-----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, FzdKBGBy6cUCwhRvL+68DWpWsGBNya+f/TzxNIe6+wjzn9UVuwQdnMV1Wy2ZDH3I xr+XIr7UTh8A37OQPrWOBA== 0001047469-97-000338.txt : 19971014 0001047469-97-000338.hdr.sgml : 19971014 ACCESSION NUMBER: 0001047469-97-000338 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971010 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOPRO INC CENTRAL INDEX KEY: 0000874263 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 841042227 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19167 FILM NUMBER: 97693479 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 FORM 10-KSB 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, 1997 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 Small Business issuer in its charter) Colorado 84-1042227 ------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification. No.) incorporation or organization) 2525 West Evans Avenue, Denver, Colorado 80219 - ---------------------------------------- ----- (Address of principal executive offices) (zip code) Issuer'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 ----------------------------------------- Check whether the issuer (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 --- --- Check if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form and no disclosure will be contained, 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 ___. State issuer's revenues for its most recent fiscal year: $36,843,000 ----------- State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and ask prices of such stock, as of a specified date within the past 60 days. On August 28, 1997, the aggregate market value of voting stock held by non-affiliates, based on the closing price as quoted by the NASDAQ Stock Market, was $100,229,000. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Shares of common stock, $.0001 par value, outstanding as of August 28, 1997: 16,497,738 shares. Documents incorporated by reference: Definitive Proxy Statement to be filed with the Commission no later than October 28, 1997. Transitional Small Business Disclosure Format (check one): Yes No X --- --- 1 TOPRO, INC. FORM 10-KSB Table of contents PART I Page Item 1 Description of business. 3 Item 2 Description of property. 8 Item 3 Legal proceedings. 9 Item 4 Submission of matters to a vote of security holders. 9 PART II Item 5 Market for common equity and related stockholder matters. 9 Item 6 Management's discussion and analysis or plan of operation. 10 Item 7 Financial statements. 16 Item 8 Changes in and disagreements with accountants on accounting and financial disclosure. 17 PART III Item 9. Directors and executive officers; Compliance with Section 16(a) of the Exchange Act. 17 Item 10. Executive compensation. 17 Item 11. Security ownership of certain beneficial owners and management. 17 Item 12. Certain relationships and related transactions. 17 PART IV Item 13 Exhibits and reports on Form 8-K. 20 2 TOPRO, INC. FORM 10-KSB FORWARD-LOOKING STATEMENTS Statements made in this Form 10-KSB that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Act and Section 21E of the 1934 Act. These statement often can be identified by the use of terms such as "may," "will," "expect," "anticipate," "estimate," or "continue," or the negative thereof. The Company intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs, failure to integrate operations of recently acquired subsidiaries and failure to capitalize upon access to new clientele. Additional risks and uncertainties which may affect forward-looking statements about the Company's Plant Y2K One-TM- business and prospects include the possibility that a competitor will develop a more comprehensive or less expensive Y2K solution, delays in market awareness of Topro and its product and service solutions, possible delays in Topro product roll out, which could have an immediate and material adverse effect by placing Topro behind its competitors for a time sensitive product and inability to engage qualified staff as needed. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. ITEM 1. DESCRIPTION OF BUSINESS. DEVELOPMENT OF BUSINESS. Topro, Inc., and its subsidiaries, doing business as TAVA Technologies, 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 its formation in 1974 through fiscal 1994, the Company operated primarily through its subsidiary Topro Systems Integration, Inc. ("Topro Systems"). Through Topro Systems, the Company is engaged in designing, developing, assembling, marketing and servicing integrated process control systems primarily to governmental and municipal entities 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 1991, the Company acquired Tech Sales, Inc. ("Tech Sales"). Through Tech Sales, the Company acted as a manufacturer's representative and distributed components and devices used in process control applications. During fiscal 1995, the Board of Directors appointed its current Chief Executive Officer as part of a plan to address and improve the Company's performance. At that time, the Board approved a strategic plan to re-focus the Company's operations in its core business of control systems integration. 3 TOPRO, INC. Commencing in fiscal 1996, the Company has expanded its core business of control system integration through select acquisitions of other system integration companies in new geographical and application markets. The acquisition strategy was founded on identifying quality regional or specific market control systems integration companies and using their established infra- structures to bring the Company's products and services to new markets. In addition, the acquired companies bring significant new vertical market expertise and technologies to the Company that can be applied in its established geographical markets. The Company believes this broad geographical coverage and position in multiple vertical markets is a competitive advantage. Executing this strategy, during July 1995, the Company acquired Management Design and Consulting Services, Inc. ("Management Design"), an Atlanta, Georgia based system integration company. Management Design provides control hardware, technical design and programming services for upgrading of existing factory automation systems. Effective January 1996, the Company acquired Advanced Control Technology, Inc. ("Advanced Control"), an independent control system integration company headquartered in Albany, Oregon. Advanced Control is a leading control system integrator with acknowledged leadership in certain vertical markets including wood products, aerospace, grain handling, and computer aided dispatch. In May 1996, the Company acquired Vision Engineering Corporation ("Vision"), a leading control systems integration company based in Cypress, California with sales and engineering offices in Sacramento, Los Angeles, Phoenix and Chicago and sales offices in Boston and Puerto Rico. Vision has a significant market position in the food processing, pharmaceutical packaging and electronic component manufacturing industries. Effective December 1, 1996, the Company acquired All Control Systems, Inc. ("All Control"), another leading independent control system integration company headquartered in West Chester, Pennsylvania. Within the control system industry, All Control was an established leader in the development of specific application products to provide packaged solutions to meet identified industry specific automation needs. As an example, All Control developed automated batching products for the baking industry, BakeOne-TM-, and for the beverage industry, BevOne-TM-. All Control provides the Company with a strong presence in the Mid Atlantic and Northeast Region and enjoys a strong market reputation. Management believes these acquisitions have given the Company a significant competitive advantage. The Company's combined staff allows it to address projects of a size and scope that other smaller control system integration companies cannot. The Company's geographic reach through branch offices positions it to address the total national needs of customers with diverse manufacturing locations. Management believes the Company is one of the nations largest independent systems integration companies operating at the process control level. The Company will continue its growth pattern through additional selective acquisitions. The Company has retained key management personnel from each of the acquired organizations and has promoted certain other employees to senior management positions in the combined organization. During the year ended June 30, 1997, the Company added to its senior management structure and centrally located the group at its corporate headquarters in Denver, Colorado. As a critical aspect of its strategy, during fiscal 1995 the Company discontinued the activities and operations of Sharp Electric Construction Company ("Sharp"). The Company acquired Sharp, a full service electrical contracting firm, in 1993. The Company anticipated that the acquisition of Sharp would improve its ability to secure process control projects with electrical construction requirements and to expand its ability to handle field installations. In spite of various management changes and attempts to 4 TOPRO, INC. strategically reposition the business, Sharp continued to produce operating losses. As a consequence, in May 1995, the Company sold substantially all of the assets of Sharp and discontinued its operations. Sharp's operating losses during fiscal 1996 and 1997 are included in the Company's financial statements under discontinued operations. Management believes the operations of Sharp have been completed and does not anticipate additional expenses associated with Sharp or other discontinued operations. During fiscal 1995, management determined that the operations of Tech Sales were of marginal strategic value and historic profit contribution was negative. As a result, the Company sold certain assets of Tech Sales during fiscal 1995. Consequently, the operations of Tech Sales were formally discontinued during January 1996. The costs of terminating the Tech Sales operations are reflected in the Company's financial statements for the fiscal year ended June 30, 1996 under discontinued operations. Through 1995, the Company invested in a company, Direct Measurement Corporation ("DMC"), which developed and marketed products utilizing a unique gas flow measuring method. During the year ended June 30, 1996, the Company sold its remaining investment in DMC but, as a condition of that sale, retained a future royalty interest in sales of DMC products. DMC has been purchased by Food and Machinery Corporation which is obligated under the royalty agreement. No royalty income has been generated to date. NARRATIVE DESCRIPTION OF BUSINESS. The Company is a project based industrial technology company that develops, produces and markets control system integration products and services that provide factory and other automation solutions to industry. Through its wholly- owned subsidiaries, the Company provides software applications, system design and configuration for manufacturing and other process control systems. The Company markets its systems, products and services to industrial customers in the chemical, petrochemical, pharmaceutical, aerospace, wood products, mining, electric power and food processing industries and to users of advanced communication networks that are based on fiber optics, microwave and radio. The Company develops and maintains a library of industrial software applications for specific vertical market and industry requirements. The Company has developed a limited number of proprietary factory automation systems which it sells through its direct sales force and regional distributors. The control systems products and services that the Company provides are based on Programmable Logic Controllers, Computer Numerical Controllers, DDC Controllers networked with an Operator Interface, usually a Personal Computer, using both text and graphics to display the plant or system operation and performance characteristics usually in real-time. The information systems are either personal computer or mini-computer based and are networked to a control system in order to gather operational data concerning the plant or system, enabling customers to make better decisions about the operations of their plant or system. Distribution of these systems is done through a direct sales force reporting to an Executive Vice President and National Sales Manager (hired subsequent to June 30,1997) and through a distribution network for certain products. These process control and information systems use hardware manufactured by suppliers such as Allen-Bradley, General Electric, Square D, Modicon, Texas Instruments, Digital Equipment Corporation, IBM, Hewlett Packard and others. The purchased products are readily available on a national basis and the Company is not dependent upon any particular supplier or group of suppliers. The purchased products are assembled into a system at the Company's operating facilities and are configured to the custom software that is written to accommodate the specified application at those particular customer locations. Performance tests are conducted on each system and are witnessed and approved by the customer prior to shipment for installation. 5 TOPRO, INC. Contracts for the systems, including hardware and software, are negotiated and are generally for a fixed price for a well defined scope of work. Before commencing a project, the Company consults with the customer to develop: a functional description document defining what the project will accomplish; a design document to define how the project will be undertaken to satisfy those objectives and acceptance test procedures, which define in advance how the project will be determined to be complete. In late fiscal 1997, the Company signed a strategic alliance agreement with PacifiCorp Energy Services, Inc., a division of PacifiCorp Holdings, Inc., a leading electrical utility with international operations headquartered in Portland, Oregon. The alliance agreement addresses the joint development of business in automating utility and industrial power distribution substations. The alliance combines the automation technology and know-how of Topro with the utility specific experience and know-how of the PacifiCorp engineering resources. During the fourth quarter of fiscal 1997, the Company announced a major business initiative based on its PlantY2KOne-TM- suite of products and services designed to address year 2000 compliance problems in process control and factory automation systems. The PlantY2KOne-TM- product suite includes a methodology designed specifically to address the manufacturing and process floor environment, an inventory and compliance database that includes vendor information for commonly used factory automation hardware and software components and search engines that locate date related code in application programs. The methodology includes assessment, analysis, planning and remediation phases. The process begins with an assessment in which the overall project is defined and organized. An inventory of all process control hardware and software is then completed. In the analysis phase, that inventory is examined, component by component, with the Company's database of vendor year 2000 compliance statements and custom code is analyzed with its search engines to reveal date usage. The conversion planning stage addresses the results of the analysis to develop a plan for bringing the client's system into year 2000 compliance. The final stage is to execute the remediation plan. The Company supplies either "end to end" consulting services built upon the methodology and use of the database and tools, or it will sell the methodology, tools and database access, packaged on CD ROM supported by internet access to the client for self execution. The CD ROM version of the product is in late stage development and is expected to be available to market in October 1997. During the first 60 days after introduction, the Company received more than a dozen engagements for its Y2KOne-TM- services. In addition, the Company has received more than 10 requests for proposals for multi-plant engagements. Though only in its early stages of these engagements, which makes forecasting difficult, the Company believes its Y2KOne-TM- product and services hold significant near-term commercial opportunity. To properly support that opportunity, the Company will have to add significant staff, perhaps as many as 150 engineers. Further, it will have to make additional investment in product development. Management believes that its pursuit of year 2000 business opportunities will have long-term effects on its operations. In addition to the near-term effect of increased revenues and improved margins, the Company expects that these efforts will expand its client base for its core business of system integration. Subsequent to June 30, 1997, the Company signed preliminary distribution agreements with major automation hardware and software suppliers, including Wonderware, Inc. and Square D Company, a division of Groupe Schneider, and is developing a strategic alliance agreement with Fluor Daniel, Inc. that will include marketing its products and services to Fluor Daniel customers. 6 TOPRO, INC. During fiscal 1997, the Company provided process control systems and services to national firms including the following: Coca-Cola Baxter Hunt-Wesson Nestle Nabisco Hershey Westshore Pipeline Boeing Fluor Daniel Hewlett Packard O.C. America Construction AMAX Minerals Cyprus Minerals Marshall Hyman Unocal Corporation Sales to one customer accounted for approximately 18% of the Company's total contract revenue during the year ended June 30, 1997. During 1996, no one customer accounted for more than 10% of total revenue. In Denver, Colorado, the Company operates a service division that provides instrumentation calibration and small scope system configuration services to local customers on a "demand" service basis. This work is generally done at the customer's facility. The group employs eight to ten technicians on a full time basis. These technicians also occasionally support larger system integration engineering projects. COMPETITION. Many firms throughout the United States provide control systems integration services comparable to those offered by the Company. The Company believes that the dominant practice among firms in the control systems integration business is to focus their competitive efforts on a single geographic region or a particular marketplace. Examples include vertical market prominence (water and waste-water treatment, power-generation, petroleum, mining, and chemical industries) or functional prominence (programmable logic control, distribution control systems, and data acquisition). By focusing upon a particular market, many firms typically acquire expertise, specialized resources and business relationships that result in a competitive advantage only within that market. The Company believes that through its acquisition strategy, it has assembled a broad range of market expertise which, when combined with its large resource base and diverse geographical presence, gives it competitive advantages over many 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 country. While most independent control system integrators are much smaller than the Company, there are some general engineering firms which are larger and better financed. The Company may compete in certain markets with these firms but generally not across all markets. RESEARCH AND DEVELOPMENT. The Company conducts limited research and development through both customer funded projects or internal research projects. Costs are incurred in specific system projects that employ existing technologies for which feasibility previously has been established to develop applications within specific industries. These applications are produced to have broad application in specific industries. Production costs for the development of the software used in these projects for which technological feasibility has been established but before ready for sale, are capitalized when broad applications are identified. This investment is designed to create both improved margins through repeat sales of applications in specific vertical markets and to improve the Company's competitive position in these markets. Costs that are incurred prior to determining technical and market feasibility are expensed. The Company will be increasing its research 7 TOPRO, INC. and development activities as it continues the development of its Plant Y2KOne-TM- product and plant automation products. BACKLOG. At June 30, 1996 and 1997, the sales order backlogs for the Company's products and services were approximately $8,837,000 and $12,153,000, respectively. Certain of the Company's contracts require the provision of its services as a smaller portion of a large contract. Consequently, the Company can not always control the timing of the execution of its work on a specific project. This restriction may prevent contracted backlog from being completed within an ensuing twelve month period. EMPLOYEES. At June 30, 1997, the Company had 318 full-time employees. That number includes 179 engineers, designers, and project managers; 43 wiring, assembly, and fabrication workers; 30 sales persons; 24 service and other technicians and 42 administrative personnel, including its Executive Officers. No employee is represented by a labor union and the Company believes its employee relations are good. ITEM 2. DESCRIPTION OF PROPERTY. The Company maintains leased facilities and one owned building at the following locations. Square Term of Current Function Location Feet lease annual rent - -------------------------------------------------------------------------------------------------------- Corporate headquarters and 2525 West Evans Avenue 32,000 April 1999 $148,000 Topro Systems, engineering Denver, CO and manufacturing facilities. Topro Systems, engineering 1800 West Broadway 6,000 January 2001 $ 50,000 facilities. Phoenix, AZ All Control, engineering 905 Airport Road 35,000 April 2004 $365,000 and manufacturing facilities. West Chester, PA Advanced Control, engineering 2830 Ferry Street 13,000 Owned(1) N/A and manufacturing facilities. Albany, OR Advanced Control, additional 2514 Ferry Street 12,000 July 2001 $ 72,000 facilities. Albany, OR Advanced Control, engineering 3400 188th Avenue 1,000 Month-to- $ 12,000 office. Lynwood, WA month Management Design, engineering 1360 Seaboard Ind. Blvd. 9,000 June 1998 $ 41,000 and manufacturing facilities. Atlanta, GA Vision, engineering and 10855 Business Center Dr. 31,000 September 2001 $170,000 manufacturing facilities. Cypress, CA Vision, engineering and sales 9940 Business Center Dr. 7,000 Month-to- $ 59,000 facilities. Sacramento, CA month Vision, engineering and sales 760 Pasquinelli Dr. 4,000 April 1998 $ 65,000 facilities. Westmont, IL - --------------------------------------------------------------------------------------------------------
