U.S. 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, 1999
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______________ to _______________
Commission File number 33-58694
FBR CAPITAL CORPORATION
(Name of small business issuer in its charter)
Nevada 13-3465289
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
20 East University, Suite 304, Tempe, Arizona 85281
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(Address of principal executive offices)
(480) 967-5800
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.005 par value
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 in response to Item
405 of Regulation S-B is not 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 this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Revenues for most recent fiscal year: $743,954
The aggregate market value of the voting stock (based on the closing price
on that date) held by non-affiliates of the Registrant as of September 13, 1999
was approximately $2,700,000.
Number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: At September 13, 1999, the issuer had
outstanding 13,241,031 shares of Common Stock, par value $.005 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive proxy statement dated September 16, 1999 for
the Annual Meeting of Stockholders to be held on October 7, 1999 (Part III -
Items 10, 11, 12 and 13).
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
FBR Capital Corporation (the "Company" or "FBR") was incorporated as
Richard Barrie Fragrances, Inc. in the State of Nevada on June 6, 1988, for the
original purpose of developing, manufacturing and marketing fragrances,
cosmetics, skin treatment and personal care products sold primarily through
department and specialty stores and drugstores. On July 1, 1996, following the
Asset Sale (discussed below) and approval of its stockholders, the Company filed
a Certificate of Amendment to its Articles of Incorporation to change its name
from "Richard Barrie Fragrances, Inc." to "FBR Capital Corporation." As of the
date of this report, the Company conducts its operations through its subsidiary,
Vitrix Incorporated, an Arizona corporation formed on April 26, 1996 ("Vitrix").
Unless otherwise indicated, references to the Company in this report shall
include Vitrix.
Effective June 30, 1996, FBR sold substantially all of its properties and
rights (the "Asset Sale") to Parlux Fragrances, Inc. During the period from the
Asset Sale to April 1999, FBR's operations were limited to the conduct of
administrative activities and discussions with third parties regarding possible
business combinations.
On April 15, 1999, FBR acquired the outstanding capital stock of Vitrix
pursuant to the terms of an Exchange Agreement, dated as of such date, by and
among FBR, Vitrix and certain of the Vitrix shareholders who agreed to
participate in the transaction. Under the terms of the Exchange Agreement, each
outstanding share of Vitrix common stock, no par value per share ("Vitrix Common
Stock") was converted into a combination of .9225 shares of FBR common stock,
$.005 par value per share ("Common Stock") and 1.0736 shares of Series B
Convertible Preferred Stock, $.01 par value per share, of FBR ("Preferred
Stock"). Each share of Preferred Stock is automatically convertible into one
share of Common Stock at such time as FBR has the authorized capital to issue
such shares.
The aggregate consideration paid in the transaction was 8,592,826 shares of
Common Stock and 10,000,000 shares of Preferred Stock (the "Shares"). The
Exchange Agreement also provided for the assumption of outstanding options and
warrants to purchase an aggregate of 1,086,000 shares of Vitrix Common Stock,
which have been converted into options and warrants to purchase an aggregate of
2,167,798 shares of Common Stock. Giving effect to the issuance of the Shares,
Vitrix shareholders now own approximately 80% of the outstanding shares of
Common Stock (assuming conversion of the Preferred Stock into Common Stock and
excluding outstanding options and warrants) and the shareholders of FBR existing
prior to the Exchange Agreement now own the remaining 20% of such FBR shares.
Although FBR became the parent company of Vitrix following the consummation
of the transaction, the acquisition was accounted for as a recapitalization of
Vitrix and the purchase of FBR by Vitrix, as Vitrix is the controlling company
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after the transaction. The accompanying financial statements of FBR include the
accounts of Vitrix for all periods presented, and the accounts of FBR from April
15, 1999, the effective date of the acquisition.
Vitrix designs, develops, manufactures and markets a complete line of time
and labor management products targeting small to mid-sized companies of five (5)
to 2,000 employees. Vitrix's products are designed to improve productivity by
automating collection of time and attendance data, staff scheduling and
management of labor resources. Vitrix markets its products through a nationwide
reseller network and directly to end-users.
On September 16, 1999, the Company filed a definitive Information Statement
for its Annual Meeting of Stockholders to be held on October 7, 1999 (the
"Annual Meeting"). Proposals to elect six (6) directors, amend the Company's
Articles of Incorporation to increase the number of authorized shares of Common
Stock to 50,000,000 and change the Company's name to Vitrix Inc. and adopt the
Company's 1999 Equity Compensation Plan will be considered at the Annual
Meeting. Upon approval of such proposals, the Company intends to promptly file
with the Nevada Secretary of State an amendment to the Company Articles of
Incorporation to effectuate the change in the number of authorized shares and
Company name. Immediately following such filing, the Preferred Stock will be
automatically converted into Common Stock without any further action on the part
of the holder of such Preferred Stock.
PRODUCTS AND SERVICES
The Company designs, develops, manufacturers and markets a line of time and
labor management hardware and software products targeting small to mid-sized
companies of up to 2,000 employees. The Company's core product, HourTrack 98,
was first introduced in November 1998 and is an internally developed,
proprietary software application that maintains and automates the process of
collecting time sheet information and provides reports to help companies
determine how their employees spend their time. HourTrack 98 also automatically
accrues vacation, sick and personal time, and effectively replaces the
traditional punch clock with a fully automated system designed to provide
significant savings to its users.
The Company offers three (3) types of business solutions:
SOFTWARE-ONLY SOLUTIONS - The Company's software-only solutions are
designed for environments in which all company employees have access to a
personal computer. Clocking in and out is performed using a Windows 95, 98 or NT
computer running HourTrack. The HourTrack software is designed to provide a high
value to customers due to its low cost, ease of use and high level of
functionality.
BADGE READER SOLUTIONS - The Company's badge reader solutions are designed
for environments where there are a large number of hourly employees or
individuals that do not have access to a personal computer, such as high traffic
office area or shop floors.
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BIOMETRIC SOLUTIONS - The Company's biometric solutions (used in lieu of
badges or password systems) are designed to help employers ensure that the
person clocking in or out is the actual person being clocked in and out, and
thereby eliminate a common problem known as "buddy-punching." The Company
believes that employers lose significant money as a result of employees clocking
in for each other, thereby impacting earnings. The Company's biometric solutions
include three (3) hardware options: fingerprint verification, two-finger
geometry and full hand geometry.
LABOR MANAGEMENT SOLUTIONS
The Company's flagship product, HourTrack 98, is an internally developed,
proprietary software application designed to maintain and automate the process
of collecting time sheet information and assist management in enhancing employer
productivity in the workplace. By replacing the traditional punch clock with a
fully automated system, the Company believes this product produces substantial
savings employers.
HOURTRACK 98
All hardware options available from Vitrix function by communicating with
HourTrack 98. This software is responsible for making sense of and reporting
data as well as maintaining and enforcing company policies. The primary features
of HourTrack 98 include time tracking, benefit tracking, job tracking, human
resource functionality, employee scheduling, messaging, reporting and the
import/export of data. HourTrack 98 also automatically accrues vacation, sick
and personal time.
HourTrack 98 is currently available in two editions:
HOURTRACK 98 SMALL BUSINESS EDITION (SBE) - This version of HourTrack
98 includes all of the primary features of the software (discussed
above) and is designed for a single-administrator-environment in a
small business.
HOURTRACK 98 PROFESSIONAL EDITION (PRO) - This version of HourTrack 98
contains all of the SBE features plus individualized security, audit
trails and rules-based benefit accruals. HourTrack 98 PRO is designed
for use in a multiple administrator environment where user-level
security and audit trails are important.
Both editions of HourTrack (SBE and PRO) are available as stand-alone
solutions or bundled in a "kit" format as the QuickSwipe Kit, QuickTouch Kit or
TelePunch Kit.
QUICKSWIPE KIT
The QuickSwipe kit is an all-in-one package that contains the software,
badge reader, cables and badge cards necessary to implement a time and
attendance system. The Company offers four different badge systems, each of
which is available as a QuickSwipe Kit to simplify the implementation of a time
and attendance system.
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QUICKTOUCH KIT
The QuickTouch kit is an all-in-one package that contains the software and
necessary hardware to implement a biometric time and attendance solution. Three
(3) biometric options are available including fingerprint verification and
two-finger geometry verification.
HANDPUNCH KIT
The HandPunch Kit is an all-in-one package that contains the software and
necessary hardware to implement a convenient and secure time and attendance
solution. This affords the customer a lower cost, high reliability entry to the
time and attendance market, particularly where "buddy punching" is an issue. The
Company believes that hand punch technology growth over the past 18 months has
been significant.
TELEPUNCH KIT
The Company's first telephony solution, TelePunch, was introduced in May
1999 in response to strong customer feedback requesting a solution for remote
management issues. Telepunch is designed to provide a solution for environments
where remote employees have the need to clock-in or clock-out at a specific site
or for a specific task or job category change during the workday. TelePunch
offers a complete hardware/software solution that allows employees to clock in
and out via use of a standard telephone or mobile phone. Through the use of an
access code and standard telephone keypad, employees are clocked in to a central
server location. For security purposes and to deal with "buddy punching," the
system also has the capability of recording caller ID information.
MARKETING
The Company markets and sells its products to small and mid-sized companies
in markets in the United States and foreign countries through its nationwide
reseller network and directly to end users. End-users include companies in the
manufacturing and service industries, and in the public and private sectors. The
Company believes that the market for time and labor management products consists
of the following three (3) business segments:
SMALL BUSINESSES. This segment is comprised of companies with
fewer than 20 employees and only a single administrator who performs
time sheet edits and prepares employee hours for payroll.
MID-SIZED BUSINESSES. This segment is comprised of companies with
20 to 500 employees. These companies normally have two (2) or more
administrators who perform time sheet edits and prepare employee hours
from a single office. In many cases multiple stations are necessary
for clocking in and out, however, all data is administered from a
central location.
ENTERPRISE BUSINESSES. Enterprise businesses generally have over
500 employees with multiple satellite offices, each of which have
one (1) or more administrators. Payrolls are performed at a central or
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headquarter office. An enterprise customer is analogous to a
collection of Mid-Sized Businesses requiring a central location to
collect and store data.
The Company is currently developing an enterprise-class software solution
designed to meet the time and attendance needs of enterprise businesses. The
Company believes that this product will be available for release in the fourth
quarter of the calendar year, although no assurance can be given that the
Company will be able to meet this schedule.
The Company believes there are over 2.4 million businesses that fall into
the small to mid-sized businesses market segment. According to industry
statistics, approximately 80% of the businesses that fall into these two market
segments could benefit from the automation of the collection of time and
attendance. At an average solution cost of approximately $1,200, the small to
mid-sized market represents approximately $2.3 billion in potential sales.
SALES
The Company offers its products through a nationwide reseller network and
directly to end users via the Internet at the Vitrix Online Store or by
contacting a Vitrix sales representative. The Company provides support in the
form of training and provision of internally generated marketing materials.
The Company's sales strategy is to continually evaluate revenue
opportunities via all channels of distribution to further develop and expand its
direct/indirect product sales marketing program. In the future, the Company
expects to maintain a marketing strategy of utilizing a combination of reseller
and direct product sales as part of its long-term strategy. The Company believes
that growth in its reseller network will exceed 250 by the last half of fiscal
year 2000. The Company also intends to expand sales via maximizing the
opportunities through the web and the Vitrix On Line Store for direct ordering
of products, although no assurance can be given that any such efforts will come
to fruition or otherwise be successful.
DIRECT SALES. Vitrix sales representatives generally provide presales
technical and pricing information to potential customers. In addition, from time
to time sales representatives present Vitrix solutions at a customer's facility.
Marketing materials, sample CDs and technical documents are normally provided by
the Company's inside sales staff to customers who desire to research the best
solutions.
Vitrix Online Store. The Vitrix Online Store, which commenced operation on
the Internet in August 1998, provides customers with an easy and complete option
to purchase products online. By visiting the Company's web site,
http://store.vitrix.com, any Vitrix product can be purchased directly online
from anywhere in the world, 24 hours a day, 7 days a week. The Online Store
enables the Company to meet the needs of existing customers looking for
accessories, and international customers who, due to time zone differences, are
unable to speak directly with a Company sales representative. Vitrix recently
introduced the Vitrix Affiliate Program, whereby any entity who features the
Company's banner and links business to the Online Store can receive compensation
in the form of a referral fee.
