-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B62Z9tyJY+SN0dg/90TkJ4BVZTaMhzK87Fy0OoRZLQ8wXB0111NPMpK55EPPExwf XyNhb7uWm9HtvYjehCDIRQ== 0000950147-99-001033.txt : 19990917 0000950147-99-001033.hdr.sgml : 19990917 ACCESSION NUMBER: 0000950147-99-001033 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990916 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FBR CAPITAL CORP /NV/ CENTRAL INDEX KEY: 0000836937 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 133465289 STATE OF INCORPORATION: NV FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 033-58694 FILM NUMBER: 99712815 BUSINESS ADDRESS: STREET 1: 20 EAST UNIVERSITY STREET 2: SUITE 304 CITY: TEMPE STATE: AZ ZIP: 85281 BUSINESS PHONE: 6029675800 MAIL ADDRESS: STREET 1: 20 EAST UNIVERSITY STREET 2: SUITE 304 CITY: TEMPE STATE: AZ ZIP: 85281 FORMER COMPANY: FORMER CONFORMED NAME: BARRIE RICHARD FRAGRANCES INC DATE OF NAME CHANGE: 19920703 10KSB 1 FORM 10-KSB OF FBR CAPITAL CORPORATION U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended June 30, 1999 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File number 33-58694 FBR CAPITAL CORPORATION (Name of small business issuer in its charter) Nevada 13-3465289 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 20 East University, Suite 304, Tempe, Arizona 85281 --------------------------------------------------- (Address of principal executive offices) (480) 967-5800 --------------------------- (Issuer's telephone number) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.005 par value Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Revenues for most recent fiscal year: $743,954 The aggregate market value of the voting stock (based on the closing price on that date) held by non-affiliates of the Registrant as of September 13, 1999 was approximately $2,700,000. Number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: At September 13, 1999, the issuer had outstanding 13,241,031 shares of Common Stock, par value $.005 per share. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive proxy statement dated September 16, 1999 for the Annual Meeting of Stockholders to be held on October 7, 1999 (Part III - Items 10, 11, 12 and 13). Transitional Small Business Disclosure Format: Yes [ ] No [X] PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL DEVELOPMENT OF BUSINESS FBR Capital Corporation (the "Company" or "FBR") was incorporated as Richard Barrie Fragrances, Inc. in the State of Nevada on June 6, 1988, for the original purpose of developing, manufacturing and marketing fragrances, cosmetics, skin treatment and personal care products sold primarily through department and specialty stores and drugstores. On July 1, 1996, following the Asset Sale (discussed below) and approval of its stockholders, the Company filed a Certificate of Amendment to its Articles of Incorporation to change its name from "Richard Barrie Fragrances, Inc." to "FBR Capital Corporation." As of the date of this report, the Company conducts its operations through its subsidiary, Vitrix Incorporated, an Arizona corporation formed on April 26, 1996 ("Vitrix"). Unless otherwise indicated, references to the Company in this report shall include Vitrix. Effective June 30, 1996, FBR sold substantially all of its properties and rights (the "Asset Sale") to Parlux Fragrances, Inc. During the period from the Asset Sale to April 1999, FBR's operations were limited to the conduct of administrative activities and discussions with third parties regarding possible business combinations. On April 15, 1999, FBR acquired the outstanding capital stock of Vitrix pursuant to the terms of an Exchange Agreement, dated as of such date, by and among FBR, Vitrix and certain of the Vitrix shareholders who agreed to participate in the transaction. Under the terms of the Exchange Agreement, each outstanding share of Vitrix common stock, no par value per share ("Vitrix Common Stock") was converted into a combination of .9225 shares of FBR common stock, $.005 par value per share ("Common Stock") and 1.0736 shares of Series B Convertible Preferred Stock, $.01 par value per share, of FBR ("Preferred Stock"). Each share of Preferred Stock is automatically convertible into one share of Common Stock at such time as FBR has the authorized capital to issue such shares. The aggregate consideration paid in the transaction was 8,592,826 shares of Common Stock and 10,000,000 shares of Preferred Stock (the "Shares"). The Exchange Agreement also provided for the assumption of outstanding options and warrants to purchase an aggregate of 1,086,000 shares of Vitrix Common Stock, which have been converted into options and warrants to purchase an aggregate of 2,167,798 shares of Common Stock. Giving effect to the issuance of the Shares, Vitrix shareholders now own approximately 80% of the outstanding shares of Common Stock (assuming conversion of the Preferred Stock into Common Stock and excluding outstanding options and warrants) and the shareholders of FBR existing prior to the Exchange Agreement now own the remaining 20% of such FBR shares. Although FBR became the parent company of Vitrix following the consummation of the transaction, the acquisition was accounted for as a recapitalization of Vitrix and the purchase of FBR by Vitrix, as Vitrix is the controlling company 2 after the transaction. The accompanying financial statements of FBR include the accounts of Vitrix for all periods presented, and the accounts of FBR from April 15, 1999, the effective date of the acquisition. Vitrix designs, develops, manufactures and markets a complete line of time and labor management products targeting small to mid-sized companies of five (5) to 2,000 employees. Vitrix's products are designed to improve productivity by automating collection of time and attendance data, staff scheduling and management of labor resources. Vitrix markets its products through a nationwide reseller network and directly to end-users. On September 16, 1999, the Company filed a definitive Information Statement for its Annual Meeting of Stockholders to be held on October 7, 1999 (the "Annual Meeting"). Proposals to elect six (6) directors, amend the Company's Articles of Incorporation to increase the number of authorized shares of Common Stock to 50,000,000 and change the Company's name to Vitrix Inc. and adopt the Company's 1999 Equity Compensation Plan will be considered at the Annual Meeting. Upon approval of such proposals, the Company intends to promptly file with the Nevada Secretary of State an amendment to the Company Articles of Incorporation to effectuate the change in the number of authorized shares and Company name. Immediately following such filing, the Preferred Stock will be automatically converted into Common Stock without any further action on the part of the holder of such Preferred Stock. PRODUCTS AND SERVICES The Company designs, develops, manufacturers and markets a line of time and labor management hardware and software products targeting small to mid-sized companies of up to 2,000 employees. The Company's core product, HourTrack 98, was first introduced in November 1998 and is an internally developed, proprietary software application that maintains and automates the process of collecting time sheet information and provides reports to help companies determine how their employees spend their time. HourTrack 98 also automatically accrues vacation, sick and personal time, and effectively replaces the traditional punch clock with a fully automated system designed to provide significant savings to its users. The Company offers three (3) types of business solutions: SOFTWARE-ONLY SOLUTIONS - The Company's software-only solutions are designed for environments in which all company employees have access to a personal computer. Clocking in and out is performed using a Windows 95, 98 or NT computer running HourTrack. The HourTrack software is designed to provide a high value to customers due to its low cost, ease of use and high level of functionality. BADGE READER SOLUTIONS - The Company's badge reader solutions are designed for environments where there are a large number of hourly employees or individuals that do not have access to a personal computer, such as high traffic office area or shop floors. 3 BIOMETRIC SOLUTIONS - The Company's biometric solutions (used in lieu of badges or password systems) are designed to help employers ensure that the person clocking in or out is the actual person being clocked in and out, and thereby eliminate a common problem known as "buddy-punching." The Company believes that employers lose significant money as a result of employees clocking in for each other, thereby impacting earnings. The Company's biometric solutions include three (3) hardware options: fingerprint verification, two-finger geometry and full hand geometry. LABOR MANAGEMENT SOLUTIONS The Company's flagship product, HourTrack 98, is an internally developed, proprietary software application designed to maintain and automate the process of collecting time sheet information and assist management in enhancing employer productivity in the workplace. By replacing the traditional punch clock with a fully automated system, the Company believes this product produces substantial savings employers. HOURTRACK 98 All hardware options available from Vitrix function by communicating with HourTrack 98. This software is responsible for making sense of and reporting data as well as maintaining and enforcing company policies. The primary features of HourTrack 98 include time tracking, benefit tracking, job tracking, human resource functionality, employee scheduling, messaging, reporting and the import/export of data. HourTrack 98 also automatically accrues vacation, sick and personal time. HourTrack 98 is currently available in two editions: HOURTRACK 98 SMALL BUSINESS EDITION (SBE) - This version of HourTrack 98 includes all of the primary features of the software (discussed above) and is designed for a single-administrator-environment in a small business. HOURTRACK 98 PROFESSIONAL EDITION (PRO) - This version of HourTrack 98 contains all of the SBE features plus individualized security, audit trails and rules-based benefit accruals. HourTrack 98 PRO is designed for use in a multiple administrator environment where user-level security and audit trails are important. Both editions of HourTrack (SBE and PRO) are available as stand-alone solutions or bundled in a "kit" format as the QuickSwipe Kit, QuickTouch Kit or TelePunch Kit. QUICKSWIPE KIT The QuickSwipe kit is an all-in-one package that contains the software, badge reader, cables and badge cards necessary to implement a time and attendance system. The Company offers four different badge systems, each of which is available as a QuickSwipe Kit to simplify the implementation of a time and attendance system. 