, Los Angeles, Phoenix and Chicago
and sales offices in Boston and Puerto Rico, in exchange for 200,000
"restricted" shares
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of common stock and 900,000 common stock options exercisable at prices of $2.25
and above per share. The consideration for VEC will be increased by 100,000
bonus shares in the event VEC meets certain profit goals during the first two
quarters of fiscal 1997. The Company sold an additional $1,000,000 Convertible
Debenture to Renaissance Capital in June 1996 to provide additional working
capital.
VEC enjoys a significant market position in the food processing,
pharmaceutical packaging and electronic component manufacturing industries. Its
expertise in machine vision applications is expected to contribute a strong
growth dynamic to the total organization. VEC revenues averaged approximately
$9,000,000 in the three years prior to acquisition.
Management believes these acquisitions have given the Company
significant competitive advantages. The Company's combined staff allows it to
address projects of size and scope that other smaller control system
integrators cannot. The Company's geographic reach through branch offices
positions it to address the total national needs of customers with diverse
manufacturing locations.
The Company has retained key management from each of the acquired
organizations, and in some cases promoted these people to senior management
positions in the combined organization. As the transactions were effected
through the exchange of shares there is now a significant share-ownership
position in the Company's executive management tier.
Narrative Description of Business
The Company is an industrial technology company that develops,
produces and markets control system integration products and services that
provide factory automation solutions to industry. The Company operates this
business through its wholly-owned subsidiaries, Topro Systems Integration, Inc.
("TSI"), based in the Company's Denver, Colorado facilities, MDCS,
headquartered in Atlanta, Georgia, ACT, based in Albany, Oregon, and VEC,
headquartered in Cypress, California. VEC has branch offices in Sacramento,
California and Chicago, Illinois. TSI has a branch office in Phoenix, Arizona.
ACT has a branch office in Seattle, Washington.
Through these subsidiaries, the Company provides software
applications, system design and configuration for manufacturing process control
systems to industry. The Company markets its systems, products and services to
industrial customers in the chemical, petrochemical, mining, electric power,
and food processing industries, and to users of advanced communication networks
that are based on fiber optics, microwave, and radio. The acquisition of ACT
and VEC have given the Company access to the aerospace, wood products, fleet
management, pharmaceutical and electronics industries. Through these
acquisitions, the Company has established significant local presence in key
geographical markets including Seattle, Portland, Sacramento, Los Angeles,
Phoenix, Denver, Chicago, and Atlanta. Further, the Company has added
substantially to its library of industrial software applications and specific
vertical market or industry experience.
The control systems and services that the subsidiaries provide are based
on Programmable Logic Controllers(PLC), Computer Numerical Controllers(CNC),
DDC Controllers networked with an Operator Interface, usually a Personal
Computer (PC), using both text and graphics to display the plant or system
operation and performance characteristics usually in real-time. The information
systems are either PC based or mini-computer based and are networked to the
Control System to gather operational data concerning the plant or system to
enable management personnel to make better decisions about the operation of the
plant or system. Distribution of these systems is done through a direct sales
force reporting to a National Sales Manager and through a distribution network
for certain products.
These control and information systems use off-the-shelf hardware
manufactured by suppliers such as Allen-Bradley, GE, Square D, Modicon, TI,
Digital Equipment Corporation, IBM, Hewlett Packard and others. The purchased
products are assembled into a system at the various branch locations
through-out the company and are "married" to the software that is written at
those locations. Performance tests are conducted on each system and are
witnessed and approved by the customer prior to shipment for installation.
The contracts for the systems, including hardware and software, are
negotiated and are usually fixed price for a well defined scope of work. Before
commencing a project, the Company works with the customer to develop:
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a "functional description" document defining what the project will accomplish;
a design document to define how the project will be done to satisfy those
objectives; and acceptance test procedures, which define in advance how the
project will be determined to be "complete."
During fiscal 1996, the Company's subsidiaries provided process control
systems and services to national firms, including the following:
<TABLE>
<S> <C> <C>
Amgen Weyerhauser Coastal Chem
Baxter Nestle Shell
Johnson & Johnson Coca-Cola Conoco
Boeing Nabisco Cypress Minerals
Lockheed/Martin Rockwell Semiconducter BHP
Georgia Pacific Hewlett Packard Cargill
</TABLE>
The Company also serves the market for water and waste-water treatment
facilities. This market, while having some industrial components, is largely
composed of a governmental/municipal customer base. The Company acquires this
work through bid and negotiation with electrical and general contractors. The
competitive bid projects, as a rule, support profit margins that are narrower
than those obtained on industrial contracts.
In Denver the Company operates a service division that provides
instrumentation calibration and some small scope system configuration services
to local customers on a "demand" service basis. This work is generally done at
the customer facility. The group employs eight to ten technicians on a full
time basis. These technicians also occasionally support larger system
integration engineering projects.
Competition
Many firms throughout the United States provide control systems
integration services comparable to those offered by the Company. The Company
believes that the dominant practice among firms in the control systems
integration business is to focus their competitive efforts on a single
geographic region or a particular niche in the marketplace. Examples include
vertical market niches (water and waste-water treatment, power-generation,
petroleum, mining, and chemical industries) and/or functional niches
(programmable logic control, distribution control systems, and data
acquisition). By focusing upon a given niche, most firms typically acquire
expertise, specialized resources, and business relationships that result in a
competitive advantage within the niche.
The Company believes that through its acquisition strategy, it has
assembled a broad range of specific market niche expertise which, when combined
with its large resource base and diverse geographical presence, gives it
competitive advantages over most other firms. Because of its resource base, the
Company can address projects of a size and scope many other integrators cannot.
The Company's geographic reach gives it a competitive advantage in serving
customers that have multiple manufacturing facilities spread across the U.S.
While most independent control system integrators are much smaller
than the Company, there are some firms which are larger and better financed
than the Company. The Company may compete in certain markets with these firms
but not generally across all markets.
Research and Development
The company does not expend any funds on research and development
through either customer funded projects or internal research projects. Costs
are incurred in specific system projects that employ existing technologies for
which feasibility has previously been established to develop applications
within specific industries. These applications are produced to have broad
application in specific industries. Production costs of the software are
capitalized. This investment is designed to create both improved margins
through repeat sales of applications in specific vertical markets and improve
the Company's competitive position in these markets.
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Backlog
At June 30, 1995 and June 30, 1996 the order backlog of control
systems was $6,315,000 and $8,837,000, respectively. Various contracts require
the Company to perform certain system integration functions only after others
have performed work on a specific project. This restriction prevents contracted
backlog from being completed in an ensuing twelve month period. $800,000 of the
June 30, 1996 backlog cannot be reasonably filled in the period ending June 30,
1997.
Employees
As of June 30, 1996, the Company had 294 full-time employees. That
number includes 162 engineers, designers, and project managers; 54 wiring,
assembly, and fabrication workers; 23 sales persons; 10 service technicians;
and 45 administrative personnel. No employee is represented by a labor union
and the Company believes its employee relations to be good.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains leased facilities and one owned building in the
locations listed below.
<TABLE>
<CAPTION>
Current
Square Term of Annual
Function Location Feet Lease Lease Costs
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<S> <C> <C> <C> <C>
Corporate Headquarters and 2525 West Evans Ave 32,000 April 1999 $ 148.000
Topro Systems engineering Denver, CO
and manufacturing facilities
Topro Systems engineering 1800 West Broadway 6,000 Jan 2001 $ 51,000
facilities Phoenix, AZ
Advanced Control Technology 2830 Ferry Street 13,000 Owned (1) N/A
engineering and manufacturing Albany, OR
facilities
Advanced Control Technology 2514 Ferry Street 12,000 July 2001 $ 72,000
additional facilities Albany, OR
Advanced Control Technology 3400 188th Avenue 1,000 Month-to- $ 27,000
engineering office Lynwood, WA Month
Management Design and 1360 Seaboard Ind. Blvd 9,000 June 1998 $ 41,000
Consulting Services, Inc. Atlanta, GA
engineering and manufacturing
facilities
Vision Engineering Corp. 10855 Business Ctr. Dr. 31,000 Sept. 2001 $ 248,000
Engineering and manufacturing Cypress, CA
facilities
Vision Engineering Corp. 9940 Business Ctr Dr 7,000 Feb 1997 $ 71,000
Engineering and sales facilities Sacramento, CA
Vision Engineering Corp. 1289 S. Park Victoria Dr. 1,000 Month-to- $ 16,000
Engineering and sales facilities Milpitias, CA Month
Vision Engineering Corp. 760 Pasquinelli Dr 4,000 Apr 1998 $ 64,000
Engineering and sales facilities Westmont, IL
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</TABLE>
(1) This property is subject to a $262,000 first mortgage held by First
Security Bank, a second position security interest totaling $241,000
held by Electrocom, and a third position security interest securing a
$474,000 term loan from US Bank. See Note 10 to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company
(or any of its officers or directors in their capacities as such) is a party,
or to which the property of the Company is subject nor any proceeding involving
a claim for damages in an amount greater than 10% of the Company's current
assets. Management of the Company is not aware of any material proceedings
being contemplated. The Company in the routine course of business utilizes
legal services to protect lien rights on projects to secure payment of its
outstanding balances. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Cash Flow."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock, par value $.0001 per share, is traded
under the symbol TPRO on the automated quotation system of the National
Association of Securities Dealers ("NASDAQ"). The Company's outstanding
redeemable Common Stock Purchase Warrants are traded on NASDAQ under the symbol
TPROW. The warrants are exercisable at a price of $4.25. During fiscal 1996,
the Company extended the Warrants expiration date to June 17, 1997.
The range of high and low bid quotations for the Company's Common Stock
as quoted (without retail markup or markdown and without commissions) on NASDAQ
for the past two fiscal years is provided below. They do not necessarily
represent actual transactions:
<TABLE>
<CAPTION>
1996 Fiscal Year High Bid Low Bid
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<S> <C> <C>
Fourth Quarter $ 2.88 $1.94
Third Quarter $ 2.94 $1.50
Second Quarter $ 1.88 $1.50
First Quarter $ 1.94 $1.63
1995 Fiscal Year
Fourth Quarter $ 1.91 $1.00
Third Quarter $ 1.75 $0.63
Second Quarter $ 3.38 $1.50
First Quarter $ 3.38 $3.25
</TABLE>
As of June 30, 1996, there were approximately 464 holders of record of
the Common Stock.
The Company has never declared a dividend, and it is anticipated that
any earnings will be retained for the Company's business in the foreseeable
future. The Company's ability to pay dividends is not restricted under any of
the various notes, debentures or loan agreements to which it is a party or
under any other arrangements or agreements to which it is a party.
The transfer agent for the Company's common stock is American
Securities Transfer, Incorporated, 938 Quail Street, Lakewood, CO 80215.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995:
All sales revenue and operating expenses for 1996 and 1995 have been
restated to eliminate the results of the discontinued operations of Sharp
Electric Construction Company, Inc. ("SEC") and the distribution business of
Tech Sales, Inc.("TI"). The Company's control systems integration operations
included in the following discussion are, Topro Systems Integration, Inc.
("TSI"); Management Design and Consulting Services, Inc. ("MDCS"); Advanced
Control Technology, Inc. ("ACT"), whose operations are included in the
discussion for six months period from January 1, 1996 to June 30, 1996; and
Vision Engineering Corporation (VEC), whose operating results are included for
the period May 1 - June 30, 1996.