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RESELLER NETWORK
Since the automation of time and labor management can be a big step for
certain businesses, a local reseller's role can be vital. It often requires a
great deal of planning and a strategy for deployment that might include employee
training and the coordination of a company's Human Resources and Management
Information System departments. Because of this potential complexity, customers
may prefer a face-to-face meeting or a visit to their facilities. The Company
looks to the reseller to provide this pre- and post-sales support.
Currently, it is not feasible for the Company to support installation with
every customer directly. Accordingly, having a strong reseller network is
critical to the Company's long-term business and growth strategy. Time and
Attendance vendors often service their own geographical region by visiting
customer sites and recommending a solution that best fits a customer's needs.
The Company focuses its efforts on attracting qualified resellers and providing
them with the appropriate knowledge and tools necessary to effectively sell
Vitrix's products.
During the next 12 months, as the Company's reseller network grows, the
Company intends to increase the commission structure for productive resellers,
as well as actively recruit an additional 100-150 resellers globally. The
Company's strategy with respect to resellers is to continually evaluate the
productivity and effectiveness of its resellers, with the goal of achieving a
small number of highly productive revenue producers. Toward that end, the
Company has developed ads that target resellers, which are currently running in
various reseller trade magazines. The Company also has planned to hold
educational training classes around the country that will be freely available to
educate resellers with respect to Vitrix solutions.
The Company intends to aggressively recruit resellers, value added
resellers ("VARs"), and select distributors to sell and support its products. To
that end, the Company intends to implement several programs to introduce to the
reseller channel over the next several months.
SERVICES AND SUPPORT
The Company maintains a professional service and technical support
organization which provides a suite of maintenance and professional services.
These services are designed to support the Company's customers throughout the
product life cycle. The professional services include implementation support,
technical and business technical consulting, as well as integration and
optimization. Maintenance service options are delivered through Vitrix's
centralized support operation or through local service personnel. The Company's
educational services offer a full range of curriculums which are delivered
through local training at the Company's Tempe, Arizona headquarters or via
computer based training courses. When necessary, the Company also may provide
software customization services to meet any unique customer requirements.
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MANUFACTURING AND SOURCES OF SUPPLY
The duplication of the Company's software and the printing of documentation
are outsourced to suppliers. The Company currently has four suppliers who have
been certified to the Company's manufacturing specifications to perform the
software duplication process. Although most of the parts and components included
within the Company's products are available from multiple suppliers, certain
parts and components are purchased from single suppliers. The Company has chosen
to source these items from single suppliers because it believes that the
supplier chosen is able to consistently provide the Company with the highest
quality product at a competitive price on a timely basis. While the Company has
to date been able to obtain adequate supplies of these parts and components, the
Company's inability to transition to alternate sources on a timely basis if and
as required in the future could result in delays or reductions in product
shipments which could have a material adverse effect on the Company's operating
results
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on enhancing and
increasing the performance of its existing products and developing new products
and interfaces to third party products on a timely basis for the increasingly
sophisticated needs of its customers. During fiscal 1999, and 1998, research and
development expenses were $232,250 and $117,515, respectively. The Company
intends to continue to commit resources to enhance and extend its product lines
and develop interfaces to third party products. Although the Company is
continually seeking to further enhance its product offerings and to develop new
products and interfaces, there can be no assurance that these efforts will
succeed, or that, if successful, such product enhancements or new products will
achieve widespread market acceptance, or that the Company's competitors will not
develop and market products which are superior to the Company's products or
achieve greater market acceptance. The Company also depends upon the reliability
and viability of a variety of software development tools owned by third parties
to develop its products. If these tools are inadequate or not properly
supported, the Company's ability to release competitive products in a timely
manner could be adversely impacted.
The Company is currently developing an enterprise-class software solution
designed to meet the time and attendance needs of enterprise businesses. The
Company believes that this product will be available for release in the fourth
quarter of the calendar year, although no assurance can be given that the
Company will be able to meet this schedule.
PROPRIETARY RIGHTS
The Company relies on a combination of trademarks, trade secret law and
contracts to protect its proprietary technology. The Company generally provides
software products to end-users under non-exclusive shrink-wrap licenses or under
signed licenses, both of which may be terminated by Vitrix if the end-user
breaches the terms of the license. These licenses generally require that the
software be used only internally subject to certain limitations, such as the
number of employees, simultaneous users, computer model and serial number,
features and/or terminals for which the end-user has paid the required license
fee. The Company authorizes its resellers to sublicense software products to
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end-users under similar terms. In certain circumstances, the Company also makes
master software licenses available to end-users which permit either a specified
limited number of copies or an unlimited number of copies of the software to be
made for internal use. Some customers license software products under
individually negotiated terms. Despite these precautions, it may be possible to
copy or otherwise obtain and use the Company's products or technology without
authorization. In addition, effective copyright and trade secret protection may
be unavailable or limited in certain foreign countries.
COMPETITION
The Company provides time and attendance, data collection and labor
management solutions that enables businesses to optimize their labor resources.
The labor management industry is highly competitive. Competition is increasing
as competitors in related industries, such as human resources management,
payroll processing and employee resource planning ("ERP") enter the time and
attendance market. Advances in software development tools have accelerated the
software development process and, therefore, can allow competitors to penetrate
certain of the Company's markets. Although the Company believes it has certain
technological and other advantages over its current competitors, maintaining
those advantages will require continued investment by the Company in research
and development and marketing and sales programs. There can be no assurance that
the Company will have sufficient resources to make such investments or to
achieve the technological advances necessary to maintain its competitive
advantages. Increased competition could adversely affect the Company's operating
results through price reductions and/or loss of market share.
The Company competes primarily on the basis of price/performance, quality,
reliability and customer service. In the time and attendance market, the Company
competes against firms that sell automated time and attendance products to many
industries, against firms that focus on specific industries, and against firms
selling related products, such as payroll processing, human resources
management, or ERP systems. Many of the Company's competitors, such as Kronos
Corporation, Stromberg (formerly known as Jason Data Systems) and Time America,
are substantially larger and have access to significantly greater financial
resources than the Company. Competitive market conditions could have a material
adverse effect on the Company's business, financial condition and results of
operations.
EMPLOYEES
As of June 30, 1999, the Company had sixteen employees. None of the
Company's employees is represented by a union or other collective bargaining
agreement, and the Company considers its relations with its employees to be
good. The Company has encountered intense competition for experienced technical
personnel for product development, technical support and sales and expects such
competition to continue in the future. Any inability to attract and retain a
sufficient number of qualified technical personnel could adversely affect the
Company's ability to produce, support and sell products in a timely manner.
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ITEM 2. PROPERTIES.
The Company leases approximately 2,000 square feet in Tempe, Arizona. The
Company's rental expense for this facility in fiscal 1999 was approximately
$35,000. In September 1999 the Company entered into a lease agreement for
approximately 5,000 square feet in Tempe, Arizona estimated to commence in
November 1999. The Company considers its facilities, including the new lease, to
be adequate for its current requirements and that additional space will be
available as needed in the future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time involved in legal proceedings arising from
the normal course of business. As of the date of this report, the Company is not
currently involved in any legal proceedings.
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 is traded on the NASD's over-the-counter market
on the electronic bulletin board (the "OTC Bulletin Board") under the symbol
"FBRR." The quoted prices reflect inter-dealer prices without retail mark-up,
mark-down, or commissions and may not represent actual transactions.
Set forth below are the high and low sales prices of the Common Stock for
the periods indicated as reported by the OTC Bulletin Board:
FISCAL 1999
Period High Low
------ ---- ---
First quarter $0.44 $0.19
Second quarter 0.38 0.13
Third quarter 0.69 0.38
Fourth quarter 0.58 0.39
FISCAL 1998
Period High Low
------ ---- ---
First quarter $0.56 $0.25
Second quarter 0.88 0.25
Third quarter 0.56 0.25
Fourth quarter 0.56 0.25
As of September 13, 1999 there were 174 holders of the Company's Common
Stock.
The Company has never paid any cash dividends, and the present policy of
the Company is to retain earnings for use in its business.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following selected financial information is derived from the Company's
historical financial statements and should be read in conjunction with such
financial statements and notes thereto set forth elsewhere herein and the
"Forward-Looking Statements" explanation included herein. The accompanying
financial statements of FBR include the accounts of Vitrix for all periods
presented, and the accounts of FBR from April 15, 1999, the effective date of
the merger.
SELECTED FINANCIAL INFORMATION
Years Ended June 30,
--------------------------
1999 1998
---- ----
Total Revenues $743,954 $269,677
Costs of Revenues 249,309 95,884
Gross Profit 494,645 173,793
Sales and Marketing Expense 288,559 206,214
Research and Development Expense 232,250 117,515
General and Administrative Expense 226,749 105,073
Net Loss 269,302 284,259
Basic Loss per Share 0.02 0.03
COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998
REVENUES. Revenue for fiscal year ended June 30, 1999, rose 176% to
$743,954, compared to revenue of $269,677 for the fiscal year ended June 30,
1998. This growth was principally the result of an increase in the number of
resellers and an increase in sales activity of the Company's key resellers. The
Company was also able to complete several larger dollar value sales during the
fiscal year. The Company experienced an increased customer demand for its
software-only and badge reader solutions, which resulted in an increase in sales
volume. The Company also added additional inside salespersons and increased its
advertising and promotional expenditures by 73% over the previous year.
GROSS PROFIT. Gross profit as a percentage of revenues was 67% in fiscal
1999 and 64% in fiscal 1998. The improvement in gross profit as a percentage of
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revenues in fiscal 1999 was primarily attributable to an increase in the average
price of the products sold. The average price per unit sold was increased due to
several larger dollar value sales occurring during the year.
EXPENSES. Sales and marketing expenses were $288,559, or 39% of revenues,
in fiscal 1999 and $206,214, or 76% of revenues, in fiscal 1998. The decrease in
sales and marketing expense as a percentage of revenues in fiscal 1999 is
attributable to greater sales volume. The increase in sales and marketing
expense in fiscal 1999 is primarily due to increased labor costs resulting from
the hiring of additional salespeople and increased advertising and promotional
expense.
Research and development expenses were $232,250, or 31% of revenues, in
fiscal 1999 and $117,515, or 44% of revenues, in fiscal 1998. The decrease in
research and development expense as a percentage of revenues in fiscal 1999 is
attributable to greater sales volume. The increase in research and development
expenses in fiscal 1999 is attributable to increased labor costs as a result of
the Company's commitment to enhance existing products and develop new products.
General and administrative expenses were $226,749, or 30% of revenues, in
fiscal 1999 and $105,073, or 39% of revenues, in fiscal 1998. The decrease in
general and administrative expense as a percentage of revenues in fiscal 1999 is
attributable to greater sales volume. The increase in general and administrative
expenses in fiscal 1999 is primarily attributable to the hiring of additional
management personnel and an increase in accounting fees in relation to
converting the accounting records of Vitrix to a June fiscal year end.
Other expense was $16,389 in fiscal 1999 and $29,250 in fiscal 1998. The
decrease is a due to a reduction in interest expense as result of conversion on
debt to equity during fiscal 1999 and 1998. (See "Item 12 Certain Relationships
and Related Transactions.")
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 1999 was $205,657, as compared to $59,959 at
June 30, 1998. Cash and cash equivalents at those dates amounted to $376,365 and
$96,775, respectively.
OPERATIONS. Net cash used by operations decreased to $87,624 in fiscal
1999, compared to net cash used by operations of $216,436 in fiscal 1998. The
improvement was attributable to an increase in accounts payable and accrued
liabilities and the conversion of accrued interest on notes to equity.
INVESTMENT ACTIVITIES. For the fiscal year ended June 30, 1999, the Company
generated cash of approximately $207,000 from the merger with Vitrix. The
Company used $26,472 and $10,607, to purchase property and equipment in fiscal
1999 and 1998, respectively.
FINANCING ACTIVITIES. The Company was able to raise approximately $191,000
and $103,000 through the issuance of Common Stock in fiscal 1999 and 1998,
respectively.
