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, 2000
[ ] 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
VITRIX, INC.
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(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.)
51 West Third Street, Suite 310, 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: $1,261,866
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 25, 2000
was approximately $7,965,000.
At September 25, 2000, the issuer had outstanding 30,605,290 shares of
Common Stock, par value $.005 per share.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Vitrix, Inc., a Nevada corporation (the "Company" or "Vitrix"), through its
wholly owned subsidiary, Vitrix Incorporated, an Arizona corporation ("Vitrix
Incorporated"), designs, develops, manufactures and markets a line of time and
labor management hardware and software products. Our products are designed to
improve productivity by automating time and attendance, workforce scheduling and
management of labor resources. We target our product solutions at small to
mid-sized companies of up to 2,000 employees, and the solutions are offered in a
client/server application or in a 100% Web-based application service provider
("ASP") model.
Vitrix 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 our
stockholders, we changed our name from "Richard Barrie Fragrances, Inc." to "FBR
Capital Corporation." On October 7, 1999, we changed our name again from "FBR
Capital Corporation" to "Vitrix, Inc." As of the date of this report, we conduct
our operations through our subsidiary, Vitrix Incorporated, formed on April 26,
1996. Unless the context indicates otherwise, references to the Company in this
report shall include Vitrix and Vitrix Incorporated.
Effective June 30, 1996, Vitrix 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, Vitrix's operations were limited to conducting
administrative activities and discussions with third parties regarding possible
business combinations.
On April 15, 1999, Vitrix acquired the outstanding capital stock of Vitrix
Incorporated pursuant to the terms of an Exchange Agreement, dated as of such
date, by and among Vitrix, Vitrix Incorporated and certain of the Vitrix
Incorporated shareholders who agreed to participate in the transaction (the
"Acquisition"). Under the terms of the Exchange Agreement, each outstanding
share of Vitrix Incorporated common stock, no par value per share ("Vitrix
Incorporated Common Stock"), was converted into a combination of .9225 shares of
Vitrix 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
Vitrix ("Preferred Stock"). Each share of Preferred Stock was automatically
converted into one share of Common Stock on October 7, 1999, when Vitrix amended
it Articles of Incorporation to increase the authorized capital to 50,000,000
shares so that the conversion could be completed.
The aggregate consideration paid in the Acquisition 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 Incorporated
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
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the Shares, Vitrix Incorporated shareholders hold approximately 80% of the
outstanding shares of Common Stock (assuming conversion of the Preferred Stock
into Common Stock and excluding outstanding options and warrants) immediately
subsequent to the Acquisition and the shareholders of Vitrix existing prior to
the Exchange Agreement owned the remaining 20% of such Vitrix shares.
Although Vitrix became the parent company of Vitrix Incorporated following
the consummation of the transaction, the acquisition was accounted for as a
recapitalization of Vitrix Incorporated and the purchase of Vitrix by Vitrix
Incorporated, as Vitrix Incorporated is the controlling company after the
transaction. The accompanying financial statements of Vitrix include the
accounts of Vitrix Incorporated for all periods presented, and the accounts of
Vitrix from April 15, 1999, the effective date of the acquisition.
PRODUCTS AND SERVICES
Vitrix 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 500 employees. Our solutions are offered in a client/server
application, or in a 100% Web-based ASP model. Our products are internally
developed, proprietary software applications that maintain and automate the
process of collecting time sheet information and provide reports to help
companies track and analyze how their employees spend their time. Our products
also automatically accrue vacation, sick and personal time, and effectively
replace the traditional punch clock with a fully-automated system designed to
provide significant savings to its users.
LABOR MANAGEMENT SOLUTIONS
HOURTRACK 2000
FUNCTIONALITY. HourTrack 2000 is an internally developed, client / server
architecture, proprietary software workforce management solution that tracks,
manages and reports many aspects of employee time. By replacing the traditional
punch clock with a fully-automated system, we believe this product produces
substantial savings for employers. HourTrack 2000 was released in December 1999
as an upgrade to HourTrack 98. Sales of HourTrack 98 sales ceased in February
2000. The primary features of HourTrack 2000 include:
* TIME AND ATTENDANCE - HourTrack 2000 is easily customized to conform
to an organization's unique set of payroll policies and concerns.
* LEAVE MANAGEMENT - Leave records for vacation, sick and personal time
are maintained by HourTrack 2000. It also tracks hours that are
specific to a certain organization (i.e. PTO, jury duty, training,
etc.), and automates benefit accruals by using a company's policies to
calculate how much benefit time an employee has earned.
* JOB AND TASK TRACKING - In addition to tracking total time spent on
the job, HourTrack 2000 has functions that enable users to track the
time employees spend on specific jobs and tasks. Reports assist with
job costing and analysis.
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* WORKFORCE SCHEDULING - HourTrack 2000's scheduling features help
manage payroll costs and productivity concerns by minimizing the
likelihood of expensive overstaffing and the negative effects of
understaffing. Schedule creation is performed with the assistance of a
visual interface, allowing administrators to export employee schedules
into a grid.
* STRATEGIC REPORTING - The more than 60 reports included with HourTrack
2000 enable users to transform raw data into helpful information for
managers and executives to utilize in gaining valuable insight to more
effectively manage their organizations. Reports can also be used to
share information with third party applications or service bureaus,
time tracking, benefit tracking, job tracking, human resource
functionality, employee scheduling, messaging, reporting and the
import/export of data. HourTrack 2000 also automatically accrues
vacation, sick and personal time.
DATA COLLECTION OPTIONS. Our solutions include hardware for collecting
employees' clock in and out times. Set forth below are the various hardware
devices designed to meet the challenges of a diverse set of work environments:
* V-BADGE TERMINALS - These badge readers are well suited for a wide
variety of environments, from doctors' offices to manufacturing
plants. Employees clock in and out by simply sliding a badge through a
scanner.
* V-BIO TERMINALS - This device analyzes the biometric measurements of
users' hands to verify their identities. Instead of using a badge,
employees can clock in and out by placing their hands onto the scanner
and awaiting verification. This method eliminates losses due to
buddy-punching (the practice of clocking in or out for another
employee).
* V-MOBILE DEVICES - It is often helpful to track the time a mobile
workforce spends on projects. V-Mobile devices allow organizations to
do just that. Instead of a PC or terminal, Vitrix's data collection
software runs on a palm-sized device operating under the Windows CE
terminal.
* TELEPUNCH - The TelePunch solution allows employees to clock in and
out for the day, for jobs, or for departments using any touch-tone
telephone. Clients who purchase this solution receive a
pre-configured, Dell telephony server from Vitrix. This server runs
Vitrix's software, and allows callers to interact with HourTrack 2000.
* EWEBCLOCK - eWebClock partially reduces the users total investment, by
utilizing the Internet to collect employee clock in and out times. By
simply logging on to a Web page (via the local network or the World
Wide Web), employees can clock in and out.
* PC TIME CLOCK - Vitrix's most straightforward solution, PC Time Clock,
allows employees to clock in and out on a Windows-based computer. This
is generally beneficial in office environments where employees each
have access to their own desktop computer.