4 QUICKTOUCH KIT The QuickTouch kit is an all-in-one package that contains the software and necessary hardware to implement a biometric time and attendance solution. Three (3) biometric options are available including fingerprint verification and two-finger geometry verification. HANDPUNCH KIT The HandPunch Kit is an all-in-one package that contains the software and necessary hardware to implement a convenient and secure time and attendance solution. This affords the customer a lower cost, high reliability entry to the time and attendance market, particularly where "buddy punching" is an issue. The Company believes that hand punch technology growth over the past 18 months has been significant. TELEPUNCH KIT The Company's first telephony solution, TelePunch, was introduced in May 1999 in response to strong customer feedback requesting a solution for remote management issues. Telepunch is designed to provide a solution for environments where remote employees have the need to clock-in or clock-out at a specific site or for a specific task or job category change during the workday. TelePunch offers a complete hardware/software solution that allows employees to clock in and out via use of a standard telephone or mobile phone. Through the use of an access code and standard telephone keypad, employees are clocked in to a central server location. For security purposes and to deal with "buddy punching," the system also has the capability of recording caller ID information. MARKETING The Company markets and sells its products to small and mid-sized companies in markets in the United States and foreign countries through its nationwide reseller network and directly to end users. End-users include companies in the manufacturing and service industries, and in the public and private sectors. The Company believes that the market for time and labor management products consists of the following three (3) business segments: SMALL BUSINESSES. This segment is comprised of companies with fewer than 20 employees and only a single administrator who performs time sheet edits and prepares employee hours for payroll. MID-SIZED BUSINESSES. This segment is comprised of companies with 20 to 500 employees. These companies normally have two (2) or more administrators who perform time sheet edits and prepare employee hours from a single office. In many cases multiple stations are necessary for clocking in and out, however, all data is administered from a central location. ENTERPRISE BUSINESSES. Enterprise businesses generally have over 500 employees with multiple satellite offices, each of which have one (1) or more administrators. Payrolls are performed at a central or 5 headquarter office. An enterprise customer is analogous to a collection of Mid-Sized Businesses requiring a central location to collect and store data. The Company is currently developing an enterprise-class software solution designed to meet the time and attendance needs of enterprise businesses. The Company believes that this product will be available for release in the fourth quarter of the calendar year, although no assurance can be given that the Company will be able to meet this schedule. The Company believes there are over 2.4 million businesses that fall into the small to mid-sized businesses market segment. According to industry statistics, approximately 80% of the businesses that fall into these two market segments could benefit from the automation of the collection of time and attendance. At an average solution cost of approximately $1,200, the small to mid-sized market represents approximately $2.3 billion in potential sales. SALES The Company offers its products through a nationwide reseller network and directly to end users via the Internet at the Vitrix Online Store or by contacting a Vitrix sales representative. The Company provides support in the form of training and provision of internally generated marketing materials. The Company's sales strategy is to continually evaluate revenue opportunities via all channels of distribution to further develop and expand its direct/indirect product sales marketing program. In the future, the Company expects to maintain a marketing strategy of utilizing a combination of reseller and direct product sales as part of its long-term strategy. The Company believes that growth in its reseller network will exceed 250 by the last half of fiscal year 2000. The Company also intends to expand sales via maximizing the opportunities through the web and the Vitrix On Line Store for direct ordering of products, although no assurance can be given that any such efforts will come to fruition or otherwise be successful. DIRECT SALES. Vitrix sales representatives generally provide presales technical and pricing information to potential customers. In addition, from time to time sales representatives present Vitrix solutions at a customer's facility. Marketing materials, sample CDs and technical documents are normally provided by the Company's inside sales staff to customers who desire to research the best solutions. Vitrix Online Store. The Vitrix Online Store, which commenced operation on the Internet in August 1998, provides customers with an easy and complete option to purchase products online. By visiting the Company's web site, http://store.vitrix.com, any Vitrix product can be purchased directly online from anywhere in the world, 24 hours a day, 7 days a week. The Online Store enables the Company to meet the needs of existing customers looking for accessories, and international customers who, due to time zone differences, are unable to speak directly with a Company sales representative. Vitrix recently introduced the Vitrix Affiliate Program, whereby any entity who features the Company's banner and links business to the Online Store can receive compensation in the form of a referral fee. 6 RESELLER NETWORK Since the automation of time and labor management can be a big step for certain businesses, a local reseller's role can be vital. It often requires a great deal of planning and a strategy for deployment that might include employee training and the coordination of a company's Human Resources and Management Information System departments. Because of this potential complexity, customers may prefer a face-to-face meeting or a visit to their facilities. The Company looks to the reseller to provide this pre- and post-sales support. Currently, it is not feasible for the Company to support installation with every customer directly. Accordingly, having a strong reseller network is critical to the Company's long-term business and growth strategy. Time and Attendance vendors often service their own geographical region by visiting customer sites and recommending a solution that best fits a customer's needs. The Company focuses its efforts on attracting qualified resellers and providing them with the appropriate knowledge and tools necessary to effectively sell Vitrix's products. During the next 12 months, as the Company's reseller network grows, the Company intends to increase the commission structure for productive resellers, as well as actively recruit an additional 100-150 resellers globally. The Company's strategy with respect to resellers is to continually evaluate the productivity and effectiveness of its resellers, with the goal of achieving a small number of highly productive revenue producers. Toward that end, the Company has developed ads that target resellers, which are currently running in various reseller trade magazines. The Company also has planned to hold educational training classes around the country that will be freely available to educate resellers with respect to Vitrix solutions. The Company intends to aggressively recruit resellers, value added resellers ("VARs"), and select distributors to sell and support its products. To that end, the Company intends to implement several programs to introduce to the reseller channel over the next several months. SERVICES AND SUPPORT The Company maintains a professional service and technical support organization which provides a suite of maintenance and professional services. These services are designed to support the Company's customers throughout the product life cycle. The professional services include implementation support, technical and business technical consulting, as well as integration and optimization. Maintenance service options are delivered through Vitrix's centralized support operation or through local service personnel. The Company's educational services offer a full range of curriculums which are delivered through local training at the Company's Tempe, Arizona headquarters or via computer based training courses. When necessary, the Company also may provide software customization services to meet any unique customer requirements. 7 MANUFACTURING AND SOURCES OF SUPPLY The duplication of the Company's software and the printing of documentation are outsourced to suppliers. The Company currently has four suppliers who have been certified to the Company's manufacturing specifications to perform the software duplication process. Although most of the parts and components included within the Company's products are available from multiple suppliers, certain parts and components are purchased from single suppliers. The Company has chosen to source these items from single suppliers because it believes that the supplier chosen is able to consistently provide the Company with the highest quality product at a competitive price on a timely basis. While the Company has to date been able to obtain adequate supplies of these parts and components, the Company's inability to transition to alternate sources on a timely basis if and as required in the future could result in delays or reductions in product shipments which could have a material adverse effect on the Company's operating results PRODUCT DEVELOPMENT The Company's product development efforts are focused on enhancing and increasing the performance of its existing products and developing new products and interfaces to third party products on a timely basis for the increasingly sophisticated needs of its customers. During fiscal 1999, and 1998, research and development expenses were $232,250 and $117,515, respectively. The Company intends to continue to commit resources to enhance and extend its product lines and develop interfaces to third party products. Although the Company is continually seeking to further enhance its product offerings and to develop new products and interfaces, there can be no assurance that these efforts will succeed, or that, if successful, such product enhancements or new products will achieve widespread market acceptance, or that the Company's competitors will not develop and market products which are superior to the Company's products or achieve greater market acceptance. The Company also depends upon the reliability and viability of a variety of