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The Company believes that, with its current working capital and funds
generated through operations, it will have sufficient working capital to address
the anticipated growth of demand and market for its products for the next 12
months. The Company may, however, seek to obtain additional capital through a
line of credit at a financial institution or through additional debt or equity
offerings during this time period. The raising of additional capital in public
markets will primarily be dependent upon prevailing market conditions and the
demand for the Company's products and services. No assurance can be given that
the Company will be able to raise additional capital, or that such capital, if
available, will be on acceptable terms.
INFLATION AND SEASONALITY
The Company does not believe that its operations are significantly impacted
by inflation. The Company's business is not seasonal in nature.
YEAR 2000 COMPLIANCE
The Company has reviewed its computer systems to identify those areas that
could be adversely affected by the Year 2000 ("Y2K") issue. The Y2K issue is the
result of computer programs being written using two digits rather than four to
define the applicable year. The Company has determined that all of its
information systems are Y2K compliant. The compliance effort to date has
resulted in immaterial cost to the Company. Although the Company expects that
any future expenditures made in connection with Y2K conversions will not be
material, the Company may experience material unanticipated problems and costs
caused by undetected errors or defects in its systems.
As a result of this uncertainty, we are formulating a contingency plan to
address the possible effects of problems encountered as a result of Y2K issues.
The Company believes that some of its customers may be impacted by the Y2K
problem, which could in turn impact the Company sales efforts with respect to
such customers and the Company's results of operations.
The Company has completed an inquiry of key vendors to assess their Y2K
readiness. Based on this inquiry, the Company is not aware of any problems that
would materially affect its business, results of operations or financial
condition. However, the inability of such vendors to meet Y2K requirements could
materially impact the Company's ability to procure materials from these vendors
and to meet its obligations to supply products to its customers.
The Company is currently formulating a contingency plan to address the
possible effects of problems encountered as a result of Y2K issues, and expect
that this plan will be complete by October 1999. The Company expects the cost of
this plan to be immaterial.
The Company's products it offers for sale are all Year 2000 compliant.
13
<PAGE>
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains certain forward-looking statements
and information which we believe are within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. The forward looking statements contained herein can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates," or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. The Company wishes to caution the
reader that these forward-looking statements that are not historical facts, are
only predictions. No assurances can be given that the future results indicated,
whether expressed or implied, will be achieved. While sometimes presented with
numerical specificity, these projections and other forward-looking statements
are based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not materialize,
and unanticipated events and circumstances may occur subsequent to the date of
this report. These forward-looking statements are based on current expectations
and the Company assumes no obligation to update this information. Therefore, the
actual experience of the Company and the results achieved during the period
covered by any particular projections or forward-looking statements may differ
substantially from those projected. Consequently, the inclusion of projections
and other forward-looking statements should not be regarded as a representation
by the Company or any other person that these estimates and projections will be
realized, and actual results may vary materially. There can be no assurance that
any of these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements and schedules are included herewith commencing on
page F-1.
14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
FBR Capital Corporation
Tempe, Arizona
We have audited the accompanying balance sheet of FBR Capital Corporation as of
June 30, 1999, and the related statements of operations, stockholders' equity
and cash flows for the years ended June 30, 1998 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FBR Capital Corporation as of
June 30, 1999, and the results of its operations and its cash flows for the
years ended June 30, 1998 and 1999, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
Los Angeles, California
July 28, 1999
F-1
<PAGE>
FBR CAPITAL CORPORATION
BALANCE SHEET
JUNE 30, 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 376,365
Accounts receivable - trade, net (Note 1) 42,596
Inventory (Note 1) 28,397
Prepaid expenses and other current assets 10,591
---------
TOTAL CURRENT ASSETS 457,949
PROPERTY AND EQUIPMENT, NET (NOTES 1 AND 2) 60,865
---------
TOTAL ASSETS $ 518,814
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $ 28,848
Accounts payable 146,084
Accrued liabilities 64,125
Deferred revenue (Note 1) 13,235
---------
TOTAL CURRENT LIABILITIES 252,292
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 3) 14,466
---------
TOTAL LIABILITIES 266,758
---------
COMMITMENTS: (NOTE 5) --
STOCKHOLDERS' EQUITY: (NOTE 6)
Preferred Stock, $.01 par value, 10,000,000 shares authorized,
issued and outstanding 100,000
Common stock, $.005 par value, 16,666,667 shares authorized,
13,241,031 shares issued and outstanding 66,205
Contributed capital 956,468
Accumulated deficit (870,617)
---------
TOTAL STOCKHOLDERS' EQUITY 252,056
---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 518,814
=========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-2
<PAGE>
FBR CAPITAL CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
----------------------------
1999 1998
------------ -----------
Revenues:
Product sales $ 730,641 $ 267,697
Services revenue 13,313 1,980
------------ -----------
TOTAL REVENUES 743,954 269,677
COST OF REVENUES 249,309 95,884
------------ -----------
GROSS PROFIT 494,645 173,793
------------ -----------
COSTS AND EXPENSES:
Sales and marketing 288,559 206,214
Research and development 232,250 117,515
General and administrative 226,749 105,073
------------ -----------
TOTAL COSTS AND EXPENSES 747,558 428,802
------------ -----------
NET LOSS FROM OPERATIONS (252,913) (255,009)
------------ -----------
OTHER INCOME (EXPENSE):
Interest expense (24,112) (35,543)
Interest income 7,723 6,293
------------ -----------
(16,389) (29,250)
------------ -----------
NET LOSS $ (269,302) $ (284,259)
============ ===========
BASIC LOSS PER SHARE (NOTE 1) $ (0.02) $ (0.03)
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 16,473,873 9,123,236
============ ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-3
<PAGE>
FBR CAPITAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CONTRIBUTED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 4,809,734 $ 48,097 4,132,921 $ 20,665 $ 186,558 $(317,056) $ (61,736)
Issuance of stock to employees
and directors 257,664 2,577 221,406 1,107 (1,459) -- 2,225
Sale of stock 2,469,283 24,693 2,121,812 10,609 65,898 -- 101,200
Forgiveness of related party
debt and interest -- -- 136,876 -- 136,876
Net loss -- -- -- (284,259) (284,259)
---------- -------- ---------- --------- --------- --------- ---------
Balance at June 30, 1998 7,536,681 75,367 6,476,139 32,381 387,873 (601,315) (105,694)
Conversion of related party
debt and interest 1,463,319 14,633 1,257,404 6,287 243,650 -- 264,570
Sale of stock, net of
costs of $9,063 1,000,000 10,000 859,283 4,296 176,622 -- 190,918
Merger with Vitrix Incorporated 4,648,205 23,241 148,323 171,564
Net loss -- -- -- (269,302) (269,302)
---------- -------- ---------- --------- --------- --------- ---------
Balance at June 30, 1999 10,000,000 $100,000 13,241,031 $ 66,205 $ 956,468 $(870,617) $ 252,056
========== ======== ========== ========= ========= ========= =========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-4
<PAGE>
FBR CAPITAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
-----------------------
1999 1998
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Loss $(269,302) $(284,259)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 28,678 20,367
Non-cash interest expense 64,570 26,876
Accrued interest assumed in merger (11,645)
Changes in Assets and Liabilities:
Accounts receivable-trade (7,429) (5,213)
Inventory (11,352) 7,426
Prepaid expenses and other current assets (7,477) (3,114)
Accounts payable 100,015 13,854
Accrued liabilities 13,083 7,627
Deferred revenue 13,235 --
--------- ---------
NET CASH USED BY OPERATING ACTIVITIES (87,624) (216,436)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (26,472) (10,607)
Cash acquired in merger 207,678 --
--------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 181,206 (10,607)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital leases (4,910) --
Proceeds from issuance of stock 190,918 103,425
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 186,008 103,425
--------- ---------
Net change in cash and cash equivalents 279,590 (123,618)
Cash and cash equivalents at beginning of period 96,775 220,393
--------- ---------
Cash and cash equivalents at end of period $ 376,365 $ 96,775
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 3,142 $ 2,710
========= =========
Income taxes paid $ -- $ --
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired by entering into capital leases $ 28,724 $ --
========= =========
Conversion of related party notes and accrued
interest to equity $ 264,570 $ 136,876
========= =========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-5
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES:
- --------------------------------------------------------------------------------
NATURE OF BUSINESS AND MERGER:
FBR Capital Corporation (the Company or FBR) was incorporated as Richard Barrie
Fragrances, Inc. in the State of Nevada on June 6, 1988, for the original
purpose of developing, manufacturing and marketing fragrances, cosmetics, skin
treatment and personal care products sold primarily through department and
specialty stores and drugstores. On July 1, 1996, following the transaction
described below, the Company filed a Certificate of Amendment to its Articles of
Incorporation to change its name from "Richard Barrie Fragrances, Inc." to "FBR
Capital Corporation", as authorized by the stockholders of the Company. For
purposes of these Notes to Financial Statements, the Company shall also include
Vitrix (defined below).
Effective June 30, 1996, the Company sold substantially all of the assets (the
Asset Sale), properties and rights owned by the Company in connection with its
fragrance business to Parlux Fragrances, Inc. Since the Asset Sale in June 1996,
the Company's operations have been limited to the conduct of administrative
activities and conducting discussions with respect to possible business
combinations.
On April 15, 1999 FBR acquired the outstanding capital stock of Vitrix
Incorporated (Vitrix). The merger was consummated in accordance with the terms
of an Exchange Agreement dated April 15, 1999, by and among FBR, Vitrix and
certain of the Vitrix shareholders who agreed to participate in the merger.
Under the terms of the Exchange Agreement, each outstanding share of Vitrix
common stock was converted into a combination of .9225 shares of FBR common
stock and 1.0736 shares of Series B Convertible Preferred Stock of FBR. Each
share of FBR Preferred Stock is automatically convertible into one share of FBR
Common Stock at such time as FBR has the authorized capital to issue such
shares. The aggregate consideration paid in the merger was 8,592,826 shares of
FBR common stock and 10,000,000 shares of Preferred Stock (the "Shares"). The
Exchange Agreement also provided for the assumption of outstanding options and
warrants to purchase an aggregate of 1,086,000 shares of Vitrix common stock,
which have been converted into options and warrants to purchase FBR Common
Stock, subject to adjustment for the appropriate exchange ratio.
Giving effect to the issuance of the Shares, the Vitrix shareholders own
approximately 80% of the outstanding shares of FBR Common Stock (assuming
conversion of the Preferred Stock into FBR Common Stock) and the prior FBR
shareholders own the remaining 20% of the outstanding FBR shares. Although FBR
is the parent company of Vitrix following the transaction, the transaction was
accounted for as a recapitalization of Vitrix and a purchase of FBR by Vitrix as
Vitrix is the controlling company after the merger. The accompanying financial
statements of FBR include the accounts of Vitrix for all periods presented, and
the accounts of FBR from April 15, 1999, the effective date of the merger. The
Company intends to change its name from FBR Capital Corporation to Vitrix, Inc.,
pending shareholder approval.
Vitrix Incorporated, an Arizona corporation formed on April 26, 1996, develops
time and labor management solutions that help its customers improve productivity
by automating data collection, staff scheduling and management of labor
resources. Its proprietary software applications are targeted to small to
mid-size companies and are sold via the Internet from the Vitrix Online Store,
resellers and directly through Vitrix's sales representatives.
F-6
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES: (CONTINUED)
- --------------------------------------------------------------------------------
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents are considered to be all highly liquid investments
purchased with an initial maturity of three (3) months or less.
ACCOUNTS RECEIVABLE - TRADE:
The Company provides for potentially uncollectible accounts receivable by use of
the allowance method. The allowance is provided based upon a review of the
individual accounts outstanding, and the Company's prior history of
uncollectible accounts receivable. As of June 30, 1999 a provision for
uncollectible accounts has been established in the amount of $2,427.
INVENTORY:
Inventory is stated at the lower of cost (first-in, first-out method) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation is provided for on the
straight-line method over the estimated useful lives of the assets. The average
lives range from three to five years. Maintenance and repairs that neither
materially add to the value of the property nor appreciably prolong its life are
charged to expense as incurred. Betterments or renewals are capitalized when
incurred. Property and equipment are reviewed each year to determine whether any
events or circumstances indicate that the carrying amount of the assets may not
be recoverable. Such review includes estimating future cash flows. Property and
equipment costs are expensed when determined not realizable. Depreciation
expense was $28,678 and $20,367, respectively, for the years ended June 30, 1999
and 1998.