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MYVITRIX
FUNCTIONALITY. MyVITRIX is a 100% Web-based service deliverable to clients
through the application service provider (ASP) model. It delivers the
functionality of HourTrack 2000, its client / server predecessor, through Web
distribution. MyVITRIX was released in September 2000. The main features of
MyVITRIX include:
* HOURTRACK 2000 STRUCTURE - By building on top of the HourTrack 2000
engine, MyVITRIX has all of the functionality of HourTrack 2000, as
discussed above. MyVITRIX was introduced with a robust feature-set in
the areas of time and attendance, leave management, job and task
tracking, employee scheduling and data analysis.
* CUSTOMIZATION - MyVITRIX allows for customization and flexibility.
Administrators and employees determine exactly which data MyVITRIX
will display for them, allowing clients to work at optimum efficiency
in the MyVITRIX environment. Additionally, MyVITRIX will work in the
manner required by clients. For example, clients with a mobile
workforce have the ability to access the MyVITRIX pages using any
Web-enabled cellular phone or PDA device (Palm, Windows CE, etc.).
* ANYTIME, ANYWHERE - Because MyVITRIX is delivered via the Internet
through any Web browser, it brings the world closer to Vitrix's
"anytime, anywhere" vision for performing or self-servicing human
resources tasks. Wherever clients have Internet access, they have
access to MyVITRIX and the functionality and wealth of information it
provides.
* CUSTOMER ACCOUNT SELF-SERVICE - MyVITRIX gives customers the ability
to view their account status online. They can even order additional
Vitrix products, obtain system help, or contact a support
representative directly from the MyVITRIX website.
DATA COLLECTION OPTIONS. The MyVITRIX solution collects data using the
TCP/IP Internet protocol. Data can be collected by any of these various methods:
* WEB BROWSER - MyVITRIX delivers its ultimate user experience to
clients accessing the service through a standard Web browser. The full
range of actions (clocking in and out, transferring jobs and
departments, etc.) and information (hours worked, schedules, status
board, etc.) are available.
* WEB-ENABLED CELL PHONE OR PDA - A streamlined version of MyVITRIX is
available to clients accessing the service through a text-only
browser, such as those operating on cell phones and PDAs. Essential
services such as clocking in and out are available.
* TCP/IP-ENABLED HARDWARE - Customers may utilize TCP/IP-enabled
hardware devices, such as badge readers, to collect clock in and out
data from their employees.
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SERVICES AND SUPPORT
We maintain a professional service and technical support organization which
provides a suite of maintenance and professional services. These services are
designed to support Vitrix customers throughout the life cycle of our products.
The professional services include implementation, training, technical and
business technical consulting. Maintenance service options are delivered through
Vitrix's centralized support operation or through local service personnel. Our
educational services offer a full range of curriculums which are delivered
through local training at our Tempe, Arizona headquarters or via computer based
training courses. When necessary, we also may provide software customization
services to meet any unique customer requirements.
MARKETING AND SALES
We market and sell our products to small and mid-sized companies in markets
in the United States and foreign countries through our Business Alliance and
Partner Program as well as directly to end users. End users include companies in
the manufacturing and service industries, and in the public and private sectors.
We believe 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
headquarter office. An enterprise customer is analogous to a
collection of mid-sized businesses requiring a central location to
collect and store data.
We believe there are over 2.4 million businesses that fall into the small
to mid-sized businesses market segments. 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 $5,000, the small to mid-sized market
represents approximately $9.6 billion in potential sales.
DIRECT SALES. Our 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.
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Marketing materials, sample CDs and technical documents are normally provided by
our inside sales staff to customers who desire to research the best solutions.
BUSINESS ALLIANCE AND PARTNER PROGRAM. Our Business Alliance and Partner
Program was formed to enhance sales by creating partnerships with leaders and
participants within the following horizontal industries:
* Payroll Service Providers;
* Software companies;
* Systems integrators and consultants;
* Human Resource PEO;
* Web portals;
* SMB Web site companies;
* Telecom & ISP companies;
* Financial management companies;
* Other ASPs.
Our partnership programs are divided into four (4) categories: strategic
partners, technology partners, distribution partners, and alliance partners.
* Strategic Partners are companies who are leaders in their industries
and markets. Our Strategic Partners and Vitrix, together make
significant legal commitments relating to sales, marketing,
technology, and distribution. Both partners invest significant capital
and human resources in order to meet customer needs, and expand
markets and revenue by leveraging each other's resources.
* Distribution Partners are companies who distribute and re-sell Vitrix
software and hardware solutions to their customers via marketing
efforts and the Distribution Partner's sales force. Distribution
Partners also include our new ASP offerings that afford private label,
co-branded or Vitrix-branded solutions for labor management.
* Technology Partners are the firms who either supply Vitrix with the
technology, or the technology delivery support services we use to
build and deliver our offerings. Technology Partners also encompass
firms who license and use Vitrix technology to embed or wrap around
their own offerings via our Software Development Kit.
* Alliance Partners are organizations that wish to have a relationship
with Vitrix that is primarily oriented toward selling and marketing
activities. The Alliance Partner program is simple, non-exclusive and
intended to provide mutually beneficial referral fee revenue. The
Alliance Partner Program benefits both partners by lending each others
name to an effort, creating and giving support, typically through
cross pollination of sales and marketing staffs.
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MANUFACTURING AND SOURCES OF SUPPLY
The duplication of Vitrix software is done with our own equipment. The
printing of documentation is outsourced to suppliers. Although most of the parts
and components included within our products are available from multiple
suppliers, certain parts and components are purchased from single suppliers. We
have chosen to source these items from single suppliers because we believe that
the supplier chosen is able to consistently provide us with the highest quality
product at a competitive price on a timely basis. While to date we have been
able to obtain adequate supplies of these parts and components, the inability to
transition to alternate sources on a timely basis if required in the future,
could result in delays or reductions in product shipments which could have a
material adverse effect on our operating results.
PRODUCT DEVELOPMENT
Our product development efforts are focused on enhancing and increasing the
performance of our existing products and developing new products. During fiscal
2000 and 1999, research and development expenses were $570,856 and $232,250,
respectively. The Company intends to continue to commit resources to enhance and
extend our product lines and develop interfaces to third party products.
Although we are continually seeking to further enhance our product offerings and
to develop new products, 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 our competitors will not develop
and market products which are superior to our products or achieve greater market
acceptance. We also depend upon the reliability and viability of a variety of
software development tools owned by third parties to develop our products. If
these tools are inadequate or not properly supported, our ability to release
competitive products in a timely manner could be adversely impacted.
PROPRIETARY RIGHTS
We rely on a combination of trademarks, trade secret law and contracts to
protect our proprietary technology. We generally provide 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. We authorize our
resellers to sublicense software products to end users under similar terms. In
certain circumstances, we also make 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 our products
or technology without authorization. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
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COMPETITION
We provide time and attendance, data collection and labor management
solutions that enable businesses to optimize their labor resources. The labor
management industry is highly competitive. Competition is increasing as
businesses in related industries, such as human resources management, payroll
processing and enterprise resource planning ("ERP") enter the time and
attendance market. Advances in software development tools have accelerated the
software development process and, therefore, enable competitors to penetrate our
markets. Although we believe we have certain technological and other advantages
over our current competitors, maintaining those advantages will require
continued investment by the Company in research and development and marketing
and sales initiatives. There can be no assurance that we will have sufficient
resources to make such investments or to achieve the technological advances
necessary to maintain our competitive advantages. Increased competition could
adversely affect our operating results through price reductions and/or loss of
market share.