software development tools owned by third parties to develop its products. If these tools are inadequate or not properly supported, the Company's ability to release competitive products in a timely manner could be adversely impacted. The Company is currently developing an enterprise-class software solution designed to meet the time and attendance needs of enterprise businesses. The Company believes that this product will be available for release in the fourth quarter of the calendar year, although no assurance can be given that the Company will be able to meet this schedule. PROPRIETARY RIGHTS The Company relies on a combination of trademarks, trade secret law and contracts to protect its proprietary technology. The Company generally provides software products to end-users under non-exclusive shrink-wrap licenses or under signed licenses, both of which may be terminated by Vitrix if the end-user breaches the terms of the license. These licenses generally require that the software be used only internally subject to certain limitations, such as the number of employees, simultaneous users, computer model and serial number, features and/or terminals for which the end-user has paid the required license fee. The Company authorizes its resellers to sublicense software products to 8 end-users under similar terms. In certain circumstances, the Company also makes master software licenses available to end-users which permit either a specified limited number of copies or an unlimited number of copies of the software to be made for internal use. Some customers license software products under individually negotiated terms. Despite these precautions, it may be possible to copy or otherwise obtain and use the Company's products or technology without authorization. In addition, effective copyright and trade secret protection may be unavailable or limited in certain foreign countries. COMPETITION The Company provides time and attendance, data collection and labor management solutions that enables businesses to optimize their labor resources. The labor management industry is highly competitive. Competition is increasing as competitors in related industries, such as human resources management, payroll processing and employee resource planning ("ERP") enter the time and attendance market. Advances in software development tools have accelerated the software development process and, therefore, can allow competitors to penetrate certain of the Company's markets. Although the Company believes it has certain technological and other advantages over its current competitors, maintaining those advantages will require continued investment by the Company in research and development and marketing and sales programs. There can be no assurance that the Company will have sufficient resources to make such investments or to achieve the technological advances necessary to maintain its competitive advantages. Increased competition could adversely affect the Company's operating results through price reductions and/or loss of market share. The Company competes primarily on the basis of price/performance, quality, reliability and customer service. In the time and attendance market, the Company competes against firms that sell automated time and attendance products to many industries, against firms that focus on specific industries, and against firms selling related products, such as payroll processing, human resources management, or ERP systems. Many of the Company's competitors, such as Kronos Corporation, Stromberg (formerly known as Jason Data Systems) and Time America, are substantially larger and have access to significantly greater financial resources than the Company. Competitive market conditions could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of June 30, 1999, the Company had sixteen employees. None of the Company's employees is represented by a union or other collective bargaining agreement, and the Company considers its relations with its employees to be good. The Company has encountered intense competition for experienced technical personnel for product development, technical support and sales and expects such competition to continue in the future. Any inability to attract and retain a sufficient number of qualified technical personnel could adversely affect the Company's ability to produce, support and sell products in a timely manner. 9 ITEM 2. PROPERTIES. The Company leases approximately 2,000 square feet in Tempe, Arizona. The Company's rental expense for this facility in fiscal 1999 was approximately $35,000. In September 1999 the Company entered into a lease agreement for approximately 5,000 square feet in Tempe, Arizona estimated to commence in November 1999. The Company considers its facilities, including the new lease, to be adequate for its current requirements and that additional space will be available as needed in the future. ITEM 3. LEGAL PROCEEDINGS. The Company is from time to time involved in legal proceedings arising from the normal course of business. As of the date of this report, the Company is not currently involved in any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the NASD's over-the-counter market on the electronic bulletin board (the "OTC Bulletin Board") under the symbol "FBRR." The quoted prices reflect inter-dealer prices without retail mark-up, mark-down, or commissions and may not represent actual transactions. Set forth below are the high and low sales prices of the Common Stock for the periods indicated as reported by the OTC Bulletin Board: FISCAL 1999 Period High Low ------ ---- --- First quarter $0.44 $0.19 Second quarter 0.38 0.13 Third quarter 0.69 0.38 Fourth quarter 0.58 0.39 FISCAL 1998 Period High Low ------ ---- --- First quarter $0.56 $0.25 Second quarter 0.88 0.25 Third quarter 0.56 0.25 Fourth quarter 0.56 0.25 As of September 13, 1999 there were 174 holders of the Company's Common Stock. The Company has never paid any cash dividends, and the present policy of the Company is to retain earnings for use in its business. 10 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS The following selected financial information is derived from the Company's historical financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein and the "Forward-Looking Statements" explanation included herein. The accompanying financial statements of FBR include the accounts of Vitrix for all periods presented, and the accounts of FBR from April 15, 1999, the effective date of the merger. SELECTED FINANCIAL INFORMATION Years Ended June 30, -------------------------- 1999 1998 ---- ---- Total Revenues $743,954 $269,677 Costs of Revenues 249,309 95,884 Gross Profit 494,645 173,793 Sales and Marketing Expense 288,559 206,214 Research and Development Expense 232,250 117,515 General and Administrative Expense 226,749 105,073 Net Loss 269,302 284,259 Basic Loss per Share 0.02 0.03 COMPARISON OF THE FISCAL YEARS ENDED JUNE 30, 1999 AND JUNE 30, 1998 REVENUES. Revenue for fiscal year ended June 30, 1999, rose 176% to $743,954, compared to revenue of $269,677 for the fiscal year ended June 30, 1998. This growth was principally the result of an increase in the number of resellers and an increase in sales activity of the Company's key resellers. The Company was also able to complete several larger dollar value sales during the fiscal year. The Company experienced an increased customer demand for its software-only and badge reader solutions, which resulted in an increase in sales volume. The Company also added additional inside salespersons and increased its advertising and promotional expenditures by 73% over the previous year. GROSS PROFIT. Gross profit as a percentage of revenues was 67% in fiscal 1999 and 64% in fiscal 1998. The improvement in gross profit as a percentage of 11 revenues in fiscal 1999 was primarily attributable to an increase in the average price of the products sold. The average price per unit sold was increased due to several larger dollar value sales occurring during the year. EXPENSES. Sales and marketing expenses were $288,559, or 39% of revenues, in fiscal 1999 and $206,214, or 76% of revenues, in fiscal 1998. The decrease in sales and marketing expense as a percentage of revenues in fiscal 1999 is attributable to greater sales volume. The increase in sales and marketing expense in fiscal 1999 is primarily due to increased labor costs resulting from the hiring of additional salespeople and increased advertising and promotional expense. Research and development expenses were $232,250, or 31% of revenues, in fiscal 1999 and $117,515, or 44% of revenues, in fiscal 1998. The decrease in research and development expense as a percentage of revenues in fiscal 1999 is attributable to greater sales volume. The increase in research and development expenses in fiscal 1999 is attributable to increased labor costs as a result of the Company's commitment to enhance existing products and develop new products. General and administrative expenses were $226,749, or 30% of revenues, in fiscal 1999 and $105,073, or 39% of revenues, in fiscal 1998. The decrease in general and administrative expense as a percentage of revenues in fiscal 1999 is attributable to greater sales volume. The increase in general and administrative expenses in fiscal 1999 is primarily attributable to the hiring of additional management personnel and an increase in accounting fees in relation to converting the accounting records of Vitrix to a June fiscal year end. Other expense was $16,389 in fiscal 1999 and $29,250 in fiscal 1998. The decrease is a due to a reduction in interest expense as result of conversion on debt to equity during fiscal 1999 and 1998. (See "Item 12 Certain Relationships and Related Transactions.") LIQUIDITY AND CAPITAL RESOURCES Working capital as of June 30, 1999 was $205,657, as compared to $59,959 at June 30, 1998. Cash and cash equivalents at those dates amounted to $376,365 and $96,775, respectively. OPERATIONS. Net cash used by operations decreased to $87,624 in fiscal 1999, compared to net cash used by operations of $216,436 in fiscal 1998. The improvement was attributable to an increase in accounts payable and accrued liabilities and the conversion of accrued interest on notes to equity. INVESTMENT ACTIVITIES. For the fiscal year ended June 30, 1999, the Company generated cash of approximately $207,000 from the merger with Vitrix. The Company used $26,472 and $10,607, to purchase property and equipment in fiscal 1999 and 1998, respectively. FINANCING ACTIVITIES. The Company was able to raise approximately $191,000 and $103,000 through the issuance of Common Stock in fiscal 1999 and 1998, respectively. 