The Company is the lessee of computer equipment, with an original cost of
approximately $29,000, under three (3) capital lease agreements expiring through
November 2001. The assets and liabilities under the capital lease agreements are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the assets. The assets are being depreciated over their estimated
productive lives. Depreciation of the assets under the capital lease agreements
is included in depreciation expense as noted above.
F-7
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES: (CONTINUED)
- --------------------------------------------------------------------------------
SOFTWARE DEVELOPMENT COSTS:
The Company capitalizes software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software
development costs begins upon the establishment of technological feasibility of
the product. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgement
by management with respect to certain external factors including, but not
limited to, anticipated future gross product revenue, estimated economic life,
and changes in software and hardware technology. Amortization of capitalized
software development costs begins when the products are available for general
release to customers and is computed on a product-by-product basis using
straight-line amortization with useful lives of five years or, if less, the
remaining estimated economic life of the product. Amounts related to internal
software development that could be capitalized under this statement were
immaterial.
REVENUE RECOGNITION AND DEFERRED REVENUE:
The Company derives its revenues from the sale of frontline labor management
systems as well as sales of application software, parts and components. The
Company's systems consist of fully integrated software and intelligent data
collection terminals. The Company also derives revenues by providing
maintenance, professional and educational services to its direct customers. The
Company recognizes revenues from sales of its systems, application software,
parts and components at the time of shipment, unless the Company has significant
obligations remaining. When significant obligations remain, revenue is not
recognized until such obligations have been completed or are no longer
significant. The Company recognizes revenues from its sales-type leases of
systems at time of shipment. Service revenues are recognized ratably over the
contractual period or as the services are performed.
The Company provides installation services and certain warranties to its
customers. It also provides, without additional charge, certain software product
enhancements for customers covered under software maintenance contracts. The
provision for these expenses are made at the time revenues are recognized.
DEFERRED INCOME TAXES:
Deferred income taxes are provided on an asset and liability method, whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, there is uncertainty of the utilization of the operating
losses in future periods. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of cash, cash equivalents, accounts receivable, accounts
payable and current notes payable approximate their fair values because of the
short maturity of these instruments. With respect to long-term debt, based on
the borrowing rates currently available to the Company for similar bank and
equipment loans and capitalized leases, the amounts reported approximate the
fair value of the respective financial instruments.
F-8
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES: (CONTINUED)
- --------------------------------------------------------------------------------
LOSS PER SHARE:
Basic loss per share of common stock was computed by dividing the net loss by
the weighted average number of shares outstanding of common and preferred stock.
The common and preferred stock amounts in the accompanying financial statements
have been restated to give effect to the exchange ratio established in the
Exchange Agreement between FBR and Vitrix. The preferred stock was included in
the calculation due to its automatic conversion into common stock once the
Company has sufficient authorized common stock to issue the shares. (See Note 6)
Diluted earnings per share are computed based on the weighted average number of
shares of common stock and dilutive securities outstanding during the period.
Dilutive securities are options and warrants that are freely exercisable into
common stock at less than the prevailing market price. Dilutive securities are
not included in the weighted average number of shares when inclusion would
increase the earnings per share or decrease the loss per share. At June 30, 1999
and 1998, options and warrants to purchase 2,278,298 and 1,102,577 shares of the
Company's common stock were not included in the determination of diluted loss
per share as their effect was anti-dilutive.
STOCK-BASED COMPENSATION:
The Company has elected to follow Accounting Principles Board Opinion No.25,
"Accounting for Stock Issued to Employees" (APB 25) and the related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of employee stock options equals or exceeds the
market price of the underlying stock on the date of grant, no compensation
expense is recorded. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation."
- --------------------------------------------------------------------------------
NOTE 2
PROPERTY AND EQUIPMENT:
- --------------------------------------------------------------------------------
At June 30, 1999 property and equipment consists of:
Computers and equipment $ 118,407
Furniture and fixtures 6,144
---------
124,551
Less: accumulated depreciation (63,686)
---------
$ 60,865
=========
F-9
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 3
LONG-TERM DEBT
- --------------------------------------------------------------------------------
At June 30, 1999 long-term debt consists of the following:
10% convertible subordinated promissory note to an
individual, currently in default, see description below. $ 19,500
Capital leases payable, interest at rates ranging from
20% to 24%, payable in monthly installments of principal
and interest, maturing through November 2001 23,814
--------
43,314
Less: current portion (28,848)
--------
Long-term debt $ 14,466
========
During 1996, Vitrix entered into a debt financing agreement for $310,000 with
T.P.B. Investment Limited Partnership (TPB), which is owned by a member of the
Company's Board of Directors. On June 20, 1998, TPB converted debt of $110,000,
together with accrued interest thereon of approximately $27,000, to contributed
capital.
On March 3, 1999, TPB agreed to convert the remaining principal and accrued
interest outstanding on its notes. The agreement calls for the conversion of the
remaining $200,000 principal and accrued interest of $64,570 in exchange for
2,720,723 shares of the Company's common and preferred stock.
On January 13, 1994, FBR entered into a series of 10% convertible subordinated
promissory notes due January 15, 1996 totaling $5,157,750. On June 30, 1996
simultaneous with the closing of the Asset Sale, FBR completed an exchange offer
in the aggregate principal amount of $5,040,750 with certain holders of the
notes. On October 21, 1996, FBR completed the extinguishments of $97,500 of the
notes in exchange for cash and, common stock warrants (Note 6). The Company
believes the remaining note holder will also accept a settlement of the
obligation on terms not requiring the full cash payment of the amount due. As of
June 30, 1999, accrued interest on the note was $12,374.
On April 14, 1999 the Company entered into an agreement with an institution in
which the Company has the right to demand the institution to purchase 100,000
shares of the Company's common stock at $.35 per share in order to satisfy the
convertible note's outstanding principal and interest due. This agreement
expires on January 31, 2001 or the date the note is satisfied in full.
F-10
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 3
LONG-TERM DEBT (CONTINUED)
- --------------------------------------------------------------------------------
As of June 30, 1999 future minimum lease payments due under the capital lease
agreements, are as follows:
YEAR ENDING
JUNE 30
-----------
2000 $ 13,827
2001 13,333
2002 3,388
--------
Total minimum lease payments 30,548
Less: amount representing interest (6,734)
--------
Present value of net minimum lease payments 23,814
Less: current maturities of capital lease obligations (9,348)
--------
Long-term maturities of capital lease obligations $ 14,466
========
- --------------------------------------------------------------------------------
NOTE 4
INCOME TAXES:
- --------------------------------------------------------------------------------
As of June 30, 1999 deferred tax assets consist of the following:
Federal loss carryforwards $ 190,000
State loss carryforwards 45,000
---------
235,000
Less: valuation allowances (235,000)
---------
$ --
=========
The Company has established a valuation allowance equal to the full amount of
the deferred tax assets primarily because of uncertainty in the utilization of
net operating loss carryforwards.
As a result of stock ownership changes during 1997 and 1998, the Company's
ability to utilize net operating losses in the future could be limited, in whole
or part, under Internal Revenue Code Section 382. The Company was treated as an
S-Corporation for income tax purposes through May 13, 1997. As of June 30, 1999
the Company's federal net operating loss carryforwards was approximately
$600,000, and begins expiring in 2012.
The Company's tax expense (benefit) differed from the statutory rate primarily
due to the $100,000 change in the deferred tax asset valuation allowance from
June 30, 1998.
F-11
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 5
COMMITMENTS:
- --------------------------------------------------------------------------------
The Company currently leases office space in Tempe, Arizona under a
non-cancelable operating lease agreement which expires in May 2001. For the
years ended June 30, 1999 and 1998, expense under the aforementioned
non-cancelable operating lease agreements was approximately $35,000 and $20,000,
respectively.
Future minimum lease payments due under the operating lease agreement is as
follows:
YEAR ENDING
JUNE 30
-----------
YEAR
----
2000 $ 36,484
2001 34,249
--------
$ 70,733
========
- --------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY:
- --------------------------------------------------------------------------------
SERIES B PREFERRED STOCK:
The Series B Preferred Stock automatically converts into common stock on a
one-for-one basis when the Company has the available authorized common stock to
complete the conversion for all 10,000,000 shares outstanding as of June 30,
1999.
STOCK OPTIONS:
On July 13, 1999, the Board of Directors authorized the implementation of the
1999 Equity Compensation Plan, subject to shareholder approval. The plan allows
for the award of incentive stock options, non-statutory stock options or
restricted stock awards to certain employees, directors, consultants and
independent contractors. The Company has reserved an aggregate of 3,000,000
shares of common stock for distribution under the plan. The exercise price will
be determined by the Board of Directors. Incentive stock options granted under
the plan may be granted to employees only, and may not have an exercise price
less than the fair market value the common stock on the date of grant. Options
may be exercised on a one-for-one basis, with a maximum term of ten (10) years
from the date of grant.
Pursuant to the Exchange Agreement, the outstanding options of Vitrix prior to
the merger were converted into options to purchase common stock of the Company
at the exchange ratio (1.9961 to 1) established in the Exchange Agreement. The
table below combines the option activity of FBR and Vitrix based on post-merger
number of options.
F-12
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY (CONTINUED):
- --------------------------------------------------------------------------------
STOCK OPTIONS (CONTINUED):
A summary of the activity of the plan follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at June 30, 1997 414,361 $ 0.23
Granted 39,923 0.11
--------- ------
Outstanding at June 30, 1998 454,284 0.22
Granted 1,295,489 0.11
Forfeited (119,768) 0.11
--------- ------
Outstanding at June 30, 1999 1,630,005 $ 0.14
========= ======
Additional information about outstanding options to purchase the Company's
common stock as of June 30, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------------
WEIGHTED AVG.
REMAINING
NUMBER OF CONTRACTURAL WEIGHTED AVG. NUMBER OF WEIGHTED AVG.
EXERCISE PRICE SHARES LIFE (IN YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
-------------- --------- --------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$2.25 15,000 4.25 $ 2.25 15,000 $ 2.25
$.11 - $.4375 1,615,005 9.40 $ 0.12 664,846 $ 0.14
</TABLE>
Approximately 250,000 options granted prior to June 30, 1998 were originally
issued with an exercise price of $.31 per share. In March 1999, the options were
repriced at $.11 per share pursuant to a resolution of the Board of Directors.
The stock options issued to employees have an exercise price not less than the
fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value
method, there is no related compensation expense recorded in the Company's
financial statements for the years ended June 30, 1999 and 1998. Had
compensation cost for stock-based compensation been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
the Company's net loss for the years ended June 30, 1999 and 1998 would have
been reduced to the pro forma amounts presented below:
F-13
<PAGE>
FBR CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY (CONTINUED):
- --------------------------------------------------------------------------------
STOCK OPTIONS (CONTINUED):
Years Ended June 30,
--------------------------
1999 1998
---------- ----------
NET LOSS:
As reported $ (269,302) $ (284,259)
========== ==========
Pro forma $ (282,157) $ (289,809)
========== ==========
The fair value of option grants is estimated as of the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for all grants, expected life of options of three (3) years,
risk-free interest rates of eight percent (8%), and a zero percent (0%) dividend
yield. The weighted average fair value at date of grant for options granted
during the years ended June 30, 1999 and 1998 approximated $.03.
WARRANTS:
During the year ended June 30, 1998, the Company granted warrants to purchase
622,793 (post-merger figures) shares of the Company's common stock. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $.022 per share. The warrants expire in June 2001.
In addition, the Company has outstanding warrants to purchase 12,500 shares of
the Company's common stock at $2 per share. The warrants expire October 25,
1999.
F-14
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On May 13, 1999, the Company, with the approval of its board of directors,
dismissed Arthur Andersen LLP ("Arthur Andersen") and engaged BDO Seidman, LLP
("BDO Seidman") as its independent public accountants for the year ending June
30, 1999. The dismissal of Arthur Andersen was the result of a change in control
of the Company.
Arthur Andersen's reports on the Company's financial statements for the
past two (2) years contained no adverse opinion and no disclaimer of opinion,
nor were such reports qualified or modified as to uncertainty, audit scope or
accounting principles. In the Company's two most recent fiscal years and the
subsequent interim periods preceding the dismissal of Arthur Andersen, there
were no disagreements with Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Arthur
Andersen, would have caused it to make a reference to the subject matter of the
disagreements in connection with its reports.