REVENUE FROM SYSTEMS INTEGRATION in 1996 increased $8,815,000 (81%)
from $10,911,000 in 1995 to $19,726,000 in 1996. This is attributed to a
$1,488,000 increase in TSI, a $558,000 increase in MDCS, $4,820,000 from the
acquisition of ACT, and $1,949,000 from the acquisition of VEC. Management
attributes the revenue increase in TSI and MDCS to aggressive sales efforts in
new markets. The Company has refocused its sales effort on industrial customers
in select vertical markets. Average industrial contracts are generally smaller
in gross sales value but hold much better margins than municipal work. As the
Company continues to change its business mix from
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municipal to industrial markets gross revenues may decline in favor of
improved margins. No single customer exceeds ten percent of revenues.
GROSS PROFIT for the Company increased to $5,701,000 in 1996 from
$3,133,000 in 1995 or 82%. In TSI the margin declined slightly from $2,647,000
in 1995 to $2,561,000 in 1996 while MDCS improved from $486,000 in 1995 to
$660,000 in 1996. Additional gross profit was earned from the ACT acquisition
($1,739,000) and the VEC acquisition ($741,000). The overall GROSS PROFIT
MARGIN realized in 1996, including the acquired companies, was 28.8% compared
to 28.7% in 1995. The acquired companies gross margins, however, are
considerably higher (36%) - (including MDCS) than for TSI (23%). TSI gross
margins remained low as the Company executed a substantial amount of municipal
project backlog booked in early Fiscal 1995 but not completed until 1996 It is
expected 1997 will realize much higher gross profit margins, when both ACT and
VEC reflects a full year's operations, and the TSI business includes a greater
industrial component.
TOTAL SG & A EXPENSES increased $2,436,000 from $2,652,000 in 1995 to
$5,089,000 in 1996. $1,276,000 of the increase was from the acquisition of ACT
and $803,000 from the VEC acquisition. TSI increased $228,000 from $2,287,000 in
1995 to $2,514,000 in 1996. MDCS increased $243,000 from $365,000 to $609,000 in
the current period. SALES EXPENSE increased $575,000. Nearly all of the increase
was due to the acquisition of ACT and VEC. (TSI decreased $53,000). G & A
EXPENSE increased $1,861,000 from $2,059,000 in 1995 to $3,920,000 in 1996. The
addition of ACT ($701,000) and VEC ($636,000) accounted for $1,337,000 of the
increase. TSI increased from $1,694,000 in 1995 to $1,974,000 in 1996. The
increase is attributable to several factors: TSI in 1996; the costs of executing
the Company's acquisition program, including cross training in procedures and
practices, and raising necessary capital, were part of G & A expenses in 1996
and not present in 1995. Additionally, TSI absorbed the expense of the VEC
Phoenix office for one month. MDCS G& A expense increased $243,000 from $366,000
in 1995 to $609,000 in 1996 due to the addition of an operations manager and a
46% increase in sales volume. Goodwill amortization totaled $114,000 ($83,000
from ACT and $31,000 from VEC). Goodwill amortization in 1997 will total
$352,000.
The Company continues its efforts to reduce total G & A expense
through programs such as consolidating accounting and sales functions, while
investing in a wide-area network that will reduce costs of inter-company
communications.
INCOME FROM SYSTEMS INTEGRATION increased $18,142 from $480,000 profit
in 1995 to a profit of $498,000 in 1996. The acquisition of ACT (effective for
the last half of the year) accounted for a profit of $463,000. VEC for the two
months activity resulted in a loss of $63,000, and MDCS added $51,000 in net
income as compared to $120,000 in 1995 (a decrease of $69,000). TSI earned
$47,000, a change of $313,000 from the profit of $360,000 recorded in 1995. The
decline in TSI, which included corporate costs, is attributable to the unusual
expenses in general and administrative as discussed above.
OTHER INCOME AND EXPENSES. Interest expense increased $197,000 in 1996
($379,000) over 1995 ($182,000) due to greater borrowing at TSI ($34,000), and
to interest expense incurred in the acquired companies of $109,000 in ACT and
$54,000 in VEC. The Company recognized gains from the disposal of fixed assets
increased $282,000 to $435,000 in 1996.
INCOME FROM CONTINUING OPERATIONS was $16,000 in 1996 compared to a
loss of $61,000 in 1995, an increase of $77,000. A loss of $616,000 was
recorded in the distribution operations in 1996 compared to a loss of $518,000
in 1995. The distribution business was discontinued in mid-year ending any
gross profit contribution from that business. TSI earned $292,000 ( which
includes a gain on sale of fixed assets and investments of $421,000) in 1996
compared to a profit of $604,000 in 1995. This increase is attributable to
lower G&A costs as well as the lower gross margins sustained by the municipal
project backlog addressed above. MDCS's net income decreased $69,000 from
$120,000 in 1995 to $51,000 currently. Acquisitions added $354,000 from ACT
and a loss of $64,000 from VEC.
DISCONTINUED OPERATIONS losses of $1,871,000 consist of the results of
completion of the Sharp Electric backlog. The actual cost of completing the
projects remaining open at June 30, 1995 greatly exceeded the costs forecasted
at that time. SEC projects save one were completed prior to July 1, 1996 and
the one remaining is expected to be completed October 18, 1996.
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The Company has net operating loss carry forwards of approximately
$8,200,000 for Federal purposes that will expire in 2008 through 2011. The net
operating loss carry forward is subject to limitations from the net operating
losses acquired in the acquisitions due to substantial change in ownership.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED JUNE 30, 1996:
Capital and Debt Financing
During the year in conjunction with the acquisition of ACT and VEC,
the Company on February 21, 1996 issued $1,500,000, on March 5, 1996 issued
$1,000,000 and on June 23, 1996 issued 1,000,000 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
the assets of the Company including assets of ACT, MDCS, TSI and Topro, Inc.
Interest on the unpaid principal balance is due monthly. 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 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 is $ 1.50 per share on $2,500,000 of the principal amount of
the convertible debentures. On the next $1,000,000 of the principal amount of
the debenture the conversion price is $2.25. 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
Company has apportioned $38,000 to the value of this compensation. 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 these restrictive covenants as of June 30, 1996. A waiver has been granted
by Renaissance for a period to extend for 13 months through July 1997.
The Company in May 1996 completed a private offering begun March 1996
upon sale of a maximum (as amended) of 100,000 Units for gross proceeds of
$1,000,000. Each unit consisted of eight shares of Common Stock and two common
stock purchase warrants, each exercisable at $1.00 per share commencing on
March 18, 1997 or the earlier date of an effective registration statement. The
Company closed on a portion of this offering resulting in net proceeds after
commissions of $63,380 through March 31, 1996 plus $417,500 of the Company's
previously issued 12% Subordinated 180-Day Promissory Notes which were
converted to subscriptions in the offering. On April 12, 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 offering costs. On May 30, 1996 the Company closed on the final
portion of the placement for $116,000 for this stock offering. From this
closing $15,000 in 12% Subordinated 180-Day promissory Notes were converted
along with $101,000 in cash resulting in net proceeds to the company of $86,670
after offering costs. Of the total 12% Subordinated 180 Day-Promissory Notes
only $15,000 was redeemed through payment of cash.
During the quarter ended June 30, 1996, the Company borrowed an
additional $ 375,000 from three parties through the issuance of 8 % 270 Day
convertible debentures is due in February 1997. Accrued interest is due and
payable quarterly. The debentures may be pre-paid in whole or in part from time
to time without penalty. The indebtedness represented by this debenture is
specifically made senior to subsequent unsecured debt of the Company. The
debenture is convertible at the rate of one share per $1.75 of principal and
accrued interest.
CASH FLOW
For the twelve months ending June 30, 1996, the Company's cash
increased $3,000. PROFITS FROM CONTINUING OPERATIONS totaled $16,000 with
operating charges of $616,000 from the discontinuance of TI included in this
result and INCLUSIVE OF CHARGES for depreciation, amortization of note costs,
goodwill, reserve for bad debts, gain on sale of assets, issuance of options
and warrants and issuance of stock for interest, totaling $128,000. Decreases
in inventories $73,000, billings in excess of costs and estimated earnings
$82,000, and an increase in accounts payables $104,000, resulted in a change of
$259,000 in the statement of cash flow. FUNDS WERE USED to finance increases in
11
<PAGE> 12
trade receivables $1,942,000, costs and estimated earnings in excess of
billings $378,000, prepaid expenses $43,000, and accrued expenses $357,000,
totaling $2,720,000. Cash utilized by discontinued operations of SEC was
$1,198,000. INVESTMENTS requirements utilizing cash were made in capital
equipment on a consolidated basis of $95,000, software costs capitalized of
$572,000 for the year. Also, costs associated with the acquisition of ACT and
VEC required $229,000 in resources, proceeds of $40,000 was received on a note
receivable, the sale of the Company's investment of $350,000 in DMC and the
cash acquired in the ACT and VEC acquisition of $202,000. FINANCING ACTIVITIES
from short and long term debt, net of repayments, generated $2,790,000 and the
sale of stock generated, net of issuance costs, $1,267,000. Deferred financing
costs totaling $284,000 was incurred utilizing cash.
The Company has no material commitments for capital expenditures.
SEC DISCONTINUANCE - The largest use of cash for the year involved the
discontinued operations of SEC. During the fiscal 1996 year the SEC operations
utilized $1,198,000 to complete the remaining jobs.
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. The sale provides for a bonus
payment to be paid the Company. Should DMC be sold to any third party for
consideration of greater than $420 per share the Company will receive 50% of
the difference between the $420 per share and the actual price. This additional
consideration will be paid to the Company when received by the DMC selling
shareholders. The Company realized a gain of $ 410,000 from the sale of the DMC
stock.
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 was taken over by its bonding company. As of June 1996, the EC owed
the Company $427,000. 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. 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 its 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 sent
a notice to the bonding company asserting a $192,000 back charge for work
performed on the project for which the EC is entitled to reimbursement from the
Company. If the asserted claim is valid, the Company would be liable to the
bonding company. The bonding company has reviewed all supporting documents and
doesn't support the EC's claim. 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 fourth quarter of 1996. This account receivable is not the subject of any
pending legal action.
The Company, on one other project worked on with the EC, has been
discussing a settlement with the general contractor. The total amount owing
from the EC on this project amounts to $161,000. The general contractor has
issued a payment bond to the municipality to cover stop notices issued on the
project because of the EC's non payment including the Company's claim. The
requirement for the bond by the general contractor was to allow the
municipality to release retainage on the job. The municipality would not do so
unless it had assurances that the claims were provided for. The Company feels
that it has an adequate allowance to cover any unforeseen collection issues of
these receivables.
12
<PAGE> 13
MANAGEMENT DISCUSSION OF LIQUIDITY
The Company has incurred net losses for the past four years and has
had negative cash flows from operations. As of June 30, 1996, the Company is
not in compliance with its loan covenants from the issuance of the convertible
debentures issued to Renaissance capital. Renaissance has granted a forbearance
with compliance with those covenants until July, 1997. Management has taken the
following actions to improve the Company's cash flow and operating results:
1) The discontinuation of the electrical contracting business which
produced losses of over $2,300,000 in 1995 and additional losses of $1,900,000
in 1996. The last remaining contract will be completed in mid October 1996. The
Company estimates it has recognized all costs to complete all the projects in
its fiscal 1996 results. The significant, and unexpected cost over-runs
required to complete SEC's contract backlog was the largest single drain on the
Company's cash resources in 1996 totaling $1,243,000. With the completion of
the last project, SEC will no longer be a severe financial drain to the
Company.