We compete primarily on the basis of price/performance, quality,
reliability and customer service. In the time and attendance market, we compete
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 our competitors, such as Kronos Corporation,
Stromberg and Simplex, are substantially larger and have access to significantly
greater financial resources than the Company. Competitive market conditions
could have a material adverse effect on our business, financial condition and
results of operations.
EMPLOYEES
As of June 30, 2000, we employed twenty-seven individuals. None of our
employees are represented by a union or other collective bargaining agreement,
and we consider our relations with our employees to be good. We have encountered
intense competition for experienced technical personnel for product development,
technical support and sales and expect such competition to continue in the
future. Any inability to attract and retain a sufficient number of qualified
technical personnel could adversely affect our ability to produce, support and
sell products in a timely manner.
ITEM 2. PROPERTIES.
We lease approximately 9,000 square feet in Tempe, Arizona under a lease
agreement which commenced in November 1999. We have an additional 1,000 square
feet of office space in Tempe, Arizona that is being subleased to a tenant on a
month-to-month basis. Our rental expense for these facilities in fiscal 2000 was
approximately $105,000. We consider our present facilities to be adequate for
our current requirements and that additional space will be available as needed
in the future.
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ITEM 3. LEGAL PROCEEDINGS.
We are from time to time involved in legal proceedings arising from the
normal course of business. As of the date of this report, we were not currently
involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of our shareholders during the
fiscal quarter ended June 30, 2000.
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
"VTTX." The quoted prices reflect inter-dealer prices without retail mark-up,
markdown, 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 2000
Period High Low
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First quarter $0.69 $0.38
Second quarter 0.38 0.22
Third quarter 3.25 0.22
Fourth quarter 0.94 0.28
FISCAL 1999
Period High Low
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First quarter $0.44 $0.19
Second quarter 0.38 0.13
Third quarter 0.69 0.38
Fourth quarter 0.58 0.39
As of September 25, 2000, there were 225 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 Vitrix include the accounts of Vitrix Incorporated for
all periods presented, and the accounts of Vitrix from April 15, 1999, the
effective date of the Acquisition.
SELECTED FINANCIAL INFORMATION
Years Ended June 30,
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2000 1999
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Total Revenues $1,261,866 $743,954
Costs of Revenues 485,971 249,309
Gross Profit 775,895 494,645
Sales and Marketing Expense 740,332 288,559
Research and Development Expense 570,856 232,250
General and Administrative Expense 583,059 226,749
Net Loss (1,098,219) (269,302)
Basic Loss per Share (0.04) (0.02)
COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES. Revenue for the fiscal year ended June 30, 2000 (the "reporting
period"), rose 70% to $1,261,866, compared to revenue of $743,954 for the fiscal
year ended June 30, 1999 (the "comparable period"). This growth was principally
the result of increased customer demand for the Company's product solutions and
the hiring of additional salespersons to meet that demand, which resulted in an
increase in sales volume. The increase in sales volume was generated through
increased product and service revenue.
PRODUCT SALES. Product sales for the reporting period increased 48% to
$1,080,388, compared to revenue of $730,641 in the comparable period. Product
revenue growth was principally the result of increased customer demand. Product
revenue growth in fiscal 2000 was driven by sales of the Company's products to
new customers as well as sales into the Company's existing customer base. Demand
from both new and existing customers was driven by new product additions
delivered in fiscal 2000, including, specifically, the introduction of HourTrack
2000.
SERVICE REVENUE. Service revenue for the reporting period was $181,478, or
14% of revenue, compared to revenue of $13,313, or 2% of revenue in the
comparable period. The increase was principally the result of the formation of a
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professional services group during the reporting period formed as a result of an
increased demand by our customers needing professional services. The increase in
demand is primarily attributable to the introduction of new products that are
more sophisticated and robust.
GROSS PROFIT. Gross profit as a percentage of revenues was 62% in the
reporting period and 67% in the comparable period. Gross profit on product sales
in the reporting period was 63% compared to 67% in the comparable period. The
decrease in gross profit percentage was primarily attributable to a change in
the mix of product sold. The Company's product revenue in the reporting period
was derived from sales of systems in which hardware, which typically generates
lower gross profit, represented a higher proportion of product revenues than in
the comparable period. Gross profit on service revenues was 51% in the reporting
period and was not applicable in the comparable period as no costs were assigned
to cost of services due to the minimal service revenue in such period.
EXPENSES. Sales and marketing expenses were $740,332, or 59% of revenues,
in the reporting period and $288,559, or 39% of revenues, in the comparable
period. The increase in sales and marketing expense in the current period is
primarily due to increased labor costs resulting from the hiring of additional
salespeople and sales and marketing management personnel along with increased
advertising and promotional expenses.
Research and development expenses were $570,856, or 45% of revenues, in the
reporting period and $232,250, or 31% of revenues, in the comparable period. The
increase in research and development expenses in the reporting period is
attributable to increased labor costs as a result of the Company's development
of its application service provider (ASP) product MyVITRIX, and the
client/server product HourTrack 2000.
General and administrative expenses were $583,059, or 46% of revenues, in
the reporting period and $226,749, or 30% of revenues, in the comparable period.
The increase in general and administrative expenses in the current period is
primarily attributable to management personnel that were in place for the entire
duration of the reporting period and only a portion of the comparable period.
Other income (expense) was $20,133 in the reporting period and $(16,389) in
the comparable period. The change from a net other expense to a net other income
is attributable to a reduction in interest expense as result of the conversion
of debt to equity during fiscal 1999 and an increase in interest income in
fiscal 2000 resulting from an increase in cash balances due to the raising of
additional equity investments. See "Item 12 Certain Relationships and Related
Transactions."
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 2000 was $547,162, as compared to $205,657
at June 30, 1999. Cash and cash equivalents at those dates amounted to $620,765
and $376,365, respectively.
OPERATIONS. Net cash used by operations increased to $1,116,673 in the
reporting period, compared to net cash used by operations of $87,624 in the
comparable period. The increase in net cash used by operations was primarily
attributable to increases in the net loss, accounts receivable, inventory and
accrued liabilities and deferred revenue. It is the Company's policy to bill
maintenance contracts at the contract start date and professional services
accompanying product sales when the product is invoiced. The Company has
experienced growth in deferred maintenance revenues as the result of the
expansion of the installed base and the level of maintenance contracts sold to
that installed base in fiscal 2000. In fiscal 2000, the Company experienced an
increase in deferred professional services revenue as a result of an increase in
the level of professional services accompanying new sales.
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INVESTMENT ACTIVITIES. The Company used $99,875 and $26,472, to purchase
property and equipment in fiscal 2000 and 1999, respectively. During the
reporting period, the Company acquired cash of approximately $207,000 with its
acquisition of Vitrix Incorporated.
FINANCING ACTIVITIES. The Company raised approximately $1,475,000 and
$190,000 in aggregate proceeds from the issuance of Common Stock and the
exercise of common stock options and warrants in fiscal 2000 and 1999,
respectively.