During the Company's two most recent fiscal years and the subsequent
interim periods preceding the engagement of BDO Seidman, neither the Company nor
any party acting on its behalf has consulted with BDO Seidman regarding (i)
either the application of accounting principles to a specified transaction,
either completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements, or (ii) any matter that was
either the subject of a "disagreement" (as defined in Item 304(a)(1)(iv) of
Regulation S-K and related instructions) or a "reportable event" (as defined in
Item 304(a)(i)(v) of Regulation S-K).
15
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS.
Incorporated by reference to pages 2 through 5 of the Company's definitive
Information Statement for the 1999 Annual Meeting of Stockholders to be held on
October 7, 1999, under the following captions: "Director Compensation," and
"Executive Compensation.'
ITEM 10. EXECUTIVE COMPENSATION.
Incorporated by reference to pages 2 through 5 of the Company's definitive
Information Statement for the 1999 Annual Meeting of Stockholders to be held on
October 7, 1999, under the following captions: "Director Compensation," and
"Executive Compensation.'
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to page 8 of the Company's definitive Information
Statement for the 1999 Annual Meeting of Stockholders to be held on October 7,
1999, under the following caption: "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference form pages 8 and 9 of the Company's definitive
Information Statement for the 1999 Annual Meeting of Stockholders to be held on
October 7, 1999 under the following caption: "Certain Relationships and Related
Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The exhibits as indexed below are included as part of this
Form 10-KSB.
(b) Reports on Form 8-K.
The Company filed the following Reports on Form 8-K during the three
months ended June 30, 1999:
(1) Form 8-K filed on April 30, 1999, to report the acquisition of
Vitrix Incorporated.
(2) Form 8-K filed on May 20, 1999, to report the engagement of BDO
Seidman, LLP as the Company's auditors for the fiscal year ending June 30,
1999, and the dismissal of Arthur Andersen LLP.
(3) Form 8-K/A filed on June 29, 1999 amending the Form 8-K filed on
April 30, 1999, and including required financial statements and pro forma
financial information for Vitrix Incorporation.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FBR CAPITAL CORPORATION (Registrant)
/s/ Philip R. Shumway
--------------------------------------
Philip R. Shumway, President
Dated: September 16, 1999
In accordance with the Securities Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Philip R. Shumway President, CEO and Director September 16, 1999
- ---------------------- (Principal Executive Officer)
Philip R. Shumway
/s/ Craig J. Smith Chief Financial Officer September 16, 1999
- ---------------------- (Principal Financial Officer)
Craig J. Smith
/s/ Michael A. Wolf Chairman of the Board September 16, 1999
- ----------------------
Michael A. Wolf
/s/ Todd R. Belfer Director September 16, 1999
- ----------------------
Todd R. Belfer
/s/ Lise M. Lambert Director September 16, 1999
- ----------------------
Lise M. Lambert
/s/ Lise M. Lambert Director September 16, 1999
- ----------------------
Bahan Sadegh
/s/ Hamid Shojaee Director September 16, 1999
- ----------------------
Hamid Shojaee
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
- ------ ----------- ------------- --------
<S> <C> <C> <C>
3.1 Registrant's Articles of Incorporation A 3.1
3.1.1 Registrant's Amendment to its Articles of Incorporation, dated
November 7, 1988 A 3.1.1
3.1.2 Registrant's Amendment to its Articles of Incorporation,
dated June 25, 1991 B 3.1.2
3.1.3 Registrant's Certificate of Reverse Stock Split, dated
February 15, 1994 C 3.1.3
3.1.4 Registrant's Certificate of Designation of Series A Preferred
Stock, dated June 27, 1996 D 3.1.4
3.1.5 Registrant's Amendment to Articles of Incorporation, dated
June 25, 1996 D 3.15
3.1.6 Registrant's Certificate of Designation of Series B Preferred
Stock, dated March 31, 1999 Filed herewith --
3.2 Amended Bylaws of the Registrant C 3.2
4.1 Registrant's Form of Common Stock Certificate A 4.1
4.6 Registrant's Form of 10% Convertible Subordinated Promissory
Note issued to purchasers of the Registrant's securities in a
private placement of the Registrant's securities which closed
on December 14, 1993 and January 13, 1994 E 4.7
4.7 Registrant's Form of Warrant to purchase shares of
Registrant's Common Stock at an exercise price of $.90 per
share dated February 3, 1994 E 4.8
4.7.1 Schedule of omitted documents in the form of Exhibit 4.7,
including material detail in which such documents differ from
Exhibit 4.7. E 4.8.1
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT BY REFERENCE NO. IN
NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT
- ------ ----------- ------------- --------
<S> <C> <C> <C>
10.2 Stock Option Agreement, dated September 20, 1993, between
Registrant and Patrick McEnany E 10.17
10.2.1 Amendment to Stock Option Agreement, dated February 21, 1995,
between Registrant and Patrick McEnany G -
10.3 Asset Purchase Agreement between the Company and Parlux
Fragrances, Inc., dated January 31, 1996 F 10.17
10.4 Registration Rights Agreement between the Company and Parlux
Fragrances, Inc., dated June 28, 1996 F 10.18
10.5 Exchange Agreement, dated April 15, 1999, between the Company,
Vitrix Incorporated ("Vitrix") and the shareholders of Vitrix
signatory thereto H 2
10.6 Employment Agreement, dated February 16, 1999, between Vitrix
and Philip R. Shumway Filed herewith --
10.7 1999 Equity Compensation Plan Filed herewith --
27 Financial Data Schedule Filed herewith --
</TABLE>
- ----------
A. Form S-18 Registration Statement No. 33-25704-NY.
B. Form 10-K Annual Report of the Registrant for the fiscal year ended June
30, 1991.
C. Form 10-KSB Annual Report of the Registrant for the fiscal year ended June
30, 1994
D. Form 8-K Current Report reporting event on June 28, 1996.
E. Form 10-QSB Quarterly Report of the Registrant for the fiscal quarter ended
December 31, 1993.
F. Form 10-QSB Quarterly Report of the Registrant for the fiscal quarter ended
December 31, 1995.
G. Form 10-KSB Annual Report of the Registrant for the fiscal year ended June
30, 1996
H. Form 8-K Current Report reporting event on April 15, 1999.
19
STATEMENT OF RIGHTS, PREFERENCES, PRIVILEGES AND
RESTRICTIONS OF SERIES B CONVERTIBLE PREFERRED STOCK PURSUANT
TO NEVADA STATUTES SS.SS.78.195
The name of the corporation is FBR Capital Corporation.
The resolution set forth below was duly adopted by the Board of Directors of FBR
Capital Corporation on March 31, 1999;
WHEREAS, the Articles of Incorporation of this corporation provide for a class
of shares known as preferred stock, issuable from time to time in one or more
series; and
WHEREAS, the Board of Directors of this corporation are authorized to determine
or alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any wholly unissued series of preferred stock, to fix the number of
shares constituting any such series, and to determine the designation thereof,
or any of them; and
WHEREAS, the corporation has issued shares of Series A of such preferred stock,
all of which have heretofore been redeemed, and the Board of Directors of this
corporation desire, pursuant to their authority as aforesaid, to determine and
fix the rights, preferences, privileges, and restrictions relating to an
additional series of said preferred stock and the number of shares constituting
and the designation of said shares;
NOW, THEREFORE, BE IT RESOLVED THAT:
A. SERIES B CONVERTIBLE PREFERRED STOCK
1. DESIGNATION OF SERIES
There is hereby provided a series of Preferred Stock, designated Series B
Convertible Preferred Stock.
2. NUMBER OF SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK
The number of shares constituting the Series B Convertible Preferred Stock is
fixed at 10,000,000.
3. EXCHANGE AGREEMENT.
The Series B Convertible Preferred Stock shall be issued pursuant to that
certain Exchange Agreement dated April, 1999 by and between FBR Capital
Corporation, a Nevada corporation and Vitrix Incorporated, an Arizona
corporation.
<PAGE>
4. DIVIDEND PROVISIONS
The holders of shares of Series B Convertible Preferred Stock shall participate
with the holders of the corporation's common stock in the accrual and payment of
dividends on an "as converted" basis.
5. LIQUIDATION PREFERENCE
In the event of any liquidation, consolidation or merger of this corporation
with or into any other corporation or the dissolution or winding up of this
corporation, or any partial liquidation effected by means of distribution of
assets or return of capital, either voluntary or involuntary, the holders of
shares of Series B Convertible Preferred Stock shall be entitled to receive, a
pro-rata share of any assets available for distribution to all of this
corporation's shareholders on an as "as converted" basis.
6. REDEMPTION
The corporation has no right to redeem any Series B Convertible Preferred Stock
7. CONVERSION
The Series B Convertible Preferred Stock shall be convertible into shares of the
common stock of this corporation rights as follows:
(a) CONVERSION RATIO. The Conversion Ratio per share at which shares of common
stock shall be issuable upon conversion of Series B Convertible Preferred
Stock after the date hereof shall be one share of common stock for each
share of Series B Convertible Preferred Stock.
The Conversion Ratio will be subject to adjustment in the event this
corporation shall do any of the following: (i) pay a dividend or make a
distribution in shares of its capital stock (whether shares of Common Stock
or of capital stock of any other class), to the holders of its Common
stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine
its outstanding shares of Common Stock into a smaller number of shares, or
(iv) issue by reclassification of its shares of Common Stock any shares of
capital stock of this corporation. The conversion privilege and the
Conversion Ratio in effect immediately prior to any such action shall be
adjusted so that if the Series B Convertible Preferred Stock is thereafter
surrendered for conversion, a holder of Series B Preferred Stock shall be
entitled to receive the number of shares of capital stock of this
corporation or other rights which he would have owned immediately following
such action had the Series B Preferred Stock been converted immediately
prior thereto. An adjustment so made shall become effective immediately
after the record date in the case of a dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or reclassification. If, as a result of such
adjustment, a holder of Series B Preferred Stock shall become entitled, if
the Series B Preferred Stock is thereafter surrendered for conversion, to
receive shares of two or more classes of capital stock of this corporation
or other rights, the Board of Directors of this corporation, whose
determination shall be conclusive, shall determine the allocation of the
<PAGE>
adjusted conversion ratio between or among shares of such classes of
capital stock or other rights. Except in the cases enumerated above, the
Conversion Ratio will not be adjusted for the issuance of Common Stock.
In the case of any reclassification or change in the Common Stock
(other than a change in par value or a subdivision or combination) or any
consolidation or merger of this corporation with or into any other person
(other than a merger with a person not affiliated with this corporation in
which this corporation is the surviving corporation), or any sale or
transfer of substantially all the assets of this corporation, any holder of
Series B Preferred Stock will be entitled, after the occurrence of any such
event, to receive on conversion of the Series B Preferred Stock the
consideration which the holder would have received had such holder
converted immediately prior to the occurrence of such event and thereafter
the number of such other shares so receivable upon conversion of the Series
B Preferred Stock shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock as described herein; provided however,
that the foregoing provisions shall not be applicable to any of the
transactions contemplated by the Exchange Agreement.
(b) MANDATORY CONVERSION. Subject to subparagraph (e) of this Section 7, each
share of Series B Convertible Preferred Stock shall be automatically
converted when the Board of Directors of this corporation has determined in
good faith that there is a sufficient number of authorized but unissued
shares of its common stock to effect such conversion in accordance with the
terms of the Series B Convertible Preferred Stock.
(c) MECHANICS OF CONVERSION. Each certificate evidencing any of the outstanding
shares of Series B Convertible Preferred Stock shall, upon such conversion,
be deemed to be a certificate evidencing the number of shares of common
stock into which the Series B Convertible Preferred Stock has been
converted. Each share of Series B Convertible Preferred Stock is
convertible in whole but not in part.
(d) NO IMPAIRMENT. This corporation will not, by amendment, of its Articles of
Incorporation or sale of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or
performed hereunder by this corporation, but will at all times in good
faith assist in the carrying out of all the provisions of this Section 7
and in the taking of all such action as may be necessary or appropriate in
order to protect the Conversion Rights of the holders of the Series B
Convertible Preferred Stock against impairment.