2) The discontinuation of the remaining operation of the distribution
business which generated operating losses of $616,000 inclusive of $110,000 in
costs to wind down the affairs of the operation in 1996.
3) An overhead reduction program undertaken in the first and second
quarter of fiscal 1996. In addition, the Company continued to make management
changes to improve the effectiveness of its various functions.
4) The Company has continued to implement additional management
financial controls that improve the ability to execute projects with maximum
profitability.
5) The acquisition program increased significantly the Company's sales
revenue and afforded opportunity to reduce consolidated operating costs through
centralization of certain general and administrative functions.
Further, the acquisition program provides the Company significant opportunity
for profitable growth. The Company is now well positioned in new, fast growing
vertical markets such as food and pharmaceutical packaging, and aerospace
manufacturing. In addition, the Company's expanded geographical base of
operations provides new regional markets for its traditional products and
services as well as those of the acquired companies.
The Company has continued to shift emphasis away from lower margin municipal
business to higher margin opportunities in the industrial markets. By way of
specific example, the Company closed its 1996 financial year with the lowest
backlog of municipal work in the past four years. New municipal orders in 1996
were less than 10% of the total orders booked.
Management believes that the actions taken to improve operating results will
provide adequate cash flow to meet the Company's operating needs, and that if
necessary, the Company will be able to obtain additional debt or equity
financing. Although there can be no assurance that the Company will be
successful in obtaining additional financing and generating sufficient cash
flow to meet its operating needs, management believes that the actions taken
will be adequate to enable the Company to continue.
13
<PAGE> 14
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
Independent Auditor's Report F-2
Consolidated Balance Sheets - June 30, 1996 F-3
Consolidated Statements of Operations - For the Years
Ended June 30, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity - For the
Period from July 1, 1994 through June 30, 1996 F-6
Consolidated Statements of Cash Flows - For the Years
Ended June 30, 1995 and 1996 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
14
<PAGE> 15
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Topro, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Topro, Inc. and
subsidiaries as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended June 30,
1995 and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Topro, Inc. and
subsidiaries as of June 30, 1996, and the results of their operations and their
cash flows for the years ended June 30, 1995 and 1996, in conformity with
generally accepted accounting principles.
/s/ Hein + Associates LLP
Denver, Colorado
October 4, 1996
F-2
<PAGE> 16
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 236,000
Receivables:
Trade, net of allowance for doubtful accounts of $377,000 6,801,000
Refundable income taxes 222,000
Other 54,000
Costs and estimated earnings in excess of billings on uncompleted contracts 2,837,000
Inventories 148,000
Prepaid expenses 173,000
Assets of discontinued operations 526,000
-----------
Total current assets 10,997,000
PROPERTY AND EQUIPMENT, at cost:
Land and building 850,000
Furniture, equipment and vehicles 2,516,000
Leasehold improvements 743,000
-----------
4,109,000
Less accumulated depreciation and amortization (1,249,000)
-----------
Net property and equipment 2,860,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, net of accumulated
amortization of $36,000 536,000
DEBT ISSUANCE COSTS, net of accumulated amortization of $52,000 354,000
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net of
accumulated amortization of $114,000 5,111,000
OTHER ASSETS 155,000
-----------
TOTAL ASSETS $ 20,013,000
============
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 17
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C>
CURRENT LIABILITIES:
Line-of-credit $ 1,019,000
Current portion of long-term debt:
Related parties 230,000
Financial institutions and other 975,000
Current portion of capital lease obligations 56,000
Accounts payable 5,915,000
Billings in excess of costs and estimated earnings on uncompleted contracts 1,582,000
Accrued expenses 2,224,000
-------------
Total current liabilities 12,001,000
LONG-TERM DEBT, net of current portion 4,859,000
CAPITAL LEASE OBLIGATIONS, net of current portion 151,000
COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 5, and 14)
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;
6,639,403 shares issued and outstanding 1,000
Additional paid-in capital 7,774,000
Accumulated deficit (4,773,000)
-------------
Total stockholders' equity 3,002,000
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,013,000
=============
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE> 18
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
REVENUE:
Control systems integration $ 10,911,000 $ 19,726,000
Distributorship 2,565,000 907,000
------------- -------------
13,476,000 20,633,000
COST OF SALES:
Control systems integration 7,778,000 14,025,000
Distributorship 1,858,000 652,000
------------- -------------
9,636,000 14,677,000
GROSS PROFIT 3,840,000 5,956,000
OPERATING EXPENSES:
Sales expense 593,000 1,168,000
General and administrative expense 2,060,000 3,921,000
Distributorship selling and other expenses 1,225,000 871,000
Amortization of goodwill - 114,000
------------- -------------
3,878,000 6,074,000
OTHER INCOME (EXPENSE):
Gain on sale of assets 158,000 435,000
Interest expense (182,000) (380,000)
Other 1,000 79,000
------------- -------------
(23,000) 134,000
------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (61,000) 16,000
DISCONTINUED OPERATIONS:
Loss from discontinued operations of Sharp Electric (1,989,000) -
Loss on disposal of Sharp Electric (134,000) (1,871,000)
------------- -------------
(2,123,000) (1,871,000)
------------- -------------
NET LOSS $ (2,184,000) $ (1,855,000)
============= =============
NET INCOME (LOSS) PER SHARE:
Continuing operations $ (.02) $ *
Discontinued operations (.84) (.40)
------------- -------------
Net loss $ (.86) $ (.40)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 2,527,000 4,655,000
============= =============
- ---------------------------
* Less than $.01 per share.
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE> 19
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------- ------- -------
<S> <C> <C> <C> <C>
BALANCE, July 1, 1994 2,203,857 $ 1,000 $ 3,142,000 $ (734,000)
Shares issued for cash in private
placements 589,850 - 455,000 -
Shares issued for commission to
underwriter 37,313 - 25,000 -
Shares issued for conversion of senior
notes 228,726 - 153,000 -
Shares issued to employees for
compensation 67,163 - 45,000 -
Shares issued to employees for cash 248,719 - 280,000 -
Options issued to an officer for
compensation - - 78,000 -
Net loss - - - (2,184,000)
--------- --------- ------------ -----------
BALANCE, June 30, 1995 3,375,628 1,000 4,178,000 (2,918,000)
Shares issued for cash in private
placements 845,000 - 757,000 -
Shares issued for conversion of 12%
180-day debentures and accrued
interest 390,000 - 488,000 -
Shares issued to employees for
compensation 2,000 - 1,000 -
Shares issued for conversion of senior
notes 39,102 - 26,000 -
Shares issued for payment of interest
on senior notes 55,673 - 37,000 -
Shares issued for the acquisition of
ACT 1,657,000 - 1,657,000 -
Shares issued for conversion of ACT
debt 65,000 - 105,000 -
Warrants issued with convertible
debentures - - 38,000 -
Shares issued for the acquisition of
Vision 200,000 - 300,000 -
Options issued for acquisition of
Vision - - 90,000 -
Shares issued for conversion of
accounts payable balance 10,000 - 10,000 -
Warrants issued for services - - 87,000 -
Net loss (1,855,000)
--------- --------- ------------ -----------
BALANCE, June 30, 1996 6,639,403 $ 1,000 $ 7,774,000 $(4,773,000)
========= ========= ============ ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE> 20
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
----------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations $ (61,000) $ 16,000
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 167,000 446,000
Allowance for doubtful accounts (1,000) 61,000
Gain on sale of assets (158,000) (435,000)
Issuance of compensatory options and warrants 78,000 18,000
Stock issued for interest - 37,000
Changes in operating assets and liabilities, net of effects from
acquisition and disposition of Sharp:
(Increase) decrease in:
Receivables (382,000) (1,942,000)
Costs and estimated earnings in excess of billings (696,000) (378,000)
Inventories 53,000 73,000
Prepaid expenses and other (145,000) (43,000)
Increase (decrease) in:
Accounts payable 1,090,000 104,000
Billings in excess of costs and estimated earnings 194,000 82,000
Accrued expenses (55,000) (357,000)
---------- -----------
Net cash provided by (used in) continuing operating activities 84,000 (2,318,000)
Loss from discontinued operations: (2,123,000) (1,871,000)
Depreciation 69,000 -
Changes in assets (506,000) 1,294,000
Increase (decrease) in accounts payable and accrued expenses 1,167,000 (621,000)
---------- -----------
Net cash used by discontinued operations (1,393,000) (1,198,000)
---------- -----------
NET CASH USED IN TOTAL OPERATING ACTIVITIES (1,309,000) (3,516,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisitions of ACT and Vision - 202,000
Purchase of investment (400,000) (229,000)
Proceeds from sale of investment - 350,000
Purchase of property and equipment (141,000) (95,000)
Capitalized software development costs - (572,000)
Proceeds from sale of property and equipment 1,127,000 -
Proceeds from note receivable 10,000 40,000
---------- -----------
Net cash provided by (used in) investing activities 596,000 (304,000)
</TABLE>
See accompanying notes to these consolidated financial statements.
F-7
<PAGE> 21
TOPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-----------------------------
1995 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings:
Related parties 75,000 -
Financial institutions and other 14,525,000 12,396,000
Deferred financing costs - (284,000)
Principal payments on borrowings (14,458,000) (9,556,000)
Payment of related party note (75,000) -
Proceeds from sale of common stock, net 735,000 1,267,000
-------------- -----------
Net cash provided by financing activities 802,000 3,823,000
-------------- -----------
INCREASE IN CASH 89,000 3,000
CASH, beginning of year 144,000 233,000
-------------- -----------
CASH, end of year $ 233,000 $ 236,000
============== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 196,000 $ 294,000
============== ===========
Cash paid for income taxes $ - $ -
============== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued as payment for commission on the sale of senior notes $ 25,000 $ -
============== ===========
Common stock issued to employees as payment of commission $ 45,000 $ -
============== ===========
Notes received from sale of assets $ 85,000 $ -
============== ===========
Conversion of notes and accrued interest to common stock $ 150,000 $ 551,000
============== ===========
Exchanged 1,200 shares of DMC stock and issued new notes for $760,000 in
exchange for the redemption of $1,000,000 of old notes $ 1,000,000 $ -
============== ===========
Notes payable cancelled in exchange for DMC stock $ - $ 760,000
============== ===========
Common stock issued in acquisition of Advanced Control Technologies $ - $ 1,657,000
============== ===========
Common stock and options issued in acquisition of Vision Engineering $ - $ 390,000
============== ===========
Common stock issued as payment of accounts payable $ - $ 10,000
============== ===========
Warrants issued in conjunction with convertible debentures $ - $ 38,000
============== ===========
Interest converted to common stock $ - $ 37,000
============== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
F-8
<PAGE> 22
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS:
Topro, Inc. (Topro or the Company) designs, develops, assembles,
markets, and services control system integration products. Integrated
control systems are sophisticated computer controlled packages of
measurement instruments and control devices that provide automatic
control of manufacturing processes. The Company also operates a service
division that provides instrument calibration and system configuration
services. Prior to February 1996, it also acted as a distributor and
manufacturer's representative for instrumentation and control valve
products through its subsidiary Tech Sales, Inc. (Tech Sales). The
operations of Tech Sales were discontinued in February 1996 (see Note
6).