At August 31, 2000, the Company's working capital and funds generated from
operations are sufficient to fund the Company's operations for the next three
months. In the absence of obtaining additional capital through asset sales,
securing a revolving credit facility, debt or equity offerings, or a combination
of the foregoing, the Company will be unable to fund its operations and will
experience defaults under certain of its contractual agreements, including its
lease agreements for its corporate headquarters. These agreements are subject to
termination in the event of default. Certain of the parties to these agreements
could take legal action against the Company to collect amounts owed to them.
Accordingly, the Company's financial condition could require that the Company
seek the protection of applicable reorganization laws in order to avoid or delay
actions by third parties, which could materially adversely affect, interrupt or
cause the cessation of the Company's operations. As a result, the Company's
independent certified public accountants have issued a going concern opinion on
the financial statements of the Company for the year ended June 30, 2000.
The Company has on-going discussions with various financial sources in an
effort to raise additional capital. While the Company believes that it will
succeed in attracting additional capital, there can be no assurance that the
Company's efforts will be successful.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" (SFAS 133),
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. Statement
of Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the effective date of FASB Statement No.
133 - an amendment of FASB Statement No. 133 ("SFAS 133"), defers the effective
date of SFAS 133 to be effective for financial statements ending after June 15,
2000. Adoption of SFAS 133 does not have a material effect, if any, on the
Company's financial position or results of operations.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. SAB 101 must be applied to the financial statements
no later than the quarter ending September 30, 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on the
Company's financial results.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") Accounting for Certain Transactions Involving
Stock Compensation, an Interpretation of APB Opinion No. 25. FIN 44 clarifies
the application of Opinion No. 25 for (a) the definition of employee for
purposes of applying Opinion No. 25, (b) the criteria for determining whether a
plan qualifies as a non-compensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 is effective July 2, 2000, but certain conclusions
cover specific events that occur after either December 15, 1998, or January 12,
2000. The Company believes that the impact of FIN 44 will not have a material
effect on the Company's financial position.
13
<PAGE>
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.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-KSB 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. Examples of uncertainties which could cause such
differences include, but are not limited to, the ability of the Company to
attract and retain key personnel, especially highly skilled technology
personnel, the ability of the Company to secure additional capital to finance
its business strategy, competition from other companies providing time and labor
management hardware and software products, and the Company's reliance on
technology and information and telecommunication systems. 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.
Independent Auditors' Report F-1
Balance Sheet F-2
Statements of Operations F-3
Statements of Changes in Stockholders' Equity (Deficit) F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Information regarding the Company's directors and executive officers is
provided below.
THOMAS S. BEDNARIK. Mr. Bednarik, age 50, has served as President, Chief
Executive Officer and a director of the Company since February 2000. From April
1998 to February 2000, Mr. Bednarik served as Vice President of Sales and
Support at NetPro Computing, Inc., an Arizona-based software development company
that provides directly infrastructure management tools to clients with Novell
and Microsoft platforms. In addition, Mr. Bednarik has served in various
executive management capacities, including Chief Executive Officer, President
and Executive Vice President, with such firms as Idea Corporation, Decision
Data, Alcatel Information Systems and ITT Corporation.
CRAIG J. SMITH. Mr. Smith, age 30, has served as the Company's Vice
President of Finance and Administration and Chief Financial Officer since April
1999. From 1998 to 1999, Mr. Smith served as Controller of Pacific Numerix
Corporation. From 1993 to 1998, served as an Audit Manager of Semple & Cooper
LLP. Mr. Smith earned a Bachelor of Science degree in finance and accounting
from Mankato State University-Minnesota in 1992 and is completing his MBA from
Arizona State University.
TODD P. BELFER. Mr. Belfer, age 32, has served as a director of the Company
since March 1999, and as Chairman of the Board of Directors of Vitrix from April
1996 until March 1999. Mr. Belfer also is currently serving as President and
Chairman of the Board of M.D. Labs, Incorporated, a private Arizona-based
company, where he has been employed since February 1994. Mr. Belfer also
co-founded Employee Solutions, Inc. in May 1990, and served as its Executive
Vice-President and as a director from 1991 to 1996. Mr. Belfer earned a Bachelor
of Science in Finance and Economics from the University of Arizona in 1989.
BAHAN SADEGH. Mr. Sadegh, age 27, has served as a director of Vitrix since
1996. Mr. Sadegh co-founded Vitrix in 1996, and has served as Chief Technology
Officer of Vitrix since its founding. Mr. Sadegh served as an engineer
consultant for Brouwer, Palmer and Associates from 1992 until 1995. Mr. Sadegh
is completing a degree in mathematics and business administration at Arizona
State University.
HAMID SHOJAEE. Mr. Shojaee, age 27, has served as a director of the Company
since April 1996. Mr. Shojaee co-founded Vitrix in 1996, served as its President
and Chief Executive Officer from June 1998 until March 1999. Mr. Shojaee
currently serves as Information Technology Director for Vitrix. Mr. Shojaee
formerly owned and operated Power Computing Solutions, a computer consultant
business, from August 1993 until December 1995. Mr. Shojaee served as a network
administrator for International Business Machines Corporation from January 1992
until December 1993. Mr. Shojaee is a Microsoft Certified Systems Engineer, and
attended Arizona State University.
15
<PAGE>
MICHAEL A. WOLF. Mr. Wolf, age 48, has served as a director of the Company
since March 1999, and as a director of Vitrix Incorporated, since June 1997.
From March 1999 to November 1999, Mr. Wolf also served as Chairman of the Board
of the Company. From November 1999 to February 2000, Mr. Wolf acted as Interim
Chief Executive Office of the Company. Mr. Wolf co-founded VIASOFT in November
1984, served as its Executive Vice-President and Chief Technology Officer and as
a director from which he retired in August 1997. Mr. Wolf is a member of the
Board of Directors of the Arizona Software and Internet Association, the
Advisory Committee of the Arizona Angels Investor Network, and serves on the
Boards or Advisory Boards of several other technology-related companies. Mr.
Wolf earned a Bachelor of Science in Quantitative Systems from Arizona State
University.
LISE M. LAMBERT. Ms. Lambert, age 43, has served as a director of the
Company since April 1999 and as director of Vitrix since January 1998. Ms.
Lambert is President of Relevant, Inc., a consulting company that serves the
computer software industry. Ms. Lambert has been employed by Relevant, Inc.
since 1996. In 1986, Ms. Lambert co-founded Mastersoft, Inc., where she served
as Vice-President of Marketing from 1986 to 1990 and Senior Vice-President of
Sales from 1990 to 1995. Ms. Lambert has held various sales and management
positions, including Product Line Manager at MicroAge, Inc. in Tempe Arizona,
and currently serves as director for OutBack Resource Group. Ms. Lambert earned
Bachelor of Arts degrees in education and music, and a Masters degree in
deafness and audiology from Smith College.
WILLIAM K. SWARTZ. Mr. Swartz, age 44, has served as director of the
Company since January 2000. Since 1982, Mr. Swartz has served as President of
Swartz & Associates, Inc., an executive recruiting firm engaged in the
recruiting of executives for major software, internet and computer companies
such as Vstore, herebid.com, Visitalk and MyGeek.com.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, as well as persons beneficially
owning more than 10% of the Company's outstanding Common Stock, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission (the "SEC") within specified time periods. Such officers, directors
and shareholders are also required to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on its review of such forms received by it, or written
representations from certain reporting persons, the Company believes that all
Section 16(a) filing requirements applicable to its officers, directors and 10%
shareholders were complied with during the fiscal year ended June 30, 2000.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes all compensation to the Company's Chief
Executive Officer and to the Company's other most highly compensated executive
officers other than the Chief Executive Officer whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Officers"), for services
rendered to the Company for each of the fiscal years ended June 30, 2000, 1999
and 1998.
