-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WA7+cvWXHD+13ChXjwM8g4auXA9HH4d+CFyzYDihq1UKkcyahxgW8kQ9wQdZczIR ANHwR2Mz3TEiafA8smzY1g== 0000950134-96-005419.txt : 19970130 0000950134-96-005419.hdr.sgml : 19970130 ACCESSION NUMBER: 0000950134-96-005419 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOPRO INC CENTRAL INDEX KEY: 0000874263 STANDARD INDUSTRIAL CLASSIFICATION: 3620 IRS NUMBER: 841042227 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19167 FILM NUMBER: 96643821 BUSINESS ADDRESS: STREET 1: 2525 W EVANS AVE CITY: DENVER STATE: CO ZIP: 80219 BUSINESS PHONE: 3039351221 MAIL ADDRESS: STREET 1: 2525 W EVANS AVE CITY: DENVER STATE: CO ZIP: 80219 FORMER COMPANY: FORMER CONFORMED NAME: ENTERINVESTMENT CORP DATE OF NAME CHANGE: 19600201 10KSB 1 10-KSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB X Annual report pursuant to Section 13 or 15(d) of the Securities --- Exchange Act of 1934 For the fiscal year ended 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. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Colorado 84-1042227 - - ----------------------------------------- ---------------------------- (State or other jurisdiction of I.R.S. Employer I. D. Number incorporation or organization) 2525 West Evans Avenue, Denver, Colorado 80219 - - ----------------------------------------- ----- (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 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 --- --- 2 TOPRO, INC. FORM 10-KSB TABLE OF CONTENTS
Part I Page - - ------ ---- 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 - - ------- 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 - - -------- 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 - - ------- Item 13 Exhibits and Reports on Form 8-K 21
3 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 $2,390,000 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. 3 4 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 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 re-assessment 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. 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." 4 5 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 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. 5 6 During fiscal 1996, the Company's subsidiaries provided process control systems and services to national firms, including the following: 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 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. 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. In fiscal 1996 the Company began to expend limited funds for research and development. This spending is applied to development of specific industrial application software. 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. 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. 6 7 ITEM 2. DESCRIPTION OF PROPERTY The Company maintains leased facilities and one owned building in the locations listed below.
Current Square Term of Annual Function Location Feet Lease Lease Costs - - ---------------------------------------------------------------------------------------------------- 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 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 Consulting 1360 Seaboard Ind. Blvd 9,000 June 1998 $ 41,000 Services, Inc. engineering and Atlanta, GA 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
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. Management of the Company is not aware of any material proceedings being contemplated. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 8 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:
1996 Fiscal Year High Bid Low Bid ---------------- -------- ------- 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
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 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 8 9 to change its business mix from 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 $2,817,000 from $2,385,000 in 1995 to $5,202,000 in 1996. $1,276,000 of the increase was from the acquisition of ACT and $803,000 from the VEC acquisition. TSI increased $495,000 from $2,019,000 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 $2,128,000 from $1,792,000 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 $1,426,000 in 1995 to $1,974,000 in 1996. The increase is attributable to several factors: in 1995, discontinued operations of SEC and TI absorbed some fixed expenses such as utilities, lease expense, and deprecation that were fully absorbed by 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 decreased $250,000 from a $748,000 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 $580,000 from the profit of $627,000 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 $206,000 in 1995, a decrease of $190,000. 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 decrease is attributable to higher 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. 9 10 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. 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. 10 11 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 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. 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. It was felt that the Company had reasonably reserved for the portion of the receivable that was disputed by the EC. The offer for settlement has since been withdrawn by the general contractor. The Company has retained legal counsel in California to review the adequacy of 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 stating a $192,000 back charge. 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. 11 12 The ITP also believes the Company has a direct claim against the municipality for owner-directed changes and delays. The Company is in the process of perfecting its claims position. The Company has not made any material resolution to the outstanding issues with regard to these receivables in the quarter. The Company, 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 bond to the municipality to cover stop notices issued on the project because of the EC's non payment including our 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 they 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 in the fourth quarter of 1996. The Company has no material commitments for capital expenditures. 12 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 14 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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