12 The Company believes that, with its current working capital and funds generated through operations, it will have sufficient working capital to address the anticipated growth of demand and market for its products for the next 12 months. The Company may, however, seek to obtain additional capital through a line of credit at a financial institution or through additional debt or equity offerings during this time period. The raising of additional capital in public markets will primarily be dependent upon prevailing market conditions and the demand for the Company's products and services. No assurance can be given that the Company will be able to raise additional capital, or that such capital, if available, will be on acceptable terms. INFLATION AND SEASONALITY The Company does not believe that its operations are significantly impacted by inflation. The Company's business is not seasonal in nature. YEAR 2000 COMPLIANCE The Company has reviewed its computer systems to identify those areas that could be adversely affected by the Year 2000 ("Y2K") issue. The Y2K issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company has determined that all of its information systems are Y2K compliant. The compliance effort to date has resulted in immaterial cost to the Company. Although the Company expects that any future expenditures made in connection with Y2K conversions will not be material, the Company may experience material unanticipated problems and costs caused by undetected errors or defects in its systems. As a result of this uncertainty, we are formulating a contingency plan to address the possible effects of problems encountered as a result of Y2K issues. The Company believes that some of its customers may be impacted by the Y2K problem, which could in turn impact the Company sales efforts with respect to such customers and the Company's results of operations. The Company has completed an inquiry of key vendors to assess their Y2K readiness. Based on this inquiry, the Company is not aware of any problems that would materially affect its business, results of operations or financial condition. However, the inability of such vendors to meet Y2K requirements could materially impact the Company's ability to procure materials from these vendors and to meet its obligations to supply products to its customers. The Company is currently formulating a contingency plan to address the possible effects of problems encountered as a result of Y2K issues, and expect that this plan will be complete by October 1999. The Company expects the cost of this plan to be immaterial. The Company's products it offers for sale are all Year 2000 compliant. 13 FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains certain forward-looking statements and information which we believe are within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward looking statements contained herein can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates," or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The Company wishes to caution the reader that these forward-looking statements that are not historical facts, are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by the Company, may not be realized. Because of the number and range of assumptions underlying the Company's projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. ITEM 7. FINANCIAL STATEMENTS. The financial statements and schedules are included herewith commencing on page F-1. 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors FBR Capital Corporation Tempe, Arizona We have audited the accompanying balance sheet of FBR Capital Corporation as of June 30, 1999, and the related statements of operations, stockholders' equity and cash flows for the years ended June 30, 1998 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FBR Capital Corporation as of June 30, 1999, and the results of its operations and its cash flows for the years ended June 30, 1998 and 1999, in conformity with generally accepted accounting principles. BDO SEIDMAN, LLP Los Angeles, California July 28, 1999 F-1 FBR CAPITAL CORPORATION BALANCE SHEET JUNE 30, 1999 ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 1) $ 376,365 Accounts receivable - trade, net (Note 1) 42,596 Inventory (Note 1) 28,397 Prepaid expenses and other current assets 10,591 --------- TOTAL CURRENT ASSETS 457,949 PROPERTY AND EQUIPMENT, NET (NOTES 1 AND 2) 60,865 --------- TOTAL ASSETS $ 518,814 ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 3) $ 28,848 Accounts payable 146,084 Accrued liabilities 64,125 Deferred revenue (Note 1) 13,235 --------- TOTAL CURRENT LIABILITIES 252,292 LONG-TERM DEBT, LESS CURRENT PORTION (NOTE 3) 14,466 --------- TOTAL LIABILITIES 266,758 --------- COMMITMENTS: (NOTE 5) -- STOCKHOLDERS' EQUITY: (NOTE 6) Preferred Stock, $.01 par value, 10,000,000 shares authorized, issued and outstanding 100,000 Common stock, $.005 par value, 16,666,667 shares authorized, 13,241,031 shares issued and outstanding 66,205 Contributed capital 956,468 Accumulated deficit (870,617) --------- TOTAL STOCKHOLDERS' EQUITY 252,056 --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 518,814 ========= The Accompanying Notes are an Integral Part of the Financial Statements F-2 FBR CAPITAL CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, ---------------------------- 1999 1998 ------------ ----------- Revenues: Product sales $ 730,641 $ 267,697 Services revenue 13,313 1,980 ------------ ----------- TOTAL REVENUES 743,954 269,677 COST OF REVENUES 249,309 95,884 ------------ ----------- GROSS PROFIT 494,645 173,793 ------------ ----------- COSTS AND EXPENSES: Sales and marketing 288,559 206,214 Research and development 232,250 117,515 General and administrative 226,749 105,073 ------------ ----------- TOTAL COSTS AND EXPENSES 747,558 428,802 ------------ ----------- NET LOSS FROM OPERATIONS (252,913) (255,009) ------------ ----------- OTHER INCOME (EXPENSE): Interest expense (24,112) (35,543) Interest income 7,723 6,293 ------------ ----------- (16,389) (29,250) ------------ ----------- NET LOSS $ (269,302) $ (284,259) ============ =========== BASIC LOSS PER SHARE (NOTE 1) $ (0.02) $ (0.03) ============ =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 16,473,873 9,123,236 ============ =========== The Accompanying Notes are an Integral Part of the Financial Statements F-3 FBR CAPITAL CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
PREFERRED STOCK COMMON STOCK CONTRIBUTED ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------ ------- ------- ----- Balance at July 1, 1997 4,809,734 $ 48,097 4,132,921 $ 20,665 $ 186,558 $(317,056) $ (61,736) Issuance of stock to employees and directors 257,664 2,577 221,406 1,107 (1,459) -- 2,225 Sale of stock 2,469,283 24,693 2,121,812 10,609 65,898 -- 101,200 Forgiveness of related party debt and interest -- -- 136,876 -- 136,876 Net loss -- -- -- (284,259) (284,259) ---------- -------- ---------- --------- --------- --------- --------- Balance at June 30, 1998 7,536,681 75,367 6,476,139 32,381 387,873 (601,315) (105,694) Conversion of related party debt and interest 1,463,319 14,633 1,257,404 6,287 243,650 -- 264,570 Sale of stock, net of costs of $9,063 1,000,000 10,000 859,283 4,296 176,622 -- 190,918 Merger with Vitrix Incorporated 4,648,205 23,241 148,323 171,564 Net loss -- -- -- (269,302) (269,302) ---------- -------- ---------- --------- --------- --------- --------- Balance at June 30, 1999 10,000,000 $100,000 13,241,031 $ 66,205 $ 956,468 $(870,617) $ 252,056 ========== ======== ========== ========= ========= ========= =========
The Accompanying Notes are an Integral Part of the Financial Statements F-4 FBR CAPITAL CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, ----------------------- 1999 1998 --------- --------- Increase (Decrease) in Cash and Cash Equivalents: Cash flows from operating activities: Net Loss $(269,302) $(284,259) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 28,678 20,367 Non-cash interest expense 64,570 26,876 Accrued interest assumed in merger (11,645) Changes in Assets and Liabilities: Accounts receivable-trade (7,429) (5,213) Inventory (11,352) 7,426 Prepaid expenses and other current assets (7,477) (3,114) Accounts payable 100,015 13,854 Accrued liabilities 13,083 7,627 Deferred revenue 13,235 -- --------- --------- NET CASH USED BY OPERATING ACTIVITIES (87,624) (216,436) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (26,472) (10,607) Cash acquired in merger 207,678 -- --------- --------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 181,206 (10,607) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of capital leases (4,910) -- Proceeds from issuance of stock 190,918 103,425 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 186,008 103,425 --------- --------- Net change in cash and cash equivalents 279,590 (123,618) Cash and cash equivalents at beginning of period 96,775 220,393 --------- --------- Cash and cash equivalents at end of period $ 376,365 $ 96,775 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 3,142 $ 2,710 ========= ========= Income taxes paid $ -- $ -- ========= ========= NONCASH INVESTING AND FINANCING ACTIVITIES: Assets acquired by entering into capital leases $ 28,724 $ -- ========= ========= Conversion of related party notes and accrued interest to equity $ 264,570 $ 136,876 ========= ========= The Accompanying Notes are an Integral Part of the Financial Statements F-5 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: - -------------------------------------------------------------------------------- NATURE OF BUSINESS AND MERGER: FBR Capital Corporation (the Company or FBR) was incorporated as Richard Barrie Fragrances, Inc. in the State of Nevada on June 6, 1988, for the original purpose of developing, manufacturing and marketing fragrances, cosmetics, skin treatment and personal care products sold primarily through department and specialty stores and drugstores. On July 1, 1996, following the transaction described below, the Company filed a Certificate of Amendment to its Articles of Incorporation to change its name from "Richard Barrie Fragrances, Inc." to "FBR Capital Corporation", as authorized by the stockholders of the Company. For purposes of these Notes to Financial Statements, the Company shall also include Vitrix (defined below). Effective June 30, 1996, the Company sold substantially all of the assets (the Asset Sale), properties and rights owned by the Company in connection with its fragrance business to Parlux Fragrances, Inc. Since the Asset Sale in June 1996, the Company's operations have been limited to the conduct of administrative activities and conducting discussions with respect to possible business combinations. On April 15, 1999 FBR acquired the outstanding capital stock of Vitrix Incorporated (Vitrix). The merger was consummated in accordance with the terms of an Exchange Agreement dated April 15, 1999, by and among FBR, Vitrix and certain of the Vitrix shareholders who agreed to participate in the merger. Under the terms of the Exchange Agreement, each outstanding