8 TOPRO, INC. (1) This property is subject to a $255,000 first mortgage held by a bank, a second position security interest totaling $185,000 held by a creditor, and a third position security interest securing a $404,000 term loan from a bank. (See Note 8 to the consolidated financial statements). Subsequent to June 30, 1997, the Company has accepted an offer to sell this property to an unrelated party under a lease back arrangement. The transaction is expected to close by December 1997. 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 its property is subject, that have not been adequately reserved for. At June 30, 1997, there is a dispute involving a claim by the Company for damages included in its balance sheet under the caption of: Costs and estimated earnings in excess of billings on uncompleted contracts, in the amount of $2,200,000. The claim, in the total amount of $3,900,000, arises from a dispute with a customer regarding contractual disagreements primarily resulting from change orders. The Company is also party to various disputes involving contractual matters of contract compliance and payment of its billings. Management does not believe that the outcome of these disputes will have a material adverse effect on the Company's results of operations, its financial position or cash flows. The Company, in the routine course of business, utilizes legal services to protect lien rights on projects to secure payment of its outstanding accounts. At June 30, 1997, the Company has reserves for potential losses on contracts and an allowance for doubtful accounts in the amount of $2,445,000. (See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Cash Flow.)" ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 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 Small-Cap Market ("NASDAQ"). The Company's outstanding redeemable common stock purchase warrants are also quoted on NASDAQ under the symbol TPROW. The warrants are exercisable to purchase one share of the Company's common stock. During fiscal 1997, the Company extended the warrant exercise period to expire on June 24, 1999 and reduced the exercise price from $4.25 to $3.50 for one share of common stock. The range of the high and low sales price quotations for the Company's common stock as quoted by NASDAQ for the past two fiscal years is provided below : Year ended June 30, 1997 High sales price Low sales price - -------------------------------------------------------------------------------- Fourth quarter $2.13 $1.22 Third quarter $2.81 $1.22 Second quarter $3.38 $2.13 First quarter $2.88 $1.63 - -------------------------------------------------------------------------------- 9 TOPRO, INC. Year ended June 30, 1996 High sales price Low sales price - -------------------------------------------------------------------------------- Fourth quarter $2.88 $1.94 Third quarter $2.94 $1.50 Second quarter $1.88 $1.50 First quarter $1.94 $1.63 - -------------------------------------------------------------------------------- On August 28,1997, there were 475 record holders of the Company's common stock and approximately 5,500 beneficial holders, including holders of shares held in nominee or street name. The Company has never declared a dividend on its common stock, and it is anticipated that any earnings will be retained for use in its business for the foreseeable future. The Company's ability to pay dividends is not restricted under any of the various promissory notes, debentures or loan agreements to which it is a party or under any other arrangements or agreements to which it is a party, except that cumulative dividends on its Series A convertible preferred stock must be paid before dividends may be paid to common stockholders. The Company has not been in arrears on the payment of preferred stock dividends. The transfer agent for the Company's common stock is American Securities Transfer, Incorporated, 938 Quail Street, Suite 101, Lakewood, CO 80215. On April 29 and June 30, 1997, the Company sold 100,000 and 33,334 shares, respectively, of its Series A Convertible Preferred Stock and granted 300,000 and 100,000 common stock purchase warrants, respectively, in a private placement. The Company received proceeds in the amounts of $1,500,000 and $500,000, respectively. Each share of preferred stock has a stated value of $15.00 per share and is convertible at any time at the holder's option into 10 shares of the Company's $.0001 par value common stock at a rate of $1.50 per share of common stock, subject to adjustment. The preferred shares will automatically convert into common stock if, after one year from issue, the closing price of the Company's common stock for 20 consecutive trading days is $3.00 or more or on April 30, 2002, whichever occurs first. Each share of preferred stock shall receive a 6% cumulative dividend, payable quarterly, based upon its stated value and has voting rights on matters submitted to a vote of common stockholders equal to the number of common shares into which it may be converted. Each warrant may be exercised at any time until June 30, 1999 to purchase one share of the Company's common stock for $2.00 per share. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996: During the two year period ended June 30, 1997, the Company made acquisitions of four private companies, all of which were engaged in businesses similar to its own. Three of the acquisitions were accounted for under the purchase method of accounting, which requires that operating results of the acquired companies be included in the Company's financial statements from the time of acquisition forward. The acquisitions occurred relatively evenly spread over the periods. These three companies had annual revenues and gross profit margins similar to those of the Company. As a consequence, comparisons of changes in the Company's operating results from year to year are difficult to make. Through its acquisition strategy, the Company has significantly increased its technology asset base, its professional staff and its geographical reach. As a result, the Company is now able to secure and staff larger individual projects and increase business opportunity by bringing its newly acquired technologies and expertise to different geographical and application markets. Management believes this offers a competitive advantage in the Company's markets. 10 TOPRO, INC. The 1996 statement of operations and related footnote disclosures contain information on two subsidiaries whose operations were discontinued during that year. At June 30, 1997, the remaining obligations of those entities have been completed. Losses from discontinued operations were $106,000 and $1,871,000 for the years ended June 30, 1997 and 1996, respectively. Management does not believe that remaining obligations, if any, will have an impact on the Company's operations in the future. The following analysis discusses only the continuing operations of the Company. During the year ended June 30, 1997, the Company incurred an after tax loss from continuing operations in the amount of $2,629,000. Although gross profit margins improved, overhead expenses, particularly the non-cash expenses incurred for depreciation, $767,000, amortization of goodwill and capitalized software, $815,000, a provision for doubtful accounts, $944,000 (creating a total allowance at June 30, 1997 in the amount of $2,075,000) and adjustments relating expenses anticipated to be incurred in connection with the acquisition of Vision, $250,000, contributed significantly to the net loss. During the fourth quarter of fiscal 1997, management made a decision to increase the allowance for doubtful accounts based on its opinion of risks associated with collectibility. In addition, based upon its assessment of an anticipated contractual dispute settlement, management determined that it was appropriate to create a reserve for expenses anticipated to be incurred in connection with it. A charge to income from continuing operations in the amount of $250,000 was made during the fourth quarter of fiscal 1997. This charge created a reserve which management believes is adequate to cover these contingencies. Revenues increased by $16,210,000 or 79% to $36,843,000 during the year ended June 30, 1997 as compared to revenue of $20,633,000 in 1996. The current year reflects the contributions of $9,833,000 and $9,825,000 from All Control and Vision, respectively. Vision's revenues were included for only two months of the pervious year, while All Control's were not included at all. Further, the current year includes a full twelve months of contribution from Advanced Control, which was acquired as of January 1, 1996. Advanced Control's revenues for the current year were $7,570,000. During the year ended June 30, 1996, Advanced Control's operations were included for only six months. Its revenues during that period were $4,820,000. The Company's business includes resale of hardware, software and subcontracting services to customers. These activities generally are passed through to customers at lower gross margins than labor services or proprietary product sales. The Company's revenue mix between the resale hardware, software and subcontracting services to value added labor and proprietary products, can have significant impact on both revenues and gross margins between accounting periods. The successful introduction of the Y2KOne-TM- program will bring a new revenue stream into the organization. In addition to consulting and implementation revenues, the Company expects to receive licensing fees from the sale of its proprietary software tool kits and access to its database. Gross profit increased by $6,565,000 or 110% to $12,521,000 during the year ended June 30, 1997, as compared to gross profit of $5,956,000 in 1996. All Control and Vision contributed gross profits of $2,762,000 and $4,340,000, respectively, for the current year. The consolidated results of operations resulted in an increase in gross profit percentage from 29% in 1996 to 34% during 1997. This increase is significant in that it demonstrates improved product mix and improved project execution. Since the Company's contracts are generally fixed price and include material, subcontracts, labor engineering and installation, it is not possible to accurately determine the gross profit margin on the individual contract components. Generally, the Company develops its project bids assuming a material and subcontract markup of approximately 10%. Applying this general assumption to the year ending June 30,1997 would suggest a gross profit margin on labor engineering services and installation of approximately 50%. The composition of costs of goods sold during the year ended June 30, 1997 was approximately 57% material and subcontractor costs and approximately 43% labor, overhead and other costs. Since material and 11 TOPRO, INC. subcontracts are resold to customers at a lower gross margin than labor services and proprietary product sales, the revenue mix impacts the Company's gross profit margin and will continue to impact the gross profit margin in the future. The Y2KOne-TM- service offering is an internal labor intensive initiative. Subcontractor and material costs will not contribute as significantly to cost of goods sold as does the Company's core business. In addition, the tools and database software carry gross margins higher than the Company historically has obtained on its core business. If the Company is successful with Y2KOne-TM- implementation and depending upon the extent that its revenues contribute to total revenue, gross profits should increase during the second half of the next fiscal year. Selling, general and administrative expenses increased by $6,295,000 or 107% to $12,168,000 for the year ended June 30, 1997. Selling expense accounted for $553,000 of the increase and general and administrative expense accounted for the remaining $5,742,000. The increases are attributable to the general increase in the Company's business levels and acquisitions. The Company now operates from nine branch locations across the United States, each of which carries attendant operating expenses such as salaries, rent and local administration. Further, the Company recently has added members to its executive management group and has centrally located them at its corporate office in Denver, Colorado. During the year, the Company made considerable investments in developing a national sales organization, developing and installing a uniform operating structure and methodology and the initial development stages of the Y2KOne-TM- program. Since its growth expectations will depend to a certain extent on future acquisitions, management anticipates that the level of selling, general and administrative expenses will continue to grow in order to support the expanded operations, but will decrease as a percentage of sales. Amortization of goodwill resulting from the acquisitions totaled $479,000 for the year ended June 30, 1997 compared to $114,000 for the preceding year. Amortization expense in the amounts of $189,000, $162,000 and $128,000 were attributed to Vision, Advanced Control and All Control, respectively. The Company capitalizes the cost of developing software products after achieving technological feasibility and before ready for sale, when it believes there is an after-market for future use of the technology. During the years ended June 30, 1997 and 1996, the Company capitalized $1,174,000 and $572,000, respectively, of software development costs. Amortization expense of the capitalized costs was $336,000 and $36,000 for 1997 and 1996, respectively. Interest expense increased by $607,000 to $987,000 for the year ended June 30, 1997 when compared to the previous year. The increase is due to the debt financing incurred to support the working capital needs of the acquired companies and the bank credit lines and notes assumed as part of the acquisitions. Subsequent to June 30, 1997, the holder of $2,685,000 of long-term convertible debt elected to convert it to common stock. This reduction in debt will contribute to lower interest costs in future years. Although the Company incurred a consolidated net loss, a provision for income taxes at the state level was necessary because there were profitable operations in a state which does not permit the filing of a consolidated income tax return. The Company recorded an income tax provision in the amount of $110,000 during the year ended June 30, 1997. The Company recognized a 100% valuation allowance on its net deferred tax asset since it could not be determined if it was more likely than not it would be realized. The Company expects that its growth and acquisition strategy will continue to provide opportunities to improve earnings through volume increases and greater operating efficiencies at both the direct and overhead expense levels. 12 TOPRO, INC. The Company has undertaken a number of programs to effect the sharing of resources and technologies among branch locations and markets. The beneficial effect of these programs is not always immediate and will take time to have a significant cumulative effect. Management believes that a positive impact of these programs can be achieved in the near-term future. LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDING JUNE 30, 1997. The following summarizes the sources of debt and equity funding during the year ending June 30, 1997. In September and October of 1996, the Company issued $150,000 of 12% unsecured subordinated promissory notes. In January and March 1997, a total of $100,000 of the notes were repaid and $50,000 of the notes were converted to common stock. On October 30, 1996, the Company issued $1,200,000 of its 9% convertible debentures to provide working capital funding. This indebtedness is collateralized by a security interest in the assets of the Company including assets of Advanced Control, Management Design, All Control, Vision and Topro. The Company also pledged the shares of its subsidiaries to secure repayment of the debenture. On November 27, 1996, the Company closed a private offering of 700,000 shares of its common stock to institutional and accredited investors. Net proceeds to the Company, after legal and broker fees totaling $80,000, were approximately $970,000. Proceeds were used for working capital and repayment of short-term debt. During November 1996, the Company received a request from the holders of its 8% 270-day convertible debentures to convert the notes into the its common stock. The entire principal in the amount of $375,000 plus accrued interest was converted into 214,285 common shares at the price of one share per $1.75 of principal. On March 31, 1997, holders of the Company's 10% senior convertible notes in the amount of $350,000 converted their notes into units of its securities at the rate of $.67 for each $1.00 of principal plus accrued interest. Each unit consisted of one share of common stock and one warrant to purchase common stock. The warrants are exercisable to purchase one share of common stock for $1.00 per share until March 31, 2000. On March 13, 1997, the Company called 1,043,449 redeemable stock purchase warrants, representing an equal number of underlying common shares, for redemption. The stock purchase warrants were exercisable by the holders to purchase one share of common stock at rates of $1.00 and $1.75 per share. Holders of warrants representing 906,327 shares of common stock exercised their rights thereunder. The Company received proceeds in the amount of $906,000. Upon the expiration of the exercise period, 122,836 warrants to purchase common stock for $1.00 per share and 14,286 warrants to purchase common stock for $1.75 per share were canceled due to non-exercise by the holders. During April 1997, the holder of stock purchase warrants to purchase 32,870 and 24,537 shares of common stock for $.67 and $1.00, respectively, exercised its rights thereunder. The Company received proceeds in the amount of $46,560. During April 1997, the Company lowered the exercise price from $4.25 to $1.00 per share to holders of stock purchase warrants to purchase 214,284 shares of common stock. The warrants were originally issued in connection with the sale of common stock by the Company. The holders exercised their rights thereunder and the Company received proceeds in the amount of $214,284. 13 TOPRO, INC. During April 1997, the Company lowered the exercise price and extended the exercise period of its 662,000 publicly traded warrants. The warrants' exercise price was reduced to $3.50 from $4.25 and the exercise period was extended from June 17, 1997 until June 24, 1999. The warrants were originally issued in connection with the sale of common stock by the Company. The stock purchase warrants are redeemable by the Company at the exercise price if the closing price of its common shares is $6.38 or more for 20 consecutive trading days. On April 29 and June 30, 1997, the Company sold 100,000 and 33,334 shares, respectively, of its Series A Convertible Preferred Stock and granted 300,000 and 100,000 common stock purchase warrants, respectively, in a private placement. The Company received proceeds in the amounts of $1,500,000 and $500,000, respectively as proceeds from the sale. Subsequent to June 30, 1997, the Company has received proceeds of $4,616,000 upon the exercise by the holders of 3,001,101 stock options and stock purchase warrants for 3,001,101 shares of common stock. Proceeds have been used for general working capital, including repayment of bank debt and the reduction in accounts payable. Further, subsequent to June 30, 1997, the holders of the Company's 9% convertible debentures have converted $2,685,000 of long term debt into 1,790,032 shares of its common stock. During the past eighteen months, the Company has assumed debt obligations to three banks in the course of executing its acquisition strategy. According to the terms of these debt agreements, the Company is required to repay one of these obligations by November 30, 1997. This facility is comprised of a revolving line of credit in the amount of $75,000 and a term note in the amount of $404,000. The Company has commenced discussions with the lender regarding a short-term extension of this facility and is reasonably confident that the maturities will be extended. Under the terms of the other two credit facilities, the Company is required to repay the facilities by January 1, 1998. As of June 30, 1997, the Company owed $1,143,000 under these facilities. The Company has continued the process of securing replacement financing for its short-term debt obligations. The Company plans to consolidate its outstanding debt obligations into one or two larger credit facilities and secure an increase in its revolving credit facility to provide improved capacity to handle the short-term working capital requirements of the larger projects and its anticipated revenue growth. While a firm commitment has not yet been received, the Company has received proposals and is reasonably confident that it will be successful obtaining this financing. If the Company is not successful in refinancing these facilities, its overall liquidity would be negatively impacted and default could result in acceleration of other obligations, including the 9% convertible debentures. (See "Management's discussion of liquidity" below.) Accounts receivable and accounts payable. In the course of the past twelve months, the Company has experienced severe cash flow issues, primarily as a result of the rapid growth of a semiconductor fabrication facility expansion project undertaken for a customer. The project has more than doubled in size from its inception as a result of scope increases and massive functional requirement changes. The invoice processing system employed by the customer was inadequate to the task of keeping up with the changes they were directing. As a result, the Company has had significant and disproportionate working capital tied up in accounts receivable, retention and change order processing on this one project. As a consequence, management was forced to delay payment of its accounts to preserve maximum possible liquidity. The Company has had to repeatedly force the issue of improved invoice processing with the customer's management. In addition, the Company believes it has substantial claims in excess of the original contract amount that will be recovered through the claims process. As of June 30, 1997, the Company has recognized revenue of $2,200,000 associated with this claim which it believes is in excess of $3,900,000. Accounts receivable and costs in excess of billings 14 TOPRO, INC. relating to this project at June 30, 1997 totaled $4,489,000 with obligations related to this project in the amount of $737,000. Management believes these assets will be fully realizable although litigation may be required. As of September 15, 1997, work on this project is substantially complete. Should the Company not be successful in realizing these amounts, liquidity would be negatively impacted. As of June 30, 1997, the Company elected to increase its allowance for doubtful accounts by incurring a provision expense of $944,000 for the year. This expense resulted in the Company having an allowance for doubtful accounts of $2,075,000 at June 30, 1997. The allowance account was increased based on the increase in size of the Company's general business and individual contracts as well as review its over 90 day accounts receivable and costs in excess of billings. The allowance account is reviewed regularly by management. As of June 30, 1997, the Company had accounts payable in excess of 90 days past invoice date in the amount of $3,435,000. The Company anticipates utilizing collection of receivables and proceeds of any additional financing to reduce trade accounts payable. Some of the extended accounts payable relate to disputes with vendors regarding the performance of their equipment and subcontractors to the Company of projects where the Company has extended accounts receivable. Capital expenditures. The Company has no material commitments for capital expenditures. The Company anticipates capital spending to upgrade its computer network and for the development of hardware and software in fiscal 1998. These expenditures are anticipated to be made from cash flow, cash resources on hand and proceeds of debt or equity financings as resources are available. Cash flow. During the year ended June 30, 1997, the Company experienced negative cash flow from continuing operations in the amount of $868,000. This is an improvement of $1,450,000 when compared to cash used in continuing operations during the preceding year. Cash used in discontinued operations was $554,000 and $1,198,000 during the years ended June 30, 1997 and 1996, respectively. The improved cash flow from operating activities was primarily attributed to improved accounts receivable collections and the reduction in cash used in discontinued operations. Cash used in investing activities increased by $1,593,000 to $1,897,000 during the year ended June 30, 1997 when compared to the preceding year. The increase is primarily attributed to an increase in software development costs of $602,000 and acquisition costs of subsidiaries of $522,000. Cash provided by financing activities was $3,990,000 for the year ended June 30, 1997 compared to $3,823,000 for the preceding year. The Company received net proceeds in the amounts of $4,217,000 and $1,411,000 from the sale of equity securities and the issuance of notes and other borrowings, respectively, during the year. Principal repayments on debt obligations during the year ended June 30, 1997 were $1,503,000. Management's discussion of liquidity. The Company has incurred losses for the previous five years and has experienced negative cash flow from operations. As of June 30, 1997, the Company had working capital of $168,000 and has bank debt totaling $1,764,000 maturing within the next six months. The Company is aggressively pursuing new product development (Plant Y2KOne-TM-) and anticipates additional working capital will be required to complete product development and establish volume sales. 15 TOPRO, INC. During July and August 1997, the Company received proceeds in the amount of $4,616,000 through the exercise by the holders of 3,001,101 stock options and stock purchase warrants. These proceeds have been applied to improve working capital, including payment of accounts payable, reduction in debt, payment of normal operating expenses and increasing cash balances. It is management's belief that additional working capital in the near-term will be required to support operations and anticipated revenue growth. As of August 31, 1997, the Company had outstanding exercisable stock purchase warrants and stock options for common shares which, if exercised, would generate approximately $6,205,000 in cash proceeds. It is management's intent to improve liquidity and cash flow from operations through the following activities: 1) Improve the Company's profitability and working capital management. 2) Generate cash proceeds through the exercise of outstanding options and warrants. 3) Prudent use of a credit facility. 4) Issue additional equity, if required. In an effort to improve the Company's profitability and working capital position, management is: 1) Investing in product development designed to improve gross margins. 2) Improving project performance by centralizing cash management, financial and accounting functions. 3) Improving contract management by standardizing appropriate terms and conditions. 4) Negotiating more favorable payment terms with the Company's customers and suppliers. 