F-1 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. HEIN + ASSOCIATES LLP Denver, Colorado October 4, 1996 F-2 16 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1996 ASSETS 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 ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-3 17 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, 1996 LIABILITIES AND STOCKHOLDERS' EQUITY 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 ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 18 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, ---------------------------- 1995 1996 ------------ ------------ 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 1,793,000 3,921,000 Distributorship selling and other expenses 1,225,000 871,000 Amortization of goodwill -- 114,000 ------------ ------------ 3,611,000 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 FROM CONTINUING OPERATIONS 206,000 16,000 DISCONTINUED OPERATIONS: Loss from discontinued operations of Sharp Electric (2,256,000) -- Loss on disposal of Sharp Electric (134,000) (1,871,000) ------------ ------------ (2,390,000) (1,871,000) ------------ ------------ NET LOSS $ (2,184,000) $ (1,855,000) ============ ============ NET INCOME (LOSS) PER SHARE: Continuing operations $ .08 $ * Discontinued operations (.94) (.40) ------------ ------------ Net loss $ (.86) $ (.40) ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 2,527,000 4,655,000 ============ ============
- - -------------- * Less than $.01 per share SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-5 19 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1995 AND 1996
COMMON STOCK ADDITIONAL -------------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT ----------- ----------- ----------- ----------- 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) =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-6 20 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, ---------------------------- 1995 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $ 206,000 $ 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 351,000 (2,318,000) Loss from discontinued operations (2,390,000) (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 (1,660,000) (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)
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-7 21 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, ---------------------------- 1995 1996 ------------ ------------ 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 ============ ============
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS. F-8 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 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 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:
YEARS ------- Building 31 Furniture and equipment 5-10 Vehicles 3-5
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 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 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 $2,300,000 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 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:
Topro MDCS Combined ----------- ----------- ----------- Net revenues $ 9,700,000 $ 1,211,000 $10,911,000 Net income (loss) (2,304,000) 120,000 (2,184,000)
F-13 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 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 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.
FOR THE YEARS ENDED JUNE 30, ---------------------------- 1995 1996 ------------ ------------ (Unaudited) Net revenues $ 32,161,000 $ 30,611,000 Net loss (3,380,000) (6,221,000) Loss per share (0.42) (1.13)
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:
1995 1996 ------------ ------------ Revenues $ 6,532,000 $ 3,379,000 Loss before income tax expense (benefit) (2,256,000) (1,892,000) Net loss (2,256,000) (1,892,000)
Assets of discontinued operations are comprised of the following as of June 30, 1995 and 1996: 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 ============ ============
F-15 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:
FOR THE YEARS ENDED JUNE 30, ---------------------------- 1995 1996 ------------ ------------ Revenues $ 2,565,000 $ 907,000 Loss from operations (518,000) (616,000)
7. TRADE RECEIVABLES: The following information summarizes trade receivables at June 30, 1996: 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 ============
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 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: 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 ============
These amounts are included in accompanying balance sheet under the following captions as of June 30, 1996: 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 ============
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 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: 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 ==========
F-18 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: 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
-------------- (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 33 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ==========
The payment schedule for the years ended June 30 is as follows:
RELATED YEAR PARTIES OTHER ---- ---------- ---------- 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 ========== ==========
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 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: 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 $ -- ============
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 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 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:
EXERCISE SHARES PRICE ------------ ------------ 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 ============
F-23 37 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Warrants: --------- 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 ============
Expiration Date Shares -------------- --------- Options outstanding at June 30, 1996 expire as follows: ------------------------------------------------------- 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 =========
F-24 38 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expiration Date Shares -------------- --------- Warrants outstanding at June 30, 1996 expire as follows: -------------------------------------------------------- Exercise price of $5.10 August 1995 60,000 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 --------- 3,700,407 =========
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 F-25 39 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS less than 85% of the fair market value of the stock on enrollment date or exercise date, whichever is 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: Equipment $ 216,000 Accumulated amortization (2,000) ---------- $ 214,000 ==========
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:
Capital Operating Year Ended June 30, Leases Leases ----------------------------- ---------- ---------- 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 ==========
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 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 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.