share of Vitrix common stock was converted into a combination of .9225 shares of FBR common stock and 1.0736 shares of Series B Convertible Preferred Stock of FBR. Each share of FBR Preferred Stock is automatically convertible into one share of FBR Common Stock at such time as FBR has the authorized capital to issue such shares. The aggregate consideration paid in the merger was 8,592,826 shares of FBR common stock and 10,000,000 shares of Preferred Stock (the "Shares"). The Exchange Agreement also provided for the assumption of outstanding options and warrants to purchase an aggregate of 1,086,000 shares of Vitrix common stock, which have been converted into options and warrants to purchase FBR Common Stock, subject to adjustment for the appropriate exchange ratio. Giving effect to the issuance of the Shares, the Vitrix shareholders own approximately 80% of the outstanding shares of FBR Common Stock (assuming conversion of the Preferred Stock into FBR Common Stock) and the prior FBR shareholders own the remaining 20% of the outstanding FBR shares. Although FBR is the parent company of Vitrix following the transaction, the transaction was accounted for as a recapitalization of Vitrix and a purchase of FBR by Vitrix as Vitrix is the controlling company after the merger. The accompanying financial statements of FBR include the accounts of Vitrix for all periods presented, and the accounts of FBR from April 15, 1999, the effective date of the merger. The Company intends to change its name from FBR Capital Corporation to Vitrix, Inc., pending shareholder approval. Vitrix Incorporated, an Arizona corporation formed on April 26, 1996, develops time and labor management solutions that help its customers improve productivity by automating data collection, staff scheduling and management of labor resources. Its proprietary software applications are targeted to small to mid-size companies and are sold via the Internet from the Vitrix Online Store, resellers and directly through Vitrix's sales representatives. F-6 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: (CONTINUED) - -------------------------------------------------------------------------------- PERVASIVENESS OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less. ACCOUNTS RECEIVABLE - TRADE: The Company provides for potentially uncollectible accounts receivable by use of the allowance method. The allowance is provided based upon a review of the individual accounts outstanding, and the Company's prior history of uncollectible accounts receivable. As of June 30, 1999 a provision for uncollectible accounts has been established in the amount of $2,427. INVENTORY: Inventory is stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT: Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets. The average lives range from three to five years. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Property and equipment are reviewed each year to determine whether any events or circumstances indicate that the carrying amount of the assets may not be recoverable. Such review includes estimating future cash flows. Property and equipment costs are expensed when determined not realizable. Depreciation expense was $28,678 and $20,367, respectively, for the years ended June 30, 1999 and 1998. The Company is the lessee of computer equipment, with an original cost of approximately $29,000, under three (3) capital lease agreements expiring through November 2001. The assets and liabilities under the capital lease agreements are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are being depreciated over their estimated productive lives. Depreciation of the assets under the capital lease agreements is included in depreciation expense as noted above. F-7 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: (CONTINUED) - -------------------------------------------------------------------------------- SOFTWARE DEVELOPMENT COSTS: The Company capitalizes software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Capitalization of software development costs begins upon the establishment of technological feasibility of the product. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgement by management with respect to certain external factors including, but not limited to, anticipated future gross product revenue, estimated economic life, and changes in software and hardware technology. Amortization of capitalized software development costs begins when the products are available for general release to customers and is computed on a product-by-product basis using straight-line amortization with useful lives of five years or, if less, the remaining estimated economic life of the product. Amounts related to internal software development that could be capitalized under this statement were immaterial. REVENUE RECOGNITION AND DEFERRED REVENUE: The Company derives its revenues from the sale of frontline labor management systems as well as sales of application software, parts and components. The Company's systems consist of fully integrated software and intelligent data collection terminals. The Company also derives revenues by providing maintenance, professional and educational services to its direct customers. The Company recognizes revenues from sales of its systems, application software, parts and components at the time of shipment, unless the Company has significant obligations remaining. When significant obligations remain, revenue is not recognized until such obligations have been completed or are no longer significant. The Company recognizes revenues from its sales-type leases of systems at time of shipment. Service revenues are recognized ratably over the contractual period or as the services are performed. The Company provides installation services and certain warranties to its customers. It also provides, without additional charge, certain software product enhancements for customers covered under software maintenance contracts. The provision for these expenses are made at the time revenues are recognized. DEFERRED INCOME TAXES: Deferred income taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, there is uncertainty of the utilization of the operating losses in future periods. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash, cash equivalents, accounts receivable, accounts payable and current notes payable approximate their fair values because of the short maturity of these instruments. With respect to long-term debt, based on the borrowing rates currently available to the Company for similar bank and equipment loans and capitalized leases, the amounts reported approximate the fair value of the respective financial instruments. F-8 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, NATURE OF OPERATIONS AND USE OF ESTIMATES: (CONTINUED) - -------------------------------------------------------------------------------- LOSS PER SHARE: Basic loss per share of common stock was computed by dividing the net loss by the weighted average number of shares outstanding of common and preferred stock. The common and preferred stock amounts in the accompanying financial statements have been restated to give effect to the exchange ratio established in the Exchange Agreement between FBR and Vitrix. The preferred stock was included in the calculation due to its automatic conversion into common stock once the Company has sufficient authorized common stock to issue the shares. (See Note 6) Diluted earnings per share are computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are options and warrants that are freely exercisable into common stock at less than the prevailing market price. Dilutive securities are not included in the weighted average number of shares when inclusion would increase the earnings per share or decrease the loss per share. At June 30, 1999 and 1998, options and warrants to purchase 2,278,298 and 1,102,577 shares of the Company's common stock were not included in the determination of diluted loss per share as their effect was anti-dilutive. STOCK-BASED COMPENSATION: The Company has elected to follow Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees" (APB 25) and the related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." - -------------------------------------------------------------------------------- NOTE 2 PROPERTY AND EQUIPMENT: - -------------------------------------------------------------------------------- At June 30, 1999 property and equipment consists of: Computers and equipment $ 118,407 Furniture and fixtures 6,144 --------- 124,551 Less: accumulated depreciation (63,686) --------- $ 60,865 ========= F-9 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 3 LONG-TERM DEBT - -------------------------------------------------------------------------------- At June 30, 1999 long-term debt consists of the following: 10% convertible subordinated promissory note to an individual, currently in default, see description below. $ 19,500 Capital leases payable, interest at rates ranging from 20% to 24%, payable in monthly installments of principal and interest, maturing through November 2001 23,814 -------- 43,314 Less: current portion (28,848) -------- Long-term debt $ 14,466 ======== During 1996, Vitrix entered into a debt financing agreement for $310,000 with T.P.B. Investment Limited Partnership (TPB), which is owned by a member of the Company's Board of Directors. On June 20, 1998, TPB converted debt of $110,000, together with accrued interest thereon of approximately $27,000, to contributed capital. On March 3, 1999, TPB agreed to convert the remaining principal and accrued interest outstanding on its notes. The agreement calls for the conversion of the remaining $200,000 principal and accrued interest of $64,570 in exchange for 2,720,723 shares of the Company's common and preferred stock. On January 13, 1994, FBR entered into a series of 10% convertible subordinated promissory notes due January 15, 1996 totaling $5,157,750. On June 30, 1996 simultaneous with the closing of the Asset Sale, FBR completed an exchange offer in the aggregate principal amount of $5,040,750 with certain holders of the notes. On October 21, 1996, FBR completed the extinguishments of $97,500 of the notes in exchange for cash and, common stock warrants (Note 6). The Company believes the remaining note holder will also accept a settlement of the obligation on terms not requiring the full cash payment of the amount due. As of June 30, 1999, accrued interest on the note was $12,374. On April 14, 1999 the Company entered into an agreement with an institution in which the Company has the right to demand the institution to purchase 100,000 shares of the Company's common stock at $.35 per share in order to satisfy the convertible note's outstanding principal and interest due. This agreement expires on January 31, 2001 or the date the note is satisfied in full. F-10 