16
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------- ----------------------
NAME AND OTHER ANNUAL SECURITIES UNDERLYING
PRINCIPAL POSITION(1) YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS/SARS (#)
--------------------- ---- --------- -------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas S. Bednarik(2) 2000 $39,531 $5,000 -0- 1,000,000(2)
President and 1999 N/A N/A N/A N/A
Chief Executive Officer 1998 N/A N/A N/A N/A
Philip R. Shumway(3) 2000 $68,939 N/A N/A N/A
President and 1999 $31,439 N/A N/A 758,528(4)
Chief Executive Officer 1998 N/A N/A N/A N/A
</TABLE>
----------
(1) No other executive officer of the Company received compensation in excess
of $100,000 for the periods presented.
(2) Mr. Bednarik was appointed President and Chief Executive Officer of the
Company effective February 17, 2000. Had Mr. Bednarik been with the Company
for an entire year his annual base salary would have been $115,000.
Pursuant to the terms of a letter agreement, dated February 17, 2000,
between Mr. Bednarik and the Company, Mr. Bednarik was granted options to
purchase 1,000,000 shares of the Company's Common Stock at a per share
exercise price of $0.94.
(3) Mr. Shumway resigned as President and Chief Executive Officer of the
Company effective October 31, 1999. Mr. Shumway's annual salary was
$100,000. The salary amount for Mr. Shumway reflects salary received for
the period July 1, 1999 through March 8, 2000. In accordance with the terms
of a Severance Agreement and General Release, dated October 25, 1999, Mr.
Shumway was paid severance pay from November 1, 1999 to March 8, 2000.
(4) Pursuant to the terms of his Employment Agreement with Vitrix, Mr. Shumway
received options to purchase 380,000 shares of Common Stock of Vitrix which
were converted to options to purchase 758,528 shares of Company Common
Stock in connection with the consummation of the transactions contemplated
by that certain Exchange Agreement, dated April 15, 1999, by and among the
Company, Vitrix Incorporated and the shareholders signatory thereto. In
accordance with the terms of a Severance Agreement and General Release,
dated October 25,1999, between the Company and Mr. Shumway, Mr. Shumway
agreed to forfeit all but 120,000 of such options.
17
<PAGE>
The following table sets forth information concerning individual grants of
stock options made to the Named Officers during the fiscal year ended June 30,
2000.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZED VALUE
NUMBER OF % OF TOTAL AT ASSUMED RATES OF ANNUAL
SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (2)
NAME AND OPTIONS/SARS EMPLOYEES IN EXERCISE EXPIRATION ------------------------
PRINCIPAL POSITION GRANTED (#)(1) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
------------------ -------------- ----------- ------------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Thomas S. Bednarik 1,000,000 31% $0.94 02/2010 $590,000 $1,500,000
President and Chief
Executive Officer
</TABLE>
----------
(1) In connection with Mr. Bednarik's employment with Vitrix, Mr. Bednarik was
granted options to purchase 1,000,000 shares of the Company's Common Stock.
The options may be exercised for 25% of the underlying stock beginning on
February 17, 2001, and 25% on each additional one-year anniversary
thereafter.
(2) Amounts represent hypothetical gains that could be achieved for the options
if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% or 10% compounded annually from
the date the options were granted to their expiration date and are not
presented to forecast possible future appreciation, if any, in the price of
the Common Stock. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Common Stock, overall stock
market conditions, as well as the optionholder's continued employment
through the vesting period. The amounts reflected in this table may not
necessarily be achieved.
OPTION EXERCISE
There were no option exercises by the Named Officers during the fiscal year
ended June 30, 2000.
EMPLOYMENT AGREEMENTS
As of February 15, 2000, the Board of Directors approved the terms of Mr.
Bednarik's at-will employment with the Company for services as its President and
Chief Executive Officer. Under the terms of a letter agreement, dated as of
February 17, 2000, Mr. Bednarik receives a base salary of $115,000. Mr. Bednarik
is also entitled to receive quarterly and annual bonus payments payable in cash
based on the Company's achievement of certain revenue targets for such periods.
Mr. Bednarik received a $5,000 cash bonus during the fiscal year ended June 30,
2000.
Mr. Bednarik is also entitled to participate in the Company's medical and
dental plans, with the Company paying 50% of the cost of the medical coverage
for Mr. Bednarik's family. Under the terms of the letter agreement, a portion of
Mr. Bednarik's unvested options become immediately vested in the event he is
terminated without cause (as defined in his Option Agreement with the Company).
In the event the Company is acquired or merged into another company, any
unvested options will become automatically vested.
18
<PAGE>
Effective October 31, 1999, Mr. Philip R. Shumway resigned as the Company's
President and Chief Executive Officer. In connection with such resignation, the
Company and Mr. Shumway entered into a Severance Agreement and General Release,
dated as of October 25, 1999 (the "Severance Agreement). Under the terms of the
Severance Agreement, the parties agreed to terminate Mr. Shumway's Employment
Agreement, effective October 31, 1999. In addition, in consideration for Mr.
Shumway's release of any potential claims against the Company, its officers,
directors, stockholders, agents and certain other parties, the company paid Mr.
Shumway a severance payment of approximately $35,000 and $3,846 for accrued
vacation time. The Company also agreed to keep in force medical and dental
benefits until the earlier of the remaining term of his Employment Agreement or
the date Mr. Shumway receives comparable benefits in connection with any new
employment obtained by Mr. Shumway. The Severance Agreement also provided that
Mr. Shumway could keep 120,000 options. Conversely, Mr. Shumway has agreed not
to compete with the Company for a period of one year from the date of the
Agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information, as of August 31, 2000,
concerning the beneficial ownership of shares of Common Stock of the Company by
(i) each person known by the Company to beneficially own more than 5% of the
Company's Common Stock; (ii) each Director; (iii) each of the Named Officers;
and (iv) all Directors and executive officers of the Company as a group. To the
knowledge of the Company, all persons listed in the table have sole voting and
investment power with respect to their shares, except to the extent that
authority is shared with their respective spouse under applicable law.
SHARES BENEFICIALLY OWNED (1)
NAME AND ADDRESS OF ----------------------------------
BENEFICIAL OWNER (2) NUMBER PERCENT
-------------------- ------ -------
Thomas S. Bednarik 187,500 (3) *
Michael A. Wolf 1,026,433 (4) 3.3
Todd P. Belfer 4,438,506 (5) 14.5
Lise M. Lambert 501,624 (6) 1.6
William K. Swartz -- --
Bahan Sadegh 1,625,702 (7) 5.3
Hamid Shojaee 5,456,446 17.8
Craig J. Smith 59,942 (8) *
Circle F Ventures 4,425,000 (9) 13.8
All directors and Named
Officers as a group 13,296,153 42.6
----------
* Less than 1%.