Name Age Positions ---- --- --------- 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.
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 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 $100,000 per annum during the fiscal year ended June 30, 1996: 16 43 SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation ---------------------------------------- ------------------------------------------------------ Awards Payouts --------------------------- --------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Restricted Securities Name and Principal Annual Stock Underling LTIP All Other Position Year Salary($) Bonus($) Comp ($) Awards ($) Option/SAR's (#) Payouts Compensation - - -------------------------------------------------------------------------------------------------------------------- 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 -- -- -- -- -- --
- - --------------- (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
(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) - - ----------------------------------------------------------------------------------------------------------------- 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)
- - --------------- (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 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 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.
Percentage of Beneficial Common Stock Name of Beneficial Owner Ownership Outstanding ------------------------ --------- ------------------ 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
- - --------------- (1) The figure shown reflects 401,071 shares that are subject to options and warrants held by Mr. Jenkins. 19 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 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. Filed herewith. 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 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. Filed herewith. 27 Financial Data Schedule - - --------------- (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 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 report to be signed on its behalf by the undersigned, thereunto duly authorized. Topro, Inc. Date: October , 1996 By: /s/ John P. Jenkins - - ----------------------- ---------------------------------- John P. Jenkins President and CEO Date: October , 1996 By: /s/ Thomas Tennessen - - ----------------------- -------------------------------- Thomas Tennessen Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date /s/ R. Larry Ethridge Chairman and a October 15, 1996 - - ----------------------------- Director ----- R. Larry Ethridge /s/ John P. Jenkins President and October 15, 1996 - - ----------------------------- Director (Chief ----- John P. Jenkins Executive Officer) Executive Vice President October , 1996 - - ----------------------------- ----- William B. Heermann /s/ H. Robert Gill Director October 15, 1996 - - ----------------------------- ----- H. Robert Gill /s/ H. R. Hodge Director October 15, 1996 - - ----------------------------- ----- H. R. Hodge Director October , 1996 - - ----------------------------- ----- Jon E. Walker
23 50 EXHIBIT INDEX
Exhibit Number Exhibit Description Page - - ------------- ------------------- ---- 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. Filed herewith. 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)
51 EXHIBIT INDEX
Exhibit Number Exhibit Description Page - - ------------- ------------------- ---- 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. Filed herewith. 27 Financial Data Schedule
- - --------------- (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. EX-3.3 2 ARTICLES 1 EXHIBIT 3.3 Page 1 ARTICLES OF AMENDMENT AND RESTATEMENT TO THE ARTICLES OF INCORPORATION OF TOPRO, INC. (A COLORADO CORPORATION) Pursuant to Sections 7-2-109 and 7-2-112 of the Colorado Corporation Code, the undersigned corporation adopts the following Articles of Amendment and Restatement to its Articles of Incorporation: FIRST: The name of the Corporation is Topro, Inc. SECOND: The amendment and restatement presented below correctly sets forth the provisions of the Articles of Incorporation of the Corporation, as amended to date, and was adopted by vote of the shareholders of the Corporation sufficient for approval on October 29, 1992, in the manner prescribed by the Colorado Corporation Code: AMENDMENT AND RESTATEMENT OF THE ARTICLES OF INCORPORATION THIRD: The Articles of Amendment and Restatement set forth below supersede the Corporation's original Articles of Incorporation and all amendments thereto, which are hereby amended and restated in their entirety to provide that: ARTICLE I NAME AND DURATION The name of this corporation (the "Company") is: Topro, Inc. It shall have perpetual duration. ARTICLE II CAPITAL STOCK 2.01 AUTHORIZED SHARES. The aggregate number of shares that the Company shall have authority to issue is two hundred ten million (210,000,000) shares. Two hundred million (200,000,000) shares shall be designated "Common Stock" and shall have a par value of $.0001 per share. Ten million (10,000,000) shares shall be designated "Preferred Stock" and shall have a par value of $.0001 per share. 