(e) NO FRACTIONAL SHARES AND CERTIFICATES AS TO ADJUSTMENT. No fractional
shares shall be issuable upon conversion. If more than one share of Series
B Convertible Preferred Stock is surrendered for conversion at any one time
by the same holder, the number of shares of common stock to be issued upon
conversion thereof shall be computed on the basis of the aggregate number
of shares of Series B Convertible Preferred Stock so surrendered. If any
fractional interest in a common share would, except for the provisions of
this subparagraph 7(e), be
<PAGE>
deliverable upon conversion of Series B Convertible Preferred Stock, this
corporation shall pay to the holders of such converted stock an amount in
cash equal to the current fair value of such fractional interest.
(f) ACTION TO AUTHORIZE SUFFICIENT SHARES OF COMMON STOCK. If at any time the
number of authorized but unissued shares of common stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series B Convertible Preferred Stock, this corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of common stock to such number
of shares as shall be sufficient for such purposes.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. When the Articles of
Incorporation of this corporation have been amended so as to authorize a
sufficient number of shares of common stock to permit the conversion of all
of the Series B Convertible Preferred Stock, this corporation shall
thenceforth at all times reserve and keep available out of its authorized
but unissued shares of common stock solely for the purpose of affecting the
conversion of the shares of the Series B Convertible Preferred Stock such
number of its shares of common stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of the Series
B Convertible Preferred Stock.
(h) NOTICES. Any notice required by the provisions of this Section 7 to be
given to the holder of shares of Series B Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the
books of this corporation.
8. VOTING RIGHTS
Each holder of the Series B Convertible Preferred Stock shall be entitled to the
number of votes equal to the number of shares of common stock into which shares
of Series B Convertible Preferred Stock would be convertible if fully converted
on the record date for such shareholder vote and shall have voting rights and
powers equal to the voting rights and powers of the common stock (except as
otherwise provided herein or as required by law, voting together with the common
stock as a single class) and shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of this corporation.
9. PROTECTIVE PROVISIONS
(a) APPROVAL OF CERTAIN ACTIONS. So long as shares of Series B Convertible
Preferred Stock are outstanding, this corporation shall not without first
obtaining the approval (by vote or written consent, as provided by law) of
the
<PAGE>
holders of at least sixty-seven percent (67%) of the then outstanding
shares of Series B Convertible Preferred Stock, voting together as a single
class.
(i) Redeem, purchase or otherwise acquire for value (or pay into or set
aside for a sinking fund for such purpose) any share or shares of Series B
Convertible Preferred Stock other than by conversion in accordance with Section
7 hereof;
(ii) Redeem, purchase or otherwise acquire (or pay into or set aside for a
sinking fund for such purpose) any of the common stock of this corporation.
(iii) Authorize, designate or issue, or obligate itself to issue, any other
equity security (including any security convertible into or exercisable for any
equity security) senior to or on a parity with the Series B Convertible
Preferred Stock as to any of the rights, privileges or preferences of the Series
B Convertible Preferred Stock including, without limitation, method or nature of
payment of dividends, terms of redemption, amounts payable on liquidation or
dissolution and seniority of preference relative to other classes or series of
capital stock, sinking fund provisions, conversion rights and voting rights;
(iv) Effect any sale, lease, assignment, transfer or other conveyance of
all or substantially all of the assets of this corporation of any of its
subsidiaries, or any consolidation or merger involving this corporation or any
of its subsidiaries, or any reclassification or other change of any stock, or
any recapitalization of this corporation;
(v) Permit any subsidiary to issue or sell, or obligate itself to issue or
sell, except to this corporation, or any wholly owned subsidiary, any stock of
such subsidiary; or
(vi) Increase or decrease (other than by redemption or conversion) the
total number of authorized shares of Series B Convertible Preferred Stock.
(b) APPROVAL OF ADVERSE CHANGE. The corporation shall not amend its Articles of
Incorporation or Bylaws without the approval, by vote or written consent,
by the holders of sixty-seven percent (67%) of the Series B Convertible
Preferred Stock if such amendment would change or alter any of the rights,
preferences or privileges of the shares of Series B Convertible Preferred
Stock so as to affect adversely the shares of such Stock. In connection
with the submission of any such matter to the holders of Series B
Convertible Preferred Stock for a vote, such holders shall be treated as a
separate class for the purpose of determining applicable notice, proxy and
quorum requirements and the presence in person or by proxy of the holders
of a majority of outstanding shares of Series B Convertible Preferred Stock
shall be required in order for a quorum to be present with respect to any
such matter. As to all matters on which the Series B Convertible Preferred
Stock is entitled to vote in accordance with the foregoing
<PAGE>
provisions, the holders of the Series B Convertible Preferred Stock shall
be entitled to cast one vote for each share held by them of record on the
books of the Corporation.
(c) Lawful Issuance. If for any reason, the shares of common stock required to
be reserved for purposes of conversion of the Series B Convertible
Preferred Stock, in the opinion of legal counsel for the corporation,
require registration with or approval of any governmental authority under
any federal or state law, or listing upon any national securities exchange,
before such shares may be issued upon conversion, the corporation shall be
under no obligation to issue such securities until such securities shall be
duly registered, approved or listed, as the case may be. The corporation
shall take such steps as are reasonable and appropriate in the judgment of
the Board of Directors to provide for the lawful issuance of such shares of
common stock as are issuable upon such conversion.
<PAGE>
B. COMMON STOCK
The following provisions are intended to confirm, and not to modify, the rights
of the holders of the Common Stock pursuant to the Articles of Incorporation.
1. DIVIDEND RIGHTS
Subject to the prior rights of holders of all classes of stock at the time
outstanding having prior rights as to dividends, the holders of the common stock
shall be entitled to receive, when and as declared by the Board of Directors out
of any assets of this corporation legally available therefor, such dividends as
may be declared from time to time by the Board of Directors.
2. LIQUIDATION RIGHTS
Upon the liquidation, dissolution or winding up of the corporation, the assets
of this corporation shall be distributed as provided in Section A.5 hereof.
3. VOTING RIGHTS
Subject to the rights of the holders of Series B Convertible Preferred Stock
provided in Section A.8 hereof, the holder of each share of Common Stock shall
have the right to one vote and shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of this corporation, and shall be entitled
to vote upon such matters and in such manner as are provided by law.
IN WITNESS WHEREOF, FBR Capital Corporation has caused this statement to be
signed by Charles D. Snead, Jr., its President, this 31st day of March, 1999.
FBR CAPITAL CORPORATION, a Nevada
corporation
By: /s/ Charles D. Snead
------------------------------------
Charles D. Snead, Jr., President
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of February 16, 1999,
is by and between VITRIX INCORPORATED, an Arizona corporation ("Vitrix"), and
Philip R. Shumway, an individual ("Employee").
A. Vitrix wishes to employ Employee and Employee wishes to be employed by
Vitrix and both parties wish to define the nature of the employment
relationship.
B. The parties wish to set forth in this Agreement the terms and conditions
of such employment.
In consideration of the recitals and mutual agreements hereinafter set
forth, the parties agree as follows:
1. EMPLOYMENT AND DUTIES. Vitrix agrees to employ Employee on a full-time
basis, subject to the terms and conditions provided herein, and Employee agrees
to accept such full-time employment upon said terms and conditions. Employee's
position shall be President and Chief Executive Officer of Vitrix, in which
capacity Employee shall have general responsibility for management of Vitrix's
day-to-day operations, subject to the direction and control of the Board of
Directors (the "Board"). Unless he agrees to a change of location, Employee will
be based in Vitrix's Phoenix, Arizona office.
2. TERM. The term of employment under this Agreement shall commence on
March 8,, 1999 (the "Effective Date") and shall continue for a period of one
year, unless earlier terminated as set forth in Section 6 below.
3. COMPENSATION.
(a) BASE SALARY. Vitrix agrees to pay Employee a base salary, before
deducting all applicable withholdings, at the annual rate of $100,000, which
shall be payable in accordance with Vitrix's standard executive payroll policies
as they may be revised from time to time.
(b) QUARTERLY INCENTIVE BONUS. Employee shall be entitled to a
quarterly bonus payable in cash according to the schedule provided below if
Vitrix's revenues for the applicable quarter exceed the amount indicated below.
Such quarterly bonuses earned by Employee shall be deducted from any year-end
bonus payable to Employee under Section 3(c) of this Agreement.
Q2 '99 Q3 '99 Q4 '99 Q1 '99 Total
------ ------ ------ ------ -----
Revenues of $242K $367K $431K $584K $1.624M
Cash Bonus $5,000 $5,000 $7,500 $7,500 $25,000
1
<PAGE>
(c) YEAR-END INCENTIVE BONUS. Employee shall be entitled to a bonus
payable for the annual period ending March 31, 2000 in cash according to the
schedule provided below if Vitrix's revenues exceed the amount indicated minus
any quarterly bonuses already paid to Employee under Section 3(b) of this
Agreement:
Revenue Exceeds: $2M $2.25M $2.5M $2.75M $3.0M
Cash Bonus $40,000 $50,000 $75,000 $90,000 $120,000
(d) STOCK OPTIONS. Employee shall be granted options to acquire
380,000 shares of the Common Stock of Vitrix, exercisable at a price of $0.215
per share. The options will have a 10-year term, and will be exercisable as
follows:
Number of Common Shares as to Date Beginning on which
which Option may be Exercised Option may be Exercised
- ----------------------------- -----------------------
126,666 First Anniversary of the Effective Date
126,666 Second Anniversary of the Effective Date
126,668 Third Anniversary of the Effective Date
The options will be issued as "incentive stock options" pursuant to and will
otherwise be governed by the Company's Stock Option Plan dated December 20,
1996.
4. BENEFITS.
(a) In addition to the compensation described above, while Employee is
employed hereunder, Vitrix shall pay for and provide Employee and his dependents
with the same amount and type of health, medical and life insurance as is
provided from time to time to Vitrix executives of Employee's level during the
term of this Agreement.
(b) In addition to the compensation and benefits provided above,
Vitrix shall, upon receipt of appropriate documentation, reimburse Employee each
month for his reasonable travel, lodging and other ordinary and necessary
business expenses consistent with Vitrix's policies as in effect from time to
time.
5. VACATION. Employee shall be entitled to 2 weeks vacation with pay in
accordance with Vitrix's vacation policy as in effect from time to time. In
addition, Employee shall be entitled to eight (8) holidays with pay.
6. TERMINATION.
(a) FOR CAUSE. The Board may terminate Employee's employment by Vitrix
prior to the expiration of the term of employment for cause upon written notice
to the Employee stating the facts constituting such cause, provided that
Employee shall have 20 days following such notice to cure any conduct or act, if
curable, alleged to provide grounds for termination for cause hereunder. In the
event of termination for cause, Vitrix shall be obligated to pay the Employee
only salary at the current rate due him through the date of termination pursuant
2
<PAGE>
to this Section 6(a). For purposes of this Section 6(a), "cause" shall include
(i) material neglect of duties; (ii) willful failure to abide by ethical and
good faith instructions or policies from or set by the Board; (iii) Employee's
material breach of this Agreement; (iv) the appropriation (or attempted
appropriation) of a material business opportunity of Vitrix, including
attempting to secure or securing any personal profit in connection with any
transaction entered into on behalf of Vitrix; (v) the misappropriation (or
attempted misappropriation) of any of Vitrix's funds or property; or (vi) the
conviction of, the indictment for (or its procedural equivalent), or the
entering of a guilty plea or plea of no contest with respect to, a felony, or
any other crime with respect to which imprisonment is a possible punishment.
(b) DISABILITY. If during the term of this Agreement, Employee fails
to perform his duties hereunder because of illness or other incapacity for a
period of 90 consecutive days within any 180-day period, Vitrix shall have the
right to terminate this Agreement, upon written notice to the Employee, without
further obligation hereunder except for (i) payment to the Employee of salary at
the current rate due him through the date of the termination; (ii) any bonus
amount earned prior to the date of termination and (iii) any amounts payable
pursuant to disability plans generally applicable to executive employees. In
addition within 90 days after the end of the four fiscal quarters ending March
31, 2000 in the event termination pursuant to this Section 6(b) occurs, Employee
shall be entitled to receive a bonus payment determined in accordance with
Section 3(c), but prorated to the extent that Employee's employment was less
than one full year.