In August 1993, the Company acquired 100% of the outstanding common
stock of Sharp Electric Construction Company (Sharp). Sharp was
primarily engaged in electrical project construction and service. As
discussed in Note 5, the Company sold the assets of Sharp in May 1995.
In July 1995, the Company acquired with Management Design & Consulting
Services (MDCS).
In February 1996, the Company acquired all the outstanding common stock
of Advanced Control Technology, Inc. (ACT).
In May 1996, the Company acquired all the outstanding stock of
Visioneering Holding Corporation (Vision).
The above companies with the exception of Sharp, are involved in
activities similar to Topro.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation - The consolidated financial statements
include the accounts of Topro, Tech Sales, Sharp, ACT, Vision, and MDCS.
Collectively, these entities are referred to as the Company. All
significant intercompany transactions and accounts have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid
monetary instruments purchased with an original maturity of three months
or less to be cash equivalents. The Company maintains cash in bank
deposit accounts which, at times, may exceed Federally insured limits.
The Company has not experienced any losses in such accounts. The
Company believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Inventories - Inventories, which consist primarily of finished goods,
are stated at the lower of cost or market using the first-in, first-out
method.
F-9
<PAGE> 23
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment - Depreciation of property and equipment is
provided utilizing the straight-line method over the following
estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Building 31
Furniture and equipment 5-10
Vehicles 3-5
</TABLE>
Major renewals and betterments are capitalized while expenditures for
maintenance and repairs are charged to expense as incurred.
Computer Software - Computer software development costs and other
research and development costs are expensed as incurred. Costs incurred
to develop product masters of computer software, for which technological
feasibility has been established, are capitalized. Capitalized software
costs are amortized on a product-by-product basis each year based on the
greater of: (1) the amount computed using the ratio of current year
gross revenues to the sum of current and anticipated future gross
revenues for that product, or (2) five-year straight-line amortization.
For the years ended June 30, 1995 and 1996, the Company capitalized $-0-
and $572,000, respectively, of such costs. Amortization expense was $-0-
and $36,371 for 1995 and 1996, respectively.
Excess of Cost Over Fair Value of Net Assets Acquired - The Company
amortizes costs in excess of the fair value of net assets of businesses
acquired using the straight-line method over 15 years. Recoverability
is reviewed annually or sooner if events or circumstances indicate that
the carrying amount may exceed fair value. Recoverability is then
determined by comparing the undiscounted net cash flows of the assets to
which goodwill applies to the net book value including goodwill of those
assets. The analyses necessary involve significant management judgment
to evaluate the capacity of an acquired business to perform within
projections.
Income Recognition - The Company follows the percentage of completion
method of accounting for all significant long-term contracts. The
percentage of completion method of reporting income from contracts takes
into account the cost, estimated earnings, and revenue to date on
contracts not yet completed.
The amount of revenue recognized is the portion of the total contract
price that the cost expended to date bears to the anticipated final
total cost, based on current estimates of cost to complete. Contract
cost includes all labor and benefits, materials unique to or installed
in the project, subcontract costs, and allocations of indirect costs.
Selling, general and administrative costs are charged to expense as
incurred.
As long-term contracts extend over one or more years, revisions in
estimates of costs and earnings during the course of the work are
reflected in the accounting period in which the facts which require the
revision become known. At the time a loss on a contract becomes known,
the entire amount of the estimated ultimate loss is recognized in the
financial statements. Contracts which are substantially
F-10
<PAGE> 24
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
complete are considered closed for financial statement purposes.
Revenue earned on contracts in progress in excess of billings is
classified as a current asset. Amounts billed in excess of revenue
earned are classified as a current liability.
Income related to direct sales of equipment and parts is recognized upon
shipment. Commission income is recognized when the commission is
received from the principal.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have
been recognized in the financial statements or tax returns. Deferred
tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities
using current enacted tax rates.
Earnings (Loss) Per Share - Earnings (loss) per share is calculated by
dividing net income (loss) by the weighted average common shares
outstanding. Common stock equivalents have not been included as their
effects are antidilutive.
Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles requires the Company's management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. Actual results could differ from
those estimates. Significant estimates include the estimates of costs
to complete long-term contracts, and net realizable value of intangible
assets. Due to uncertainties inherent in the estimation process, it is
at least reasonably possible that these estimates could change in the
near term, and that such revisions could be material.
Accrued Warranty Costs - Estimated warranty costs are provided for at
the time of sale of the warranted product. The Company generally
extends warranty coverage for one year from the time of sale.
Concentrations of Credit Risk - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed completely to perform as contracted. Concentrations of credit
risk (whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or groups of counterparties
when they have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly effected by
changes in economic or other conditions.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under SFAS No. 107, Disclosures About Fair Value
of Financial Instruments, are determined at discrete points in time
based on relevant market information. These estimates involve
uncertainties and cannot be determined with precision. The estimated
fair values of the Company's financial instruments, which includes all
cash, accounts receivables, accounts payable, long-term debt, and other
debt, approximates the carrying value in the consolidated financial
statements at June 30, 1996.
Reclassifications - Certain reclassifications have been made to the
prior years financial statements to conform to the current year's
presentation. Such reclassifications had no effect on net loss.
F-11
<PAGE> 25
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact of Recently Issued Accounting Standards - In March 1995, the
Financial Accounting Standards Board issued a new statement titled
Accounting for Impairment of Long-Lived Assets. This new standard is
effective for years beginning after December 15, 1995 and would change
the Company's method of determining impairment of long-lived assets.
Although the Company has not performed a detailed analysis of the impact
of this new standard on the Company's financial statements, the Company
does not believe that adoption of the new standard will have a material
effect on the financial statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled Accounting for Stock- Based Compensation (FAS 123).
The new statement is effective for fiscal years beginning after December
15, 1995. FAS 123 encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and
other equity instruments to employees based on fair value. Companies
that do not adopt the fair value accounting rules must disclose the
impact of adopting the new method in the notes to the financial
statements. The Company currently does not intend to adopt the fair
value accounting prescribed by FAS 123, and will be subject only to the
disclosure requirements prescribed by FAS 123. However, the Company
intends to continue its analysis of FAS 123 and may elect to adopt its
provisions in the future.
3. LIQUIDITY AND CONTINUED OPERATIONS:
The Company has incurred net losses for the past four years and has had
negative cash flows from operations. As of June 30, 1996, the Company
is not in compliance with the loan covenants in the convertible
debentures issued to Renaissance Capital. Renaissance has granted a
forbearance with compliance with those covenants until July 1997.
Management has taken the following actions to improve the Company's cash
flow and operating results:
o The discontinuation of the electrical contracting business
which produced losses of over $2,100,000 in 1995 and a
further loss of $1,900,000 in 1996. The last remaining
contract will be completed in mid October 1996. The
Company has recognized all costs to complete this work, in
its fiscal 1996 results. The huge, unexpected costs
overruns required to complete the Sharp contract backlog
were the largest single drain of the Company's cash
resources in 1996. With the completion of the last
project, Sharp no longer will be a financial cost to the
Company.
o The discontinuation of the remaining operations of the
distribution business which generated operating losses of
$616,000, including $110,000 in costs to terminate the
operations in 1996.
o An overhead reduction program undertaken in the first and
second quarter of fiscal 1996. In addition, the Company
continued to make management changes to improve the
effectiveness of its various functions.
F-12
<PAGE> 26
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The Company has continued to implement additional
management financial controls that improve the ability to
execute projects with maximum profitability.
o The acquisition program that increased significantly the
Company's sales revenue and afforded opportunity to reduce
consolidated operating costs through centralization of
certain general and administrative functions.
o Further, the acquisition program provides the Company
significant opportunity for profitable growth. The Company
is now well positioned in new, fast growing vertical
markets such as food and pharmaceutical packaging, and
aerospace manufacturing. In addition, the Company's
expanded geographical base of operations provides new
regional markets for its traditional products and services
as well as those of the acquired companies.
o The Company has continued to shift emphasis away from lower
margin municipal business to higher margin opportunities in
the industrial markets. By way of specific example, the
Company closed its 1996 financial year with its lowest
backlog of municipal work in the past four years. New
municipal orders in 1996 were less than 10% of total orders
booked.
Management believes that the actions taken to improve operating results
will provide adequate cash flow to meet the Company's operating needs,
and that if necessary, the Company will be able to obtain additional
debt or equity financing. Although there can be no assurances that the
Company will be successful in obtaining additional financing and
generating sufficient cash flow to meet its operating needs, management
believes that the actions taken will be adequate to enable the Company
to continue as a going concern.
4. ACQUISITIONS:
MDCS - In July 1995, the Company, acquired all the outstanding capital
stock of MDCS, in exchange for 200,000 shares of the Company's common
stock. MDCS provides consulting and engineering services related to the
design, development, assembly and service of integrated process control
systems to customers in the southeastern U.S. The Company intends to
continue the business of MDCS. The sole shareholder and President of
MDCS entered into an employment agreement with the Company for an
initial term of two years and remains President of MDCS. The
transaction was accounted for as a pooling of interests and, therefore,
all prior period financial statements have been restated to include the
accounts and operations of MDCS for all periods prior to the
acquisition.
Separate results of operations for the year ended June 30, 1995 are as
follows:
<TABLE>
<CAPTION>
Topro MDCS Combined
----- ---- --------
<S> <C> <C> <C>
Net revenues $9,700,000 $1,211,000 $10,911,000
Net income (loss) (2,304,000) 120,000 (2,184,000)
</TABLE>
F-13
<PAGE> 27
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACT - Effective January 1, 1996, the Company acquired all the
outstanding common stock of ACT for 1,657,000 restricted shares of the
Company's common stock. The acquisition has been accounted for as a
purchase, and, accordingly the purchase price has been allocated to the
assets purchased and liabilities assumed based upon the fair values at
the date of acquisition. The purchase price of $1,657,000 was
determined based on the estimated fair value of the restricted shares
issued. The excess of the purchase price over the estimated fair value
of net assets acquired was $2,474,000 and is being amortized over 15
years. The operating results of ACT have been included in the
consolidated statement of operations from the date of acquisition. The
major shareholder and president of ACT entered into an employment
agreement with the Company for 30 months.
Immediately prior to the acquisition, ACT sold the rights to certain
technology and related assets to a new entity formed by the former
shareholders of ACT in exchange for $5,000 cash and a $95,000 note
receivable. Topro obtained rights to acquire an equity interest in the
new entity.
Vision - Effective May 1, 1996, Topro acquired all the outstanding
capital stock of Vision, an independent control systems integrator
located in Cypress, California. The purchase price was 200,000 shares
of restricted Topro stock, and options to acquire 150,000 shares of
Topro stock exercisable at $2.25 commencing October 1996, 150,000 shares
exercisable at $2.25 commencing April 1997, 300,000 shares exercisable
at $2.50 commencing January 1998, and 300,000 shares exercisable at
$2.75 commencing January 1999. An additional 100,000 shares will be
issued if Vision meets certain future earning goals. In connection with
the merger, Topro agreed to guarantee the bank debt of Vision in the
amount of $1,165,000. The acquisition has been accounted for as a
purchase, and, accordingly the purchase price has been allocated to the
assets purchased and liabilities assumed based upon the fair values at
the date of acquisition. The purchase price of $390,000 was determined
based on the estimated fair value of the restricted shares and options
issued. The 100,000 contingent shares will be recorded as additional
purchase price if they are ultimately issued. The excess of the
purchase price over the estimated fair value of net assets acquired was
$2,792,000 and is being amortized over 15 years. The operating results
of Vision have been included in the consolidated statement of operations
from the date of acquisition.