5) Continuing to focus on changing the Company's revenue mix to a higher labor content and higher margin product sales. Management believes the above programs will be sufficient to improve operating results, improve cash flow from operations and that additional debt and equity financing will be available to support the Company's operations. ITEM 7. FINANCIAL STATEMENTS. Reports of independent certified public accountants. F-1 Consolidated balance sheet at June 30, 1997. F-3 Consolidated statements of operations for the years ended June 30, 1997 and 1996. F-5 Consolidated statements of stockholders' equity for the years ended June 30, 1996 and 1997. F-6 Consolidated statements of cash flows for the years ended June 30, 1997 and 1996. F-7 Notes to consolidated financial statements. F-9 16 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Topro, Inc. Denver, Colorado We have audited the accompanying consolidated balance sheet of Topro, Inc. and subsidiaries as of June 30, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides 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 at June 30, 1997 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Denver, Colorado September 26, 1997 F-1 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Topro, Inc. Denver, Colorado We have audited the consolidated balance sheet of Topro, Inc. and subsidiaries as of June 30, 1996 (not separately presented herein) and the accompanying related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides 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 year then ended, in conformity with generally accepted accounting principles. Hein + Associates LLP Denver, Colorado October 4, 1996 F-2 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1997 Pro forma - ------------------------------------------------------------------------------------- ASSETS (Note 8) (Note 16) CURRENT ASSETS: Cash (Note 13) $ 907,000 $ 3,215,000 Receivables: Trade, net of allowance for doubtful accounts of $2,075,000 (Note 6) 6,097,000 6,097,000 Other receivables 20,000 20,000 Costs and estimated earnings in excess of billings on uncompleted contracts (Note 7) 5,712,000 5,712,000 Inventories 174,000 174,000 Prepaid expenses and other 222,000 222,000 - ------------------------------------------------------------------------------------- Total current assets 13,132,000 15,440,000 PROPERTY AND EQUIPMENT, at cost: Building and land 850,000 850,000 Furniture and equipment 2,820,000 2,820,000 Leasehold improvements 786,000 786,000 - ------------------------------------------------------------------------------------- 4,456,000 4,456,000 Accumulated depreciation and amortization (1,823,000) (1,823,000) - ------------------------------------------------------------------------------------- Net property and equipment 2,633,000 2,633,000 CAPITALIZED SOFTWARE COSTS, net of accumulated amortization of $401,000 2,025,000 2,025,000 OTHER ASSETS: Excess of cost over fair value of assets acquired, net of accumulated amortization of $634,000 (Note 4) 8,538,000 8,538,000 Debt issuance costs, net of accumulated amortization of $64,000 274,000 274,000 Other assets 284,000 284,000 - ------------------------------------------------------------------------------------- TOTAL ASSETS $26,886,000 $29,194,000 - -------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-3 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET June 30, 1997 Pro forma - ----------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (Note 16) CURRENT LIABILITIES: Line-of-credit (Note 8) $ 75,000 $ 75,000 Current portion of long-term debt (Note 8): Related parties 142,000 142,000 Financial institutions and other 1,823,000 1,823,000 Capital lease obligations 111,000 111,000 Accounts payable 7,247,000 4,939,000 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 7) 1,478,000 1,478,000 Accrued expenses 1,718,000 1,718,000 Reserve for contract losses (Note 13) 370,000 370,000 - ----------------------------------------------------------------------------------------- Total current liabilities 12,964,000 10,656,000 LONG-TERM DEBT, net of current portion (Note 8): Financial institutions and other 5,332,000 2,647,000 Capital lease obligations 90,000 90,000 - ----------------------------------------------------------------------------------------- Total long-term debt 5,422,000 2,737,000 Deferred gain (Note 13) 24,000 24,000 - ----------------------------------------------------------------------------------------- Total liabilities 18,410,000 13,417,000 COMMITMENTS AND CONTINGENCIES (Notes 3, 7 and 13) STOCKHOLDERS' EQUITY (Notes 10, 11 and 12): Preferred stock, par value $.0001 per share; authorized 10,000,000 shares, 133,334 shares issued and outstanding -- -- Common stock, par value $.0001 per share; authorized 200,000,000 shares, 11,709,605 shares issued and outstanding, 16,500,738 shares issued and outstanding pro forma 1,000 2,000 Additional paid-in capital 15,998,000 23,298,000 Accumulated deficit (7,523,000) (7,523,000) - ----------------------------------------------------------------------------------------- Total stockholders' equity 8,476,000 15,777,000 - ----------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,886,000 $29,194,000 - -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-4 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended June 30, 1997 1996 - ------------------------------------------------------------------------------- REVENUES $36,843,000 $20,633,000 COST OF SALES 24,322,000 14,677,000 - ------------------------------------------------------------------------------- GROSS PROFIT 12,521,000 5,956,000 EXPENSES: Sales expenses 2,297,000 1,744,000 General and administrative expenses 9,871,000 4,129,000 Bad debt expense 944,000 51,000 Amortization of capitalized software costs and goodwill 815,000 150,000 Subsidiary acquisition purchase adjustment (Note 4) 250,000 -- - ------------------------------------------------------------------------------- 14,177,000 6,074,000 OTHER INCOME (EXPENSE): Gain on sale of assets 8,000 435,000 Interest expense (987,000) (380,000) Other 116,000 79,000 - ------------------------------------------------------------------------------- (863,000) 134,000 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE (2,519,000) 16,000 Income tax expense (Note 9) (110,000) -- - ------------------------------------------------------------------------------- Income (loss) from continuing operations (2,629,000) 16,000 DISCONTINUED OPERATIONS (Note 5): Loss on disposal (106,000) (1,871,000) - ------------------------------------------------------------------------------- NET LOSS $(2,735,000) $(1,855,000) - ------------------------------------------------------------------------------- NET LOSS APPLICABLE TO COMMON SHAREHOLDERS $(2,750,000) $(1,855,000) - ------------------------------------------------------------------------------- NET LOSS PER SHARE: Continuing operations $ (0.30) $ -- Discontinued operations (0.01) (0.40) - ------------------------------------------------------------------------------- NET LOSS PER SHARE $ (0.31) $ (0.40) - ------------------------------------------------------------------------------- WEIGHTED AVERAGE SHARES OUTSTANDING 8,882,000 4,655,000 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-5 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended June 30, 1996 and 1997 Additional Preferred stock Common stock paid-in Accumulated Shares Amount Shares Amount capital deficit - ---------------------------------------------------------------------------------------------------------------------------------- Balance, July 1, 1995 -- $ -- 3,375,628 $1,000 $ 4,178,000 $(2,918,000) Shares issued for cash in private placements, net -- -- 845,000 -- 757,000 -- Shares issued for conversion of 12% 180 day debentures and accrued interest -- -- 390,000 -- 488,000 -- Shares issued to employees as compensation -- -- 2,000 -- 1,000 -- Shares issued for acquisition of Advanced Control -- -- 1,657,000 -- 1,657,000 -- Shares issued for conversion of senior notes and accrued interest -- -- 94,775 -- 63,000 -- Shares issued in payment of Advanced Control debt -- -- 65,000 -- 105,000 -- Warrants issued with convertible debentures -- -- -- -- 38,000 -- Shares issued for acquisition of Vision -- -- 200,000 -- 300,000 -- Options issued for acquisition of Vision -- -- -- -- 90,000 -- Shares issued for payment of accounts payable -- -- 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) Shares issued for cash in private placements, net 133,334 -- 880,000 -- 2,984,000 -- Shares issued for conversion of 8% notes -- -- 214,285 -- 375,000 -- Shares issued for conversion of 12% notes and accrued interest -- -- 35,000 -- 53,000 -- Shares issued for conversion of 10% senior notes and accrued interest -- -- 548,436 -- 367,000 -- Shares issued for financing fees and extensions -- -- 40,000 -- 99,000 -- Shares issued for acquisition of All Control -- -- 1,883,333 -- 2,825,000 -- Shares issued for acquisition of Vision -- -- 201,130 -- 289,000 -- Shares issued upon exercise of warrants -- -- 1,178,018 -- 1,167,000 -- Shares issued upon exercise of stock options -- -- 90,000 -- 66,000 -- Options and warrants issued for outside services -- -- -- -- 52,000 -- Deferred debt costs upon conversion of debt -- -- -- -- (53,000) -- Preferred stock dividends -- -- -- -- -- (15,000) Net loss -- -- -- -- -- (2,735,000) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, June 30, 1997 133,334 $ -- 11,709,605 $1,000 $15,998,000 $(7,523,000) - ---------------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-6
TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 1997 1996 - ---------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $(2,629,000) $ 16,000 Adjustments to reconcile income (loss) to cash used in continuing operating activities: Depreciation 767,000 296,000 Amortization 815,000 150,000 Provision for doubtful accounts 813,000 61,000 Gain on sale of fixed assets (8,000) (435,000) Issuance of compensatory options and warrants 52,000 18,000 Common stock issued for interest and other fees 99,000 37,000 Changes in operating assets and liabilities: (Increase) decrease in: Receivables 3,740,000 (1,942,000) Costs and estimated earnings in excess of billings (1,886,000) (378,000) Inventories (26,000) 73,000 Prepaid expenses and other 9,000 (43,000) Increase (decrease) in: Accounts payable (32,000) 104,000 Billings in excess of costs and estimated earnings (1,528,000) 82,000 Accrued expenses and other (1,054,000) (357,000) - ---------------------------------------------------------------------------- Net cash used in continuing operating activities (868,000) (2,318,000) Discontinued operations: Loss from discontinued operations (106,000) (1,871,000) Change in assets 526,000 1,294,000 Decrease in accounts payable (974,000) (621,000) - ---------------------------------------------------------------------------- Net cash used in discontinued operations (554,000) (1,198,000) - ---------------------------------------------------------------------------- Net cash used in operating activities (1,422,000) (3,516,000) - ---------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in acquisitions of subsidiaries 3,000 202,000 Purchase of investment -- (229,000) Sale of investments -- 350,000 Proceeds from sale of property and equipment 13,000 -- Purchase of property and equipment (217,000) (95,000) Acquisition costs of subsidiaries (522,000) -- Capitalized software development costs (1,174,000) (572,000) Proceeds from notes receivable -- 40,000 - ---------------------------------------------------------------------------- Net cash used in investing activities (1,897,000) (304,000) - ---------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-7 TOPRO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended June 30, 1997 1996 - ------------------------------------------------------------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Proceeds from issuance of notes and other borrowings 1,411,000 12,396,000 Principal payments on notes and other borrowings (1,503,000) (9,556,000) Deferred note and other financing costs (120,000) (284,000) Proceeds from the sale of stock and exercise of warrants and options, net of offering costs of $336,000 4,217,000 1,267,000 Preferred stock dividends (15,000) -- - ------------------------------------------------------------------------------- Net cash provided by financing activities 3,990,000 3,823,000 - ------------------------------------------------------------------------------- INCREASE IN CASH 671,000 3,000 CASH, BEGINNING OF YEAR 236,000 233,000 - ------------------------------------------------------------------------------- CASH, END OF YEAR $ 907,000 $ 236,000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 1,049,000 $ 294,000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued in the acquisition of All Control $ 2,825,000 $ -- Conversion of notes, accrued interest and debt issue costs to common stock 742,000 588,000 Common stock issued in the acquisition of Vision 289,000 390,000 Purchase of equipment under long-term lease 32,000 -- Notes payable cancelled in exchange for equity investment -- 760,000 Common stock issued in the acquisition of Advanced Control -- 1,657,000 Common stock issued as payment of accounts payable -- 10,000 Warrants issued in connection with convertible debentures -- 38,000 - ------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. F-8 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION AND NATURE OF BUSINESS. Topro, Inc. ("Topro" or the "Company") designs, develops, assembles, markets and services control system integration products. Integrated control systems are sophisticated computer hardware and software control 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 during February 1996 (See Note 5). In August 1993, the Company acquired all of the outstanding common stock of Sharp Electric Construction Company ("Sharp"). Sharp was primarily engaged in the electrical project construction and service business. As discussed in Note 5, the Company sold the assets of Sharp in May 1995. In July 1995, the Company acquired all of the outstanding common stock of Management Design & Consulting Services, Inc. ("Management Design"). In January 1996, the Company acquired all of the outstanding common stock of Advanced Control Technology, Inc. ("Advanced Control"). In May 1996, the Company acquired all of the outstanding common stock of Vision Engineering Holding Corporation ("Vision"). In December 1996, the Company acquired all of the outstanding common stock of All Control Systems, Inc. ("All Control"). The above companies, with the exception of Sharp and Tech Sales, are engaged in business activities similar to those of Topro. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Topro, Tech Sales, Sharp, Management Design, Advanced Control, Vision and All Control. Collectively, these entities are referred to as the Company. All significant intercompany transactions and accounts have been eliminated in consolidation. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid monetary instruments 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 with regard to cash and cash equivalents. INVENTORIES. Inventories, which consist primarily of finished goods and supplies, are stated at the lower of cost or market using the first-in, first- out method of accounting. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Depreciation is provided utilizing the straight-line method over estimated useful lives. F-9 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Estimated useful lives: Asset Years - ------------------------------------------------------------------ Buildings 31 Furniture and equipment 3-10 - ------------------------------------------------------------------ Major renewals and betterments are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. LEASEHOLD IMPROVEMENTS. Leasehold improvements are stated at cost. Amortization is provided utilizing the straight-line method over the terms of the leases. SOFTWARE DEVELOPMENT COSTS. Computer software development costs and other research and development costs are charged to expense as incurred. Costs incurred to develop product masters of computer software, for which technological feasibility has been established but before ready for sale, are capitalized. Capitalized software development costs are amortized on a product- by-product basis each year based upon the greater of: (1) the amount computed using the ratio of current year gross revenue to the sum of current and anticipated future gross revenue for that product, or (2) five year straight- line amortization. For the years ended June 30, 1997 and 1996, the Company capitalized software development costs in the amounts of $1,174,000 and $572,000, respectively. Amortization expense was $336,000 and $36,000 for the years ended June 30, 1997 and 1996, respectively. DEBT ISSUANCE COSTS. The costs related to the issuance of debt are capitalized and amortized as interest expense over the term of the related debt. 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 analysis necessary involve significant management judgment to evaluate the capacity of an acquired business to perform within projections. INCOME RECOGNITION. The Company utilizes the percentage of completion method of accounting for all significant long-term contracts. The percentage of completion method of reporting income takes into account the cost, estimated earnings and revenue to date on contracts not yet complete. 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 upon current estimates of the cost to complete the contract. 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 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 loss is recognized in the financial statements. Contracts which are substantially complete are considered closed for financial statement purposes. Costs incurred on contracts in progress in excess of billings are classified as a current asset. Amounts billed in excess of revenue earned are classified as a current liability. F-10 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income related to direct sales of equipment and parts is recognized upon shipment. INCOME TAXES. The Company accounts for income taxes under the asset and liability method of accounting. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based upon the difference between the financial statement and income tax bases of assets and liabilities using current income tax rates. EARNINGS (LOSS) PER SHARE. Earnings (loss) per share is calculated by dividing net income (loss) after deducting preferred stock dividends by the weighted average common and common equivalent shares outstanding. Common stock equivalents are not included when the effect is antidilutive. USE OF ESTIMATES. The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires its management to make estimates and assumptions that affect the amounts reported in the 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 values 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 the revisions could be material. CONCENTRATIONS OF CREDIT RISK. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to completely perform as contracted. Concentrations of credit risk, whether on or off the 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 of financial instruments under Statement of Financial Accounting Standards 107, "Disclosures About Fair Values 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 cash, accounts receivable, accounts payable, long-term debt and other debt, approximate their respective carrying values in the consolidated financial statements at June 30, 1997. STOCK OPTIONS AND STOCK PURCHASE WARRANTS. Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees", is applied in accounting for all employee stock option and stock purchase warrant arrangements. Compensation cost is recognized for all stock options and stock purchase warrants granted to employees when the exercise price is less than the market price of the underlying common stock on the date of grant. Statement of Financial Accounting Standards 123, "Accounting for Stock-Based Compensation". Statement 123 requires pro forma disclosures regarding net income (loss) as if compensation cost for stock options and stock purchase warrants had been determined in accordance with the fair value based method prescribed in Statement 123. Estimates of the fair value are made for each stock option and stock purchase warrant at the date of grant by the use of the Black-Scholes option pricing model. F-11 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS. Statement of Financial Accounting Standards 128, "Earnings per Share" and Statement of Financial Accounting Standards 129 "Disclosure of Information About an Entity's Capital Structure". Statement 128 provides a different method of calculating earnings per share than is currently used in accordance with Accounting Principles Board Opinion 15 "Earnings per Share". Statement 128 provides for the calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share. Statement 129 establishes standards for disclosing information about an entity's capital structure. Statements 128 and 129 are effective for financial statements issued for periods ending after December 15, 1997. Their implementation is not expected to have a material effect on the consolidated financial statements. Statement of Financial Accounting Standards 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards 131 "Disclosures About Segments of an Enterprise and Related Information". Statement 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that displays with the same prominence as other financial statements. Statement 131 supersedes Statement of Financial Accounting Standards 14 "Financial Reporting for Segments of a Business Enterprise". Statement 131 establishes standards on the way that public companies report financial information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Statements 130 and 131 are effective for financial statements for periods beginning after December 15, 1997 and require comparative information for earlier years to be restated. Because of the recent issuance of these standards, management has been unable to fully evaluate the impact, if any, the standards may have on the future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of these standards. RECLASSIFICATIONS. Certain reclassifications have been made to the financial statements for the year ended June 30, 1996 to conform to the current year presentation. These reclassifications had no effect on the net loss. NOTE 3. LIQUIDITY. The Company has incurred net losses for the past five years and has experienced negative cash flow from operations. In addition, the Company has $2,151,000 of debt due during fiscal 1998. At June 30, 1997, the Company was not in compliance with a loan covenant provision on certain of its debt. The lender has granted a waiver of this violation. Management has taken the following actions to improve the Company's cash flow and results of operations. F-12 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - Management has developed and launched the Company's Plant Y2K program. It is anticipated that this program will generate revenues and cash flow for the Company and improve its gross margins. - - During the two months subsequent to June 30, 1997, the Company received $4,600,000 in proceeds from the exercise of stock options and stock purchase warrants. This cash infusion, together with the reduction of $2,700,000 of debt through conversion to common stock, has enhanced the Company's working capital position. - - The Company has added to its executive management group and centrally located it at its corporate offices. This will better enable the Company to consolidate the management functions of its operations and produce operational efficiencies. - - Improve project performance by beginning a program to centralize cash management, financial and accounting functions. - - Continue to pursue raising additional cash through the issuance of debt or equity financing. - - Continue to eliminate duplications in its cost structure and identify areas where costs can be reduced. Management believes that improved operating results will provide adequate cash flow to meet operational needs for the foreseeable future. If necessary, management believes that it will be able to obtain additional debt or equity financing. Although there are no assurances that the Company will be able to obtain additional financing or generate adequate cash flow to meet its operational needs, management believes that actions taken and those that are planned, will enable the Company to continue as a going concern. NOTE 4. ACQUISITIONS. In July 1995, the Company acquired all of the outstanding common stock of Management Design in exchange for 200,000 shares of its common stock. Management Design, located in Atlanta, Georgia, provides consulting and engineering services related to the design, development, assembly and service of integrated process control systems to customers in the southeastern United States. The transaction was accounted for as a pooling of interests. Effective January 1, 1996, the Company acquired all of the outstanding common stock of Advanced Control in exchange for 1,657,000 shares of its common stock. Advanced Control is a control system integration company located in Albany, Oregon. The acquisition was accounted under the purchase method of accounting and accordingly, the operating results of Advanced Control have been included in the consolidated statement of operations from the date of acquisition. The value of the consideration given amounted to of $1,657,000 and was determined based upon the estimated fair value of the common stock issued and other costs incurred in connection with the acquisition. The purchase price has been allocated to the assets purchased and liabilities assumed based upon their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was $2,477,000 and is being amortized over 15 years. Immediately prior to the acquisition, Advanced Control sold the rights to certain technology for $5,000 in cash and a $95,000 note receivable. The Company obtained rights to acquire an equity interest in the