2.02 CONSIDERATION FOR SHARES. All shares of Common Stock and Preferred Stock shall be issued by the Company for cash, property, or services actually performed, for no less than the par value per share. All shares shall be fully paid and non-assessable. 2 Page 2 2.03 ISSUANCE OF PREFERRED STOCK. The Preferred Stock authorized by these Articles of Incorporation may be issued from time to time in series. The Board of Directors of the Company is authorized to establish such series, to fix and determine the variations in the relative rights and preferences as between series, and thereafter to issue such stock from time to time. The Board of Directors is also authorized to allow for conversion of the Preferred Stock into Common Stock under such terms and conditions as shall be determined by the Board of Directors. 2.04 DIVIDENDS. Dividends in cash, property, or shares of the Company may be paid upon the Preferred and Common Stock, as and when declared by the Board of Directors, out of funds of the Company to the extent and in the manner permitted by law. 2.05 VOTING RIGHTS; CUMULATIVE VOTING. Each outstanding share of Common Stock shall be entitled to one vote and each fractional share of Common Stock shall be entitled to a corresponding fractional vote on each matter submitted to a vote of shareholders. The voting rights of Preferred Stock, if any, shall be established by the Board of Directors at the time such stock is issued in series. Cumulative voting shall not be allowed in the election of Directors of the Company. 2.06 DENIAL OF PRE-EMPTIVE RIGHTS. No holder of any shares of the Company, whether now or hereafter authorized, shall have any pre-emptive or preferential right to acquire any shares or securities of the Company, including shares or securities held in the treasury of the Company. 2.07 DISTRIBUTION IN LIQUIDATION. Upon any liquidation, dissolution, or winding up of the Company, and after paying or adequately providing for the payment of all of its obligations, including any preferences granted to Preferred Stock, the remainder of the assets of the Company shall be distributed, either in cash or in kind, pro rata to the holders of the Common Stock and, if not previously provided for, to the holders of the Preferred Stock, without regard to par value. 2.08 PARTIAL LIQUIDATION. The Board of Directors may, from time to time, distribute to the shareholders in partial liquidation, out of the stated capital or capital surplus of the Company, a portion of the Company's assets, in cash or property, subject to the limitations contained in the Colorado Corporation Code. ARTICLE III DIRECTORS The Company's Board of Directors shall consists of the number of Directors fixed in, or determined in accordance with, the Company's Bylaws and, in default of any such provision therein, the Board shall consist of three (3) Directors. Directors shall be elected by plurality vote and need not be shareholders of the Company or residents of the State of Colorado. 3 Page 3 ARTICLE IV REGISTERED HOLDERS The Company shall be entitled to treat the registered holder of any shares of the Company as the owner of such shares, and shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares, unless and until such purchaser, assignee, transferee or other person becomes the registered holder of such shares, whether or not the Company shall have either actual or constructive notice of the interests of such purchaser, assignee, or transferee or other person. The purchaser, assignee, or transferee of any of the shares of the Company shall not be entitled: to receive notice of meetings of the shareholders; to vote at such meetings; to examine a list of the shareholders; to be paid dividends or other sums payable to shareholders; or to own, enjoy and exercise any other property or rights deriving from such shares against the Company, until such purchaser, assignee, or transferee has become the registered holder of such shares. ARTICLE V RIGHTS OF DIRECTORS The following provisions are inserted for the management of the Company and for the conduct of its affairs, and the same are in furtherance of and not in limitation or exclusion of the powers conferred by law. 5.01 RIGHT OF DIRECTORS TO CONTRACT WITH THE COMPANY. No contract or other transaction between the Company and one or more of its Directors or any other corporation, firm, association, or entity in which one or more of its Directors are directors or officers or are financially interested shall be either void or voidable solely because of such relationship or interest or solely