(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant or right. Shares of Common Stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options, warrants or rights, but are not deemed outstanding
for computing the percentage of any other person. The amounts and
percentages are based upon 30,605,290 shares of Common Stock outstanding as
of September 25, 2000.
(2) The address of each of the beneficial owners is c/o Vitrix, Inc., 51 West
Third Street, Suite 310, Tempe, Arizona 85281, except for Circle F
Ventures, whose address is 17797 North Perimeter Drive, Suite 105,
Scottsdale, Arizona 85255.
19
<PAGE>
(3) Includes 62,500 shares of Common Stock issuable upon exercise of warrants
issued in the Company's February 2000 private placement.
(4) Includes (i) 159,690 shares of Common Stock which are subject to
unexercised options that were exercisable on September 1, 2000, or within
60 days thereafter, and (ii) 54,000 shares of Common Stock issuable upon
exercise of warrants issued in the Company's October 1999 and February 2000
private placements.
(5) Includes 129,700 shares of Common Stock issuable upon exercise of warrants
issued in the Company's October 1999 and February 2000 private placements.
(6) Includes (i) 159,690 shares of Common Stock which are subject to
unexercised options that were exercisable on September 1, 2000, or within
60 days thereafter, and (ii) 23,200 shares of Common Stock issuable upon
exercise of warrants issued in the Company's October 1999 private
placement.
(7) Includes 9,600 shares of Common Stock issuable upon exercise of warrants
issued in the Company's October 1999 private placement.
(8) Includes (i) 29,942 shares of Common Stock which are subject to unexercised
options that were exercisable on September 1, 2000, or within 60 days
thereafter, and (ii) 10,000 shares of Common Stock issuable upon exercise
of warrants issued in the Company's October 1999 private placement.
(9) Includes 1,475,000 shares of Common Stock issuable upon exercise of
warrants issued in the Company's October 1999 and February 2000 private
placements.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1996, the Company entered into a debt financing agreement for
$310,000 with T.P.B. Investment Limited Partnership (TPB), which is owned by
Todd P. Belfer, 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 ($200,000)
and accrued interest ($64,570) outstanding on its notes into 2,720,723 shares of
the Company's Common Stock and Preferred Stock. The shares of Preferred Stock
were subsequently converted into Common Stock on October 7, 1999, when the
Company amended its Articles of Incorporation.
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.
There were no Current Reports on Form 8-K during the fiscal quarter ended
June 30, 2000.
20
<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.
VITRIX, INC.
Dated: September 28, 2000 /s/ Thomas S. Bednarik
------------------------------------
Thomas S. Bednarik, President and
Chief Executive Officer
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.
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas S. Bednarik and Craig J. Smith, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstititon for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments to this Form 10-KSB Annual
Report, and to file the same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Signatures Title Date
---------- ----- ----
/s/ Thomas S. Bednarik President, CEO and Director September 28, 2000
---------------------- (Principal Executive Officer)
Thomas S. Bednarik
/s/ Craig J. Smith Chief Financial Officer September 28, 2000
---------------------- (Principal Financial Officer)
Craig J. Smith
/s/ Todd P. Belfer Chairman of the Board September 28, 2000
----------------------
Todd P. Belfer
/s/ Michael A. Wolf Director September 28, 2000
----------------------
Michael A. Wolf
/s/ Lise M. Lambert Director September 28, 2000
----------------------
Lise M. Lambert
/s/ Bahan Sadegh Director September 28, 2000
----------------------
Bahan Sadegh
/s/ Hamid Shojaee Director September 28, 2000
----------------------
Hamid Shojaee
/s/ William K. Swartz Director September 28, 2000
----------------------
William K. Swartz
21
<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 I 3.1.6
3.1.7 Registrant's Amendment to Articles of Incorporation, dated
October 7, 1999. J 3.1
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
10.1 Stock Option Agreement, dated September 20, 1993, between
Registrant and Patrick McEnany E 10.17
10.1.1 Amendment to Stock Option Agreement, dated February 21,
1995, between Registrant and Patrick McEnany G 10.2.1
10.2 Asset Purchase Agreement between the Company and Parlux
Fragrances, Inc., dated January 31, 1996 F 10.17
10.3 Registration Rights Agreement between the Company and Parlux
Fragrances, Inc., dated June 28, 1996 F 10.18
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
BY REFERENCE
EXHIBIT FROM NO. IN
NUMBER DESCRIPTION DOCUMENT DOCUMENT
------ ----------- -------- --------
<S> <C> <C> <C>
10.4 Exchange Agreement, dated April 15, 1999, between the
Company, Vitrix Incorporated ("Vitrix") and the shareholders
of Vitrix signatory thereto H 2
10.5 Employment Agreement, dated February 16, 1999, between
Vitrix and Philip R. Shumway I 10.6
10.6 1999 Equity Compensation Plan I 10.7
10.7.1 Lease Agreement, dated September 3, 1999, beween LAFP
Phoenix, Inc., as lessor, and the Registrant, as lessee J 10.1
10.7.2 First Amendment to Office Lease Agreement, dated March 28,
2000, between LAFP Phoenix, Inc., as lessor and the
Registrant, as lessee K 10.1
10.8 Securities Purchase Agreement, dated September 21, 1999,
between Circle F Ventures, LLC and the Registrant J 10.2
10.9 Severance Agreement and General Release, dated October 25,
1999, between Philip R. Shumway and the Registrant J 10.3
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.
I. Form 10-KSB Annual Report of the Registrant for the fiscal year ended June
30, 1999.
J. Form 10-QSB Quarterly Report of the Registrant for the fiscal quarter ended
September 30, 1999.
K. Form 10-QSB Quarterly Report of the Registrant for the fiscal quarter ended
March 31, 2000.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors of Vitrix, Inc.
We have audited the accompanying consolidated balance sheet of Vitrix, Inc. as
of June 30, 2000, and the related consolidated statements of operations, changes
in stockholders' equity (deficit) and cash flows for the years ended June 30,
2000 and 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vitrix, Inc. as of
June 30, 2000, and the results of its operations, changes in stockholders'
equity (deficit), and its cash flows for the years ended June 30, 2000 and 1999,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, the Company's significant operating losses
raise substantial doubt about its ability to continue as a going concern.
Managements' plans in regard to this matter are also discussed in Note 7. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Los Angeles, California
August 15, 2000
F-1
<PAGE>
VITRIX, INC.