purchasing entity. F-13 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective May 1, 1996, the Company acquired all of the outstanding common stock of Vision in exchange for 200,000 shares of its common stock and options to acquire: 150,000 shares of its common stock for $2.25 per share commencing October 1996, 150,000 shares of its common stock for $2.25 per share commencing April 1997, 300,000 shares of its common stock for $2.50 commencing January 1998 and 300,000 shares of its common stock for $2.75 commencing January 1998. In March 1997, the Company issued an additional 100,000 shares of its common stock as a result of Vision achieving certain earnings goals and an additional 101,130 shares to satisfy other obligations assumed upon Vision's acquisition. The estimated fair value of the additional 201,130 shares, amounting to $289,000, has been added to the consideration paid for Vision and recorded as additional goodwill. During the year ended June 30, 1997, an acquisition adjustment relating to an anticipated contractual dispute settlement, which was determined subsequent to the acquisition and amounting to $250,000, was charged to operations. Vision is a control systems integration company located in Cypress, California. The acquisition was accounted under the purchase method of accounting and accordingly, the operating results of Vision have been included in the consolidated statement of operations from the date of acquisition. The value of the consideration given amounted to $679,000 and was determined based upon the estimated fair value of the common stock and options issued and other costs incurred in connection with the acquisition. The purchase price has been allocated to the assets purchased and liabilities assumed based upon their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was $3,121,000 and is being amortized over 15 years. Effective December 1, 1996, the Company acquired all of the outstanding common stock of All Control in exchange for 1,883,333 shares of its common stock. Of the shares issued in connection with the acquisition, 61,733 are being held in escrow to satisfy any potential future income tax liabilities that may arise from the tax treatment of capitalized software costs incurred prior to All Control's acquisition. All Control is a control systems integration company located in Westchester, Pennsylvania. The acquisition was accounted under the purchase method of accounting and accordingly, the operating results of All Control have been included in the consolidated statement of operations from the date of acquisition. The value of the consideration given amounted to $2,825,000 and was determined based upon the estimated fair value of the common stock issued and other costs incurred in connection with the acquisition. The purchase price has been allocated to the assets purchased and liabilities assumed based upon their fair values at the date of acquisition. The excess of the purchase price over the estimated fair value of the net assets acquired was $3,574,000 and is being amortized over 15 years. An officer of the Company is the majority owner of a company that has an option to purchase certain of the All Control's software products relating to the color printing industry. The option may not be exercised before November 1998 and extends through February 2000. The agreement provides that the option price is to be equal to the then net book value of the software products to be purchased. The following unaudited pro forma summary combines the consolidated results of operations of the Company, Advanced Control, Vision and All Control as if their acquisitions had occurred at the beginning of the periods presented 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 future operations or the results that would have occurred had the transactions been consummated at the beginning of the periods indicated. F-14 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 1997 1996 - ------------------------------------------------------------------------------ (Unaudited) Net revenues $40,210,000 $38,435,000 Net loss $(3,175,000) $(5,130,000) Loss per share $ (0.40) $ (.60) - ------------------------------------------------------------------------------ NOTE 5. DISCONTINUED OPERATIONS. During May 1995, the Company discontinued the operations of and completed the sale of substantially all of the assets of Sharp for $50,000 cash and a $50,000 note receivable, due through September 1995. In 1995, the Comany 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. The loss incurred during 1997 resulted from the completion of remaining projects. All contracts in progress at the time of the sale have been completed at June 30, 1997. During June 1995, the Company sold the assets of Tech Sales. Tech Sales' operations were formally discontinued during February 1996. The following is a summary of the Company's results from discontinued operations: Years ended June 30, 1997 1996 - ------------------------------------------------------------------------------ Revenues $ 423,000 $ 3,379,000 Loss on disposal $(106,000) $(1,871,000) - ------------------------------------------------------------------------------ NOTE 6. TRADE RECEIVABLES. The following is a summary of the Company's trade accounts receivable at June 30, 1997: - ------------------------------------------------------------------------------ Contract receivables: Completed contracts $ 2,174,000 Uncompleted contracts 4,941,000 Retention 1,057,000 - ------------------------------------------------------------------------------ 8,172,000 Less: allowance for doubtful accounts (2,075,000) - ------------------------------------------------------------------------------ Contract receivables, net $ 6,097,000 - ------------------------------------------------------------------------------ Generally, the Company's contracts contain retention provisions that require certain percentages of completion be achieved before amounts under contracts may be billed. Retention is generally collected within one year after the completion of a contract. F-15 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has concentrations of credit risk along industry lines in manufacturing, aerospace, mining and food processing customers. The Company undertakes ongoing credit evaluation of its customers, however, collateral is generally not required. The Company typically deals with subcontractors under performance bonds and it generally has the right to file mechanics' liens to secure contractual obligations. Management believes that the allowance for doubtful accounts is sufficient to cover the Company's credit risk. Sales to one customer accounted for approximately 18% of total contract revenues for the year ended June 30, 1997. During 1996, no one customer accounted for more than 10% of total revenue. NOTE 7. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS. The following information is applicable to uncompleted contracts of continuing operations at June 30, 1997: - ------------------------------------------------------------------------------- Costs incurred on uncompleted contracts $ 54,400,000 Estimated earnings 10,136,000 - ------------------------------------------------------------------------------- 64,536,000 Less: billings to date (60,302,000) - ------------------------------------------------------------------------------- $ 4,234,000 - ------------------------------------------------------------------------------- These amounts are included in the accompanying balance sheet under the following captions at June 30, 1997: - ------------------------------------------------------------------------------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 5,712,000 Billings in excess of costs and estimated earnings on uncompleted contracts 1,478,000 - ------------------------------------------------------------------------------- $ 4,234,000 - ------------------------------------------------------------------------------- Costs and estimated earnings in excess of billings on uncompleted contracts at June 30, 1997 includes a claim, which is expected by management to be billed and collected within one year. The claim arises from a dispute with a customer over certain change orders and other contractual matters. The change orders were made at the request of the customer. In the opinion of independent contract analysis experts, the dispute over the change orders and other contractual matters provides a valid claim against the customer. Revenue from the claim is only recognized to the extent that contract costs relating to the claim have been incurred During the year ended June 30, 1997, approximately $2,200,000 of a $3,900,000 claim amount have been included in contract revenues. NOTE 8. LINES-OF-CREDIT, SHORT AND LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS. The following is a summary of the Company's indebtedness at June 30, 1997: - ------------------------------------------------------------------------------- LINE OF CREDIT: $500,000 line-of-credit pursuant to a loan agreement with a financial institution, collateralized by substantially all assets of Advanced Control and a deed of trust on its real property, interest at the prime rate (2) plus 2.0% per annum. The line expires in November 1997. $ 75,000 - ------------------------------------------------------------------------------- Total line-of-credit $ 75,000 - ------------------------------------------------------------------------------- F-16 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Line-of-credit, short and long-term debt and capital lease obligations continued. - ------------------------------------------------------------------------------- RELATED PARTY: Notes payable to an officer and a director of the Company, interest at 10.0% per annum payable semiannually, due on demand, unsecured. $ 80,000 Notes payable to a director and former majority stockholders of Vision, interest at 8.0% per annum, monthly payments of $10,000, unsecured. 42,000 Note payable to relatives of a director and former majority stockholders of Vision, interest at 10.0% per annum payable quarterly, unsecured. 20,000 - ------------------------------------------------------------------------------- Total related party $ 142,000 - ------------------------------------------------------------------------------- SHORT-TERM DEBT: Term loan pursuant to a loan agreement with a financial institution, collateralized by substantially all assets of Vision, interest at the prime rate (2) plus 2.0% per annum. The loan matures in December 1997 and requires monthly principal payments in the amount of $17,000 plus interest. $ 243,000 $1,000,000 term loan pursuant to a loan agreement with a financial institution collateralized by substantially all assets of All Control and guaranteed by an officer, interest at the prime rate (2) plus 3.5% per annum, monthly principal payments of $20,000. Prior to February 10, 1997, this obligation was a $1,600,000 line-of-credit. In conjunction with the acquisition of All Control, the line-of-credit was converted to a term loan of $1,000,000 which is due on January 1, 1998. 900,000 Term loan pursuant to a loan agreement with a financial institution collateralized by substantially all assets and a deed of trust on the real property of Advanced Control. Monthly principal and interest payments of $11,000, interest at the prime rate (2) plus 2.5% per annum. The loan has a balloon payment on the unpaid balance due November 1997. 404,000 Term loan payable to a bank, interest at the prime rate (2) plus 2.0% per annum, collateralized by equipment and leasehold improvements of Vision, due on demand or if no demand, payable in monthly installments of $7,000 plus interest through April 1998. 69,000 - ------------------------------------------------------------------------------- Total short-term $ 1,616,000 - ------------------------------------------------------------------------------- LONG-TERM DEBT: 9% convertible debentures with a small business investment fund. Outstanding borrowings bear interest at 9.0% per annum, interest payable monthly. If the debentures are not sooner redeemed or converted, a mandatory principal redemption is due beginning March 1, 1999 in the amount of 1% of the then remaining principal amount outstanding. The debentures are convertible into the Company's common stock at the rate of one share for each $1.50 of principal. The loan is collateralized by all the assets of Topro, Advanced Control, Management Design and All Control . During July and August, 1997, the debenture holders converted $2,685,000 of principal into 1,790,032 shares of common stock. (1) $ 4,700,000 F-17 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Line-of-credit, short and long-term debt and capital lease obligations continued. - ------------------------------------------------------------------------------- Mortgage note payable to a bank, due in monthly installments of $2,941 including interest at 11.0% per annum, balloon payment of remaining balance is due November 2001, collateralized by a first deed of trust on Advanced Control's land and building. 255,000 Four year promissory note bearing interest at 8.0% per annum payable to a creditor. Monthly payments of $6,103 are due beginning May 1, 1996. The promissory note is collateralized by a second position on the real estate of Advanced Control. 185,000 Term loan payable to a bank, interest adjusted quarterly based upon the prime rate (2) plus 2.75% per annum, collateralized by a second security interest on substantially all assets of Vision, guaranteed by the Small Business Administration and personally guaranteed by an officer, which personal guarantee is collateralized by a third deed on the officer's residence, payable in monthly principal payments of $7,000 adjusted quarterly, through September 2002. 274,000 Non-interest bearing note payable to Advanced Control's legal counsel payable over 30 months at $5,000 monthly beginning April 1, 1996. The note has been discounted using an effective interest rate of 10.25%. 88,000 Various notes payable, due in monthly installments through November 1998, collateralized by equipment and vehicles. 37,000 Capital lease obligations secured by equipment. 201,000 - ------------------------------------------------------------------------------- Total long-term $ 5,740,000 - ------------------------------------------------------------------------------- Total indebtedness $ 7,573,000 Less current portion (2,151,000) - ------------------------------------------------------------------------------- Long-term portion $ 5,422,000 - ------------------------------------------------------------------------------- (1) The debentures include covenants which require the Company to maintain certain working capital and net worth ratios. At June 30, 1997, the Company was not in compliance with a certain financial covenant, however, the lender has agreed to waive its rights to declare a default for such violation and has reduced the minimum standards required for the ratio through December 1997 at which time management believes the Company will be in compliance with such covenants. (2) At June 30, 1997, the prime rate of interest was 8.50% per annum. Scheduled principal payments for years ending June 30 are as follows: Related party Other - ------------------------------------------------------------------------------- 1998 $142,000 $2,009,000 1999 -- 434,000 2000 -- 650,000 2001 -- 547,000 2002 -- 646,000 Thereafter -- 3,145,000 - ------------------------------------------------------------------------------- F-18 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During September and October 1996, the Company issued 12% unsecured subordinated Series 1996-A Promissory Notes in the amount of $150,000. The Company paid the lenders fees in the amount of 2,500 shares of its common stock for each $50,000 of principal and an aggregate of 32,500 shares of its common stock as fees to extend the maturities of the notes. Notes in the principal amount of $100,000 plus accrued interest were repaid. The holder of a note in the principal amount of $50,000 converted its note into 35,000 shares of the Company's common stock at the rate of one share for each $1.50 of principal plus accrued interest of $3,000. On October 30, 1996, the Company issued $1,200,000 of its 9% convertible debentures to the holder of $3,500,000 of its previously issued 9% convertible debentures. During November 1996, the Company received requests from the holders of its 8% 270 day convertible notes to convert them into the Company's common stock. The entire principal in the amount of $375,000 was converted into 214,285 common shares at the rate of one share for each $1.75 of principal. During March 1997, the Company received requests from the holders of $350,000 of its 10% senior convertible notes to convert them into units of the securities. The notes were converted at the rate of $.67 per unit for each $1.00 of principal plus accrued interest of $17,000. Each unit consisted of one share of common stock and one stock purchase warrant to purchase common stock. The stock purchase warrants are exercisable to purchase one share of common stock for $1.00 per share until March 31, 2000. NOTE 9. INCOME TAXES. Deferred tax assets (liabilities) at June 30, 1997 are comprised of the following: - ----------------------------------------------------------------------- Current deferred tax assets (liabilities): Trade receivables $ 705,000 Contract loss provisions 122,000 Deferred gain 60,000 Accrued liabilities 267,000 Property and equipment (143,000) Capitalized software (689,000) Net operating loss carryfowards 3,127,000 - ----------------------------------------------------------------------- Total 3,449,000 Less valuation allowance (3,449,000) - ----------------------------------------------------------------------- Net $ -- - ----------------------------------------------------------------------- Income tax expense for the year ended June 30, 1997 relates to amounts currently payable for state income tax purposes. Income tax expense for the year ended June 30, 1997 does not bear the normal relationship to the expected tax benefit resulting from the loss incurred due to state taxes and the change in the valuation allowance. The Company recognized a 100% valuation allowance on the net deferred tax asset since it could not be determined if it was more likely than not it would be realized. F-19 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At June 30, 1997, the Company had net operating loss carryforwards in the amount of approximately $9,000,000 for Federal income tax purposes. The loss carryforwards expire in 2008 through 2012. A portion of these carryforwards will be limited due to the change in control of acquired subsidiary companies. NOTE 10. STOCKHOLDERS' EQUITY. During September 1995, a note holder converted $25,000 of notes and $1,000 of accrued interest into 39,102 shares of common stock and stock purchase warrants to purchase 39,102 shares of common stock. Each stock purchase warrant is exercisable to purchase one share of common stock for $1.00 through August 1998. During September 1995, the Company completed a private placement of 435,000 shares of common stock and incurred offering costs in the amount of $11,000 in conjunction therewith. During October 1995, the Company granted 50,000 stock purchase warrants to a public relations firm. Each warrant is exercisable to purchase one share of common stock for $1.00 through October 2000. During November 1995 in conjunction with a loan agreement, the Company granted 14,286 stock purchase warrants to a financial institution. Each warrant is exercisable to purchase one share of common stock for $1.75 through November 2000. During February and March 1996 in conjunction with the issuance of $3,500,000 of its 9% convertible debentures, the Company granted 375,000 stock purchase warrants to the lender. Each stock purchase warrant is exercisable to purchase one share of common stock for $1.50 through March 1999. The Company allocated $38,000 of the debenture proceeds to the warrants. During December 1995 and January 1996, the Company issued $480,000 of its 12% convertible 180 day notes. The note holders were granted 240,000 stock purchase warrants. Each stock purchase warrant is exercisable to purchase one share of common stock for $1.00 through April 2000. During May 1996, the Company completed a private placement of units consisting of 800,000 shares of common stock and 240,000 stock purchase warrants. Each stock purchase warrant is exercisable to purchase one share of common stock for $1.00 through April 2000. The offering included the conversion of $465,000 of the Company's 12% convertible notes and $535,000 in cash proceeds. In conjunction with this offering, the Company granted the underwriter 150,000 stock purchase warrants. Each warrant is exercisable to purchase one share of common stock for $1.50 through March 2001. During February 1996 in conjunction with a service agreement with its public relations firm, the Company granted 200,000 stock purchase warrants to the firm. Each stock purchase warrant is exercisable to purchase one share of common stock through October 2000 as follows: 50,000 exercisable at $1.25, 50,000 exercisable at $2.00, 50,000 exercisable at $2.50 and 50,000 exercisable at $3.00. The Company recognized $87,000 of expense as the value of the warrants which is being amortized over the two year term of the service agreement. During April 1996, the Company granted 100,000 stock purchase warrants as additional compensation to its investment advisor. Each stock purchase warrant is exercisable to purchase one share of common stock for $2.56 through February 2001. F-20 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During January and June 1996, the Company issued 55,673 shares of its common stock and granted 50,000 stock purchase warrants in payment of $37,000 of interest on its debt. Each stock purchase warrant is exercisable to purchase one share of common stock for $2.00 through May 1999. On November 27, 1996, the Company sold 700,000 shares of its $.0001 par value common stock and granted 70,000 stock purchase warrants in a private placement, receiving proceeds in the amount of $1,050,000. The stock purchase warrants are exercisable at any time before January 31, 1999 to purchase one share of common stock for $2.46. On March 13, 1997, the Company called 1,043,449 redeemable stock purchase warrants, representing an equal number of underlying common shares, for redemption. The stock purchase warrants were exercisable by the holders to purchase one share of common stock at rates of $1.00 and $1.75 per share. Holders of warrants representing 906,327 shares of common stock exercised their rights thereunder. The Company received proceeds in the amount of $906,000. Upon the expiration of the exercise period, 122,836 warrants to purchase common stock for $1.00 per share and 14,286 warrants to purchase common stock for $1.75 per share were canceled due to non-exercise by the holders. During March 1997, the Company sold 180,000 shares of its $.0001 par value common stock in a private placement, receiving proceeds in the amount of $270,000. During April 1997, the holder of stock purchase warrants to purchase 32,870 and 24,537 shares of common stock for $.67 and $1.00, respectively, exercised its rights thereunder. The Company received proceeds in the amount of $46,560. During April 1997, the Company lowered the exercise price from $4.25 to $1.00 per share to holders of stock purchase warrants to purchase 214,284 shares of common stock. The warrants were originally issued in connection with the sale of common stock by the Company. The holders exercised their rights thereunder and the Company received proceeds in the amount of $214,284. During April 1997, the Company lowered the exercise price and extended the exercise period of its 662,000 publicly traded warrants. The warrants' exercise price was reduced to $3.50 from $4.25 and the exercise period was extended from June 17, 1997 until June 24, 1999. The warrants were originally issued in connection with the sale of common stock by the Company. The stock purchase warrants are redeemable by the Company at the exercise price if the closing price of its common shares is $6.38 or more for 20 consecutive trading days. On April 29 and June 30, 1997, the Company sold 100,000 and 33,334 shares, respectively, of its Series A Convertible Preferred Stock and granted 300,000 and 100,000 common stock purchase warrants, respectively, in a private placement. The Company received proceeds in the amounts of $1,500,000 and $500,000, respectively. Each share of preferred stock has a stated value of $15.00 per share and is convertible at any time at the holder's option into 10 shares of the Company's $.0001 par value common stock at a rate of $1.50 per share of common stock, subject to adjustment. The preferred shares will automatically convert into common stock if, after one year from issue, the closing price of the Company's common stock for 20 consecutive trading days is $3.00 or more or on April 30, 2002, whichever occurs first. Each share of preferred stock shall receive a 6% cumulative dividend, payable quarterly, based upon its stated value and has voting rights on matters submitted to a vote of common stockholders equal to the number of common shares into which it may be converted. Each warrant may be exercised at any time until June 30, 1999 to purchase one share of the Company's common stock for $2.00 per share. F-21 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. STOCK OPTIONS AND STOCK PURCHASE WARRANTS. The following is a summary of changes in stock options and stock purchase warrants outstanding during the years ended June 30, 1996 and 1997. Each stock option and stock purchase warrant outstanding is exercisable to purchase one share of the Company's $.0001 par value common stock. Weighted average Number of shares exercise price - ------------------------------------------------------------------------------- Stock options: Balance, July 1, 1995 425,000 $2.26 Granted 1,237,250 2.40 Exercised -- -- Expired / cancelled -- -- - ------------------------------------------------------------------------------- Balance, June 30, 1996 1,662,250 $2.37 Granted 1,610,000 2.06 Exercised (90,000) .74 Expired / cancelled -- -- - ------------------------------------------------------------------------------- Balance, June 30, 1997 3,182,250 $2.26 - ------------------------------------------------------------------------------- Stock purchase warrants: Balance, July 1, 1995 2,380,019 $2.09 Granted 1,590,345 1.45 Exercised -- -- Expired / cancelled (60,000) 5.10 - ------------------------------------------------------------------------------- Balance, June 30, 1996 3,910,364 $1.79 Granted 1,143,436 1.59 Exercised (1,178,016) .99 Expired / cancelled (137,121) 1.08 - ------------------------------------------------------------------------------- Balance, June 30, 1997 3,738,663 $2.00 - ------------------------------------------------------------------------------- The following information summarizes stock options outstanding at June 30, 1997. Outstanding Exercisable - --------------------------------------------------------- ----------------------------- Year of Number Weighted average Range of Number Weighted average expiration Outstanding exercise price exercise price exercisable exercise price - --------------------------------------------------------- ----------------------------- 2002 575,000 $1.53 $1.39 - $1.54 575,000 $1.53 2002 135,000 $3.65 $2.75 - $4.25 135,000 $3.65 2003 10,000 $3.75 $3.75 10,000 $3.75 2004 10,000 $3.50 $3.50 10,000 $3.50 2005 20,000 $ .63 $ .63 20,000 $ .63 2005 60,000 $1.20 $1.20 60,000 $1.20 2006 37,250 $1.35 $1.25 - $1.63 37,250 $1.35 2006 375,000 $2.15 $1.75 - $2.25 375,000 $2.15 2007 1,276,667 $2.56 $2.25 - $2.75 576,667 $2.51 2007 200,000 $1.78 $1.42 - $2.13 -- $ -- 2008 216,667 $2.42 $2.25 - $2.50 -- $ -- 2009 266,666 $2.44 $2.25 - $2.50 -- $ -- - --------------------------------------------------------- ----------------------------- 3,182,250 $2.26 $0.63 - $4.25 1,798,917 $2.13 - --------------------------------------------------------- -----------------------------