because such Directors are present at the meeting of the Board of Directors or a committee thereof which authorizes, approves, or ratifies such contract or transaction or solely because their votes are counted for such purpose if: (a) The fact of such relationship or interest is disclosed or known to the Board of Directors or committee which authorizes, approves, or ratifies the contract or transaction by a vote or consent sufficient for the purpose without counting the votes or consents of such interested Directors; or (b) The fact of such relationship or interest is disclosed or known to the shareholders entitled to vote and they authorize, approve, or ratify such contract or transaction by vote or written consent; or (c) The contract or transaction is fair and reasonable to the Company. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or a committee thereof which authorizes, approves, or satisfies such a contract or transaction. 4 Page 4 5.02 EXCLUSION OF LIABILITY. As authorized by Section 7-3-101 of the Colorado Corporation Code, no Director of the Company shall be personally liable to the Company or any shareholder thereof for monetary damages for breach of his fiduciary duty as a Director, except for liability for (i) any breach of a Director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) acts in violation of C.R.S. Section 7-5-114 or any successor legislation, or (iv) any transaction from which a Director derives an improper personal benefit. This Section 5.02 shall apply to a person who has ceased to be a Director of the Company with respect to any breach of fiduciary duty which occurred when such person was serving as a Director. This Section 5.02 shall not be construed to limit or modify in any way any Director's right to indemnification or other right whatsoever under these Articles of Incorporation, the Company's Bylaws or the Colorado Corporation Code. If the Colorado Corporation Code hereafter is amended to authorize the further elimination of the liability of Directors, then the liability of the Company's Directors, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the Colorado Corporation Code as so amended. Any repeal or modification of this Section 5.02 by the shareholders shall be prospective only and shall not adversely affect any limitation on the personal liability of any Director existing at the time of such repeal or modification. The affirmative vote of at least two-thirds (2/3) of the total voting power shall be required to amend or repeal, or to adopt any provision inconsistent with, this Section 5.02. 5.03 CORPORATE OPPORTUNITY. The Officers, Directors and other members of management of the Company shall be subject to the doctrine of "corporate opportunities" only insofar as it applies to business opportunities in which the Company has expressed an interest as determined from time to time by the Company's Board of Directors as evidenced by resolutions appearing in the Company's minutes. Once such areas of interest are delineated, all such business opportunities within such areas of interest which come to the attention of the Officers, Directors, or other members of management of the Company shall be disclosed promptly to the Company and made available to it. The Board of Directors may reject any business opportunity presented to it, and thereafter any Officer, Director or other member of management may avail himself of such opportunity. Until such time as the Company, through its Board of Directors, has designated an area of interest, the Officers, Directors, and other members of management of the Company shall be free to engage in such area of interest on their own, and this doctrine shall not limit the rights of any Officer, Director, or other member of management of the Company to continue a business existing prior to the time that such area of interest is designated by the Company. This provision shall not be construed to release any employee of the Company (other than an Officer, Director, or member of management) from any duties which he may have to this Company. 5.04 INDEMNIFICATION OF DIRECTORS AND OTHERS. (a) Actions, Suits, or Proceedings Other than by or in the Right of the 5 Page 5 Company. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Company) by reason of the fact that he is or was a Director, Officer, employee, or agent of the Company or is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and, in the case of conduct in his official capacity with the Company, in a manner he reasonably believed to be in the best interests of the Company, or, in all other cases, that his conduct was at least not opposed to the Company's best interests. In the case of any criminal proceeding, he must have had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, determine that the individual did not meet the standard of conduct set forth in this paragraph (a). (b) Actions or Suits by or in the Right of the Company. The Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a Director, Officer, employee, or agent of the Company or is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and, in the case of conduct in his official capacity with the Company, in a manner he reasonably believed to be in the best interests of the Company and, in all other cases, that his conduct was at least not opposed to the Company's best interests; but no indemnification shall be made in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for negligence or misconduct in the performance of his duty to the Company or where such person was adjudged liable on the basis that personal benefit was improperly received by him, unless and only to the extent that the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which such court deems proper. (c) Indemnification of Successful Party. To the extent that a Director, Officer, employee, or agent of the Company has been successful on the merits or otherwise (including without limitation, dismissal without prejudice) in defense of any action, suit, or proceeding referred to in this Section 5.04, or in defense of any claim, issue, or matter therein, he shall be indemnified against all expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Determination of Right to Indemnification. Any indemnification under paragraphs (a) or (b) of this Section 5.04 (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the Director, Officer, employee, or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (a) or (b) of this Section 5.04. Such 6 Page 6 determination shall be made by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit, or proceeding, or, if such a quorum is not obtainable and a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or by the shareholders. (e) Advance of Costs, Charges, and Expenses. Costs, charges, and expenses (including attorneys' fees) incurred in defending a civil or criminal action, suit, or proceeding may be paid by the Company in advance of the final disposition of such action, suit, or proceeding as authorized by the Board of Directors as provided in paragraph (d) of this Section 5.04 upon receipt of a written affirmation by the Director, Officer, employee, or agent of his good faith belief that he has met the standard of conduct described in paragraphs (a) and (b) of this Section 5.04, and an undertaking by or on behalf of the Director, Officer, employee, or agent to repay such amounts unless it is ultimately determined that he is entitled to be indemnified by the Company as authorized in this Section 5.04. The majority of the Directors may, in the manner set forth above, and upon approval of such Director, Officer, employee, or agent of the Company, authorize the Company's counsel to represent such person in any action, suit, or proceeding, whether or not the Company is a party to such action, suit or proceeding. (f) Settlement. If in any action, suit, or proceeding, including any appeal, within the scope of paragraph (a) or (b) of this Section 5.04, the person to be indemnified shall have unreasonably failed to enter into a settlement thereof, then, notwithstanding any other provision hereof, the indemnification obligation of the Company to such person in connection with such action, suit, or proceeding shall not exceed the total of the amount at which settlement could have been made and the expenses by such person prior to the time such settlement could reasonably have been effected. (g) Other Rights; Continuation of Right to Indemnification. The indemnification provided by this Section 5.04 shall not be deemed exclusive of any other rights to which those indemnified may be entitled under these Articles of Incorporation, any bylaw, agreement, vote of shareholders or disinterested Directors, or otherwise, and any procedure provided for by any of the foregoing, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, Officer, employee, or agent and shall inure to the benefit of heirs, executors, and administrators of such a person. All rights to indemnification under this Section 5.04 shall be deemed to be a contract between the Company and each Director or Officer of the Company who serves or served in such capacity at any time while this Section 5.04 is in effect. Any repeal or modification of this Section 5.04 or any repeal or modification of relevant provisions of the Colorado Corporation Code or any other applicable laws shall not in any way diminish any rights to indemnification of such Director, Officer, employee, or agent or the obligations of the Company arising hereunder. This Section 5.04 shall be binding upon any successor corporation to this Company, whether by way of acquisition, merger, consolidation, or otherwise. (h) Insurance. The Company may purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee, or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee, or