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 3 LONG-TERM DEBT (CONTINUED) - -------------------------------------------------------------------------------- As of June 30, 1999 future minimum lease payments due under the capital lease agreements, are as follows: YEAR ENDING JUNE 30 ----------- 2000 $ 13,827 2001 13,333 2002 3,388 -------- Total minimum lease payments 30,548 Less: amount representing interest (6,734) -------- Present value of net minimum lease payments 23,814 Less: current maturities of capital lease obligations (9,348) -------- Long-term maturities of capital lease obligations $ 14,466 ======== - -------------------------------------------------------------------------------- NOTE 4 INCOME TAXES: - -------------------------------------------------------------------------------- As of June 30, 1999 deferred tax assets consist of the following: Federal loss carryforwards $ 190,000 State loss carryforwards 45,000 --------- 235,000 Less: valuation allowances (235,000) --------- $ -- ========= The Company has established a valuation allowance equal to the full amount of the deferred tax assets primarily because of uncertainty in the utilization of net operating loss carryforwards. As a result of stock ownership changes during 1997 and 1998, the Company's ability to utilize net operating losses in the future could be limited, in whole or part, under Internal Revenue Code Section 382. The Company was treated as an S-Corporation for income tax purposes through May 13, 1997. As of June 30, 1999 the Company's federal net operating loss carryforwards was approximately $600,000, and begins expiring in 2012. The Company's tax expense (benefit) differed from the statutory rate primarily due to the $100,000 change in the deferred tax asset valuation allowance from June 30, 1998. F-11 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 5 COMMITMENTS: - -------------------------------------------------------------------------------- The Company currently leases office space in Tempe, Arizona under a non-cancelable operating lease agreement which expires in May 2001. For the years ended June 30, 1999 and 1998, expense under the aforementioned non-cancelable operating lease agreements was approximately $35,000 and $20,000, respectively. Future minimum lease payments due under the operating lease agreement is as follows: YEAR ENDING JUNE 30 ----------- YEAR ---- 2000 $ 36,484 2001 34,249 -------- $ 70,733 ======== - -------------------------------------------------------------------------------- NOTE 6 STOCKHOLDERS' EQUITY: - -------------------------------------------------------------------------------- SERIES B PREFERRED STOCK: The Series B Preferred Stock automatically converts into common stock on a one-for-one basis when the Company has the available authorized common stock to complete the conversion for all 10,000,000 shares outstanding as of June 30, 1999. STOCK OPTIONS: On July 13, 1999, the Board of Directors authorized the implementation of the 1999 Equity Compensation Plan, subject to shareholder approval. The plan allows for the award of incentive stock options, non-statutory stock options or restricted stock awards to certain employees, directors, consultants and independent contractors. The Company has reserved an aggregate of 3,000,000 shares of common stock for distribution under the plan. The exercise price will be determined by the Board of Directors. Incentive stock options granted under the plan may be granted to employees only, and may not have an exercise price less than the fair market value the common stock on the date of grant. Options may be exercised on a one-for-one basis, with a maximum term of ten (10) years from the date of grant. Pursuant to the Exchange Agreement, the outstanding options of Vitrix prior to the merger were converted into options to purchase common stock of the Company at the exchange ratio (1.9961 to 1) established in the Exchange Agreement. The table below combines the option activity of FBR and Vitrix based on post-merger number of options. F-12 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 6 STOCKHOLDERS' EQUITY (CONTINUED): - -------------------------------------------------------------------------------- STOCK OPTIONS (CONTINUED): A summary of the activity of the plan follows: NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ------- -------------- Outstanding at June 30, 1997 414,361 $ 0.23 Granted 39,923 0.11 --------- ------ Outstanding at June 30, 1998 454,284 0.22 Granted 1,295,489 0.11 Forfeited (119,768) 0.11 --------- ------ Outstanding at June 30, 1999 1,630,005 $ 0.14 ========= ====== Additional information about outstanding options to purchase the Company's common stock as of June 30, 1999 is as follows:
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 -------------- --------- --------------- -------------- ------ -------------- $2.25 15,000 4.25 $ 2.25 15,000 $ 2.25 $.11 - $.4375 1,615,005 9.40 $ 0.12 664,846 $ 0.14
Approximately 250,000 options granted prior to June 30, 1998 were originally issued with an exercise price of $.31 per share. In March 1999, the options were repriced at $.11 per share pursuant to a resolution of the Board of Directors. The stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant. In accordance with accounting for such options utilizing the intrinsic value method, there is no related compensation expense recorded in the Company's financial statements for the years ended June 30, 1999 and 1998. Had compensation cost for stock-based compensation been determined based on the fair value of the options at the grant dates consistent with the method of SFAS 123, the Company's net loss for the years ended June 30, 1999 and 1998 would have been reduced to the pro forma amounts presented below: F-13 FBR CAPITAL CORPORATION NOTES TO FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- NOTE 6 STOCKHOLDERS' EQUITY (CONTINUED): - -------------------------------------------------------------------------------- STOCK OPTIONS (CONTINUED): Years Ended June 30, -------------------------- 1999 1998 ---------- ---------- NET LOSS: As reported $ (269,302) $ (284,259) ========== ========== Pro forma $ (282,157) $ (289,809) ========== ========== The fair value of option grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for all grants, expected life of options of three (3) years, risk-free interest rates of eight percent (8%), and a zero percent (0%) dividend yield. The weighted average fair value at date of grant for options granted during the years ended June 30, 1999 and 1998 approximated $.03. WARRANTS: During the year ended June 30, 1998, the Company granted warrants to purchase 622,793 (post-merger figures) shares of the Company's common stock. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $.022 per share. The warrants expire in June 2001. In addition, the Company has outstanding warrants to purchase 12,500 shares of the Company's common stock at $2 per share. The warrants expire October 25, 1999. F-14 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. On May 13, 1999, the Company, with the approval of its board of directors, dismissed Arthur Andersen LLP ("Arthur Andersen") and engaged BDO Seidman, LLP ("BDO Seidman") as its independent public accountants for the year ending June 30, 1999. The dismissal of Arthur Andersen was the result of a change in control of the Company. Arthur Andersen's reports on the Company's financial statements for the past two (2) years contained no adverse opinion and no disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. In the Company's two most recent fiscal years and the subsequent interim periods preceding the dismissal of Arthur Andersen, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports. During the Company's two most recent fiscal years and the subsequent interim periods preceding the engagement of BDO Seidman, neither the Company nor any party acting on its behalf has consulted with BDO Seidman regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, or (ii) any matter that was either the subject of a "disagreement" (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) or a "reportable event" (as defined in Item 304(a)(i)(v) of Regulation S-K). 15 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS. Incorporated by reference to pages 2 through 5 of the Company's definitive Information Statement for the 1999 Annual Meeting of Stockholders to be held on October 7, 1999, under the following captions: "Director Compensation," and "Executive Compensation.' ITEM 10. EXECUTIVE COMPENSATION. Incorporated by reference to pages 2 through 5 of the Company's definitive Information Statement for the 1999 Annual Meeting of Stockholders to be held on October 7, 1999, under the following captions: "Director Compensation," and "Executive Compensation.' ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference to page 8 of the Company's definitive Information Statement for the 1999 Annual Meeting of Stockholders to be held on October 7, 1999, under the following caption: "Security Ownership of Certain Beneficial Owners and Management." ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference form pages 8 and 9 of the Company's definitive Information Statement for the 1999 Annual Meeting of Stockholders to be held on October 7, 1999 under the following caption: "Certain Relationships and Related Transactions." ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. The exhibits as indexed below are included as part of this Form 10-KSB. (b) Reports on Form 8-K. The Company filed the following Reports on Form 8-K during the three months ended June 30, 1999: (1) Form 8-K filed on April 30, 1999, to report the acquisition of Vitrix Incorporated. (2) Form 8-K filed on May 20, 1999, to report the engagement of BDO Seidman, LLP as the Company's auditors for the fiscal year ending June 30, 1999, and the dismissal of Arthur Andersen LLP. (3) Form 8-K/A filed on June 29, 1999 amending the Form 8-K filed on April 30, 1999, and including required financial statements and pro forma financial information for Vitrix Incorporation. 16 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. FBR CAPITAL CORPORATION (Registrant) /s/ Philip R. Shumway -------------------------------------- Philip R. Shumway, President Dated: September 16, 1999 In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signatures Title Date - ---------- ----- ---- /s/ Philip R. Shumway President, CEO and Director September 16, 1999 - ---------------------- (Principal Executive Officer) Philip R. Shumway /s/ Craig J. Smith Chief Financial Officer September 16, 1999 - ---------------------- (Principal Financial Officer) Craig J. Smith /s/ Michael A. Wolf Chairman of the Board September 16, 1999 - ---------------------- Michael A. Wolf /s/ Todd R. Belfer Director September 16, 1999 - ---------------------- Todd R. Belfer /s/ Lise M. Lambert Director September 16, 1999 - ---------------------- Lise M. Lambert /s/ Lise M. Lambert Director September 16, 1999 - ---------------------- Bahan Sadegh /s/ Hamid Shojaee Director September 16, 1999 - ---------------------- Hamid Shojaee 17 EXHIBIT INDEX
EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT - ------ ----------- ------------- -------- 3.1 Registrant's Articles of Incorporation A 3.1 3.1.1 Registrant's Amendment to its Articles of Incorporation, dated November 7, 1988 A 3.1.1 3.1.2 Registrant's Amendment to its Articles of Incorporation, dated June 25, 1991 B 3.1.2 3.1.3 Registrant's Certificate of Reverse Stock Split, dated February 15, 1994 C 3.1.3 3.1.4 Registrant's Certificate of Designation of Series A Preferred Stock, dated June 27, 1996 D 3.1.4 3.1.5 Registrant's Amendment to Articles of Incorporation, dated June 25, 1996 D 3.15 3.1.6 Registrant's Certificate of Designation of Series B Preferred Stock, dated March 31, 1999 Filed herewith -- 3.2 Amended Bylaws of the Registrant C 3.2 4.1 Registrant's Form of Common Stock Certificate A 4.1 4.6 Registrant's Form of 10% Convertible Subordinated Promissory Note issued to purchasers of the Registrant's securities in a private placement of the Registrant's securities which closed on December 14, 1993 and January 13, 1994 E 4.7 4.7 Registrant's Form of Warrant to purchase shares of Registrant's Common Stock at an exercise price of $.90 per share dated February 3, 1994 E 4.8 4.7.1 Schedule of omitted documents in the form of Exhibit 4.7, including material detail in which such documents differ from Exhibit 4.7. E 4.8.1
18
EXHIBIT BY REFERENCE NO. IN NUMBER DESCRIPTION FROM DOCUMENT DOCUMENT - ------ ----------- ------------- -------- 10.2 Stock Option Agreement, dated September 20, 1993, between Registrant and Patrick McEnany E 10.17 10.2.1 Amendment to Stock Option Agreement, dated February 21, 1995, between Registrant and Patrick McEnany G - 10.3 Asset Purchase Agreement between the Company and Parlux Fragrances, Inc., dated January 31, 1996 F 10.17 10.4 Registration Rights Agreement between the Company and Parlux Fragrances, Inc., dated June 28, 1996 F 10.18 10.5 Exchange Agreement, dated April 15, 1999, between the Company, Vitrix Incorporated ("Vitrix") and the shareholders of Vitrix signatory thereto H 2 10.6 Employment Agreement, dated February 16, 1999, between Vitrix and Philip R. Shumway Filed herewith -- 10.7 1999 Equity Compensation Plan Filed herewith -- 27 Financial Data Schedule Filed herewith --
- ---------- A. Form S-18 Registration Statement No. 33-25704-NY. B. Form 10-K Annual Report of the Registrant for the fiscal year ended June 30, 1991. C. Form 10-KSB Annual Report of the Registrant for the fiscal year ended June 30, 1994 D. Form 8-K Current Report reporting event on June 28, 1996. E. Form 10-QSB Quarterly Report of the Registrant for the fiscal quarter ended December 31, 1993. F. Form 10-QSB Quarterly Report of the Registrant for the fiscal quarter ended December 31, 1995. G. Form 10-KSB Annual Report of the Registrant for the fiscal year ended June 30, 1996 H. Form 8-K Current Report reporting event on April 15, 1999. 19 EX-3.1.6 2 REGISTRATION RIGHTS AGREEMENT STATEMENT OF RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF SERIES B CONVERTIBLE PREFERRED STOCK PURSUANT TO NEVADA STATUTES SS.SS.78.195 The name of the corporation is FBR Capital Corporation. The resolution set forth below was duly adopted by the Board of Directors of FBR Capital Corporation on March 31, 1999; WHEREAS, the Articles of Incorporation of this corporation provide for a class of shares known as preferred stock, issuable from time to time in one or more series; and WHEREAS, the Board of Directors of this corporation are authorized to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of preferred stock, to fix the number of shares constituting any such series, and to determine the designation thereof, or any of them; and WHEREAS, the corporation has issued shares of Series A of such preferred stock, all of which have heretofore been redeemed, and the Board of Directors of this corporation desire, pursuant to their authority as aforesaid, to determine and fix the rights, preferences, privileges, and restrictions relating to an additional series of said preferred stock and the number of shares constituting and the designation of said shares; NOW, THEREFORE, BE IT RESOLVED THAT: A. SERIES B CONVERTIBLE PREFERRED STOCK 1. DESIGNATION OF SERIES There is hereby provided a series of Preferred Stock, designated Series B Convertible Preferred Stock. 2. NUMBER OF SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK The number of shares constituting the Series B Convertible Preferred Stock is fixed at 10,000,000. 3. EXCHANGE AGREEMENT. The Series B Convertible Preferred Stock shall be issued pursuant to that certain Exchange Agreement dated April, 1999 by and between FBR Capital Corporation, a Nevada corporation and Vitrix Incorporated, an Arizona corporation. 4. DIVIDEND PROVISIONS The holders of shares of Series B Convertible Preferred Stock shall participate with the holders of the corporation's common stock in the accrual and payment of dividends on an "as converted" basis. 5. LIQUIDATION PREFERENCE In the event of any liquidation, consolidation or merger of this corporation with or into any other corporation or the dissolution or winding up of this corporation, or any partial liquidation effected by means of distribution of assets or return of capital, either voluntary or involuntary, the holders of shares of Series B Convertible Preferred Stock shall be entitled to receive, a pro-rata share of any assets available for distribution to all of this corporation's shareholders on an as "as converted" basis. 6. REDEMPTION The corporation has no right to redeem any Series B Convertible Preferred Stock 7. CONVERSION The Series B Convertible Preferred Stock shall be convertible into shares of the common stock of this corporation rights as follows: (a) CONVERSION RATIO. The Conversion Ratio per share at which shares of common stock shall be issuable upon conversion of Series B Convertible Preferred Stock after the date hereof shall be one share of common stock for each share of Series B Convertible Preferred Stock. The Conversion Ratio will be subject to adjustment in the event this corporation shall do any of the following: (i) pay a dividend or make a distribution in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), to the holders of its Common stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares, or (iv) issue by reclassification of its shares of Common Stock any shares of capital stock of this corporation. The conversion privilege and the Conversion Ratio in effect immediately prior to any such action shall be adjusted so that if the Series B Convertible Preferred Stock is thereafter surrendered for conversion, a holder of Series B Preferred Stock shall be entitled to receive the number of shares of capital stock of this corporation or other rights which he would have owned immediately following such action had the Series B Preferred Stock been converted immediately prior thereto. An adjustment so made shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of such adjustment, a holder of Series B Preferred Stock shall become entitled, if the Series B Preferred Stock is thereafter surrendered for conversion, to receive shares of two or more classes of capital stock of this corporation or other rights, the Board of Directors of this corporation, whose determination shall be conclusive, shall determine the allocation of the adjusted conversion ratio between or among shares of such classes of capital stock or other rights. Except in the cases enumerated above, the Conversion Ratio will not be adjusted for the issuance of Common Stock. In the case of any reclassification or change in the Common Stock (other than a change in par value or a subdivision or combination) or any consolidation or merger of this corporation with or into any other person (other than a merger with a person not affiliated with this corporation in which this corporation is the surviving corporation), or any sale or transfer of substantially all the assets of this corporation, any holder of Series B Preferred Stock will be entitled, after the occurrence of any such event, to receive on conversion of the Series B Preferred Stock the consideration which the holder would have received had such holder converted immediately prior to the occurrence of such event and thereafter the number of such other shares so receivable upon conversion of the Series B Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock as described herein; provided however, that the foregoing provisions shall not be applicable to any of the transactions contemplated by the Exchange Agreement. (b) MANDATORY CONVERSION. Subject to subparagraph (e) of this Section 7, each share of Series B Convertible Preferred Stock shall be automatically converted when the Board of Directors of this corporation has determined in good faith that there is a sufficient number of authorized but unissued shares of its common stock to effect such conversion in accordance with the terms of the Series B Convertible Preferred Stock. (c) MECHANICS OF CONVERSION. Each certificate evidencing any of the outstanding shares of Series B Convertible Preferred Stock shall, upon such conversion, be deemed to be a certificate evidencing the number of shares of common stock into which the Series B Convertible Preferred Stock has been converted. Each share of Series B Convertible Preferred Stock is convertible in whole but not in part. (d) NO IMPAIRMENT. This corporation will not, by amendment, of its Articles of Incorporation or sale of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 7 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Series B Convertible Preferred Stock against impairment. (e) NO FRACTIONAL SHARES AND CERTIFICATES AS TO ADJUSTMENT. No fractional shares shall be issuable upon conversion. If more than one share of Series B Convertible Preferred Stock is surrendered for conversion at any one time by the same holder, the number of shares of common stock to be issued upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series B Convertible Preferred Stock so surrendered. If any fractional interest in a common share would, except for the provisions of this subparagraph 7(e), be deliverable upon conversion of Series B Convertible Preferred Stock, this corporation shall pay to the holders of such converted stock an amount in cash equal to the current fair value of such fractional interest. (f) ACTION TO AUTHORIZE SUFFICIENT SHARES OF COMMON STOCK. If at any time the number of authorized but unissued shares of common stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Convertible Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of common stock to such number of shares as shall be sufficient for such purposes. (g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. When the Articles of Incorporation of this corporation have been amended so as to authorize a sufficient number of shares of common stock to permit the conversion of all of the Series B Convertible Preferred Stock, this corporation shall thenceforth at all times reserve and keep available out of its authorized but unissued shares of common stock solely for the purpose of affecting the conversion of the shares of the Series B Convertible Preferred Stock such number of its shares of common stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series B Convertible Preferred Stock. (h) NOTICES. Any notice required by the provisions of this Section 7 to be given to the holder of shares of Series B Convertible Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of this corporation. 