In connection with the merger, the past president of Vision entered into
an employment agreement with the registrant for an initial term of 6
months, and a 24-month consulting agreement commencing six months after
the date of the employment agreement. The past president will become a
director of Topro. The past secretary and vice president of Vision, who
is the spouse of the past president also entered into an employment
agreement for an initial term of five months, and a 24-month consulting
agreement commencing five months after the date of the employment
agreement. Each consulting agreement includes a grant of 150,000
options exercisable at $2.25 per share, expiring in October 2006.
The following unaudited pro forma summary combines the consolidated
results of operations of the Company, ACT, and Vision as if the
acquisitions had occurred at July 1, 1994 and 1995, with pro forma
adjustments to give effect to amortization of goodwill, depreciation,
and interest expense on debt incurred in connection with the
acquisitions. The pro forma summary is not necessarily indicative of
F-14
<PAGE> 28
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
future operations or the results that would have occurred had the
transactions been consummated at the beginning of the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
-------------------
1995 1996
---- ----
(Unaudited)
<S> <C> <C>
Net revenues $32,161,000 $30,611,000
Net loss (3,380,000) (6,221,000)
Loss per share (0.42) (1.13)
</TABLE>
5. SALE OF SHARP ELECTRIC:
In May 1995, the Company completed the sale of substantially all
operating assets of Sharp to Piper Electric Company Inc., a privately
held electrical contracting company. Piper purchased certain machinery,
tools, furniture, fixtures, equipment, vehicles, and inventory for
$50,000 cash and a $50,000 note receivable, due through September 1995.
In connection with the sale and purchase of assets, Piper, Sharp, and the
Company have entered into a Management Agreement in which Piper has
assumed management responsibility for completion of Sharp projects which
were in progress on the closing date of the transaction, and receives a
management fee equal to 12.5% of the amounts billed for work performed.
The Company retained the responsibility of payment of vendors and
collection of receivables generated from completion of these contracts.
Condensed results of discontinued operations were as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Revenues $ 6,532,000 $ 3,379,000
Loss before income tax expense (benefit) (1,989,000) (1,892,000)
Net loss (1,989,000) (1,892,000)
</TABLE>
Assets of discontinued operations are comprised of the following as of
June 30, 1995 and 1996:
<TABLE>
<S> <C> <C>
Receivables $ 1,559,000 $ 411,000
Costs and estimated earnings in excess of billings 244,000 105,000
Other assets 145,000 10,000
------------ ------------
Total assets $ 1,948,000 $ 526,000
=========== ============
</TABLE>
F-15
<PAGE> 29
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1995, the company recorded a loss on the sale of the Sharp assets of
$134,000, which included a provision for estimated future losses of
$100,000. In 1996, the Company recorded additional estimated losses of
approximately $1,871,000, as a result of the cost of completing the
Sharp projects being significantly greater than originally estimated.
6. DISCONTINUANCE OF TECH SALES OPERATIONS:
In June 1995, Tech Sales sold the assets of its Utah office to the local
management group for an aggregate purchase price of $85,000.
Fifty-thousand dollars was paid in cash and the remaining $35,000 was in
the form of a promissory note. This note bears interest at 2% over
prime (11% at June 30, 1995). The principal and all unpaid interest is
due and payable on June 30, 2000. The note is collateralized by 18,145
shares of the Company's common stock.
On January 30, 1996, the Company formally approved the discontinuance of
Tech Sales' remaining distributorship and manufacturers' representation
operations. Following is a summary of the results of operations of Tech
Sales:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JUNE 30,
--------------------
1995 1996
---- ----
<S> <C> <C>
Revenues $2,565,000 $907,000
Loss from operations (518,000) (616,000)
</TABLE>
7. TRADE RECEIVABLES:
The following information summarizes trade receivables at June 30, 1996:
<TABLE>
<S> <C>
Contract receivables:
Completed contracts $ 869,000
Uncompleted contracts 5,812,000
Retainage 497,000
-----------
7,178,000
Less allowance for doubtful accounts (377,000)
-----------
$6,801,000
===========
</TABLE>
Generally, the Company's contracts contain retainage provisions and
require that certain percentages of completion be achieved before
amounts under the contracts can be billed. Retainages are
generally collected within one year.
F-16
<PAGE> 30
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has concentrations of credit risk geographically in the
western United States, and along industry lines in mining, aerospace, and
food processing customers. The Company provides ongoing credit
evaluations of its customers but collateral is generally not required.
However, the Company typically deals with subcontractors who are bonded
and the Company generally has the right to file mechanics' liens to
secure delinquent accounts. Management believes that the allowance for
doubtful accounts is sufficient to cover the Company's credit risk.
8. CONTRACTS IN PROGRESS:
The following information is applicable to uncompleted contracts of
continuing operations at June 30, 1996:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts $ 32,071,000
Estimated earnings 2,282,000
-------------
34,353,000
Less billings to date (33,098,000)
-------------
$ 1,255,000
=============
</TABLE>
These amounts are included in accompanying balance sheet under the
following captions as of June 30, 1996:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on uncompleted contracts $ 2,837,000
Billings in excess of costs and estimated earnings on uncompleted contracts (1,582,000)
-----------
$ 1,255,000
===========
</TABLE>
9. INVESTMENT:
During fiscal 1994, the Company entered into a stock purchase agreement
with an unaffiliated privately-held entity which has developed certain
patented flowmeter devices. In 1995, the Company's former president was
appointed to the Board of Directors of the investee. In May 1995, the
Company sold 1,200 shares, including 900 shares sold to a related party,
for $164,000, resulting in a gain of $76,000.
In November 1995, the Company completed the sale of its remaining
investment in this company to three parties, one of whom is the brother
of an officer of the Company. The purchase price was $1,100,000, which
was comprised of $350,000 in cash and the cancellation of two promissory
notes with a face value of $760,000.
The original agreement included certain contingencies which resulted in
the Company deferring a $341,000 gain, which equals exposure under the
contingencies. A $68,000 gain was immediately recognized (for a total
gain of $410,000).
F-17
<PAGE> 31
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On June 28, 1996, the Company entered into a amendment to the stock
purchase agreement which resolved these contingencies. The Company
recognized the previously deferred gain of $341,000 in the fourth
quarter of 1996. The amendment also provides for a bonus payment to be
paid to Topro in the event of certain circumstances. Any gain on this
bonus payment will be recognized in the period it is received.
10. LINES-OF-CREDIT AND LONG-TERM DEBT:
<TABLE>
<S> <C>
Lines-of-credit consist of the following at June 30, 1996:
Vision has a $650,000 line-of-credit pursuant to a loan agreement with a financial
institution, collateralized by substantially all assets of Vision, with interest at
prime plus 2% (total of 10.25% at June 30, 1996). The line expires in December 1996
and requires monthly principal payments of $17,000 with an additional principal payment
of $50,000 in July 1996. $ 583,000
ACT has a $500,000 line-of-credit pursuant to a loan agreement with a financial
institution collateralized by substantially all assets of ACT, with interest at prime
plus 2.5% (total of 10.75% at June 30, 1996). The line expires in February 1997. 436,000
----------
$1,019,000
==========
Notes payable to related parties consist of the following at June 30, 1996:
Notes payable to two officers and directors, with interest at 10%, due on demand,
unsecured. $ 80,000
Notes payable to director and former majority stockholders of Vision, with interest at
8%, monthly payments of $10,000, unsecured. 130,000
Note payable to relatives of director and former majority stockholders of Vision,
interest payable quarterly at 10%, unsecured. 20,000
----------
$ 230,000
==========
</TABLE>
F-18
<PAGE> 32
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt payable to financial institutions and others consists of the
following at June 30, 1996:
<TABLE>
<S> <C>
Convertible debentures, interest payable monthly at 9%. The balance due relates to
three debentures as follows: $1,000,000 maturing March 1, 2003, $1,500,000 maturing
March 1, 2003, and $1,000,000 maturing June 1, 2003. Mandatory principal repayments
calculated at 1% of the outstanding balance begin monthly in March 1999, collateralized
by all the assets of the Company.(1) $ 3,500,000
Convertible notes, 8% interest payable quarterly on August 17, November 17, and
February 17, due in February 1997, unsecured.(2) 375,000
Senior convertible notes, 10% interest payable semi-annually on September 30 and
March 31, due in March 2000, unsecured.(3) 350,000
Note payable to a bank, with interest at prime plus 2.5% (total of 10.75% at June 30,
1996), monthly principal and interest payments of $11,000 with remaining balance due
August 1997, collateralized by substantially all assets of ACT. 474,000
Note payable to a bank, due in monthly payments of $3,000 including interest at 11%,
with remaining balance due November 1996, collateralized by land and building of ACT. 262,000
Note payable to an entity, due in monthly payments of $6,000 through April 2000,
collateralized by second position on land and building of ACT. 241,000
Note payable to legal counsel of ACT, monthly payments of $5,000 due through September
1998. The note is non-interest bearing, but has been discounted at an effective rate
of 10.25%. 121,000
</TABLE>
____________________
(1) The first two debentures are convertible into one share of common
stock at $1.50 of principal and interest, at any time. The third
debenture is convertible into one share of common stock at $2.25 of
principal and interest, at any time. The conversion prices may be
reduced in the event of certain circumstances.
(2) The notes are convertible into one share of common stock per $1.75 of
principal and interest.
(3) 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.
F-19
<PAGE> 33
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Term loan payable to a bank, with a variable interest adjusted quarterly based on prime
pus 2.75% (total of 11.0% at June 30, 1996), collateralized by a second security
interest on substantially all assets of Vision, guaranteed by SBA and personally
guaranteed by a director, which personal guarantee is collateralized by a third trust
deed on the director's residence, payable in monthly principal and interest payments of
$7,000, adjusted quarterly, through September 2002. 324,000
Term loan payable to a bank, with a variable interest rate at prime plus 2% (total of
10.25% at June 30, 1996), collateralized by equipment and leasehold improvements, due
on demand or if no demand, payable in monthly installments of $7,000 plus interest
through April 1998. 153,000
Various notes payable, due in maximum monthly installments totaling $2,000 through
March 1998, collateralized by equipment and vehicles. 34,000
------------
Total 5,834,000
Less current portion (975,000)
------------
Long-term portion $ 4,859,000
============
</TABLE>
The payment schedule for the years ended June 30 is as follows:
<TABLE>
<CAPTION>
RELATED
YEAR PARTIES OTHER
---- ------- -----
<S> <C> <C>
1997 $ 230,000 $ 975,000
1998 - 823,000
1999 - 288,000
2000 - 157,000
2001 - 76,000
Thereafter - 3,515,000
--------- -----------
$ 230,000 $ 5,834,000
========= ===========
</TABLE>
The convertible debentures described above include covenants which
require the Company, among other things, to maintain certain working
capital and net worth ratios. At June 30, 1996, the Company was not in
compliance with certain covenants, however, the lender has granted a
forbearance with compliance of the covenants through July 1997.