F-22 TOPRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The weighted average grant date fair value of stock options granted during the year is summarized as follows. Year ended June 30, 1997 1996 - ------------------------------------------------------------------------------ Market value equal to exercise price $0.37 $ -- Market value greater than exercise price $0.86 $1.17 Market value less than exercise price $0.74 $ -- - ------------------------------------------------------------------------------ The following information summarizes stock purchase warrants outstanding at June 30, 1997: Outstanding Exercisable - ------------------------------------------------------------------------------------------------ Year of Number Weighted average Range of Number Weighted average expiration Outstanding exercise price exercise price exercisable exercise price - ------------------------------------------------------------------------------------------------ 1998 178,571 $2.00 $2.00 178,571 $2.00 1998 228,726 $1.00 $1.00 228,726 $1.00 1998 200,000 $3.47 $3.38 - $3.63 200,000 $3.47 1999 105,673 $1.12 $1.00 - $1.25 105,673 $1.12 1999 995,000 $2.06 $2.00 - $2.50 995,000 $2.06 1999 712,000 $3.46 $3.00 - $3.50 712,000 $3.46 2000 927,026 $0.93 $0.67 - $1.00 927,026 $0.93 2000 50,000 $1.25 $1.25 50,000 $1.25 2000 66,667 $2.50 $2.50 66,667 $2.50 2001 150,000 $1.25 $1.25 150,000 $1.25 2001 100,000 $2.56 $2.56 100,000 $2.56 2007 25,000 $1.50 $1.50 25,000 $1.50 - ------------------------------------------------------------------------------------------------ 3,738,663 $2.00 $0.67 - $3.63 3,738,663 $2.00 - ------------------------------------------------------------------------------------------------
The weighted average grant date fair value of stock purchase warrants granted during the year is summarized as follows. Year ended June 30, 1997 1996 - ------------------------------------------------------------------------------ Market value equal to exercise price $ -- $0.92 Market value greater than exercise price $0.53 $1.34 Market value less than exercise price $0.39 $0.59 - ------------------------------------------------------------------------------ The Company applies Accounting Principals Board Opinion 25 in accounting for stock options and stock purchase warrants granted to employees. Had compensation expense been determined based upon the fair value of the awards at the grant date and consistent with the method under Statement of Financial Accounting Standards 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated in the following table. F-23 TOPRO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended June 30, 1997 1996 - ------------------------------------------------------------------------------- Net loss as reported $(2,735,000) $(1,855,000) Net loss pro forma $(3,377,000) $(2,688,000) Net loss per share as reported $ (.31) $ (0.40) Net loss per share pro forma $ (.38) $ (0.58) - ------------------------------------------------------------------------------ The fair value of each employee stock option and stock purchase warrant granted during the years ended June 30, 1997 and 1996 was estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in the pricing calculations were: expected volatility, 63%, risk free interest rate, 7.5%, expected annual dividends, none and estimated lives of the warrants and options of between one and two years. NOTE 12. BENEFIT PLANS. The Company maintains the 1997 Stock Option and Bonus Plan covering all employees, officers, directors and consultants to it. Under this plan, participants may be awarded qualified or non-qualified stock options and stock bonuses. The exercise price of an award of a qualified stock option may not be less than 100% of the market value on the date of the grant. The exercise price of an award of a non-qualified stock option may not be less than 85% of the market value on the date of the grant. The Company has reserved up to 1,500,000 shares of its common stock for awards under this plan. The Company made awards of 1,500,000 options under the plan during the year ended June 30, 1997. The Company maintains the 1992 Employee Stock Purchase Plan covering all employees with a minimum of 3 months of service except those employees owning, directly or indirectly, more than 5% of its common stock. The Company executes purchase transactions on behalf of the participating employees through semi- annual purchases in the open market. The exercise price for participating employees shall be the lower of 85% of the fair market value of the Company's common stock at the beginning or end of each six month period. During the year ended June 30, 1997, participating employees elected to purchase 10,350 shares of the Company's common stock. The Company maintains the 1992 Incentive Stock Option Plan. There are 250,000 shares of common stock reserved for issuance under the terms of the plan. Through June 30, 1996, 37,250 options have been granted under the plan. No awards were made under this plan during the year ended June 30, 1997. The exercise price of the options granted must be equal to or exceed the fair market value of the Company's common stock on the date of the grant. The Company maintains 401(K) plans covering its employees and those of its subsidiaries. Matching contributions are made at the discretion of the Board of Directors. During the year ended June 30, 1997, the Company made matching contributions in the amount of $46,000. No matching contribution was made during the year ended June 30, 1996. F-24 TOPRO, INC. AND SUBIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company maintains a profit sharing plan that covers all full-time employees with a minimum of 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, as amended, may be contributed to the plan. The Company did not make contributions to the plan during the years ended June 30, 1997 and 1996 NOTE 13. COMMITMENTS AND CONTINGENCIES. CAPITAL AND OPERATING LEASE OBLIGATIONS. The Company leases certain pieces of equipment under capital leases. The following is an analysis of the net book value of equipment under capital leases at June 30, 1997: - ------------------------------------------------------------------------------ Equipment $ 283,000 Accumulated depreciation (110,000) - ------------------------------------------------------------------------------ Net book value $ 173,000 - ------------------------------------------------------------------------------ Depreciation on equipment under capital leases charged to expense during the years ended June 30, 1997 and 1996 was $33,000 and $2,000, respectively. The Company leases office space, production facilities and equipment under operating leases. Rent expense under operating leases was $1,086,000 and $310,000 for the years ended June 30, 1997 and 1996, respectively. The following is a summary of minimum future lease payments: Years ending June 30, Capital leases Operating leases - ------------------------------------------------------------------------------ 1998 $112,000 $ 988,000 1999 79,000 855,000 2000 46,000 725,000 2001 17,000 692,000 2002 -- 413,000 Thereafter -- 612,000 - ------------------------------------------------------------------------------ 254,000 $4,285,000 Less amount representing interest 53,000 - ------------------------------------------------- 201,000 Current portion 111,000 - ------------------------------------------------- $ 90,000 - ------------------------------------------------- SALE AND LEASE-BACK ARRANGEMENT. In April 1995, the Company sold its corporate headquarters and production facility for $1,025,000 under a sale and lease-back arrangement. The Company used $770,000 of the proceeds to satisfy its obligations under two mortgage notes with financial institutions. The sale resulted in a deferred gain in the amount of $97,000 which is being amortized over the four year term of the lease. F-25 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYMENT AGREEMENTS. The Company has entered into the following employment and consulting agreements with officers, directors and other key present and former employees. With an officer who is also a director, an agreement which expires in January 1999, but will be automatically renewed on each anniversary for one year periods unless written notice is provided by either party, providing for a minimum annual salary in the amount of $175,000 during the current contract period. The employment agreement provides for the granting of 450,000 stock options exercisable at $2.50 per share which vest as follows: January 1997, 100,000, December 1997, 150,000 and December 1998, 200,000. The stock options expire in January 2007. With an officer, a 2 year employment agreement, which expires in February 1999 but will be automatically renewed on each anniversary for one year periods unless written notice is provided by either party, providing for minimum annual salary in the amounts of $135,000 and $145,000 during the first and second year, respectively, and a bonus of not less than $15,000 per year. The employment agreement provides for the granting of 300,000 stock options which vest as follows: July 1997, 100,000 at an exercise price of $1.42 per share; July 1998, 100,000 at an exercise price of $2.13 per share and July 2000, 100,000 at an exercise price of $2.49 per share. The stock options expire in May 2007. With an officer, a 2 year employment agreement, which expires in July 1999 but will be automatically renewed on each anniversary for one year periods unless written notice is provided by either party, providing a minimum annual salary in the amount of $160,000. The employment agreement provides for the granting of 225,000 stock options which vest as follows: July 1997, 75,000 at an exercise price of $2.09 per share; July 1998, 75,000 at an exercise price of $3.14 per share and July 2000, 75,000 at an exercise price of $3.66 per share. The stock options expire in July 2007. With an officer, a 2 year employment agreement, which expires in December 1998 but will be automatically renewed on each anniversary for one year periods unless written notice is provided by either party, providing a minimum annual salary in the amount of $150,000 and a bonus of not less than $18,000 during the first year and $15,000 during the second year. The employment agreement provides for the granting of 200,000 stock options with an exercise price of $2.25 which vest as follows: February 1997, 66,667; February 1998, 66,667 and February 1999, 66,666. The stock options expire in February 2007. With a former major stockholder and officer of a subsidiary, a 6 month employment agreement and a consecutive 24 month consulting agreement which expires in October 1998 providing for minimum annual compensation in the amount of $140,000. With the spouse of this officer, who is also a former officer of the subsidiary, a 5 month employment agreement and a consecutive 24 month consulting agreement which expires in September 1998, providing for minimum annual compensation in the amount of $120,000. Each consulting agreement provides the granting of 150,000 stock options exercisable at $2.25 per share through October 2006. With an officer and former sole stockholder of a subsidiary, a 2 year employment agreement which expires in August 1999 but will be automatically renewed for two year periods, providing for a minimum annual salary in the amount of $75,000. The employment agreement provides for the granting of 10,000 stock options exercisable at the then market price. The options are exercisable for ten year periods. LEGAL PROCEEDINGS. At June 30, 1997, there is a proceeding involving a claim by the Company for damages included in its balance sheet under the caption of: Costs and estimated earnings in excess of billings on uncompleted contracts (See Note 7). The claim, in the total amount of $3,900,000, arises from F-26 TOPRO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS a dispute with a customer regarding contractual disagreements primarily resulting from change orders. The Company is also party to various disputes involving contractual matters of contract compliance and payment of its billings. Management does not believe that the outcome of these disputes will have a material adverse effect on the Company's results of operations, its financial position or cash flows. The Company, in the routine course of business, utilizes legal services to protect lien rights on projects to secure payment of its outstanding accounts. At June 30, 1997, the Company has reserves for potential losses on contracts and an allowance for doubtful accounts in the amount of $2,445,000 resulting primarily from management's and counsel's assessment of legal proceedings. RESTRICTED CASH. The cash balance at June 30, 1997 includes certificates of deposit in the amount of $125,000 which are restricted and being held by a bonding company to secure the Company's obligations under a performance bond. OTHER CONTINGENCIES. During June 1996, the Company recognized a gain in the amount of $341,000. This gain related to the sale of stock the Company had purchased as an investment and later sold. Prior to June 1996, the gain was being deferred pending the outcome of certain contingencies associated with the sale agreement. NOTE 14. FOURTH QUARTER ADJUSTMENTS. During the fourth quarter of fiscal 1997, the Company recorded an adjustment to the allowance for doubtful accounts and incurred an expense for the year ended June 30, 1997 in the amount of $944,000. During the fourth quarter of fiscal 1996, the Company recorded adjustments to capitalized software development costs which had been incurred during the first three quarters of the year. The effect of these adjustments was to reduce the net loss by approximately $320,000. NOTE 15. RELATED PARTY TRANSACTIONS. An officer of the Company is a Board member of a financial consulting company and a partner in its affiliate. The consulting company has made investments in private placements of the Company's securities. Since joining the Company, the officer has abstained in all matters relating to the financial consulting company's investment in the Company. An officer and stockholder of the Company is also an owner of an entity for which the Company performs subcontract work. Billings to the related entity were approximately $1,154,000 during the year ended June 30, 1997. NOTE 16. PRO FORMA BALANCE SHEET AND SUBSEQUENT EVENTS. The consolidated pro forma balance sheet at June 30, 1997 gives effect to the following transactions which occurred during the period July 1 - August 31, 1997. - - The conversion of $2,685,000 of the Company's 9% convertible debentures into 1,790,032 shares of its common stock. - - Cash proceeds in the amount of $4,616,000 received upon the exercise by the holders of 3,001,101 stock options and stock purchase warrants for 3,001,101 shares of common stock. For pro forma purposes, the cash proceeds were applied one half to the cash balance and one half to the reduction of accounts payable. F-27 TOPRO, INC. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES. During fiscal 1997, the Company changed its independent public accountants to the firm of BDO Seidman LLP. There have been no disagreements on accounting and financial disclosure matters with either its current or predecessor independent public accountants. PART III Information required by Item 9-12 of Part III of Form 10-KSB is incorporated by reference from the Registrant's Definitive Proxy Statement to be filed with the Commission no later than October 28, 1997. 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) 2.4 Agreement of Merger dated December 31, 1996 -- regarding the acquisition of All Control Systems, Inc. (N) 2.5 Amendment number 1 to the All Control Systems, Inc. Agreement of Merger. (N) 3.3 Restated Articles of Incorporation. Filed herewith. (L) 3.4 Amendment to Articles of Incorporation -- Designation of Series A preferred stock. (Q) 3.5 By Laws. (H) 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, the former Chairman of the Board of Director of the registrant, in the amount of $50,000. (I) 17 TOPRO, INC. 10.4 Promissory Note issued by Tech Sales, Inc. in favor of William B. Heermann, Vice President of the registrant, in the amount of $30,000. (I) 10.5 1992 Employee Stock Purchase Plan. (J) 10.6 1992 Incentive Stock Option Plan. (J) 10.7 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) 10.8 Non-Qualified Stock Option Agreement dated December 27, 1994 between the Registrant and John Jenkins. (D) 10.9 Asset Purchase Agreement dated May 5, 1997 -- regarding sale of certain operating assets of the Registrant's subsidiary, Sharp Electric Construction Company to Piper Electric Co., Incorporated.(F) 10.10 Agreement signed October 4, 1994 with Direct Measurement Corporation. (K) 10.11 Agreement dated December 6, 1994 with Direct Measurement Corporation. (D) 10.12 Stock Purchase Agreement dated November 7, 1995 -- regarding DMC shares. (G) 10.13 Loan Agreement -- Renaissance Capital Growth & Income Fund III, Inc. (B) 10.14 Employment Agreement dated July 27, 1995 between the Registrant and E. Gregory Fisher 10.15 Employment Agreement dated February 21, 1996 between the Registrant and Jon E. Walker. (B) 10.16 Loan Agreement and Convertible Debenture dated October 30, 1996 -- Renaissance Capital Growth & Income Trust, PLC. (M) 10.17 Employment and consulting agreement, as amended, with Michael Taylor. (M) 10.18 Employment and consulting agreement, as amended, with Kathleen Taylor. (M) 10.19 Employment agreement dated as of December 31, 1996 with Kevin Fallon, C.O.O. (O) 10.20 Employment agreement dated as of January 28,1997 with John Jenkins, Chairman of the Board of Directors, C.E.O. and President. (P) 18 TOPRO, INC. 10.21 Employment agreement dated as of May 5,1997 with Douglas Kelsall, C.F.O. (R) 10.22 1997 Stock option and bonus plan. (R) 21.1 List of Subsidiaries (P). (A) Incorporated by reference from the Form 8-K Current Report dated August 10, 1995. (B) Incorporated by reference from the Registrant's Form 8-K Current Report dated February 21, 1996. (C) Incorporated by reference from the Registrant's Form 8-K Current Report dated May 30, 1996. (D) Incorporated by reference from the Registrant's Form 10-KSB for the fiscal year ended June 30, 1995. (E) Incorporated by reference from 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 Registrant's Form 8-K Current Report 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 Registrant's Form 10-K for the fiscal year ended June 30, 1992. (J) Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended June 30, 1993. (K) Incorporated by reference from the Registrant's Form 10-K for the fiscal year ended June 30, 1994. (L) Incorporated by reference from the Registrant's Registration Statement on Form SB-2, SEC file number 33-98788. (M) Incorporated by reference from the Registrant's Form 10-QSB for the quarter ended September 1996. (N) Incorporated by reference from the Registrant's Form 8-K dated December 31, 1996, as amended. (O) Incorporated by reference from the Registrant's Form 10-QSB for the quarter ended December 1996. 19 TOPRO, INC. (P) Incorporated by reference from the Registrant's Registration Statement on Form S-3, SEC file number 333-170891, effective March 6, 1997. (Q) Incorporated by reference from the Registrant's Form 10-QSB for the quarter ended March 1997. (R) Filed herewith. - ------------------------------------------------------------------------------- (b) REPORTS ON FORM 8-K. During the last quarter of the period covered by this report, the Company filed reports on Form 8-K as listed below. No financial statements were filed with these reports. The following reports on Form 8-K reported information pursuant to "Item 5 -- Other Events". i. Form 8-K dated April 18, 1997. ii. Form 8-K dated April 29, 1997. iii. Form 8-K dated May 14, 1997. iv. Form 8-K dated June 5, 1997. v. Form 8-K dated June 26, 1997. The Company also filed a Form 8-K dated June 26, 1997 reporting, pursuant to Item 4, a change in its certifying public accountant. 20 TOPRO, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Topro, Inc. Date: October 8, 1997 By: /s/ John P. Jenkins - --------------------- ------------------------------------------ John P. Jenkins President and Chief Executive Officer Date: October 8, 1997 By: /s/ Douglas H. Kelsall - --------------------- ------------------------------------------ Douglas H. Kelsall 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/ John P. Jenkins Chairman of the Board, October 8, 1997 - ------------------------ President, Chief Executive Officer John P. Jenkins /s/ Kevin Fallon Chief Operating Officer October 8, 1997 - ------------------------ Kevin Fallon /s/ Douglas H. Kelsall Chief Financial Officer, October 8, 1997 - ------------------------ Secretary Douglas H. Kelsall /s/ H. Robert Gill Director October 8, 1997 - ------------------------ H. Robert Gill /s/ Robert Costello Director October 8, 1997 - ------------------------ Robert Costello /s/ Robert Pearson Director October 8, 1997 - ------------------------ Robert Pearson 21 EX-10.22 2 EMPLOYMENT AGREEMENT EXHIBIT 10.22 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is entered into as of May 5, 1997, ("Effective Date"), by and between Topro, Inc., a Colorado corporation (the "Employer"or "Company") and Douglas H. Kelsall (the "Employee"). In consideration of the mutual covenants contained in this Agreement, the Employer agrees to employ the Employee, and the Employee agrees to be employed by the Employer, upon the terms and conditions hereinafter set forth. ARTICLE I TERM OF EMPLOYMENT; SERVICES PRIOR TO COMMENCEMENT DATE; ELECTION OF OFFICERS 1.1 INITIAL TERM. The initial term of full-time employment hereunder shall be two years and will commence on July 16, 1997 ("Commencement Date"). 1.2 RENEWAL; NOTICE OF NON-RENEWAL. At the end of the initial term of this Agreement, and on each anniversary thereafter, the term of Employee's employment automatically will be extended for one additional year unless, at least 90 days before such anniversary, the Employer or the Employee shall have delivered to the other written notice that this Agreement will not be extended. 1.3 SERVICES PRIOR TO COMMENCEMENT DATE. After the Effective Date and prior to the Commencement Date, Employee may be engaged on a part-time basis to work on projects assigned to Employee by Employer's President, and will be compensated for his services on an hourly basis at a rate of $50.00 per hour. Commencing June 16, 1997, Employee will devote three days per week to such duties, for compensation equal to a PRO RATA amount of the full-time base salary of $135,000 established in Section 3.1. 