(c) DEATH. If the Employee dies during the term of this Agreement,
this Agreement shall terminate immediately, and the Employee's legal
representatives shall be entitled to receive the base salary due the Employee
through the end of the month in which death occurs, and any other death benefits
generally applicable to executive employees. In addition, within 90 days after
the end of the four fiscal quarters ending March 31, 2000 Employee's death
occurs, Employee's legal representative shall be entitled to receive a prorated
bonus payment as set forth in Section 6(b).
7. CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION.
(a) CONFIDENTIAL INFORMATION. Employee acknowledges that Employee may
receive, or contribute to the production of, Confidential Information. For
purposes of this Agreement, Employee agrees that "Confidential Information"
shall mean information or material proprietary to Vitrix or designated as
Confidential Information by Vitrix and not generally known by non-Vitrix
personnel, which Employee develops or of or to which Vitrix may obtain knowledge
or access through or as a result of Employee's relationship with Vitrix
(including information conceived, originated, discovered or developed in whole
or in part by Employee). Confidential Information includes, but is not limited
to, the following types of information and other information of a similar nature
(whether or not reduced to writing) related to Vitrix's business: discoveries,
inventions, ideas, concepts, research, development, processes, procedures,
"know-how", formulae, marketing techniques and materials, marketing and
development plans, business plans, customer names and other information related
to customers, price lists, pricing policies, methods of operation, financial
information, employee compensation, and computer programs and systems.
Confidential Information also includes any information described above which
3
<PAGE>
Vitrix obtains from another party and which Vitrix treats as proprietary or
designates as Confidential Information, whether or not owned by or developed by
Vitrix. Employee acknowledges that the Confidential Information derives
independent economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from its disclosure or use. Information publicly known
without breach of this Agreement that is generally employed by the trade at or
after the time Employee first learns of such information, or generic information
or knowledge which Employee would have learned in the course of similar
employment or work elsewhere in the trade, shall not be deemed part of the
Confidential Information. Employee further agrees:
(1) To furnish Vitrix on demand, at any time during or after
employment, a complete list of the names and addresses of all present, former
and potential suppliers, financing or leasing sources, patients, customers and
other contacts gained while an employee of Vitrix in Employee's possession,
whether or not in the possession or within the knowledge of Vitrix.
(2) That all notes, memoranda, documentation and records in any
way incorporating or reflecting any Confidential Information shall belong
exclusively to Vitrix, and Employee agrees to turn over all copies of such
materials in Employee's control to Vitrix upon request or upon termination of
Employee's employment with Vitrix.
(3) That while employed by Vitrix and thereafter Employee will
hold in confidence and not directly or indirectly reveal, report, publish,
disclose or transfer any of the Confidential Information to any person or
entity, or utilize any of the Confidential Information for any purpose, except
in the course of Employee's work for Vitrix.
(4) That any idea in whole or in part conceived of or made by
Employee during the term of his employment, consulting, or similar relationship
with Vitrix which relates directly or indirectly to Vitrix's current or planned
lines of business and is made through the use of any of the Confidential
Information of Vitrix or any of Vitrix's equipment, facilities, trade secrets or
time, or which results from any work performed by Employee for Vitrix, shall
belong exclusively to Vitrix and shall be deemed a part of the Confidential
Information for purposes of this Agreement. Employee hereby assigns and agrees
to assign to Vitrix all rights in and to such Confidential Information whether
for purposes of obtaining patent or copyright protection or otherwise. Employee
shall acknowledge and deliver to Vitrix, without charge to Vitrix (but at its
expense) such written instruments and do such other acts, including giving
testimony in support of Employee's authorship or inventorship, as the case may
be, necessary in the opinion of Vitrix to obtain patents or copyrights or to
otherwise protect or vest in Vitrix the entire right and title in and to the
Confidential Information.
(b) NON-COMPETITION. During the [24] months immediately following the
Effective Date, Employee agrees that he shall not enter into or engage, directly
or indirectly, whether on his own account or as a shareholder (other than as a
less than 2% shareholder of a publicly-held company), partner, joint venturer,
advisor, and/or agent, of any person, firm, corporation, or other entity, in any
or all of the activities described in Sections 7(b)(1) through 7(b)(3) of this
Agreement.
4
<PAGE>
(1) Engaging in any business competitive with the business
conducted by Vitrix during the term of Employee's employment hereunder in the
United States.
(2) Soliciting the past or existing customers, leasing or
financing sources, or suppliers of Vitrix or using any Confidential Information
(as defined in Section 7(a)) for the purpose of or which results in competition
with Vitrix .
(3) Soliciting the employment of any employees of Vitrix.
(c) INJUNCTIONS. It is agreed that the restrictions contained in this
Section 7 are reasonable, but it is recognized that damages in the event of the
breach of any of the restrictions will be difficult or impossible to ascertain;
and, therefore, Employee agrees that, in addition to and without limiting any
other right or remedy Vitrix may have, Vitrix shall have the right to an
injunction against Employee issued by a court of competent jurisdiction
enjoining any such breach without showing or proving any actual damage to
Vitrix.
(d) PART OF CONSIDERATION. Employee also agrees, acknowledges,
covenants, represents and warrants that he is fully and completely aware that,
and further understands that, the foregoing restrictive covenants are an
essential part of the consideration for Vitrix entering into this Agreement and
for Vitrix entering into the Stock Agreement and that Vitrix is entering into
this Agreement in full reliance on these acknowledgments, covenants,
representations and warranties.
(e) TIME AND TERRITORY REDUCTION. If the period of time and/or
territory described above are held to be in any respect an unreasonable
restriction, it is agreed that the court so holding may reduce the territory to
which the restriction pertains or the period of time in which it operates or may
reduce both such territory and such period, to the minimum extent necessary to
render such provision enforceable.
(f) SURVIVAL. The obligations described in this Section 7 shall
survive any termination of this Agreement or any termination of the employment
relationship created hereunder.
8. GOVERNING LAW AND VENUE. Arizona law shall govern the construction and
enforcement of this Agreement and the parties agree that any litigation
pertaining to this Agreement shall be in courts located in Maricopa County,
Arizona.
9. CONSTRUCTION. The language in all parts of this Agreement shall in all
cases be construed as a whole according to its fair meaning and not strictly for
nor against any party. The Section headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement. All terms used in one number or gender shall
be construed to include any other number or gender as the context may require.
The parties agree that each party has reviewed this Agreement and has had the
opportunity to have counsel review the same and that any rule of construction to
the effect that ambiguities are to be resolved against the drafting party shall
not apply in the interpretation of this Agreement or any amendment or any
exhibits thereof.
5
<PAGE>
10. NONDELEGABILITY OF EMPLOYEE'S RIGHTS AND OBLIGATIONS. The obligations,
rights and benefits of Employee hereunder are personal and may not be delegated,
assigned or transferred in any manner whatsoever, nor are such obligations,
rights or benefits subject to involuntary alienation, assignment or transfer.
This Agreement shall be assigned automatically to any entity merging with or
acquiring Vitrix or its business.
11. SEVERABILITY. In the event any term or provision of this Agreement is
declared by a court of competent jurisdiction to be invalid or unenforceable for
any reason, this Agreement shall remain in full force and effect, and either (a)
the invalid or unenforceable provision shall be modified to the minimum extent
necessary to make it valid and enforceable or (b) if such a modification is not
possible, this Agreement shall be interpreted as if such invalid or
unenforceable provision were not a part hereof.
12. ATTORNEYS' FEES. Except as otherwise provided herein, in the event any
party hereto institutes an action or other proceeding to enforce any rights
arising out of this Agreement, the party prevailing in such action or other
proceeding shall be paid all reasonable costs and attorneys' fees by the
non-prevailing party, such fees to be set by the court and not by a jury and to
be included in any judgment entered in such proceeding.
13. NOTICES. All notices required or permitted hereunder shall be in
writing and shall be deemed duly given upon receipt if either personally
delivered, sent by certified mail, return receipt requested, or sent by a
nationally-recognized overnight courier service, addressed to the parties as
follows:
If to Vitrix: Vitrix Incorporated
Attention: Hamid Shojaee
20 East University, Suite 304
Tempe, Arizona 85281
With a copy to: Squire, Sanders & Dempsey, LLP
Attention: Christopher D. Johnson, Esq. or
Ann-Marie Anderson, Esq.
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
If to Employee: Philip R. Shumway
14656 South 20th Street
Phoenix, Arizona 85048
With a copy to:
-------------------------------
-------------------------------
-------------------------------
or to such other address as any party may provide to the other in accordance
with this Section.
6
<PAGE>
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof (I.E., Employee's
employment by Vitrix) and supersedes all prior or contemporaneous understandings
or agreements in regard thereto. No modification or addition to this Agreement
shall be valid unless in writing, specifically referring to this Agreement and
signed by all parties hereto. No waiver of any rights under this Agreement shall
be valid unless in writing and signed by the party to be charged with such
waiver. No waiver of any term or condition contained in this Agreement shall be
deemed or construed as a further or continuing waiver of such term or condition,
unless the waiver specifically provides otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement as of February
16, 1999.
Vitrix Incorporated, an Arizona corporation: EMPLOYEE:
By: /s/ Hamid Shojaee /s/ Philip R. Shumway
----------------------------- ------------------------
Its:CEO Philip R. Shumway
7
FBR CAPITAL CORPORATION
1999 EQUITY COMPENSATION PLAN
1. PURPOSE
The purpose of the Plan is to advance the long-term interests of FBR
Capital Corporation by (i) motivating executive personnel by means of long-term
incentive compensation, (ii) furthering the identity of interests of
participants with those of the shareholders of the Corporation through the
ownership and performance of the Common Stock of the Corporation and (iii)
permitting the Corporation to attract and retain executive personnel upon whose
judgment the successful conduct of the business of the Corporation largely
depends. Toward this objective, the Committee may grant stock options and
restricted stock awards to Key Employees of the Corporation and its
Subsidiaries, on the terms and subject to the conditions set forth in the Plan.
2. DEFINITIONS
2.1 "Administrative Policies" means the administrative policies and
procedures adopted and amended from time to time by the Committee to administer
the Plan.
2.2 "Award" means any form of stock option or restricted stock award
granted under the Plan to a Participant by the Committee pursuant to such terms,
conditions, restrictions and limitations, if any, as the Committee may establish
by the Award Agreement or otherwise.
2.3 "Award Agreement" means a written agreement with respect to an Award
between the Corporation and a Participant establishing the terms, conditions,
restrictions and limitations applicable to an Award. To the extent an Award
Agreement is inconsistent with the terms of the Plan, the Plan shall govern the
rights of the Participant thereunder.
2.4 "Board" means the Board of Directors of the Corporation.
2.5 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.6 "Committee means the Compensation Committee of the Board, or such other
committee designated by the Board, authorized to administer the Plan under
Section 3 hereof.
2.7 "Common Stock" means Common Stock of the Corporation.
2.8 "Corporation" means FBR Capital Corporation
2.9 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE>
2.10 "Key Employee" means an employee of the Corporation or a Subsidiary
who holds a position of responsibility in a managerial, administrative or
professional capacity, and whose performance, as determined by the Committee in
the exercise of its sole and absolute discretion, can have a significant effect
on the growth, profitability and success of the Corporation.
2.11 "Participant" means any individual to whom an Award has been granted
by the Committee under this Plan.
2.12 "Plan" means the FBR Capital Corporation 1999 Equity Compensation
Plan.
2.13 "Stock Exchange" means the stock exchange or other market price
reporting system (if any) on which the Common Stock is traded or quoted
designated by the Committee.
2.14 "Subsidiary" means a corporation or other business entity in which the
Corporation directly or indirectly has an ownership interest of fifty percent or
more.
3. ADMINISTRATION
The Plan shall be administered under the supervision of the Committee.
Members of the Committee shall serve at the pleasure of the Board of
Directors, and may resign by written notice filed with the Chief Executive
Officer or the Secretary of the Corporation.
A vacancy in the membership of the Committee shall be filled by the
appointment of a successor member by the Board of Directors. Until such vacancy
is filled, the remaining members shall constitute a quorum and the action at any
meeting of a majority of the entire Committee, or an action unanimously approved
in writing, shall constitute action of the Committee. Subject to the express
provisions of this Plan, the Committee shall have conclusive authority to
construe and interpret the Plan, any Award Agreement entered into hereunder and
to establish, amend and rescind Administrative Policies for the administration
of this Plan and shall have such additional authority as the Board of Directors
may from time to time determine to be necessary or desirable.