F-20
<PAGE> 34
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAXES:
Deferred tax assets (liabilities) as of June 30, 1996 are comprised of
the following:
<TABLE>
<S> <C>
Current deferred tax assets (liabilities):
Trade receivables $ 128,000
Contingency loss on discontinued operations 50,000
Deferred gain 23,000
Accrued liabilities 284,000
------------
Total 485,000
Less valuation allowance (485,000)
------------
Net $ -
============
Long-term deferred tax assets (liabilities):
Property and equipment $ (138,000)
Net operating loss carryforwards 2,792,000
------------
Total 2,654,000
Less valuation allowance
(2,654,000)
------------
Net $ -
============
</TABLE>
At June 30, 1996, the Company has net operating loss carryforwards of
approximately $8,200,000 for Federal income tax purposes which expire in
2008 through 2011. A portion of these carryforwards will be limited due
to the change in control of acquired companies.
12. STOCKHOLDERS' EQUITY:
In addition to its common stock, the Company has authorized 10,000,000
shares of $1.00 par value preferred stock. The Company's Articles of
Incorporation permit the Board of Directors to issue the Preferred Stock
in series with rights and privileges to be determined by the Board of
Directors at the time of issuance.
In October 1994, the Company issued 110,000 shares of common stock and
110,000 warrants for proceeds of $144,000, net of issuance cost of
$16,000 in a private placement.
In December 1994, 30,000 shares of common stock and 30,000 warrants were
issued for proceeds of $38,000, net of issuance cost of $4,000 in a
private placement.
F-21
<PAGE> 35
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 1994, the President and Chief Executive Officer of the
Company purchased 178,571 shares of common stock and 178,571 warrants for
proceeds of $235,000, net of issuance cost of $15,000.
In April 1995, the Company issued 449,850 shares of common stock and
449,850 warrants in a private placement for proceeds $273,000, net of
issuance cost of $28,000.
In conjunction with the placement of senior notes, the Company issued
149,254 warrants to the note holders and 37,313 shares and 37,313
warrants to the underwriter as a commission.
In May 1995, two senior note holders converted a total of $150,000 of
notes and $6,000 of accrued interest into 228,726 shares of common stock
and 228,726 warrants.
In June 1995, the Company issued 137,311 shares of common stock and
137,311 warrants to employees. 67,163 shares and warrants were for
payment of services rendered by the employees. The remaining 70,148
shares and warrants were issued for cash of $45,000, net of issuance cost
of $2,000.
In conjunction with the president's employment agreement, the Company
granted him options to purchase a total of 315,000 shares of common
stock, exercisable as follows:
o Options to purchase 80,000 shares at $.75 per share
exercisable commencing January 23, 1995 through January 23,
2005.
o Options to purchase 60,000 shares at $1.20 per share
exercisable commencing June 30, 1995 through June 30, 2005.
o Options to purchase 75,000 shares at $1.75 per share
exercisable commencing June 30, 1996 through June 30, 2006.
o Options to purchase 100,000 shares at $3.50 per share
exercisable commencing June 30, 1997 through June 30, 2007.
The Company recorded compensation expense of $78,000 related to the grant
of these options during the year ended June 30,1995, which represents the
difference between the market price at the date of grant and the exercise
price.
In May 1996, the Company extended the exercise period for 662,000
warrants to June 1997.
In September 1995, a senior note holder converted $25,000 of notes and
$1,000 of accrued interest into 39,102 shares of common stock and 39,102
warrants exercisable at $1.00 through August 1998.
In October 1995, the Company issued 50,000 warrants exercisable at $1.00
through October 2000 to its public relations firm.
F-22
<PAGE> 36
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 1995, the Company issued 14,286 warrants exercisable at $1.75
through November 2000 to a financial institution in conjunction with a
loan agreement.
In conjunction with the convertible debentures issued in February and
March 1996, the Company issued to Renaissance Capital 375,000 warrants
exercisable at $2.00 per share through March 1999. The Company allocated
$38,000 of the debenture proceeds to the warrants.
In December 1995 and January 1996, the Company issued a total of $480,000
of convertible 12%, 180-day notes. The note holders received a total of
240,000 warrants exercisable at $1.00 per share through April 2000. In
May 1996, the Company completed a private placement of units consisting
of a total of 800,000 shares of common stock and warrants to purchase
200,000 shares of common stock. The warrants are exercisable at $1.00
per share through April 2000. This offering included conversion of the
$465,000, 180-day notes, accrued interest of $23,000 and $535,000 of cash
proceeds. The Company incurred offering costs of $167,000 in connection
with these transactions. The Company also granted the underwriter a
warrant to purchase 150,000 shares exercisable at $1.25 per share through
March 2001.
In September 1995, the Company completed a private placement of 435,000
shares of common stock at $1.00 per share. The Company incurred offering
costs of $11,000 in connection with this transaction.
In February 1996, the Company issued 200,000 warrants to a public
relations firm, exercisable through February 1999 as follows: 50,000 at
$1.25, 50,000 at $2.00, 50,000 at $2.50, and 50,000 at $3.00. The
Company recorded $87,000 as the value of these warrants, which is being
recognized as expense over the two-year term of the services agreement.
In April and June 1996, the Company issued 55,673 shares and 50,000
warrants exercisable at $2.00 per share through May 1999 in payment of
$37,000 of interest on the senior notes payable.
Following is a summary of changes in stock options and warrants
outstanding:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
------ --------
<S> <C> <C>
Options:
-------
JULY 1, 1994 80,000 $3.50-$4.25
Granted 377,250 $ .63-$3.50
Exercised - -
---------- -----------
JUNE 30, 1995 457,250 $ .63-$4.25
Granted 1,200,000 $2.25-$2.75
Exercised - -
---------- -----------
JUNE 30, 1996 1,657,250 $.63-4.25
========== ==========
EXERCISABLE AT JUNE 30, 1996 732,250
==========
</TABLE>
F-23
<PAGE> 37
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants:
<TABLE>
<S> <C> <C>
JULY 1, 1994 922,000 $3.38-$5.10
Granted 1,458,019 $ .67-$2.50
Exercised - -
--------- -----------
JUNE 30, 1995 2,380,019 $.67-$5.10
Granted 1,320,388
Exercised - -
--------- -----------
JUNE 30, 1996 3,700,407 $.625-$5.10
========= ===========
EXERCISABLE AT JUNE 30, 1996 3,700,407
=========
</TABLE>
Options outstanding at June 30, 1996 expire as follows:
<TABLE>
<CAPTION>
Expiration
Date Shares
---------- ------
<S> <C> <C>
Exercise price of $4.25 April 2002 60,000
Exercise price of $3.75 November 2002 10,000
Exercise price of $3.50 February 2004 10,000
Exercise price of $.75 January 2005 80,000
Exercise price of $1.20 January 2005 60,000
Exercise price of $1.75 January 2006 75,000
Exercise price of $3.50 January 2007 100,000
Exercise price of $.63 February 2005 25,000
Exercise price of $1.63 June 2000 27,250
Exercise price of $1.62 August 2005 10,000
Exercise price of $2.25 September 2006 150,000
Exercise price of $2.25 October 2006 450,000
Exercise price of $2.50 October 2006 300,000
Exercise price of $2.75 October 2006 300,000
---------
1,657,250
==========
</TABLE>
F-24
<PAGE> 38
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants outstanding at June 30, 1996 expire as follows:
<TABLE>
<CAPTION>
Expiration
Date Shares
---------- ------
<S> <C> <C>
Exercise price of $4.25 June 1997 662,000
Exercise price of $3.375 October 1998 100,000
Exercise price of $3.50 October 1998 50,000
Exercise price of $3.625 October 1998 50,000
Exercise price of $2.50 October 1999 66,667
Exercise price of $2.00 December 1997 178,571
Exercise price of $.67 March 2000 74,627
Exercise price of $1.25 October 1999 50,000
Exercise price of $.67 April 2000 159,144
Exercise price of $.67 May 2000 8,333
Exercise price of $1.00 April 2000 1,133,951
Exercise price of $1.00 May 1998 228,726
Exercise price of $1.00 October 2000 50,000
Exercise price of $1.75 November 2000 14,286
Exercise price of $1.25 February 1999 50,000
Exercise price of $2.00 February 1999 50,000
Exercise price of $2.50 February 1999 50,000
Exercise price of $3.00 February 1999 50,000
Exercise price of $2.00 May 1999 50,000
Exercise price of $2.00 March 1999 375,000
Exercise price of $1.25 March 2001 150,000
Exercise price of $1.00 August 1998 39,102
---------
3,640,407
=========
</TABLE>
13. BENEFIT PLANS:
The Company has a profit-sharing plan that covers all full-time employees
with 12 months of service who elect to enter the plan. At the option of
the Board of Directors, an amount, not to exceed that allowable under the
Internal Revenue Code of 1984, as amended, may be contributed to the
plan. During the years ended June 30, 1995 and 1996, the Company
contributed $41,000, and $-0-, respectively, to the plan.
The Company has 250,000 shares of common stock reserved for issuance
under an incentive stock option plan. Through June 30, 1996, 37,250
options have been granted under this plan. For options granted under the
plan, the exercise price must be equal to or exceed the fair market value
of the Company's common stock on the date of grant.
In October 1992, the stockholders approved an employee stock purchase
plan (the 1992 Plan), covering essentially all of the Company's employees
except those owning directly or indirectly more than 5% of the Company's
common stock. The 1992 Plan, as amended, has authorized 10,000 shares
and specifies certain dates that eligible employees may subscribe to
purchase stock. The exercise price shall be not less than 85% of the
fair market value of the stock on enrollment date or exercise date,
whichever is
F-25
<PAGE> 39
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
lower. During the year ended June 30, 1995, employees elected to
purchase 2,992 shares. The Company executed these transactions on behalf
of the employees through purchases on the open market.
14. COMMITMENTS AND CONTINGENCIES:
Leases - Vision leases equipment under leases which are classified as
capital leases. The following is an analysis of leased equipment under
capital leases at June 30, 1996:
<TABLE>
<S> <C>
Equipment $ 216,000
Accumulated amortization (2,000)
---------
$ 214,000
=========
</TABLE>
Amortization on equipment under capital leases charged to expense during
1995 and 1996 was $-0- and $2,000, respectively.
The Company also leases office space and equipment under operating
leases.
Following is a schedule of future minimum lease payments for all leases:
<TABLE>
<CAPTION>
Capital Operating
Year Ended June 30, Leases Leases
------------------- ------ --------
<S> <C> <C>
1997 $ 90,000 $ 406,000
1998 81,000 364,000
1999 59,000 285,000
2000 39,000 132,000
2001 13,000 88,000
Thereafter - -
--------- ----------
282,000 $1,275,000
==========
Less amount representing interest (75,000)
---------
207,000
Current portion (56,000)
---------
$ 151,000
=========
</TABLE>
Rental expense under all operating leases amounted to $239,000 and
$310,000 for the years ended June 30, 1995 and 1996, respectively.
F-26
<PAGE> 40
TOPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 1995, the Company sold a building for $1,025,000 and leased the
building back. The building is used as the Company's headquarters, as
well as its primary production facility. The Company used $770,000 of
the proceeds to pay off two mortgages with financial institutions. The
sale resulted in a deferred income of which $97,000 is being amortized
over the four-year lease term. The minimum lease payments of $148,000 a
year are included in the table above.