BALANCE SHEET
JUNE 30, 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 620,765
Accounts receivable - trade, net (Note 1) 229,717
Inventory (Note 1) 91,204
Prepaid expenses and other current assets 38,182
-----------
TOTAL CURRENT ASSETS 979,868
PROPERTY AND EQUIPMENT, NET (NOTES 1 AND 2) 168,779
-----------
TOTAL ASSETS $ 1,148,647
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $ 46,303
Accounts payable 88,953
Accrued liabilities 145,143
Deferred revenue (Note 1) 152,307
-----------
TOTAL CURRENT LIABILITIES 432,706
LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 3) 34,231
-----------
TOTAL LIABILITIES 466,937
-----------
COMMITMENTS: (NOTE 5) --
STOCKHOLDERS' EQUITY: (NOTE 6)
Common stock, $.005 par value, 50,000,000 shares
authorized, 30,508,218 shares issued and outstanding 152,541
Contributed capital 2,498,005
Accumulated deficit (1,968,836)
-----------
TOTAL STOCKHOLDERS' EQUITY 681,710
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,148,647
===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-2
<PAGE>
VITRIX, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
-----------------------------
2000 1999
------------ ------------
Revenues:
Product sales $ 1,080,388 $ 730,641
Services revenue 181,478 13,313
----------- -----------
TOTAL REVENUES 1,261,866 743,954
----------- -----------
COST OF REVENUES:
Product 397,742 249,309
Services 88,229 --
----------- -----------
TOTAL COST OF REVENUES 485,971 249,309
----------- -----------
GROSS PROFIT 775,895 494,645
----------- -----------
COSTS AND EXPENSES:
Sales and marketing 740,332 288,559
Research and development 570,856 232,250
General and administrative 583,059 226,749
----------- -----------
TOTAL COSTS AND EXPENSES 1,894,247 747,558
----------- -----------
NET LOSS FROM OPERATIONS (1,118,352) (252,913)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (11,155) (24,112)
Interest income 31,288 7,723
----------- -----------
20,133 (16,389)
----------- -----------
NET LOSS $(1,098,219) $ (269,302)
=========== ===========
BASIC LOSS PER SHARE (NOTE 1) $ (0.04) $ (0.02)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 27,295,777 16,473,873
=========== ===========
The Accompanying Notes are an Integral Part
of the Financial Statements
F-3
<PAGE>
VITRIX, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2000 AND 1999
<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, 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
Issuance of stock options
for services -- -- -- -- 12,000 -- 12,000
Exercise of stock options 70,000 350 26,375 -- 26,725
Exercise of warrants -- -- 264,687 1,323 4,500 -- 5,823
Sale of common stock and
warrants, net of costs -- -- 6,732,500 33,663 1,409,662 -- 1,443,325
Issuance of common stock
for services -- -- 200,000 1,000 39,000 -- 40,000
Preferred stock conversion (10,000,000) (100,000) 10,000,000 50,000 50,000 --
Net loss -- -- -- -- -- (1,098,219) (1,098,219)
----------- --------- ---------- --------- ---------- ----------- -----------
Balance at June 30, 2000 -- $ -- 30,508,218 $ 152,541 $2,498,005 $(1,968,836) $ 681,710
=========== ========= ========== ========= ========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-4
<PAGE>
VITRIX, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Net Loss $(1,098,219) $ (269,302)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 44,106 28,678
Common stock and stock options issued for services 52,000 --
Non-cash interest expense -- 64,570
Accrued interest assumed in merger -- (11,645)
Changes in Assets and Liabilities:
Accounts receivable-trade (187,121) (7,429)
Inventory (62,807) (11,352)
Prepaid expenses and other current assets (27,591) (7,477)
Accounts payable (57,131) 100,015
Accrued liabilities 81,018 13,083
Deferred revenue 139,072 13,235
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (1,116,673) (87,624)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (99,875) (26,472)
Cash acquired in merger -- 207,678
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (99,875) 181,206
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital leases (14,925) (4,910)
Proceeds from exercise of stock options and warrants 32,548 --
Proceeds from issuance of stock 1,443,325 190,918
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,460,948 186,008
----------- -----------
Net change in cash and cash equivalents 244,400 279,590
Cash and cash equivalents at beginning of period 376,365 96,775
----------- -----------
Cash and cash equivalents at end of period $ 620,765 $ 376,365
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 8,961 $ 3,142
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired by entering into capital leases $ 52,145 $ 28,724
=========== ===========
Conversion of related party notes and accrued
interest to equity $ -- $ 264,570
=========== ===========
Conversion of preferred stock to common stock $ 100,000 $ --
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-5
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES:
--------------------------------------------------------------------------------
NATURE OF BUSINESS, MERGER AND NAME CHANGE:
Vitrix, Inc., formerly FBR Capital Corporation, (the Company or VITRIX) through
its wholly owned subsidiary, Vitrix Incorporated, provides Time & Labor
Management Solutions. VITRIX products improve productivity by automating Time
and Attendance, Workforce Scheduling, and the management of Labor Resources,
with features such as employee self-service, data capture technology, time sheet
submittal, strategic reporting, and interface tools for payroll, human
resources, resource planning, and third party application integration. VITRIX
solutions are offered in a client/server application, or in a 100% Web-based
Application Service Provider (ASP) product.
On April 15, 1999 Vitrix, Inc. acquired the outstanding capital stock of Vitrix
Incorporated. The merger was consummated in accordance with the terms of an
Exchange Agreement dated April 15, 1999, by and among Vitrix, Inc., Vitrix
Incorporated and certain of the Vitrix Incorporated shareholders who agreed to
participate in the merger. Under the terms of the Exchange Agreement, each
outstanding share of Vitrix Incorporated common stock was converted into a
combination of .9225 shares of Vitrix, Inc. common stock and 1.0736 shares of
Series B Convertible Preferred Stock of Vitrix, Inc. The aggregate consideration
paid in the merger was 8,592,826 shares of Vitrix, Inc. common stock and
10,000,000 shares of Vitrix, Inc. 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 Incorporated common
stock, which have been converted into options and warrants to purchase Vitrix,
Inc. Common Stock, subject to adjustment for the appropriate exchange ratio.
Giving effect to the issuance of the Shares, the Vitrix Incorporated
shareholders own approximately 80% of the outstanding shares of Vitrix, Inc.
Common Stock (assuming conversion of the Preferred Stock into Common Stock) and
the prior Vitrix Inc. shareholders own the remaining 20% of the outstanding
Vitrix, Inc. shares immediately subsequent to the merger. Although Vitrix, Inc.
is the parent company of Vitrix Incorporated following the transaction, the
transaction was accounted for as a recapitalization of Vitrix, Inc. and a
purchase of Vitrix, Inc. by Vitrix Incorporated as Vitrix Incorporated is the
controlling company after the merger. The accompanying financial statements of
Vitrix, Inc. include the accounts of Vitrix Incorporated for all periods
presented, and the accounts of Vitrix, Inc. from April 15, 1999, the effective
date of the merger.
On October 7, 1999 The Company changed its name from FBR Capital Corporation to
Vitrix, Inc. Vitrix, Inc. is a Nevada corporation formed on June 6, 1988. Vitrix
Incorporated is an Arizona corporation formed on April 26, 1996.
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.
F-6
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES: (CONTINUED)
--------------------------------------------------------------------------------
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, 2000 a provision for
uncollectible accounts has been established in the amount of $25,000.
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 $44,106 and $28,678, respectively, for the years ended June 30, 2000
and 1999.
The Company is the lessee of computer equipment, with an original cost of
approximately $81,000, under five (5) capital lease agreements expiring through
January 2003. 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.
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.
F-7
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES: (CONTINUED)
--------------------------------------------------------------------------------
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.
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 preferred stock was included in the calculation as of June 30, 1999 due to
its automatic conversion into common stock once the Company had 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, 2000
and 1999, options and warrants to purchase 7,738,202 and 2,278,298 shares of the
Company's common stock were not included in the determination of diluted loss
per share as their effect was anti-dilutive.