1.4 ELECTION AS OFFICER. Employee's election to the offices of Vice President - Finance and Administration, Chief Financial Officer and Corporate Secretary shall be effective as of June 16, 1997. ARTICLE II DUTIES OF THE EMPLOYEE 2.1 DUTIES. The Employee shall be employed as the Company's Chief Financial Officer, Vice President - Finance and Administration, and, at the continued discretion of the Company's Board of Directors, as Corporate Secretary, with the responsibilities and authority customary for such officers including, but not limited to, those duties as from time to time may be assigned to Employee by the Company's Board of Directors. Employee shall have responsibility and authority for directing and managing all of the Company's financial affairs, Page 1 of 11 including financial reporting, acquisition development and negotiation, capitalization programs and banking relationships. Employee shall also manage the Company's Human Relations functions, including benefit program administration and regulatory compliance, and will supervise the Company's accounting and human relations staff. Employee shall report directly to the Chief Executive Officer ("CEO") of the Company. 2.2 EXTENT OF DUTIES. Subject only to the foregoing, Employee shall devote all of his working time, efforts, attention and energies to the business of the Employer. ARTICLE III COMPENSATION OF THE EMPLOYEE 3.1 BASE COMPENSATION; SIGNING BONUS. As compensation for services rendered under this Agreement, the Employee will be paid an annual base salary of not less than $135,000 during the first year of this Agreement and an annual base salary of not less than $145,000 during the second year of this Agreement, to be paid in accordance with Employer's normal payroll practices. The annual base salaries specified herein may be increased from time to time at the discretion of the Employer's Board of Directors. If increased, the Employee's annual base salary shall not thereafter be decreased without the Employee's consent. The Employee's annual base salary shall not be deemed exclusive compensation and shall not prevent Employee from participating in any other compensation or benefit plan of Employer. In addition, on the Commencement Date, Employee shall be paid a signing bonus of $10,000.00 cash, which shall be in addition to all other compensation payable hereunder. 3.2 SHORT-TERM INCENTIVE COMPENSATION PROGRAM. Employee shall be eligible to participate in any performance bonus program which may be established by the Company for its officers. The program currently contemplated would provide the opportunity for officers, including Employee, to earn annual bonuses which would average 50% of base salary over a five year term. As of the date of this Agreement, such program has not been fully designed and adopted. The Employee shall receive bonuses, pursuant to such program or otherwise, of at least $15,000 for services provided during the first year of this Agreement, such bonuses to be paid at the first and the second anniversary date, respectively, of this Agreement. Such bonuses shall not vest or become payable if this Agreement has been terminated by Employee or by Employer for Cause (hereafter defined) prior to such anniversary date. The first year bonus shall vest and become payable if this Agreement is terminated by Employer pursuant to Sections 5.1.b., 5.1.c. or 5.1.e. after the Commencement Date and prior to the first anniversary date. The second year bonus shall vest and become payable if this Agreement is terminated by Employer pursuant to Sections 5.1.b., 5.1.c. or 5.1.e. after the first and prior to the second anniversary date. These specific annual amounts represent minimum annual bonus compensation and shall not preclude Employee from receiving additional bonus or incentive compensation granted in accordance with Company programs or in the discretion of the Board of Directors. Page 2 of 11 3.3 LONG-TERM INCENTIVE COMPENSATION PROGRAM. a. Employee shall receive incentive compensation for his services hereunder through the grant of stock purchase options (the "Options") as set forth herein. On the Effective Date, the Company shall grant to Employee Options exercisable as set forth herein to purchase 300,000 shares of the Company's Common Stock, at the prices per share set forth below, which prices shall be based upon the average of the closing price of the Company's Common Stock as reported by Nasdaq for the ten trading days prior to the Effective Date (such closing price hereafter referred to as the "Market Price"). The Options shall expire on May 4, 2007, (the "Option Expiration Date"), provided, however, that all Options shall expire on the date 90 days following any termination of employment by Employee pursuant to Section 5.1.e and shall expire on the Date of Termination if employment is terminated by Employer for Cause. Subject to the provisions of Section 3.3.b. below, the Options shall become exercisable on the initial exercise dates set forth below, provided that no Option shall become exercisable if the Employee's employment has been terminated, or if Notice of Termination (hereafter defined) has been given by Employee or Employer, before the initial exercise dates specified below: (i) on the day following the Commencement Date, 100,000 Options shall become exercisable to purchase an aggregate of 100,000 shares of Common Stock at a price per share equal to the Market Price; (ii) on the day following the first anniversary of the Commencement Date, 100,000 Options shall become exercisable to purchase an aggregate of 100,000 shares of Common Stock at a price per share equal to 150% of the Market Price; and (iii) on the day following the third anniversary of the Commencement Date, 100,000 Options shall become exercisable to purchase an aggregate of 100,000 shares of Common Stock at a price per share equal to 175% of the Market Price. b. Regardless of the initial exercise dates set forth above, all unexercised options shall become immediately exercisable in the event of a "Change of Control," which, for purposes of this Agreement, shall be defined as the occurrence of one of the following events: (i) any "person" (as that term is used in Section 13(d) and 14(d) of the Exchange Act), other than the Company or any "person" who on the date hereof is a director or officer of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities, other than in connection with a merger or business combination by the Company of another entity in which the Company is the surviving entity and which does not result in a change in the majority of the Page 3 of 11 Board of Directors upon the effective date of such merger or business combination, or (ii) during any period of two consecutive years during the term of this Agreement, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. c. Employee understands that the Options and underlying shares are "restricted securities" under the Securities Act of 1933 (the "Act") and applicable state statutes. The Company intends to file a registration statement on Form S-8 with the Securities and Exchange Commission at a future date, and will include in such registration statement the Shares underlying the Options granted pursuant hereto to the extent permissible under the Act to permit the Company to issue "free trading" shares to Employee upon exercise of the Options. The Company will use its best efforts to maintain a current and effective Form S-8 Registration Statement while any of the Options are exercisable. At any time when: (i) any Option is exercisable; and (ii) the Company does not have a current and effective Form S-8; and (iii) the Company files a registration statement under the Act (including a "post-effective amendment" to a previous registration statement) which relates to a current offering of securities of the Company or any securityholder of the Company (except in connection with an offering registered on Form S-4, or any other inappropriate form(s)); then, the Company shall be obligated to offer to the Employee the opportunity to include in the registration statement the shares underlying the Options which are exercisable or which have been exercised; PROVIDED, HOWEVER, that if the offering to which the proposed registration statement relates is an underwritten offering and such underwriter objects to the inclusion of such shares in such registration statement, the Company shall be under no obligation to include the shares unless shares held by other selling securityholders are included therein, in which case the Employee shall be entitled to have his shares included pro rata with all other selling securityholders whose shares are to be included in the registration statement. The Company shall give 30 days' prior written notice to the Employee of the Company's intention to file a registration statement under the Act, which notice shall constitute an offer to the Employee to have his shares included in such registration statement, and the Employee shall notify the Company in writing within ten days thereafter if the Employee desires to accept such offer. Neither the delivery of such notice nor the acceptance by the Employee of such offer shall obligate the Company to file such registration statement and, notwithstanding the actual filing of the registration statement, the Company may at any time prior to its effectiveness elect not to pursue the registration without liability to the Employee. Employee further understands and acknowledges that the Company cannot guarantee that any registration statement will remain current and effective until the Option Expiration Date, and that shares issued upon exercise of the Options at any time when the Company does not have a current and Page 4 of 11 effective registration statement may not be sold except pursuant to exemptions from registration, which, if available, may require a holding period prior to sale. d. Employee represents and acknowledges that the issuance of securities hereunder is intended solely as compensation for the services provided pursuant to this Agreement, and that the payment in securities is not intended by the Company to be and has not been construed by Employee to be a promise of continued employment by the Company, nor as a promise of renewal of this Agreement or of the continuation of the relationship of the parties beyond the term of this Agreement. Employee represents that the securities to be acquired as compensation for his services hereunder are being acquired by Employee for his own account and not on behalf of any other person, and that the Securities are being acquired for investment purposes and not for distribution. Employee represents that an investment in the Securities is a suitable investment for Employee, taking into consideration the restrictions on transferability affecting the Securities. 3.4 BENEFITS. a. Employee shall be entitled to paid vacation and all paid holidays customarily extended to executive employees, and shall be entitled to a minimum of three weeks paid vacation during the first year of this Agreement. b. Employee shall be entitled to participate in all of Employer's employee benefit plans and employee benefits, including any retirement, 401(k), pension, profit-sharing, stock option, insurance, hospital or other plans and benefits which now may be in effect or which may hereafter be adopted, it being understood that Employee shall have the same rights and privileges to participate in such plans and benefits as any other executive employee. Participation in any benefit plans shall be in addition to the compensation otherwise provided for in this Agreement. c. Employer shall provide an automobile allowance of $300.00 per month to reimburse and compensate Employee for reasonable expenses of maintaining one automobile for Employee's use. d. Employer will assume payment of reasonable dues related to Employee's membership in professional associations. 3.5 EXPENSES. Employee shall be reimbursed promptly for all reasonable expenses incurred by Employee in the performance of his duties hereunder following Employer's customary practice. 3.6 NON-EXCLUSIVE PROVISIONS. None of the provisions of this Article III shall be deemed to limit additional compensation which the Employer's Board of Directors may grant to Employee. Page 5 of 11 ARTICLE IV NON-COMPETITION; CONFIDENTIALITY 4.1 The Employee will offer to the Employer any investment or other opportunity of which he becomes aware in the process control and systems integration industries (including, without limitation, software product development) or in the other areas of business in which the Company operates. If the Board of Directors of the Employer refuses the opportunity to participate in such investment or other opportunity, the Employee may do so as permitted by Section 4.2 hereof and otherwise only if the Employer's Board of Directors consents thereto. 4.2 Notwithstanding the above, the Employee may make passive investments in companies involved in the process control and systems integration industries or other industries in which the Company operates, provided any such investment does not exceed a 5% equity interest. Employee may acquire an equity interest exceeding 5% only if a majority of the Employer's Board of Directors consents thereto. 4.3 Except as provided in Sections 4.1 and 4.2 hereof, during the term of this Agreement the Employee may not participate in the process control or systems integration industries or other areas of business in which the Company is engaged except through and on behalf of the Company. 4.4 a. The Employee recognizes and acknowledges that the information, business, customer list and any other trade secret or other secret or confidential information relating to Employer's business as they may exist from time to time are valuable, special and unique assets of Employer's business. Therefore, Employee agrees as follows: (i) that Employee will hold in strictest confidence and not disclose, reproduce, publish or use in any manner, whether during or subsequent to this employment, without the express authorization of the Board of Directors of the Employer, any information, business, customer lists of other employees of Employer, or any other secret or confidential matter relating to any aspect of the Employer's business, except as such disclosure or use may be required in connection with Employee's work for the Employer or by court order or subpoena; (ii) that upon request or at the time of leaving the employ of the Employer the Employee will deliver to the Employer, and not keep or deliver to anyone else, any notes, memoranda, documents and, in general, any and all material relating to the Employer's business; and (iii) that the Board of Directors of Employer may from time to time designate other subject matters requiring confidentiality and secrecy that shall be covered by the terms of this Agreement. Page 6 of 11 b. The restrictions imposed by this Section 4.4 shall not apply to information which is publicly disclosed by the Company or otherwise within the public domain through no fault or action or failure to act of Employee or rightfully received by Employee from a third party without restrictions on disclosure or use. c. In the event of Employee's breach or threatened breach of the provisions of this paragraph 4.4, the Employer shall be entitled to an injunction (i) restraining the Employee from disclosing, in whole or in part, any information as described above or from rendering any services to any person, firm, corporation, association or other entity to whom such information, in whole or in part, has been disclosed or is threatened to be disclosed, and/or (ii) requiring that Employee deliver to Employer all information, documents, notes, memoranda and any other material as described above upon Employee's leave of the employ of the Employer. Nothing herein shall prohibit the Employer from pursuing other remedies available to the Employer for such breach or threatened breach, including the recovery of damages from the Employee. d. In addition to the confidential information described above, Employee agrees that prior to the Commencement Date, the existence of this Agreement is considered by the Company to be confidential and Employee agrees not to disclose this Agreement or Employee's contemplated employment by the Company to any party prior to the Company's announcement of these matters. ARTICLE V TERMINATION OF EMPLOYMENT 5.1 TERMINATION. The Employee's employment hereunder may be terminated without any breach of this Agreement only under the following circumstances: a. BY EMPLOYEE. Upon the occurrence of any of the following events, this Agreement may be terminated by the Employee by written notice to Employer: (i) if Employer makes a general assignment for the benefit of creditors, files a voluntary bankruptcy petition, files a petition or answer seeking a reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any law, or any petition or application for the involuntary bankruptcy of Employer, or other similar proceeding, has been filed in which an order for relief is entered or which remains undismissed for a period of thirty days or more, or Employer seeks, consents to, or acquiesces in the appointment of a trustee, receiver, or liquidator of Employer or any material part of its assets; (ii) a decision by Employer to terminate its business and liquidate its assets; or (iii) Employer's breach of any of the terms of this Agreement which breach is not cured by Employer within 15 business days after notice from Employee. Page 7 of 11 (iv) within 90 days following a Change in Control of the Company. b. DEATH. This Agreement shall terminate upon the death of Employee. c. DISABILITY. The Employer may terminate this Agreement due to Employee's permanent disability only in accordance with Employer's policy applicable to other employees. d. CAUSE. The Employer may terminate the Employee's employment hereunder for Cause. For purposes of this Agreement, the Employer shall have "Cause" to terminate the Employee's employment hereunder only upon the following: (i) the continued failure by the Employee substantially to perform his duties hereunder (other than any such failure resulting from the Employee's incapacity due to physical or mental illness), after demand for substantial performance is delivered by the Employer; or (ii) misconduct by the Employee that is deemed by the Board of Directors to be harmful to the Employer, monetarily or otherwise; or (iii) the violation by the Employee of the provisions of this Agreement. e. BY EMPLOYER OR EMPLOYEE OTHER THAN FOR CAUSE. In any other case, the Company and the Employee shall have the right to terminate this Agreement upon 90 days' prior written notification to the other party. 5.2 NOTICE OF TERMINATION. Any termination of the Employee's employment by the Employer or by the Employee (other than termination pursuant to subsection 5.1 (b) above) shall be communicated by written notice ("Notice of Termination") sent to the other party in accordance with Section 7.5 hereof. 5.3 DATE OF TERMINATION. "Date of Termination" shall mean (i) if the Employee's employment is terminated by his death, the date of his death; and (ii) if the Employee's employment is terminated for any other reason, the date specified in a Notice of Termination by Employer or Employee, which date shall not be less than 90 days after the date of the Notice of Termination. 5.4 PAYMENTS FOLLOWING TERMINATION OR NON-RENEWAL. a. In the event of termination of this Agreement by Employee pursuant to Section 5.1(a) (iv) or by Employer pursuant to Section 5.1(e) within one year following a Change in Control of the Company, the Employee will receive (i) continuation of base salary payments for 24 months following the Date of Termination; (ii) full and immediate vesting exercisability of all stock options and stock appreciation rights or other benefits consisting of or related to securities granted under this Agreement; and (iii) payment of any accrued bonus. Page 8 of 11 b. Following the termination of this Agreement pursuant to Section 5.1(b), Employer shall pay to Employee's estate the compensation that would otherwise be payable through the end of the month in which his death occurs. c. Upon temporary or permanent disability of the Employee as described in Section 5.1(c) hereof, whether or not the Employer elects to terminate this Agreement, Employee shall receive such compensation and benefits, if any, as are payable to employees generally in accordance with the policy of Employer. d. If this Agreement is terminated by Employer other than for Cause, Employer shall continue to pay to the Employee his base salary as then in effect for a period of six months following the Date of Termination, which payments shall constitute severance pay. e. In the event this Agreement is not renewed by Employer at the end of the initial or any subsequent term, Employer shall continue to pay to the Employee his base salary as then in effect for a period of six months following the Date of Termination. 5.5 REMEDIES. Any termination of this Agreement shall not prejudice any other remedy to which the Employer or Employee may be entitled, either at law, equity, or under this Agreement. ARTICLE VI INDEMNIFICATION 6.1 INDEMNIFICATION. To the fullest extent permitted by applicable law, Employer agrees to indemnify, defend and hold Employee harmless from any and all claims, actions, costs, expenses, damages and liabilities, including, without limitation, reasonable attorneys' fees, hereafter or heretofore arising out of or in connection with activities of Employer or its employees, including Employee, or other agents in connection with and within the scope of his employment by Employer or by reason of the fact that he is or was a director or officer of Employer or any affiliate of Employer. To the fullest extent allowed by applicable law, Employer shall advance to Employee expenses of defending any such action, claim or proceeding. However, Employer shall not indemnify Employee or defend Employee against, or hold him harmless from any claims, damages, expenses or liabilities, including attorneys' fees, resulting from the gross negligence or willful misconduct of Employee. The duty to indemnify shall survive the expiration or early termination of this Agreement as to any claims based on facts or conditions which occurred or are alleged to have occurred prior to expiration or termination. ARTICLE VII GENERAL PROVISIONS 7.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. Page 9 of 11 7.2 ARBITRATION. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in the City and County of Denver, Colorado in accordance with the rules then existing of the American Arbitration Association and judgment upon the award may be entered in any court having jurisdiction thereof. 7.3 ENTIRE AGREEMENT. This Agreement supersedes any and all other Agreements, whether oral or in writing, between the parties with respect to the employment of the Employee by the Employer. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by either party, or anyone acting on behalf of any party, that are not embodied in this Agreement, and that no agreement, statement, or promise not contained in this Agreement shall be valid or binding. 7.4 SUCCESSORS AND ASSIGNS. This Agreement, all terms and conditions hereunder, and all remedies arising here from, shall inure to the benefit of and be binding upon Employer, any successor in interest to all or substantially all of the business and/or assets of Employer (whether by merger, consolidation or otherwise), and the heirs, administrators, successors and assigns of Employee. Except as provided in the preceding sentence, the rights and obligations of the parties hereto may not be assigned or transferred by either party without the prior written consent of the other party. 7.5 NOTICES. For purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed given if delivered by hand or overnight courier or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice), and shall be deemed given on the date on which so hand-delivered, or on the business day following the day on which sent by overnight courier, or on the third business day following the date on which so mailed: If to Employee: Douglas H. Kelsall 6117 E. Princeton Ave. Cherry Hills, CO 80111 If to Employer: Topro, Inc. Attn: John Jenkins, President and CEO 2525 West Evans Avenue Denver, CO 80219 7.6 SEVERABILITY. If any provision of this Agreement is prohibited by or is unlawful or unenforceable under any applicable law of any jurisdiction as to such jurisdiction, such provision shall be ineffective to the extent of such prohibition without invalidating the remaining provisions hereof. 7.7 SECTION HEADINGS. The section headings used in this Agreement are for convenience only and shall not affect the construction of any terms of this Agreement. Page 10 of 11 7.8 SURVIVAL OF OBLIGATIONS. Termination of this Agreement for any reason shall not relieve Employer or Employee of any obligation accruing or arising prior to such termination. 7.9 AMENDMENTS. This Agreement may be amended only by written agreement of both Employer and Employee. 7.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original but all of which, when taken together, shall constitute only one legal instrument. This Agreement shall become effective when copies hereof, when taken together, shall bear the signatures of both parties hereto. It shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 7.11 FEES AND COSTS. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys fees, costs and necessary disbursements in addition to any other relief to which that party may be entitled. IN WITNESS WHEREOF, the Employer and the Employee have executed this Agreement to be effective as set forth above. "EMPLOYER" TOPRO, INC. By /s/ JOHN JENKINS ---------------------------------- John Jenkins, President and CEO "EMPLOYEE" By /s/ DOUGLAS H. KELSALL ---------------------------------- Douglas H. Kelsall Page 11 of 11 STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT entered into as of the 5th day of May, 1997, by and between Topro, Inc., a Colorado corporation (the "Corporation"), and Douglas H. Kelsall (the "Recipient"). Pursuant to the Employment Agreement dated May 5, 1997 (the "Employment Agreement") by and between the Corporation and the Recipient, and in accordance with its 1997 Stock Option and Bonus Plan (the "Plan"), a copy of which has been provided to the Recipient and is incorporated herein by reference, the Corporation desires to provide the Recipient with an opportunity to acquire $.0001 par value common stock ("Common Stock") of the Corporation on favorable terms and as incentive to put forth maximum efforts for the success of the business of the Corporation. All capitalized terms not otherwise defined herein shall be as defined in the Plan. NOW, THEREFORE, in consideration of the premises and mutual covenants herein set forth and other good and valuable consideration, the Corporation and the Recipient agree as follows: 1. CONFIRMATION OF GRANT OF OPTION. The Corporation confirms that the Recipient has been granted on May 5, 1997 (the "Date of Grant"), as a matter of separate inducement and agreement, and in addition to and not in lieu of salary or other compensation for services, Non-qualified Stock Options pursuant to Section 5(b) of the Plan (the "Options") to purchase an aggregate of 300,000 shares of Common Stock, on the terms and conditions herein set forth, subject to adjustment as provided in Paragraph 7 hereof. The Recipient will not have any rights to dividends or any other rights of a shareholder with respect to any shares of Common Stock subject to the Options until such shares shall have been purchased through the exercise of the Options and have been evidenced on the stock transfer records of the Corporation maintained by the Corporation's transfer agent. 2. OPTION PRICE. The Options will be exercisable at the prices (the "Option Price") per share set forth below, which prices are based upon the average of the closing price of the Corporation's Common Stock as reported by Nasdaq for the ten trading days prior to the Date of Grant (such closing price hereafter referred to as the "Market Price"), subject to adjustment as provided in Paragraph 7 hereof. 3. EXERCISE OF OPTION. (a) Except as otherwise provided in Section 6 of the Plan and Paragraph 4 below, and further subject to the provisions of Section 3(b) below, the Options shall become exercisable on the initial exercise dates set forth below, provided that no Option shall become exercisable if the Recipient's employment has been terminated, or if Notice of Termination pursuant to the Employment Agreement has been given by Recipient or Employer, before the initial exercise dates specified below: 1 (i) on July 17, 1997, 100,000 Options shall become exercisable to purchase an aggregate of 100,000 shares of Common Stock at an Option Price of $1.42 (equal to the Market Price); (ii) on July 17, 1998, 100,000 Options shall become exercisable to purchase an aggregate of 100,000 shares of Common Stock at an Option Price of $2.13 (equal to 150% of the Market Price); and (iii) on July 17, 2000, 100,000 Options shall become exercisable to purchase an aggregate of 100,000 shares of Common Stock an Option Price of $2.485 (equal to 175% of the Market Price). (b) Regardless of the initial exercise dates set forth above, all unexercised Options shall become immediately exercisable in the event of a "Change of Control," which, for purposes of this Agreement, shall be defined as the occurrence of one of the following events: (i) any "person" (as that term is used in Section 13(d) and 14(d) of the Exchange Act), other than the Corporation or any "person" who on the date hereof is a director or officer of the Corporation, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing 30% or more of the combined voting power of the Corporation's then outstanding securities, other than in connection with a merger or business combination by the Corporation of another entity in which the Corporation is the surviving entity and which does not result in a change in the majority of the Board of Directors upon the effective date of such merger or business combination, or (ii) during any period of two consecutive years during the term of the Employment Agreement, individuals who at the beginning of such period constitute the Board cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. (c) The Options may be exercised in whole or in part from time to time by notice and payment to the Corporation of the applicable Option Price as provided in Section 6(e) of the Plan, subject to the limitations of Paragraph 4 below. 4. TERM OF OPTIONS. The term of the Options will be through May 4, 2007, subject to earlier termination or cancellation as provided in this Agreement. All Options shall expire on the date 90 days following any termination of employment by Recipient pursuant to Section 5.1.(e) of the Employment Agreement and shall expire on the Date of Termination (as defined in the Employment Agreement) if employment is terminated by Employer for Cause pursuant to Section 5.1.(d) of Employment Agreement. 2 5. TRANSFERABILITY RESTRICTION. The Options may not be assigned, transferred or otherwise disposed of, or pledged or hypothecated in any way (whether by operation of law or otherwise) except in strict compliance with Section 6(h) of the Plan. Any assignment, transfer, pledge, hypothecation or other disposition of the Options or any attempt to make any such levy of execution, attachment or other process will cause the Options to terminate immediately upon the happening of any such event, provided, however, that any such termination of the Options under the foregoing provisions of this Paragraph 5 will not prejudice any rights or remedies which the Corporation may have under this Agreement or otherwise. 6. DEATH, DISABILITY OR RETIREMENT OF RECIPIENT. The Recipient's rights to exercise the Options upon the death, disability or retirement of the Recipient shall be as set forth in Section 6(g) of the Plan. 7. ADJUSTMENTS. The Option shall be subject to adjustment upon the occurrence of certain events as set forth in Section 6(i) of the Plan. 8. REGISTRATION OBLIGATION OF THE CORPORATION. Recipient understands that unless registered under the Securities Act of 1933 (the "Act") and applicable state statutes, the Options and underlying shares are "restricted securities" under the Act. Under the Employment Agreement, the Recipient has been granted certain registration rights, as follows: the Corporation intends to file a registration statement on Form S-8 with the Securities and Exchange Commission at a future date and will include in such registration statement the Common Stock underlying the Options granted pursuant hereto to the extent permissible under the Act to permit the Corporation to issue "free trading" shares of Common Stock to Recipient upon exercise of the Options. The Corporation will use its best efforts to maintain a current and effective Form S-8 Registration Statement while any of the Options are exercisable. At any time when: (i) any Option is exercisable; and (ii) the Corporation does not have a current and effective Form S-8; and (iii) the Corporation files a registration statement under the Act (including a "post-effective amendment" to a previous registration statement) which relates to a current offering of securities of the Corporation or any securityholder of the Corporation (except in connection with an offering registered on Form S-4, or any other inappropriate form(s)); then, the Corporation shall be obligated to offer to the Recipient the opportunity to include in the registration statement the shares of Common Stock underlying the Options which are exercisable or which have been exercised; PROVIDED, HOWEVER, that if the offering to which the proposed registration statement relates is an underwritten offering and such underwriter objects to the inclusion of such shares in such registration statement, the Corporation shall be under no obligation to include such shares unless shares held by other selling securityholders are included therein, in which case the Recipient shall be entitled to have such shares included pro rata with all other selling securityholders whose shares are to be included in the registration statement. The Corporation shall give 30 days' prior written notice to the Recipient of the Corporation's intention to file a registration statement under the Act, which notice shall constitute an offer to the Recipient to have such shares included in such registration statement, and the Recipient shall notify the Corporation in writing within ten days thereafter if the Recipient desires to accept such offer. Neither the delivery of such notice nor the acceptance by the Recipient of such offer shall obligate the Corporation to file such registration statement 3 and, notwithstanding the actual filing of the registration statement, the Corporation may at any time prior to its effectiveness elect not to pursue the registration without liability to the Recipient. Recipient further understands and acknowledges that the Corporation cannot guarantee that any registration statement will remain current and effective while the Options are exercisable, and that shares issued upon exercise of the Options at any time when the Corporation does not have a current and effective registration statement may not be sold except pursuant to exemptions from registration, which, if available, may require a holding period prior to sale. The Recipient acknowledges that all certificates for the shares issued upon exercise of the Options will bear the following legend unless such shares are registered under the Act prior to their issuance: The shares represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act"), and are "restricted securities" as that term is defined in Rule 144 under the Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Corporation. The Recipient further understands and agrees that unless a Form S-8 registration statement is effective, the Option may be exercised only if at the time of such exercise the Recipient and the Corporation are able to establish the existence of an exemption from registration under the Act and applicable state laws. 9. NOTICES. Each notice relating to this Agreement will be in writing and delivered in person or by certified mail to the proper address. Notices to the Corporation shall be addressed to the Corporation c/o John Jenkins, President, at 2525 W. Evans Ave., Denver, CO 80219. Notices to the Recipient or other person or persons then entitled to exercise the Option shall be addressed to the Recipient or such other person or persons at the Recipient's address below specified. Anyone to whom a notice may be given under this Agreement may designate a new address by notice to that effect given pursuant to this Paragraph 9. 10. APPROVAL OF COUNSEL. The exercise of the Option and the issuance and delivery of shares of Common Stock pursuant thereto shall be subject to approval by the Corporation's counsel of all legal matters in connection therewith, including compliance with the requirements of the Act, Securities Exchange Act of 1934, as amended, applicable state securities laws, the rules and regulations thereunder, and the requirements of any national securities exchange or association upon which the Common Stock then may be listed. 11. BENEFITS OF AGREEMENT. This Agreement will inure to the benefit of and be binding upon each successor and assign of the Corporation. All obligations imposed upon the Recipient and all rights granted to the Corporation under this Agreement will be binding upon the Recipient's heirs, legal representatives and successors. 12. GOVERNMENTAL AND OTHER REGULATIONS. The exercise of the Option and the Corporation's obligation to sell and deliver shares upon the exercise of rights to purchase shares is 4 subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency which, in the opinion of counsel for the Corporation, may be required. 13. CONFLICTS WITH THE PLAN. If any provision in this Agreement conflicts with a provision in the Plan, the Plan shall govern. Executed in the name and on behalf of the Corporation by one of its duly authorized officers and by the Recipient all as of the date first above written. TOPRO, INC. By: /s/ JOHN JENKINS ---------------------------------- John Jenkins, President The undersigned Recipient understands the terms of this Option Agreement and acknowledges receipt of a copy of the Plan and hereby agrees to comply therewith. /s/ DOUGLAS H. KELSALL ------------------------------------ Recipient: Douglas H. Kelsall 5 EX-10.23 3 STOCK OPTION AND STOCK BONUS PLAN EHHIBIT 10.23 TOPRO, INC. 1997 STOCK OPTION AND STOCK BONUS PLAN PURPOSES OF AND BENEFITS UNDER THE PLAN. This 1997 Stock Option and Stock Bonus Plan (the "Plan") is intended to encourage stock ownership by employees, officers, directors, advisors and consultants of Topro, Inc., its divisions, subsidiary corporations and parent corporation (the "Corporation"), so that they may acquire or increase their proprietary interest in the Corporation, to: (i) induce qualified persons to become employees, officers, directors or consultants of the Corporation; (ii) reward employees, officers, directors, and consultants for past services to the Corporation; and (iii) encourage such persons to remain in the employ of or associated with the Corporation and to put forth maximum efforts for the success of the business of the Corporation. The Plan was adopted by resolution of the Board of Directors on April 16, 1997. It is intended that options granted by the Committee pursuant to Section 4 of this Plan shall constitute "incentive stock options" ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended and options granted by the Committee pursuant to Section 5 of this Plan shall constitute "non-qualified stock options" ("Non-qualified Stock Options"). 1. DEFINITIONS. The following definitions shall apply under this Plan: (a) "Board" means the Board of Directors of the Corporation. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Committee" means a Committee appointed by the Board to oversee this Plan that is composed solely of two or more Non-Employee Directors, as defined in Rule 16b-3(b)(3) or a sub-Committee, composed solely of two or more Non-Employee Directors, of a Committee of the Board. If no Committee has been appointed, the term "Committee" shall mean the Board. (d) "Common Stock" means the Corporation's $.0001 par value common stock. (e) "Disability" means a Recipient's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or such other meaning ascribed in Section 22(e)(3) or any successor provision of the Code. If the Recipient has a disability insurance policy, the term "Disability" shall be as defined therein; provided that said definition is not inconsistent with the meaning ascribed in Section 22(e)(3) of the Code. (f) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (g) "Fair Market Value" per share as of a particular date means the last sale price of the Common Stock as reported on a national securities exchange or on the Nasdaq National Market System or, if the quotation for the last sale reported is not available for the Common Stock, the closing price of the Common Stock as reported by Nasdaq, or the average of the closing bid and ask prices reported on the electronic bulletin board or, if such quotations are unavailable, the value determined by the Committee in accordance with its discretion in making a bona fide, good faith determination of fair market value. Fair Market Value shall be determined without regard to any restriction other than a restriction which, by its terms, will never lapse. In the case of Bonuses granted at a time when the Corporation does not have a registration statement in effect relating to the shares issuable hereunder, the value at which the Bonus shares are issued may be determined by the Committee at a reasonable discount from Fair Market Value to reflect the restricted nature of the shares to be issued and the inability of the Recipient to sell those shares promptly. (h) "Option" means either an Incentive Stock Option or a Non-qualified Stock Option, or both of them. (i) "Option Price" means the purchase price of the shares of Common Stock covered by an Option determined in accordance with Section 6(c) hereunder. (j) "Parent" means any corporation which is a "parent corporation" as defined in Section 424(e) of the Code, with respect to the Corporation. (k) "Plan" means this 1997 Stock Option and Stock Bonus Plan. (l) "Recipient" means any person granted an Option or awarded a Bonus hereunder. (m) "Securities Act" means the Securities Act of 1933, as amended from time to time. (n) "Subsidiary" means any corporation which is a "subsidiary corporation" as defined in Section 424(f) of the Code, with respect to the Corporation. 2. ADMINISTRATION. (a) The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically conferred under the Plan or necessary or advisable in the administration of the Plan, including the authority to grant Options and Bonuses; to determine which Options shall be Incentive Stock Options and which shall be Non-qualified Stock Options; to determine the vesting schedules and other restrictions, if any, relating to Options and Bonuses; to determine the Option Price; to determine the persons to whom, and the time or times at which, Options and Bonuses shall be granted; to determine the number of shares to be covered by each Option and Bonus; to determine Fair Market Value per share; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Option agreements (which need not be -2- identical) entered into in connection with Options granted under the Plan; and to make all other determinations deemed necessary or advisable for the administration of the Plan. (b) Options and Bonuses granted under the Plan shall be evidenced by duly adopted resolutions of the Committee included in the minutes of the meeting at which they are adopted or in a unanimous written consent. (c) By resolution the Committee may delegate to one or more executive officers the power to grant options or stock bonuses to employees, consultants or advisors of the Company, provided, however, that grants to directors or executive officers of the Company, or any other person subject to Section 16 of the Exchange Act may not be made pursuant to such delegated authority. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or any successor regulation under the Exchange Act. To the extent any provision of this Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. Any Option or Bonus granted hereunder which would subject or subjects the Recipient to liability under Section 16(b) of the Exchange Act is void AB INITIO as if it had never been granted. (d) No member of the Committee or the Board, nor any agent, shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option or Bonus granted hereunder. (e) The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. 3. ELIGIBILITY. (a) Subject to certain limitations hereinafter set forth, Options and Bonuses may be granted to employees, officers, directors, advisors and consultants of the Corporation. In determining the persons to whom Options or Bonuses shall be granted and the number of shares to be covered by each Option or Bonus, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Corporation and such other factors as the Committee shall deem relevant to accomplish the purposes of the Plan. (b) A Recipient shall be eligible to receive more than one grant of an Option or Bonus during the term of the Plan, on the terms and subject to the restrictions herein set forth. 4. INCENTIVE STOCK OPTIONS. Options granted pursuant to this Section 4 are intended to constitute Incentive Stock Options and shall be subject to the following special terms and conditions, in addition to the general terms and conditions specified in Section 6 hereof. Only employees of the -3- Corporation (as the term "employees" is defined for the purposes of the Code) shall be entitled to receive Incentive Stock Options. (a) The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of Common Stock with respect to which Incentive Stock Options granted under this and any other plan of the Corporation or any Parent corporation or Subsidiary corporation are exercisable for the first time by a Recipient during any calendar year may not exceed the amount set forth in Section 422(d) of the Code. (b) Incentive Stock Options granted under this Plan are intended to satisfy all requirements for incentive stock options under Section 422 of the Code and the Treasury Regulations thereunder and, notwithstanding any other provision of this Plan, the Plan and all Incentive Stock Options granted under it shall be so construed, and all contrary provisions shall be so limited in scope and effect and, to the extent they cannot be so limited they shall be void. (c) Except as provided herein, or in the Stock Option Agreement approved by the Committee for a specific Recipient, an Incentive Stock Option may not be exercised unless the Recipient then is an employee of the Corporation or a Subsidiary or Parent of the Corporation, and unless the Recipient has remained continuously as an employee of the Corporation since the date of grant of the Option. The provisions set forth herein will govern unless otherwise determined by the Committee. (d) If the Recipient ceases to be an employee of the Corporation or a Subsidiary or Parent of the Corporation (other than by reason of death, disability or retirement), other than for cause, all Options theretofore granted to such Recipient but not theretofore exercised shall terminate three months after the date the Recipient ceased to be an employee of the Corporation. 5. NON-QUALIFIED STOCK OPTIONS. Options granted pursuant to this Section 5 are intended to constitute Non-qualified Stock Options and shall be subject only to the general terms and conditions specified in Section 6 hereof. 