agent of another 7 Page 7 corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the Company would have the power to indemnify him against such liability under the provisions of this Section 5.04; provided, however, that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the Directors. (i) Savings Clause. If this Section 5.04 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify each Director, Officer, employee, and agent of the Company as to any cost, charge, and expense (including attorneys' fees), judgment, fine, and amount paid in settlement with respect to any action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including an action by or in the right of the Company to the full extent permitted by any applicable portion of this Section 5.04 that shall not have been invalidated and to the full extent permitted by applicable law. (j) Amendment. The affirmative vote of at least two-thirds (2/3) of the total voting power shall be required to amend, repeal, or adopt any provision inconsistent with, this Section 5.04. No amendment, termination, or repeal of this Section 5.04 shall affect or impair in any way the rights of any Director, Officer, employee, or agent of the Company to indemnification under the provisions hereof with respect to any action, suit or proceeding arising out of, or relating to, any actions, transactions, or facts occurring prior to the final adoption of such amendment, termination, or appeal. (k) Subsequent Legislation. If the Colorado Corporation Code is amended after approval by the shareholders of this Section 5.04 to expand the indemnification permitted to Directors, Officers, employees, or agents of the Company, then the Company shall indemnify such persons to the fullest extent permitted by the Colorado Corporation Code, as so amended. ARTICLE VI SHAREHOLDERS 6.01 DEFINITIONS. Whenever the term "total voting power" appears in these Articles of Incorporation, it shall mean all shares of the Company entitled to vote on the question presented, and of every class or series of shares entitled to vote by class or series. 6.02 QUORUM. One-third (1/3) of the total voting power, represented in person or by proxy, shall constitute a quorum at any meeting of the Company's shareholders. 6.03 VOTE REQUIRED. Any action to be taken by the Company's shareholders may be taken by a majority of the total voting power, present in person or by proxy, except where these Articles of Incorporation or the Company's Bylaws then in effect require a higher proportion of the total voting power. Nothing contained in this Article shall affect the voting rights of holders of any class or series of shares entitled to vote as a class or by series. 6.04 ACTION BY WRITTEN CONSENT. Any provisions to these Articles of 8 Page 8 Incorporation to the contrary notwithstanding, any action to be taken by the Company's shareholders may be taken by unanimous written consent of all shareholders entitled to vote on such action, as provided by the Colorado Corporation Code. ARTICLE VII BYLAWS The initial Bylaws of the Company shall be adopted by its Board of Directors. The power to alter, amend, or repeal the Bylaws or adopt new Bylaws shall be vested in the Board of Directors, subject to the right of the shareholders to alter, amend, or repeal such Bylaws or adopt new Bylaws by the affirmative vote of at least two-thirds (2/3) of the total voting power. Bylaws amendments may be proposed by any Director. The Bylaws may contain any provisions for the regulation and management of the affairs of the Company not inconsistent with law or these Articles of Incorporation. FOURTH: This amendment does not provide for any exchange, reclassification or cancellation of issued shares. FIFTH: This amendment does not effect any change in the Company's stated capital. /s/ R. Larry Ethridge ------------------------------- R. Larry Ethridge, President /s/ Marvin W. Smith ------------------------------- Marvin W. Smith, Secretary EX-21.1 3 LIST OF SUBS 1 EXHIBIT 21.1 LIST OF ALL SUBSIDIARIES OF THE REGISTRANT
Name(and d/b/a Name, if any,) of Subsidiary Jurisdiction of Incorporation - - ------------------------------------------- ----------------------------- Advanced Control Technology, Inc. Oregon Visioneering Holding Corp. California Management Design and Consulting Services, Inc. Georgia Tech Sales, Inc. Colorado Topro Systems Integration, Inc. Colorado (a subsidiary of Tech Sales, Inc.) Sharp Electric Construction Company, Inc. Colorado
EX-27 4 FINANCIAL DATA SCHEDULE
5 12-MOS JUN-30-1996 JUL-01-1995 JUN-30-1996 236,000 0 7,454,000 (377,000) 2,985,000 10,997,000 4,109,000 (1,249,000) 20,013,000 12,001,000 0 0 0 1,000 3,001,000 20,013,000 20,633,000 20,633,000 14,677,000 6,074,000 514,000 61,000 380,000 (118,000) 0 16,000 (1,871,000) 0 0 (1,855,000) (0.40) 0
-----END PRIVACY-ENHANCED MESSAGE-----