Employment Agreements - The Company has entered into a employment
agreement with an officer and director of the Company. The agreement
expires in January 1997 and provides for minimum annual salaries of
$100,000 for the first year of employment and $160,000 in the second year
of employment. The agreement is automatically extended at the end of the
initial term and on each anniversary unless a written notice is delivered
by either party. See Note 4 for other employment agreements.
Contingencies - The Company and its subsidiaries are parties to various
legal proceedings and are subject to various claims arising in the
ordinary course of business. Management believes that the disposition of
these matters will not have a material effect on the consolidated
financial position of the Company.
15. FOURTH QUARTER ADJUSTMENT:
In the fourth quarter of fiscal 1996, the Company recorded adjustments to
capitalize computer software development costs which had been incurred in
the first three quarters of the year. The effect of these adjustments
was to reduce the net loss by approximately $320,000.
16. SUBSEQUENT EVENTS:
In September 1996, the Company received $150,000 of proceeds of 12%
unsecured subordinated promissory notes. Principal and interest are due
November 8, 1996, however, the Company may extend the maturity date for
up to three months by payment of 2,500 shares of common stock per $50,000
of principal for each month extended. The Company also issued 7,500
shares of common stock as a loan origination fee. The notes are
convertible at the option of the holder at one share of common stock per
$.50 of principal and accrued interest, upon occurrence of certain
events.
F-27
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
The directors and executive officers of the Company are listed below.
Directors are elected to hold office until the next annual meeting of
shareholders and until their respective successors have been elected and
qualified. Executive officers are elected by the Board of Directors and hold
office until their successors are elected and qualified. There are no
committees of the Board of Directors.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
R. Larry Ethridge 60 Chairman and Director
John P. Jenkins 46 President, Chief Executive
Officer and a Director; President
of ACT; President of MDCS
William B. Heermann 45 Executive Vice President
Jon E. Walker 63 Director; Vice-Chairman of ACT
H. Robert Gill 58 Director
H. R. Hodge 65 Director
E. Gregory Fisher 50 President of MDCS, Inc.
</TABLE>
BIOGRAPHICAL INFORMATION
R. Larry Ethridge. Mr. Ethridge has been Chairman and a Director of the
Company since October, 1991. Mr. Ethridge co-founded the Company's
predecessor, Tech Sales in 1974. Following Tech Sales' acquisition by the
Company, Mr. Ethridge served as President and CEO of the Company until January,
1995. Mr. Ethridge holds a Bachelor of Science degree in Mechanical
Engineering from Le Tourneau College, Longview, Texas.
John P. Jenkins. Mr. Jenkins has served as President, Chief Executive
Officer, and a Director of the Company since January, 1995. Mr. Jenkins has
broad domestic and international operating experience in technology intensive
business with divisional profit and loss responsibility in a Fortune 200
company. Prior to joining the Company, Mr. Jenkins served as president of
Morgan Technical Ceramics, Inc., a wholly-owned subsidiary of Morgan Crucible
plc, a publicly-traded on the London stock exchange diversified industrial
products company based in England. Mr. Jenkins holds a Bachelor of Science
degree in Mechanical Engineering from the University of Washington, and a Juris
Doctor degree from the University of Denver, Denver, Colorado. He serves as a
director of Integrated Security Systems, Inc., a publicly held company.
William B. Heermann. Mr. Heermann has been Executive Vice President of
the Company since October, 1991, also serving as a director until May, 1994.
He joined Tech Sales in 1975, and progressed through a series of positions in
that firm, including sales engineer, senior salesman, and project manager. Mr.
Heermann holds a Bachelor of Science degree in Civil Engineering from Michigan
State University.
15
<PAGE> 42
Jon E. Walker. Mr. Walker serves as a Director of the Company and as
Vice-Chairman of ACT, a company which was acquired by the Company in February,
1996. Mr. Walker founded ACT and served as its president and CEO until
February, 1996. He is a graduate of Oregon State University, in Corvallis,
Oregon with a Bachelor of Science Degree in Electrical Engineering. Mr. Walker
has over 36 years experience in engineering and management.
H. Robert Gill. Mr. Gill has been a director of the Company since
October, 1992. From 1989 until 1996, Mr. Gill served as president, chief
executive officer and a director of ConferTech International Inc., a publicly
held audio tele-conferencing firm headquartered in Westminster, Colorado. From
1983 to 1988, he served as President of the Industrial Systems Divisions of
Ball Corporation, a manufacturer of factory automation and control equipment.
For seven years prior to joining Ball Corporation, Mr. Gill served as Director
of Marine Products and Operations for Magnavox Corporation.
H. R. Hodge. Mr. Hodge has been a director of the Company since
October, 1992. Mr. Hodge has been President and owner of Beta Metal Tech, a
manufacturer of precision computer and electronic sheet metal enclosures, since
1987. From 1984 to 1987, he was in business as a management consultant. From
1971 to 1984, he owned and operated Mountain States Metal Products, Inc., a
metal stamper for the high-tech industry.
E. Gregory Fisher. Mr. Fisher has been with the Company as president
and director of MDCS, Inc. since the Company acquired MDCS in 1995. Mr. Fisher
founded MDCS, Inc. in 1976 and managed its operations since its inception.
Prior thereto, he held engineering positions with Vertex Systems, Inc. and Gulf
Oil Company. Mr. Fisher holds a Bachelor of Arts degree in economics from
Georgia State University, Atlanta, Georgia.
Compliance with Section 16 (a) of the Exchange Act
Section 16 (a) of the Securities Exchange Act of 1934 ( the "Exchange
Act") requires the Company's directors and officers and persons who own more
than ten percent of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Directors, officers and greater than ten- percent shareholders
are require by SEC regulation to furnish the Company with copies of all Section
16 (a) reports filed.
Based solely on its review of the copies of the reports it received from
persons required to file, the Company believes that during the period from July
1, 1995 through June 30, 1996, all filing requirements applicable to its
officers, directors and greater than ten-percent shareholders were complied.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
(a)(b) The following table sets forth information regarding compensation paid
during the past three fiscal years to the Company's Chief Executive Officer and
to any of the Company's four most highly compensated executive officers who
were received total salary and bonus in excess of $100,000 per annum during the
fiscal year ended June 30, 1996:
16
<PAGE> 43
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------- ------------------------------------------------------
Awards Payouts
--------------------------- ---------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Restricted Securities
Name and Principal Annual Stock Underling LTIP All Other
Position Year Salary($) Bonus($) Comp ($) Awards ($) Option/SAR's (#) Payouts Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JOHN P. JENKINS 1996 $146,416 $ 0 $ 6,732 $ 0 $ 0 $ 0 $1,600(1)
President 1995 $ 40,000(2) $ 0 $13,510 $ 0 315,000(3) $ 0
and CEO 1994 N/A -- -- -- -- -- --
JON E. WALKER 1996 $ 84,000(4) $ 50,000(4) $ 0 $ 0 $ 0 $ 0 $7,500(5)
Vice-Chairman 1995 N/A -- -- -- -- -- --
of ACT 1994 N/A -- -- -- -- -- --
</TABLE>
- ---------------
(1) Equal to the insurance premiums paid by the Company with respect to term
life insurance and the full dollar value of the remainder of the
premiums paid by the Company.
(2) Represents compensation commencing January 23, 1995.
(3) John P. Jenkins was granted Non-Qualified Options to purchase 315,000
shares on December 27, 1994 the date of his employment agreement with
the Company. As of June 30, 1996, 215,000 options were exercisable.
(4) Represents compensation paid commencing January 1, 1996 through June 30,
1996.
(5) Equal to the insurance premiums paid by the Company with respect to term
life insurance and the full dollar value of the remainder of the
premiums paid by the Company from January 1, 1996 through June 30, 1996.
(c) OPTION/SAR GRANTS IN LAST FISCAL YEAR
During the fiscal year ended June 30, 1996, no options or SARs were
granted to any of the executive officers required to be named in the Summary
Compensation Table.
(d) AGGREGATED OPTION/SAR EXERCISES FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs In-the Money Options/
Shares Value at FY-End(#) SARs at FY-End (#)
Name Acquired on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable (1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John P. Jenkins -0- -0- 80,000 (E) $ 110,000
President & CEO 60,000 (E) $ 55,500
75,000 (E) $ 28,125
100,000 (U) $ 0(2)
</TABLE>
- ---------------
(1) The year-end values represent the difference between the option exercise
prices (ranging from $.75 to $3.50 per share) and the $2.125 market
value of the Company's Common Stock on June 28, 1996, the last trading
day before fiscal year end. Fair market value represents the average of
the bid and ask prices reported by Nasdaq.
(2) The exercise price of $3.50 is in excess of the year end market value of
the Common Stock,
17
<PAGE> 44
(e) Long-Term Incentive Plan ("LTIP") Awards. During the fiscal year ended
June 30, 1996, the Company did not make any LTIP grants not disclosed above.
(f) Compensation of Directors. The Company pays no cash compensation to
directors for their service as such. It had been the Company's practice to
grant each year to outside directors a non qualified stock option for 5,000
shares of the Company's Common Stock; however, no such grant was made during
fiscal 1996. During fiscal 1996, the Company did pay $4,095 in consulting fees
to one of its directors, H. Robert Gill.
(g) Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. The Company has an employment agreement with John Jenkins, its
President and CEO, providing for, among other things, minimum cash compensation
currently at $160,000 per annum and an automobile for his exclusive use. The
agreement expires on January 23, 1997 but will renewed automatically for one
year unless 30 days' notice of non-renewal is given by either party. During
any renewed term of the agreement, the Company is required to give Mr. Jenkins
an aggregate of nine months prior notice and/or salary continuation benefits in
order to terminate his employment other than for cause, as defined in the
agreement. The salary continuation benefits will cease on such prior date as
Mr. Jenkins accepts other full-time employment. Pursuant to the employment
agreement, the Company granted Mr. Jenkins a non-qualified stock option for
315,000 shares of Common Stock as described above.
The Company entered into a two year agreement for employment commencing
August 1, 1995 with E. Gregory Fisher, President of MDCS, Inc. providing for a
minimum base salary of $75,000 per annum. The agreement will be renewed
automatically for additional two year terms unless six months' prior notice of
non-renewal is given by either party. Mr. Fisher is also entitled to receive
bonus compensation equal to one percent of the total price received by MDCS,
Inc. for all orders placed during the period of 18 months following the
Company's acquisition of MDCS. If the Company terminates Mr. Fisher's
employment other than for cause, he is entitled to receive his base salary
through the term of the agreement, less up to six months's salary payments
which will be paid as severance. Pursuant to the agreement, on the
commencement date of his employment and on each anniversary thereof, the
Company grants to Mr. Fisher an option to purchase 10,000 shares of the
Company's common stock at the current bid price. Pursuant to the agreement,
the Company provides a $500,000 term life insurance policy with a beneficiary
designated by Mr. Fisher. Mr. Fisher is also provided with an automobile.