6. TERMS AND CONDITIONS OF OPTIONS. Each Option granted pursuant to the Plan shall be evidenced by a written Option agreement between the Corporation and the Recipient, which agreement shall be in substantially the form of Exhibit A hereto as modified from time to time by the Committee in its discretion, and which shall comply with and be subject to the following terms and conditions: (a) NUMBER OF SHARES. Each Option agreement shall state the number of shares of Common Stock covered by the Option. (b) TYPE OF OPTION. Each Option agreement shall specifically identify the portion, if any, of the Option which constitutes an Incentive Stock Option and the portion, if any, which constitutes a Non-qualified Stock Option. -4- (c) OPTION PRICE. Each Option agreement shall state the Option Price, which shall be determined by the Committee subject only to the following restrictions: (i) The Option Price of any Incentive Stock Option shall be not less than 100% of the Fair Market Value per share on the date of grant of the Option; provided, however, that any Incentive Stock Option granted under the Plan to a person owning more than ten percent of the total combined voting power of the Common Stock shall have an Option Price of not less than 110% of the Fair Market Value per share on the date of grant of the Incentive Stock Option. (ii) Any Non-qualified Stock Option granted under the Plan shall be at a price not less than 85% of the Fair Market Value per share on the date of grant. (iii) The Option Price shall be subject to adjustment as provided in Section 6(i) hereof. (d) TERM OF OPTION. Each Option agreement shall state the period during and times at which the Option shall be exercisable; provided, however: (i) The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted, unless a future date is specified in the resolution; provided, however, the Recipient shall have no rights under the grant until the Recipient has executed an Option agreement with respect to such Option. (ii) Except as further restricted in paragraph 6(d)(iii), the exercise period shall not exceed ten years from the date of grant of the Option. (iii) Incentive Stock Options granted to a person owning more than ten percent of the total combined voting power of the Common Stock of the Corporation shall be exercisable for no more than five years. (iv) The Committee shall have the authority to accelerate or extend the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. No exercise period may be extended to increase the term of the Option beyond ten years from the date of the grant, or five years in the case of Incentive Stock Options granted to any person owning more than ten percent of the total combined voting power of the Common Stock of the Corporation. (v) The exercise period shall be subject to earlier termination as provided in Sections 6(f) and 6(g) hereof and, furthermore, shall be terminated upon surrender of the Option by the holder thereof if such surrender has been authorized in advance by the Committee. -5- (e) METHOD OF EXERCISE AND MEDIUM AND TIME OF PAYMENT. (i) An Option may be exercised as to any or all whole shares of Common Stock as to which it then is exercisable. (ii) Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice to the secretary of the Corporation designating the number of shares as to which the Option is being exercised, and shall be accompanied by payment in full of the Option Price for the number of shares so designated, together with any written statements required by any applicable securities laws. (iii) The Option Price shall be paid in cash or in shares of Common Stock having a Fair Market Value equal to such Option Price and, subject to approval of the Committee, may be effected in whole or in part (A) with monies received from the Corporation at the time of exercise as a compensatory cash payment, or (B) with monies borrowed from the Corporation pursuant to repayment terms and conditions as shall be determined from time to time by the Committee, in its discretion, separately with respect to each exercise of an Option and each Recipient; provided, however, that each such method and time for payment and each such borrowing and the terms and conditions of repayment shall be permitted by and be in compliance with applicable law. (iv) The Committee shall have the sole and absolute discretion to determine whether or not property other than cash or Common Stock may be used to purchase the shares of Common Stock hereunder and, if so, to determine the value of the property received. (v) Applicable withholding taxes shall be paid in the manner specified by Section 9 hereof. (f) TERMINATION. (i) Unless otherwise provided with respect to a particular Option, if the Recipient ceases to be an employee, officer, director, advisor or consultant of the Corporation or a Subsidiary or Parent to the Corporation other than by reason of death, disability or retirement, all Options theretofore granted to such Recipient but not theretofore exercised shall terminate three months after the date the Recipient ceases to be an employee, officer, director, advisor or consultant of the Corporation, and shall terminate upon the date of termination of employment if discharged for cause. (ii) Nothing in the Plan or in any Option granted hereunder shall confer upon a Recipient any right to continue in the employ of or to continue any other relationship with the Corporation nor interfere in any way with the right of the Corporation to terminate such employment or other relationship between a Recipient and the Corporation. -6- (g) DEATH, DISABILITY OR RETIREMENT OF RECIPIENT. If a Recipient shall die while an employee, officer, director, advisor or consultant of the Corporation, or if the Recipient's employment, officer or director status or advisory or consulting relationship shall terminate by reason of Disability or retirement, all Options theretofore granted to such Recipient, whether or not otherwise exercisable, unless earlier terminated in accordance with their terms, may be exercised by the Recipient or by the Recipient's estate or other permitted assignee, at any time within one year after the date of death, Disability or retirement of the Recipient; provided, however, that in the case of Incentive Stock Options such one-year period shall be limited to three months in the case of retirement. (h) TRANSFERABILITY RESTRICTION (i) Options granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974, or the rules thereunder. Options may be exercised during the lifetime of the Recipient only by the Recipient, and thereafter only by his legal representative or permitted assignee. (ii) Any attempted sale, pledge, assignment, hypothecation or other transfer of an Option contrary to the provisions hereof and the levy of any execution, attachment or similar process upon an Option shall be null and void and without force or effect and shall result in a termination of the Option. (iii) (A) As a condition to the transfer of any shares of Common Stock issued upon exercise of an Option granted under this Plan, the Corporation may require an opinion of counsel, satisfactory to the Corporation, to the effect that such transfer will not be in violation of the Securities Act or any other applicable securities laws or that such transfer has been registered under federal and all applicable state securities laws. (B) Further, the Corporation shall be authorized to refrain from delivering or transferring shares of Common Stock issued under this Plan until the Committee determines that such delivery or transfer will not violate applicable securities laws and the Recipient has tendered to the Corporation any federal, state or local tax owed by the Recipient as a result of exercising the Option or disposing of any Common Stock when the Corporation has a legal liability to satisfy such tax. (C) The Corporation shall not be liable for damages due to delay in the delivery or issuance of any stock certificate for any reason whatsoever, including, but not limited to, a delay caused by listing requirements of any securities exchange or the National Association of Securities Dealers, or any registration requirements under the Securities Act, the Exchange Act, or under any other state or federal law, rule or regulation. (D) The Corporation is under no obligation to take any action or incur any expense in order to register or qualify the delivery or transfer of shares of Common Stock under applicable securities laws or to perfect any exemption from such registration or qualification. (E) Furthermore, the Corporation will not be liable to any Recipient for failure to deliver or transfer shares of Common Stock if such failure is based upon the provisions of this paragraph. -7- (i) EFFECT OF CERTAIN CHANGES. (i) If there is any change in the number of shares of Common Stock through the declaration of stock dividends, or through a recapitalization resulting in stock splits, or combinations or exchanges of such shares, the number of shares of Common Stock available for Options and the number of such shares covered by outstanding Options, and the exercise price per share of the outstanding Options, shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number of issued shares of Common Stock; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (ii) In the event of the proposed dissolution or liquidation of the Corporation, or any corporate separation or division, including, but not limited to, split-up, split-off or spin-off, merger or consolidation of the Corporation with another corporation, or any sale or transfer by the Corporation of all or substantially all its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group for more than 50% of the then outstanding voting securities of the Corporation, the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option (at its then current Option Price) solely for the kind and amount of shares of stock and other securities, property, cash or any combination thereof receivable upon such dissolution, liquidation, corporate separation or division, merger or consolidation, sale or transfer of assets or tender offer or exchange offer, by a holder of the number of shares of Common Stock for which such Option might have been exercised immediately prior to such dissolution, liquidation, or corporate separation or division, merger or consolidation, sale or transfer of assets or tender offer or exchange offer; or in the alternative the Committee may provide that each Option granted under the Plan shall terminate as of a date fixed by the Committee; provided, however, that not less than 30 days' written notice of the date so fixed shall be given to each Recipient, who shall have the right, during the period of 30 days preceding such termination, to exercise the Option to the extent then exercisable. To the extent that Section 422(d) of the Code would not permit the provisions of this paragraph to apply to any outstanding Incentive Stock Options, such Incentive Stock Options shall immediately upon the occurrence of the event described in this paragraph, be treated for all purposes of the Plan as Non-qualified Stock Options and shall be immediately exercisable as such as provided in this paragraph. (iii) Paragraph (ii) of this Section 6(i) shall not apply to a merger or consolidation in which the Corporation is the surviving corporation and shares of Common Stock are not converted into or exchanged for stock, securities of any other corporation, cash or any other thing of value. Notwithstanding the preceding sentence, in case of any consolidation or merger of another corporation into the Corporation in which the Corporation is the surviving corporation and in which there is a reclassification or change (including a change which results in the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any change in such shares into two or more -8- classes or series of shares), the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option solely for the kind and amount of shares of stock and other securities (including those of any new direct or indirect Parent of the Corporation), property, cash or any combination thereof receivable upon such reclassification, change, consolidation or merger by the holder of the number of shares of Common Stock for which such Option might have been exercised. (iv) If there is a change in the Common Stock of the Corporation as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. (v) To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive, provided that each Incentive Stock Option granted pursuant to this Plan shall not be adjusted in a manner that causes such option to fail to continue to qualify as an Incentive Stock Option within the meaning of Section 422 of the Code, except as otherwise provided in Section 6(i)(ii) hereof. (vi) Except as expressly provided in this Section 6(i), the Recipient shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger, or consolidation or split-up, split-off or spin-off of assets or stock of another corporation; and any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. The grant of an Option under the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. (j) RIGHTS AS SHAREHOLDER - NON-DISTRIBUTIVE INTENT. (i) Neither a person to whom an Option is granted nor a permitted assignee shall be deemed to be the holder of, or to have any rights of a holder with respect to, any shares of Common Stock subject to such Option until after the Option is exercised and the shares are issued to the person exercising such Option. (ii) Upon exercise of an Option at a time when there is no registration statement in effect under the Securities Act relating to the shares issuable upon exercise, shares may be issued to the Recipient only if the Recipient represents and warrants in writing to the Corporation that the shares purchased are being acquired for investment and not with -9- a view to the distribution thereof and provides the Corporation with sufficient information to establish an exemption from the registration requirements of the Securities Act. (iii) No shares shall be issued upon the exercise of an Option unless and until there shall have been compliance with any then applicable requirements of the Securities and Exchange Commission, or any other regulatory agencies having jurisdiction over the Corporation. (iv) No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 6(i) hereof. (k) OTHER PROVISIONS. Option agreements evidencing Options granted under the Plan shall contain such other provisions, including, without limitation, the imposition of restrictions upon the exercise of an Option, and, in the case of an Incentive Stock Option, the inclusion of any condition not inconsistent with such Option qualifying as an Incentive Stock Option, as the Committee shall deem advisable. 7. STOCK RESERVED. (a) The stock subject to Options or Bonuses hereunder shall be shares of Common Stock. Such shares, in whole or in part, may be authorized but unissued shares or shares that shall have been or that may be reacquired by the Corporation. The aggregate number of shares of Common Stock as to which Options and Bonuses may be granted from time to time under the Plan (the "Available Shares") initially shall not exceed 2,200,000 shares. The number of Available Shares shall be subject to adjustment as provided in Section 6(i) hereof. (b) If any Option outstanding under the Plan for any reason expires or is terminated without having been exercised in full, or if any Bonus granted is forfeited because of vesting or other restrictions imposed at the time of grant, the shares of Common Stock allocable to the unexercised portion of such Option or the forfeited portion of the Bonus shall become available for subsequent grants of Options and Bonuses under the Plan, unless the Plan shall have been terminated. 8. GRANT OF STOCK BONUSES. In addition to, or in lieu of, the grant of an Option, the Committee may grant Bonuses of Common Stock. (a) At the time of grant of a Bonus, the Committee may impose a vesting period of up to five years, and such other restrictions which it deems appropriate. Unless otherwise directed by the Committee at the time of grant of a Bonus, the Recipient shall be considered a shareholder of the Corporation as to the Bonus shares which have vested in the Recipient at any time regardless of any forfeiture provisions which have not yet arisen. -10- (b) The grant of a Bonus and the issuance and delivery of shares of Common Stock pursuant thereto shall be subject to approval by the Corporation's counsel of all legal matters in connection therewith, including compliance with the requirements of the 1933 Act, the 1934 Act, other applicable securities laws, rules and regulations, and the requirements of any stock exchanges or other services upon which the Common Stock then may be listed or quoted. Any certificates prepared to evidence Common Stock issued pursuant to a Bonus grant shall bear legends as the Corporation's counsel may seem necessary or advisable. Included among the foregoing requirements, but without limitation, any Recipient of a Bonus at a time when a registration statement relating thereto is not effective under the 1933 Act shall execute a Subscription Agreement in a form acceptable to the Company. 9. AGREEMENT BY RECIPIENT REGARDING WITHHOLDING TAXES. Each Recipient agrees that the Corporation, to the extent permitted or required by law, shall deduct a sufficient number of shares due to the Recipient upon exercise of the Option or grant of a Bonus to allow the Corporation to pay federal, state and local taxes of any kind required by law to be withheld upon the exercise of such Option or payment of such Bonus from any payment of any kind otherwise due to the Recipient. The Corporation shall not be obligated to advise any Recipient of the existence of any tax or the amount which the Corporation will be so required to withhold. 10. TERM OF PLAN. Options and Bonuses may be granted under this Plan from time to time until April 16, 2007, which is ten years from the date the Plan was originally adopted by the Board. 11. AMENDMENT AND TERMINATION OF THE PLAN. The Committee at any time and from time to time may suspend, terminate, modify or amend the Plan. Except as provided in Section 6 hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any Option or Bonus previously granted, unless the written consent of the Recipient is obtained. 12. ASSUMPTION. Subject to Section 6(i) hereof, the terms and conditions of any outstanding Options granted under this Plan shall be assumed by, be binding upon and shall inure to the benefit of any successor corporation to the Corporation and continue to be governed by, to the extent applicable, the terms and conditions of this Plan. Such successor corporation may but shall not be obligated to assume this Plan. 13. TERMINATION OF RIGHT OF ACTION. Every right of action arising out of or in connection with the Plan by or on behalf of the Corporation, or by any shareholder of the Corporation against any past, present or future member of the Board, or against any employee, or by an employee (past, present or future) against the Corporation, irrespective of the place where an action may be brought and of the place of residence of any such shareholder, director or employee, will cease and be barred by the expiration of three years from the date of the act or omission in respect of which such right of action is alleged to have risen or such shorter period as may be provided by law. 14. TAX LITIGATION. The Corporation shall have the right, but not the obligation, to contest, at its expense, any tax ruling or decision, administrative or judicial, on any issue which is related to the Plan and which the Committee believes to be important to holders of Options or -11- Common Stock issued pursuant to Bonuses granted under the Plan and to conduct any such contest or any litigation arising therefrom to a final decision. 15. SHAREHOLDER APPROVAL. If this Plan is not approved by the shareholders of the Corporation within 12 months following the date the Plan was approved by the Board as required by Section 422(b)(1) of the Code, this Plan and the Options granted hereunder shall be and remain effective for all Recipients, but the reference to Incentive Stock Options herein shall be deleted and all options granted hereunder shall be Non-qualified Stock Options pursuant to Section 5 hereof. -12- EXHIBIT A FORM OF STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of this ___ day of _______, 199__, between Topro, Inc., a Colorado corporation (the "Corporation"), and ________________ (the "Recipient"). In accordance with its 1997 Stock Option and Stock Bonus Plan (the "Plan"), a copy of which has been provided to the Recipient and is incorporated herein by reference, the Corporation desires, in connection with the services of the Recipient, to provide the Recipient with an opportunity to acquire $.0001 par value common stock ("Common Stock") of the Corporation on favorable terms and thereby increase the Recipient's proprietary interest in the Corporation and as incentive to put forth maximum efforts for the success of the business of the Corporation. All capitalized terms not otherwise defined herein shall be as defined in the Plan. NOW, THEREFORE, in consideration of the premises and mutual covenants herein set forth and other good and valuable consideration, the Corporation and the Recipient agree as follows: 1. CONFIRMATION OF GRANT OF OPTION; NATURE OF OPTION. Pursuant to a determination of the Committee (as defined in the Plan) made on ____________, 19__ (the "Date of Grant"), the Corporation, subject to the terms of the Plan and of this Agreement, confirms that the Recipient irrevocably has been granted on the Date of Grant, as a matter of separate inducement and agreement, and in addition to and not in lieu of salary or other compensation for services, [AN INCENTIVE/A NON-QUALIFIED] Stock Option pursuant to Section [4/5] of the Plan (the "Option") to purchase an aggregate of ______ shares of Common Stock on the terms and conditions herein set forth, subject to adjustment as provided in Paragraph 9 hereof. The holder of the Option will not have any rights to dividends or any other rights of a shareholder with respect to any shares of Common Stock subject to the Option until such shares shall have been purchased through the exercise of the Option and have been evidenced on the stock transfer records of the Corporation maintained by the Corporation's transfer agent. 2. OPTION PRICE. The Option Price per share of Common Stock covered by the Option will be $_____ (the "Option Price") subject to adjustment as provided in Paragraph 9 hereof. 3. VESTING OF OPTION. This Option shall vest as to 20% of the shares covered hereby on the one year anniversary of the Date of Grant. Thereafter, this Option shall vest as to an additional 20% of the shares covered hereby, cumulatively, on the second, third, fourth and fifth anniversary dates of the Date of Grant. 4. EXERCISE OF OPTION. Except as otherwise provided in Section 6 of the Plan and Paragraph 3 above, this Option may be exercised in whole or in part at any time during the term of the Option, provided, however, no portion of this Option shall be exercisable after the expiration of the term thereof. The Option may be exercised, by notice and payment to the Corporation as provided in Paragraph 10 hereof and Section 6(e) of the Plan, subject to the limitations of Paragraph 11 below. 5. TERM OF OPTION. The term of the Option will be through __________, ____, subject to earlier termination or cancellation as provided in this Agreement or the Plan. 6. TRANSFERABILITY RESTRICTION. The Option may not be assigned, transferred or otherwise disposed of, or pledged or hypothecated in any way (whether by operation of law or otherwise) except in strict compliance with Section 6(h) of the Plan. Any assignment, transfer, pledge, hypothecation or other disposition of the Option or any attempt to make any such levy of execution, attachment or other process will cause the Option to terminate immediately upon the happening of any such event, provided, however, that any such termination of the Option under the foregoing provisions of this Paragraph 6 will not prejudice any rights or remedies which the Corporation may have under this Agreement or otherwise. 7. EXERCISE UPON TERMINATION. The Recipient's rights to exercise this Option upon termination of employment or cessation as an officer, director or consultant shall be as set forth in the Plan. 8. DEATH, DISABILITY OR RETIREMENT OF RECIPIENT. The Recipient's rights to exercise this Option upon the death, disability or retirement of the Recipient shall be as set forth in Section 6(g) of the Plan. 9. ADJUSTMENTS. The Option shall be subject to adjustment upon the occurrence of certain events as set forth in Section 6(i) of the Plan. 10. NO REGISTRATION OBLIGATION. The Recipient understands that the Option is not registered under the Securities Act of 1933, as amended (the "Securities Act") and the Corporation has no obligation to register under the Securities Act the Option or any of the shares of Common Stock subject to and issuable upon the exercise of the Option, although it may do so from time to time. The Recipient represents that the Option is being acquired by him for investment and acknowledges that all certificates for the shares issued upon exercise of the Option will bear the following legend unless such shares are registered under the Securities Act prior to their issuance: The shares represented by this Certificate have not been registered under the Securities Act of 1933 (the "Securities Act"), and are "restricted securities" as that term is defined in Rule 144 under the Securities Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from registration under the Securities Act, the availability of which is to be established to the satisfaction of the Company. The Recipient further understands and agrees that the Option may be exercised only if at the time of such exercise there is an effective registration under the Securities Act or the Recipient and -2- the Corporation are able to establish the existence of an exemption from registration under the Securities Act and applicable state laws. 11. NOTICES. Each notice relating to this Agreement will be in writing and delivered in person or by certified mail to the proper address. Notices to the Corporation shall be addressed to the Corporation c/o John Jenkins, President, at 2525 W. Evans Ave., Denver, CO 80219. Notices to the Recipient or other person or persons then entitled to exercise the Option shall be addressed to the Recipient or such other person or persons at the Recipient's address below specified. Anyone to whom a notice may be given under this Agreement may designate a new address by notice to that effect given pursuant to this Paragraph 11. 12. APPROVAL OF COUNSEL. The exercise of the Option and the issuance and delivery of shares of Common Stock pursuant thereto shall be subject to approval by the Corporation's counsel of all legal matters in connection therewith, including compliance with the requirements of the Securities Act, the Securities Exchange Act of 1934, as amended, applicable state securities laws, the rules and regulations thereunder, and the requirements of any national securities exchange or association upon which the Common Stock then may be listed. 13. BENEFITS OF AGREEMENT. This Agreement will inure to the benefit of and be binding upon each successor and assign of the Corporation. All obligations imposed upon the Recipient and all rights granted to the Corporation under this Agreement will be binding upon the Recipient's heirs, legal representatives and successors. 14. GOVERNMENTAL AND OTHER REGULATIONS. The exercise of the Option and the Corporation's obligation to sell and deliver shares upon the exercise of rights to purchase shares is subject to all applicable federal and state laws, rules and regulations, and to such approvals by any regulatory or governmental agency which, in the opinion of counsel for the Corporation, may be required. 15. CONFLICTS WITH THE PLAN. If any provision in this Agreement conflicts with a provision in the Plan, the Plan shall govern. Executed in the name and on behalf of the Corporation by one of its duly authorized officers to be effective as of the date first above written. TOPRO, INC. By: ------------------------------- John Jenkins, President -3- EX-21.1 4 EXHIBIT 21.1 TOPRO, INC. 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 All Control Systems, Inc. Pennsylvania Tech Sales, Inc. Colorado Topro Systems Integration, Inc. Colorado Sharp Electric Construction Company, Inc. Colorado - ------------------------------------------------------------------------------------
EX-27 5 FDS
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF TOPRO, INC. AND SUBSIDIARIES FOR THE YEAR ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 907,000 0 8,172,000 2,075,000 174,000 13,132,000 4,456,000 1,823,000 26,886,000 12,964,000 0 0 0 1,000 8,475,000 26,886,000 36,843,000 36,843,000 24,322,000 24,322,000 14,053,000 0 987,000 (2,519,000) 110,000 (2,629,000) (106,000) 0 0 (2,735,000) (.31) 0
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