4. ELIGIBILITY
Any Key Employee is eligible to become a Participant in the Plan.
-2-
<PAGE>
5. SHARES AVAILABLE
The aggregate number of shares of the Corporation for which options and
restricted stock awards may be granted under this Plan shall be 3,000,000;
provided, however, that whatever number of shares shall remained reserved for
issuance pursuant to the Plan at the time of any stock split, stock dividend or
other change in the Corporation's capitalization shall be appropriately and
proportionately adjusted to reflect such stock dividend, stock split or other
change in capitalization. Such shares shall be made available from authorized
but unissued or reacquired shares of the Corporation. Any shares for which an
option or restricted stock award is granted hereunder that are released from
such option or restricted stock award for any reason shall become available for
other options and awards to be granted under this Plan.
6. TERM
The Plan shall become effective upon adoption of the Plan by the Board of
Directors of the Corporation. The Plan shall be submitted to the shareholders of
the Corporation for approval within one year after its adoption by the Board of
Directors and, if the Plan shall not be approved by the shareholders within said
period, the Plan shall be void and of no effect. Any options or restricted stock
awards granted under the Plan prior to the date of approval by the shareholders
shall be void if such shareholders' approval is not obtained..
7. PARTICIPATION
The Committee shall select, from time to time, Participants from those Key
Employees who, in the opinion of the Committee, can further the Plan's purposes
and the Committee shall determine the type or types of Awards to be made to the
Participant. The terms, conditions and restrictions of each Award shall be set
forth in an Award Agreement.
8. STOCK OPTIONS
(a) GRANTS. Awards may be granted in the form of stock options. Stock
options may be incentive stock options within the meaning of section 422 of the
Code or non-statutory stock options (i.e., stock options which are not incentive
stock options), or a combination of both, or any particular type of tax
advantage option authorized by the Code from time to time.
(b) TERMS AND CONDITIONS OF OPTIONS. An option shall be exercisable in
whole or in such installments and at such times as may be determined by the
Committee; provided, however, that no stock option shall be exercisable more
than ten years after the date of grant thereof. The option exercise price shall
be established by the Committee, but such price shall not be less than the per
-3-
<PAGE>
share fair market value of the Common Stock, as determined by the Committee, on
the date of the stock option's grant subject to adjustment as provided in
Sections 18 or 19 hereof.
(c) RESTRICTIONS RELATING TO INCENTIVE STOCK OPTIONS. Stock options issued
in the form of incentive stock options shall, in addition to being subject to
all applicable terms, conditions, restrictions and/or limitations established by
the Committee, comply with section 422 of the Code. Incentive Stock Options
shall be granted only to employees of the Corporation and its subsidiaries
within the meaning of Section 424 of the Code. The aggregate fair market value
(determined as of the date the option is granted) of shares with respect to
which incentive stock options are exercisable for the first time by an
individual during any calendar year (under this Plan or any other plan of the
Corporation or any Subsidiary which provides for the granting of incentive stock
options) may not exceed $l00,000 or such other number as may be applicable under
the Code from time to time. Any incentive stock option that is granted to any
employee who is, at the time the option is granted, deemed for purposes of
section 422 of the Code, or any successor provision, to own shares of the
Corporation possessing more than ten percent of the total combined voting power
of all classes of shares of the Corporation or of a parent or subsidiary of the
Corporation, shall have an option exercise price that is at least one hundred
ten percent of the fair market value of the shares at the date of grant and
shall not be exercisable after the expiration of five years from the date it is
granted.
(d) ADDITIONAL TENTS AND CONDITIONS. The Committee may, by way of the Award
Agreement or otherwise, establish such other terms, conditions, restrictions
and/or limitations, if any, on any stock option Award, provided they are not
inconsistent with the Plan including but not limited to provisions relating to
(i) the vesting of such option, (ii) payments to be made to the Participant at
the time of exercise of such option relating to any taxes associated with such
exercise, (iii) requirements imposed on either the optionee or the Corporation
(or both) to purchase or sell the Common Stock acquired upon exercise of such
option, and (iv) the exercisability of such options upon the termination of
optionee's employment.
(e) PAYMENT. Upon exercise, a participant may pay the option exercise price
of a stock option in cash or shares of Common Stock, or a combination of the
foregoing, or such other consideration as the Committee may deem appropriate.
The Committee shall establish appropriate methods for accepting Common Stock and
may impose such conditions as it deems appropriate on the use of such Common
Stock to exercise a stock option.
9. RESTRICTED STOCK AWARDS
(a) GRANTS. Awards may be granted in the form of Restricted Stock Awards.
Restricted Stock Awards shall be awarded in such numbers and at such times as
the Committee shall determine.
(b) AWARD RESTRICTIONS. Restricted Stock Awards shall be subject to such
terms, conditions, restrictions, or limitations as the Committee deems
appropriate including, by way of illustration but not by way of limitation,
-4-
<PAGE>
restrictions on transferability, requirements of continued employment or
individual performance or the financial performance of the Corporation. The
Committee may modify, or accelerate the termination of, the restrictions
applicable to a Restricted Stock Award under such circumstances as it deems
appropriate.
(c) RIGHTS AS SHAREHOLDERS. During the period in which any restricted
shares of Common Stock are subject to the restrictions imposed under the
preceding paragraph, the Committee may, in its discretion, grant to the
Participant to whom such restricted shares have been awarded all or any of the
rights of a shareholder with respect to such shares, including, by way of
illustration but not by way of limitation, the right to vote such shares and to
receive dividends.
(d) EVIDENCE OF AWARD. Any Restricted Stock Award granted under the Plan
may be evidenced in such manner as the Committee deems appropriate, including,
without limitation, book-entry registration or issuance of a stock certificate
or certificates.
10. PAYMENT OF AWARDS
Except as otherwise provided herein Award Agreements may provide that, at
the discretion of the Committee, payment of Awards may be made in cash, Common
Stock, a combination of cash and Common Stock, or any other form of property as
the Committee shall determine. Further, the terms of Award Agreements may
provide for payment of Awards in the form of a lump sum or installments, as
determined by the Committee.
11. DIVIDENDS AND DIVIDEND EQUIVALENTS
If an Award is granted in the form of a Restricted Stock Award, the
Committee may choose, at the time of the grant of the Award, to include as part
of such Award an entitlement to receive dividends or dividend equivalents,
subject to such terms, conditions, restrictions or limitations, if any, as the
Committee may establish. Dividends and dividend equivalents shall be paid in
such form and manner and at such time as the Committee shall determine. All
dividends or dividend equivalents which are not paid currently may, at the
Committee's discretion, accrue interest or be reinvested into additional shares
of Common Stock.
12. TERMINATION OF EMPLOYMENT
The Committee shall adopt Administrative Policies determining the
entitlement of Participants who cease to be employed by either the Corporation
or Subsidiary whether because of death, disability, resignation, termination or
retirement pursuant to an established retirement plan or policy of the
Corporation or of its applicable Subsidiary.
-5-
<PAGE>
13. ASSIGNMENT AND TRANSFER
The rights and interests of a Participant under the Plan may not be
assigned, encumbered or transferred except, in the event of the death of a
Participant, by will or the laws of descent and distribution, except as may be
explicitly set forth in an Award Agreement.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any change in the outstanding shares of Common Stock by
reason of any reorganization, recapitalization, stock split, stock dividend,
combination or exchange of shares merger, consolidation or any change in the
corporate structure or shares of the Corporation, the maximum aggregate number
and class of shares as to which Awards may be granted under the Plan and the
shares issuable pursuant to then outstanding Awards (and the exercise price of
any outstanding stock options) shall be appropriately adjusted by the Committee
whose determination shall be final.
15. WITHHOLDING TAXES
The Corporation or the applicable Subsidiary shall be entitled to deduct
from any payment under the Plan, regardless of the form of such payment, the
amount of all applicable income and employment tax required by law to be
withheld with respect to such payment or may require the Participant to pay to
it such tax prior to and as a condition of the making of such payment. In
accordance with any applicable Administrative Policies it establishes, the
Committee may allow a Participant to pay the amount of taxes required by law to
be withheld from an Award by withholding from any payment of Common Stock due as
a result of such Award, or by permitting the Participant to deliver to the
Corporation shares of Common Stock having a fair market value, as determined by
the Committee, equal to the amount of such required withholding taxes.
16. REGULATORY APPROVALS AND LISTINGS
Notwithstanding anything contained in this Plan to the contrary, the
Corporation shall have a no obligation to issue or deliver certificates of
Common Stock evidencing Restricted Stock Awards or any other Award payable in
Common Stock prior to (a) the obtaining of any approval from any governmental
agency which the Corporation shall, in its sole discretion, determine to be
necessary or advisable, and (b) the completion of any registration or other
-6-
<PAGE>
qualification of said shares under any state or federal law, or ruling of any
governmental body, that the Corporation shall, in its sole discretion, determine
to be necessary or advisable.
17. NO RIGHT TO CONTINUED EMPLOYMENT OR GRANTS
Participation in the Plan shall not give any Key Employee any right to
remain in the employ of the Corporation or any Subsidiary. The Corporation or,
in the case of employment with a Subsidiary, the Subsidiary, reserves the right
to terminate the employment of any Key Employee at any time. The adoption of
this Plan shall not be deemed to give any Key Employee or any other individual
any right to be selected as a Participant, to be granted any Awards hereunder or
if granted an Award in any year, to receive Awards in any subsequent year.
18. AMENDMENT
The Corporation, by action of its Board of Directors, reserves the right to
amend, modify or terminate at any time this Plan, or, by action of the Board
with the consent of the Participant, to amend, modify or terminate any
outstanding option agreement or restricted stock award, except that the
Corporation may not, without further shareholder approval, increase the total
number of shares as to which stock options may be granted under the Plan (except
increases attributable to the adjustments authorized in section 14 hereof),
change the employees or class of employees eligible to receive options, or
materially increase the benefits accruing to Participants under the Plan.
Moreover, no action may be taken by the Company (without the consent of the
Participant) that will impair the validity of any option or restricted stock
award then outstanding or that will prevent the incentive stock options issued
or to be issued under this Plan from being "incentive stock options" under
Sections 422 of the Code, or any successor provision.
19. GOVERNING LAW
The Plan shall be governed by and construed in accordance with the laws of
the State of Nevada, except as preempted by applicable Federal law.
20. NO RIGHT, TITLE, OR INTEREST IN CORPORATION ASSETS
No Participant shall have any rights as a shareholder as a result of
participation in the Plan until the date of issuance of a stock certificate in
his name except, in the case of Restricted Stock wards, to the extent such
rights are granted to the Participant under Section 9(c) hereof. To the extent
any person acquires a right to receive payments from the Corporation under this
Plan, such rights shall be no greater than the rights of an unsecured creditor
of the Corporation.
-7-
<PAGE>
21. PAYMENT BY SUBSIDIARIES
Settlement of Awards to employees of Subsidiaries shall be made by and at
the expense of such Subsidiary. Except as prohibited by law, if any portion of
an Award is to be settled in shares of Common Stock, the Corporation shall sell
and transfer to the Subsidiary, and the Subsidiary shall purchase, the number of
shares necessary to settle such portion of the Award.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 376,365
<SECURITIES> 0
<RECEIVABLES> 42,596
<ALLOWANCES> 0
<INVENTORY> 28,397
<CURRENT-ASSETS> 457,949
<PP&E> 124,551
<DEPRECIATION> 63,686
<TOTAL-ASSETS> 518,814
<CURRENT-LIABILITIES> 252,292
<BONDS> 0
0
100,000
<COMMON> 66,205
<OTHER-SE> 956,468
<TOTAL-LIABILITY-AND-EQUITY> 518,814
<SALES> 743,954
<TOTAL-REVENUES> 743,954
<CGS> 249,309
<TOTAL-COSTS> 747,558
<OTHER-EXPENSES> 16,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,112
<INCOME-PRETAX> (269,302)
<INCOME-TAX> 0
<INCOME-CONTINUING> (269,302)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269,302)
<EPS-BASIC> 0.02
<EPS-DILUTED> 0
</TABLE>