In connection with the acquisition of ACT, on February 21, 1996 the
Company entered into a 30-month employment agreement with Jon E. Walker
pursuant to which he serves as Vice-Chairman of ACT. The employment
agreement provides for a minimum annual base salary of at least $144,000. In
the event of Mr. Walker's death or the Company's termination of Mr. Walker's
employment (other than for cause, as defined in the agreement), during the term
of the agreement the Company is required to continue to pay the base salary
payments through the term of the agreement to Mr. Walker's estate in the event
of death or to Mr. Walker, until such prior date as he accepts other full-time
employment. Mr. Walker was paid a signing bonus of $50,000. The agreement
requires the Company to keep in force the life insurance policy maintained by
ACT, for which Mr. Walker has designated the beneficiary.
The Company has a 401(k) profit-sharing plan for all eligible employees,
not limited to officers. Beginning in fiscal 1994, the Company amended the
plan providing for an elective match 25 cents for each $1 contributed by
participating employees. The Company did not make the match in calendar 1995.
(h) Report on Repricing of Options/SARs. During the fiscal year ended June
30, 1996, the Company did not amend or adjust the terms of any stock option or
SAR previously awarded to any of the named executive officers.
18
<PAGE> 45
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1996, the number of
shares of the Company's Common Stock beneficially owned by (a) owners of more
than five percent of the Company's outstanding Common Stock who are known to
the Company and (b) the Directors of the Company, individually, and the
Executive Officers and Directors of the Company as a group, and (c) the
percentage of ownership of the outstanding Common Stock represented by such
shares. The security holders listed below are deemed to be the beneficial
owners of shares of Common Stock underlying options and warrants which are
exercisable within 60 days of September 30, 1996.
<TABLE>
<CAPTION>
Percentage of
Beneficial Common Stock
Name of Beneficial Owner Ownership Outstanding
------------------------ --------- ------------------
<S> <C> <C>
R. Larry Ethridge 427,019 6.43%
6325 W. Mansfield #2236
Denver, CO 80235
John P. Jenkins 579,642 (1) 8.23%
2525 W. Evans Avenue
Denver, CO 80219
Jon E. Walker 946,932 (2) 14.22%
2830 Ferry Street
Albany, OR 97321
H. Robert Gill 15,000 (3) .23%
H. R. Hodge 15,000 (4) .23%
All executive officers and directors 2,331,714 (5) 32.8%
as a group (7 individuals)
Michael Taylor 566,000 (6) 8.02%
10855 Business Ctr Dr
Cypress, CA 90630
Renaissance Capital Growth 2,486,111 (7) 27.24%
& Income Fund III, Inc.
8080 N. Central Expwy Suite 210
Dallas, TX 75206
Richard Brown 401,431 6.04%
2830 Ferry Street
Albany, OR 97321
Steven M. Bathgate 523,524 (8) 7.73%
5350 S. Roslyn St., #380
Englewood, CO 80110
Eugene C. McColley 370,774 (9) 5.51%
5350 S. Roslyn St., #380
Englewood, CO 80111
</TABLE>
- ---------------
(1) The figure shown reflects 401,071 shares that are subject to options and
warrants held by Mr. Jenkins.
19
<PAGE> 46
(2) The figure shown includes 17,500 underlying warrants held jointly with
spouse, 20,000 shares held jointly with spouse, and 454,716 shares owned
of record by spouse.
(3) The figures shown reflect 15,000 shares that are subject to options held
by Mr. Gill.
(4) The figures shown reflect 15,000 shares that are subject to options held
by Mr. Hodge.
(5) Includes 10,000 shares underlying options in addition to those described
in footnotes (1) - (4).
(6) The figure shown represents: 114,000 shares underlying warrants and
152,000 shares held of record by the Michael and Kathleen Taylor Trust;
150,000 shares underlying options held by Mr. Taylor; and 150,000 shares
underlying options held by Mrs. Taylor.
(7) The figure shown represents 2,111,111 shares underlying 8% Convertible
Debentures and 375,000 shares underlying warrants.
(8) Includes securities held with spouse and in Keough accounts. Also
includes one-half of the 227,547 shares and 177,547 warrants held of
record by Kiawah Capital Partners, a partnership owned by Steven M.
Bathgate and Eugene C. McColley. Mr. Bathgate disclaims beneficial
ownership of one-half of the securities held by Kiawah Capital Partners.
(9) Includes one-half of the 227,547 shares and 177,547 warrants held of
record by Kiawah Capital Partners, a partnership owned by Steven M.
Bathgate and Eugene C. McColley. Mr. McColley disclaims beneficial
ownership of one-half of the securities held by Kiawah Capital Partners.
Item 12. Certain Relationships and Related Transactions
On June 30, 1985, R. Larry Ethridge and William B. Heermann lent the
Company the sums of $60,000 and $40,000, respectively, on unsecured notes that
were payable upon demand. The funds were used by the Company for working
capital. In November 1990, the Company advanced $10,000 to each of Messrs.
Ethridge and Heermann. On June 30, 1993 the advances were offset against the
notes; and new unsecured demand notes, carrying a rate of interest of 10.0%, in
the amount of $50,000 and $30,000, respectively were issued by the Company. As
of June 30, 1995 these notes remain outstanding and neither party has made
demand to the Company for payment. Interest payments are current on the notes.
On October 20, 1993 J. Neal Ethridge, a brother of the Company's
Chairman, loaned a subsidiary of the Company $750,000. Warrants totaling
200,000 shares at a price equal to the bid price of the Company's stock on the
date of grant were issued to Mr. Ethridge. During fiscal 1995, at a time when
J. Neal Ethridge was a Director of the Company, this note was cancelled and Mr.
Ethridge and a non-affiliated party extended loans of $570,000 and $190,000,
respectively, to Topro, Inc. in exchange for promissory notes secured by a
pledge of the DMC shares, subordinated to the Company's Senior Convertible Note
holders. A new note in the amount of $570,000 was renegotiated on June 1,
1995. On November 8, 1995, the Company sold its remaining 3,255 share owned in
DMC to three parties, including J. Neal Ethridge, who was at that time a
Director of the Company. The purchase price of $1,110,000 (approximately $341
per share) was paid with $350,000 in cash, and cancellation of the aggregate of
$760,000 of the Company's promissory notes held by Mr. Ethridge and the other
party. On June 28, 1996 the Company entered into an amendment to the stock
purchase agreement resolving these contingencies. The amendment provides for a
bonus payment to be paid the Company. Should DMC be sold to any third party
for consideration of greater than $420 per share the Company will receive 50%
of the difference between the $420 per share and the actual price. This
additional consideration will be paid to the Company when received by the DMC
selling shareholders. The Company realized a gain of $ 410,000 from the sale
of the DMC stock. The Board of Directors believes that the terms of this
transaction were at least as favorable as terms which could have been obtained
from any non-affiliated party.
20
<PAGE> 47
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The following Exhibits are filed herewith or have
been previously filed with the Securities and Exchange Commission and are
incorporated by reference herein:
2.1 Agreement and Plan of Merger dated July 26, 1995 regarding the
acquisition of Management Design and Consulting Services, Inc. (A)
2.2 Agreement and Plan of Merger dated February 21, 1996 -
regarding the acquisition of Advanced Control Technology, Inc. (B)
2.3 Agreement of Merger dated May 17, 1996 - regarding the
acquisition of Visioneering Holding Corporation. (C)
3.3 Restated Articles of Incorporation. *
3.4 By Laws (H)
4.1 Form of Senior Convertible Promissory Note and Security
Agreement. Pursuant to Item 601 (b)(4)(iii)(A), a copy will be furnished to the
Commission upon request.
10.1 $570,000 Variable Rate Secured Promissory Note and Security
Agreement dated June 1, 1995 with J. Neal Ethridge. (D)
10.2 $190,000 Variable Rate Secured Promissory Note and Security
Agreement dated June 1, 1995 with Gary Cansler. (D)
10.3 Promissory Note issued by Tech Sales, Inc. in favor of R.
Larry Ethridge, President and a Director of the registrant, in the amount of
$50,000. (I)
10.4 Promissory Note issued by Tech Sales, Inc. in favor of William
B. Heermann, Vice President and a Director of the registrant, in the amount of
$30,000. (I)
10.6 1992 Employee Stock Purchase Plan. (J)
10.7 1992 Incentive Stock Option Plan. (J)
10.8 Agreement dated March 29, 1993 with Direct Measurement
Corporation, whereby the Company invested $300,000 for an approximate 17%
equity interest in Direct Measurement Corporation. An additional Agreement
signed March 29, 1993, granted the Company an exclusive three year right to
market Direct Measurement Corporation's products for three years throughout
North America with non exclusive rights world wide. (J)
10.9 Employment Agreement dated December 27, 1994 between the
Registrant and John Jenkins. (E)
10.10 Non-Qualified Stock Option Agreement dated December 27, 1994
between the Registrant and John Jenkins. (D)
10.11 Asset Purchase Agreement dated May 5, 1995 - regarding sale of
certain operating assets of the Registrant's subsidiary Sharp Electric
Construction Company to Piper Electric Co., Incorporated. (F)
21
<PAGE> 48
10.13 Note, Loan and Security Agreement dated August 24, 1992 With
Merrill Lynch Business Financial Services, Inc. as amended February 19, 1993
and renewed August 23, 1993. (J)
10.14 Renewal, dated April 4, 1995, of Note, Loan and Security
agreement with Merrill Lynch Business Financial Services. (D)
10.15 Agreement signed October 4, 1994 with Direct Measurement
Corporation. (K)
10.16 Agreement dated December 6, 1994 with Direct Measurement
Corporation. (D)
10.17 Stock Purchase Agreement dated November 7, 1995 - regarding
DMC shares. (G)
10.18 Loan Agreement - Renaissance Capital Growth & Income Fund III,
Inc. (B)
10.19 Employment Agreement dated July 27, 1995 between the
Registrant and E. Gregory Fisher
10.20 Employment Agreement dated February 21, 1996 between the
Registrant and Jon E. Walker. (B)
21.1 List of Subsidiaries.*
27 Financial Data Schedule*
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* Previously Filed.
(A) Incorporated by reference to the Form 8-K Current Report dated
August 10, 1995.
(B) Incorporated by reference from the Company's Form 8-K dated
February 21, 1996.
(C) Incorporated by reference from the Company's Form 8-K dated
May 30, 1996.
(D) Incorporated by reference from the Company's Form 10-KSB for
the fiscal year ended June 30, 1995.
(E) Incorporated by reference to the Form 8-K Current Report
dated January 23, 1995.
(F) Incorporated by reference to Exhibit 2.1 to the Form 8-K
Current report dated May 2, 1995.
(G) Incorporated by reference from the Company's Form 8-K dated
November 8, 1995.
(H) Incorporated by reference from Exhibit 3.3 to Registration
Statement on Form S-1, File No. 33-47159, effective June 17,
1992.
(I) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended June 30, 1992.
(J) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended June 30, 1993.
(K) Incorporated by reference from the Company's Form 10-K for the
fiscal year ended June 30, 1994.
(b) REPORTS ON FORM 8-K
During the last quarter of the period covered by this report the Company
filed a report on Form 8-K dated May 30, 1996, reporting the acquisition of
Visioneering Holding Corp. Required financial statements of Visioneering
Holding Corp. were filed with the Form 8-K. Pro forma financial information
was filed by amendment to the Form 8-K.
22
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Topro, Inc.
Date: February 7, 1997 By: /s/ John P. Jenkins
- ---------------------- ---------------------
John P. Jenkins
President and CEO
Date: February 7, 1997 By: /s/ Thomas Tennessen
- ---------------------- ----------------------
Thomas Tennessen
Principal Accounting Officer