F-8
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS
AND USE OF ESTIMATES: (CONTINUED)
--------------------------------------------------------------------------------
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, 2000 property and equipment consists of:
Computers and equipment $ 224,087
Furniture and fixtures 37,381
Leasehold improvements 15,103
---------
276,571
Less: accumulated depreciation (107,792)
---------
$ 168,779
=========
--------------------------------------------------------------------------------
NOTE 3
LONG-TERM DEBT:
--------------------------------------------------------------------------------
At June 30, 2000 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
15% to 24%, payable in monthly installments of principal
and interest, maturing through January 2003 61,034
---------
80,534
Less: current portion (46,303)
---------
Long-term debt $ 34,231
=========
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.
F-9
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 3
LONG-TERM DEBT: (CONTINUED)
--------------------------------------------------------------------------------
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 an 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, 2000, accrued interest on the note was $14,568.
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.
As of June 30, 2000 future minimum lease payments due under the capital lease
agreements, are as follows:
YEAR ENDING
JUNE 30,
--------
2001 $ 36,082
2002 26,069
2003 13,231
--------
Total minimum lease payments 75,382
Less: amount representing interest (14,348)
--------
Present value of net minimum lease payments 61,034
Less: current maturities of capital lease obligations (26,803)
--------
Long-term maturities of capital lease obligations $ 34,231
========
--------------------------------------------------------------------------------
NOTE 4
INCOME TAXES:
--------------------------------------------------------------------------------
As of June 30, 2000 deferred tax assets consist of the following:
Federal loss carryforwards $ 540,000
State loss carryforwards 130,000
---------
670,000
Less: valuation allowances (670,000)
---------
$ --
=========
F-10
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 4
INCOME TAXES: (CONTINUED)
--------------------------------------------------------------------------------
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, 2000
the Company's federal net operating loss carryforwards was approximately
$1,525,000 and begins expiring in 2012 through 2020.
The Company's tax expense (benefit) differed from the statutory rate primarily
due to the $435,000 change in the deferred tax asset valuation allowance from
June 30, 1999.
--------------------------------------------------------------------------------
NOTE 5
COMMITMENTS:
--------------------------------------------------------------------------------
The Company currently leases office space in Tempe, Arizona at two (2) locations
under non-cancelable operating lease agreements which expire through December
2004. For the years ended June 30, 2000 and 1999, expense under the
aforementioned non-cancelable operating lease agreements was approximately
$105,000 and $35,000, respectively.
Future minimum lease payments due under the operating lease agreement is as
follows:
YEAR ENDING
YEAR JUNE 30,
---- --------
2001 $ 225,080
2002 214,822
2003 222,779
2004 230,735
2005 117,072
----------
$1,010,488
==========
--------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY:
--------------------------------------------------------------------------------
SERIES B PREFERRED STOCK:
The Series B Preferred Stock automatically converted into common stock on a
one-for-one basis on October 7, 1999 when the Company amended its Articles of
Incorporation to increase the authorized common stock to 50,000,000 shares.
F-11
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY: (CONTINUED)
--------------------------------------------------------------------------------
STOCK OPTIONS:
On July 13, 1999, the Board of Directors authorized the implementation of the
1999 Equity Compensation Plan. 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 Company plans on increasing the number of reserved shares to
6,000,000, pending shareholder approval. 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.
A summary of the activity of the plan follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
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
Granted 3,183,231 0.58
Exercised (70,000) 0.38
Forfeited (1,183,528) 0.23
---------- ------
Outstanding at June 30, 2000 3,559,708 $ 0.50
========== ======
Additional information about outstanding options to purchase the Company's
common stock as of June 30, 2000 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>
$2.25 - $1.81 23,000 5.44 $ 2.10 15,000 $ 2.25
$1.31 - $ .75 1,140,000 9.65 $ 0.95 -- --
$ .59 - $ .28 1,120,231 9.81 $ 0.40 -- --
$ .22 - $ .11 1,276,477 8.14 $ 0.14 784,712 $ 0.11
</TABLE>
F-12
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY: (CONTINUED)
--------------------------------------------------------------------------------
STOCK OPTIONS (CONTINUED):
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, 2000 and 1999. 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 and loss per share for the years ended June 30, 2000 and
1999 would have been increased to the pro forma amounts presented below:
YEARS ENDED JUNE 30,
---------------------------------
2000 1999
----------- -----------
NET LOSS:
As reported $(1,098,219) $ (269,302)
=========== ===========
Pro forma $(1,103,000) $ (282,157)
=========== ===========
LOSS PER SHARE:
As reported $ (.04) $ (.02)
=========== ===========
Pro forma $ (.04) $ (.02)
=========== ===========
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%), volatility at zero percent (0%),
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, 2000 and 1999
approximated $.03.
NON-EMPLOYEE STOCK OPTIONS AND 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. During the year ended June 30, 2000 264,687 warrants were
exercised, generating proceeds of $5,823. The warrants expire in June 2001.
In connection with its private placements of common stock during the year ended
June 30, 2000 the Company issued 3,666,250 common stock warrants. Each warrant
entitles the holder to purchase one share of common stock at varying exercise
prices depending on the round of funding. The exercise price for the first round
of funding is $.35 per share and are exercisable until October 2002. The
exercise price for the second round of funding is $.28 per share and are
exercisable until February 2003. As of June 30, 2000 none of the warrants have
been exercised.
During the year ended June 30, 2000 the Company granted 150,000 options to an
individual for consulting services. The exercise price of the options is $.45
per share and are exercisable through August 2002. The fair value of the options
granted was estimated at $11,500 at the date of grant using the Black-Scholes
pricing model. As of June 30, 2000 none of the options have been exercised.
F-13
<PAGE>
VITRIX, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
NOTE 6
STOCKHOLDERS' EQUITY: (CONTINUED)
--------------------------------------------------------------------------------
NON-EMPLOYEE STOCK OPTIONS AND WARRANTS: (CONTINUED)
The Company granted 4,138 options during the year ending June 30, 2000 to an
Institution for consulting services in which a member of the Company's Board of
Directors is a Principal. The exercise price of the options is $.29 per share
and are exercisable through November 2002. The fair value of the options granted
was estimated at $500 at the date of grant using the Black-Scholes pricing
model. As of June 30, 2000 none of the options have been exercised.
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NOTE 7
BASIS OF PRESENTATION AND GOING CONCERN:
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Through June 30, 2000, the Company had sustained recurring losses from
operations, and as of August 31, 2000, the Company estimates its' working
capital and funds generated from operations are sufficient to fund the Company's
operations for the next three months. These conditions raise substantial doubt
about the ability of the Company to continue as a going concern. During fiscal
2001, the Company expects to meet its working capital and other cash
requirements with cash derived from operations, short-term receivables, software
license fees, and other financing as required. The Company has on-going
discussions with various financial sources in an effort to raise additional
capital. While the Company believes that it will succeed in attracting
additional capital, there can be no assurance that the Company's efforts will be
successful. The Company's continued existence is dependent upon its ability to
achieve and maintain profitable operations by controlling expenses and obtaining
additional business. Management believes that the creation and marketing of new
products and continued cost control should improve the Company's profitability
in fiscal 2001. However, there can be no assurance that the Company's efforts to
achieve and maintain profitable operations will be successful. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
F-14