8. VOTING RIGHTS Each holder of the Series B Convertible Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which shares of Series B Convertible Preferred Stock would be convertible if fully converted on the record date for such shareholder vote and shall have voting rights and powers equal to the voting rights and powers of the common stock (except as otherwise provided herein or as required by law, voting together with the common stock as a single class) and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of this corporation. 9. PROTECTIVE PROVISIONS (a) APPROVAL OF CERTAIN ACTIONS. So long as shares of Series B Convertible Preferred Stock are outstanding, this corporation shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least sixty-seven percent (67%) of the then outstanding shares of Series B Convertible Preferred Stock, voting together as a single class. (i) Redeem, purchase or otherwise acquire for value (or pay into or set aside for a sinking fund for such purpose) any share or shares of Series B Convertible Preferred Stock other than by conversion in accordance with Section 7 hereof; (ii) Redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any of the common stock of this corporation. (iii) Authorize, designate or issue, or obligate itself to issue, any other equity security (including any security convertible into or exercisable for any equity security) senior to or on a parity with the Series B Convertible Preferred Stock as to any of the rights, privileges or preferences of the Series B Convertible Preferred Stock including, without limitation, method or nature of payment of dividends, terms of redemption, amounts payable on liquidation or dissolution and seniority of preference relative to other classes or series of capital stock, sinking fund provisions, conversion rights and voting rights; (iv) Effect any sale, lease, assignment, transfer or other conveyance of all or substantially all of the assets of this corporation of any of its subsidiaries, or any consolidation or merger involving this corporation or any of its subsidiaries, or any reclassification or other change of any stock, or any recapitalization of this corporation; (v) Permit any subsidiary to issue or sell, or obligate itself to issue or sell, except to this corporation, or any wholly owned subsidiary, any stock of such subsidiary; or (vi) Increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series B Convertible Preferred Stock. (b) APPROVAL OF ADVERSE CHANGE. The corporation shall not amend its Articles of Incorporation or Bylaws without the approval, by vote or written consent, by the holders of sixty-seven percent (67%) of the Series B Convertible Preferred Stock if such amendment would change or alter any of the rights, preferences or privileges of the shares of Series B Convertible Preferred Stock so as to affect adversely the shares of such Stock. In connection with the submission of any such matter to the holders of Series B Convertible Preferred Stock for a vote, such holders shall be treated as a separate class for the purpose of determining applicable notice, proxy and quorum requirements and the presence in person or by proxy of the holders of a majority of outstanding shares of Series B Convertible Preferred Stock shall be required in order for a quorum to be present with respect to any such matter. As to all matters on which the Series B Convertible Preferred Stock is entitled to vote in accordance with the foregoing provisions, the holders of the Series B Convertible Preferred Stock shall be entitled to cast one vote for each share held by them of record on the books of the Corporation. (c) Lawful Issuance. If for any reason, the shares of common stock required to be reserved for purposes of conversion of the Series B Convertible Preferred Stock, in the opinion of legal counsel for the corporation, require registration with or approval of any governmental authority under any federal or state law, or listing upon any national securities exchange, before such shares may be issued upon conversion, the corporation shall be under no obligation to issue such securities until such securities shall be duly registered, approved or listed, as the case may be. The corporation shall take such steps as are reasonable and appropriate in the judgment of the Board of Directors to provide for the lawful issuance of such shares of common stock as are issuable upon such conversion. B. COMMON STOCK The following provisions are intended to confirm, and not to modify, the rights of the holders of the Common Stock pursuant to the Articles of Incorporation. 1. DIVIDEND RIGHTS Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holders of the common stock shall be entitled to receive, when and as declared by the Board of Directors out of any assets of this corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors. 2. LIQUIDATION RIGHTS Upon the liquidation, dissolution or winding up of the corporation, the assets of this corporation shall be distributed as provided in Section A.5 hereof. 3. VOTING RIGHTS Subject to the rights of the holders of Series B Convertible Preferred Stock provided in Section A.8 hereof, the holder of each share of Common Stock shall have the right to one vote and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of this corporation, and shall be entitled to vote upon such matters and in such manner as are provided by law. IN WITNESS WHEREOF, FBR Capital Corporation has caused this statement to be signed by Charles D. Snead, Jr., its President, this 31st day of March, 1999. FBR CAPITAL CORPORATION, a Nevada corporation By: /s/ Charles D. Snead ------------------------------------ Charles D. Snead, Jr., President EX-10.6 3 EMPLOYMENT AGREEMENT-PHILIP R. SHUMWAY EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of February 16, 1999, is by and between VITRIX INCORPORATED, an Arizona corporation ("Vitrix"), and Philip R. Shumway, an individual ("Employee"). A. Vitrix wishes to employ Employee and Employee wishes to be employed by Vitrix and both parties wish to define the nature of the employment relationship. B. The parties wish to set forth in this Agreement the terms and conditions of such employment. In consideration of the recitals and mutual agreements hereinafter set forth, the parties agree as follows: 1. EMPLOYMENT AND DUTIES. Vitrix agrees to employ Employee on a full-time basis, subject to the terms and conditions provided herein, and Employee agrees to accept such full-time employment upon said terms and conditions. Employee's position shall be President and Chief Executive Officer of Vitrix, in which capacity Employee shall have general responsibility for management of Vitrix's day-to-day operations, subject to the direction and control of the Board of Directors (the "Board"). Unless he agrees to a change of location, Employee will be based in Vitrix's Phoenix, Arizona office. 2. TERM. The term of employment under this Agreement shall commence on March 8,, 1999 (the "Effective Date") and shall continue for a period of one year, unless earlier terminated as set forth in Section 6 below. 3. COMPENSATION. (a) BASE SALARY. Vitrix agrees to pay Employee a base salary, before deducting all applicable withholdings, at the annual rate of $100,000, which shall be payable in accordance with Vitrix's standard executive payroll policies as they may be revised from time to time. (b) QUARTERLY INCENTIVE BONUS. Employee shall be entitled to a quarterly bonus payable in cash according to the schedule provided below if Vitrix's revenues for the applicable quarter exceed the amount indicated below. Such quarterly bonuses earned by Employee shall be deducted from any year-end bonus payable to Employee under Section 3(c) of this Agreement. Q2 '99 Q3 '99 Q4 '99 Q1 '99 Total ------ ------ ------ ------ ----- Revenues of $242K $367K $431K $584K $1.624M Cash Bonus $5,000 $5,000 $7,500 $7,500 $25,000 1 (c) YEAR-END INCENTIVE BONUS. Employee shall be entitled to a bonus payable for the annual period ending March 31, 2000 in cash according to the schedule provided below if Vitrix's revenues exceed the amount indicated minus any quarterly bonuses already paid to Employee under Section 3(b) of this Agreement: Revenue Exceeds: $2M $2.25M $2.5M $2.75M $3.0M Cash Bonus $40,000 $50,000 $75,000 $90,000 $120,000 (d) STOCK OPTIONS. Employee shall be granted options to acquire 380,000 shares of the Common Stock of Vitrix, exercisable at a price of $0.215 per share. The options will have a 10-year term, and will be exercisable as follows: Number of Common Shares as to Date Beginning on which which Option may be Exercised Option may be Exercised - ----------------------------- ----------------------- 126,666 First Anniversary of the Effective Date 126,666 Second Anniversary of the Effective Date 126,668 Third Anniversary of the Effective Date The options will be issued as "incentive stock options" pursuant to and will otherwise be governed by the Company's Stock Option Plan dated December 20, 1996. 4. BENEFITS. (a) In addition to the compensation described above, while Employee is employed hereunder, Vitrix shall pay for and provide Employee and his dependents with the same amount and type of health, medical and life insurance as is provided from time to time to Vitrix executives of Employee's level during the term of this Agreement. (b) In addition to the compensation and benefits provided above, Vitrix shall, upon receipt of appropriate documentation, reimburse Employee each month for his reasonable travel, lodging and other ordinary and necessary business expenses consistent with Vitrix's policies as in effect from time to time. 5. VACATION. Employee shall be entitled to 2 weeks vacation with pay in accordance with Vitrix's vacation policy as in effect from time to time. In addition, Employee shall be entitled to eight (8) holidays with pay. 6. TERMINATION. (a) FOR CAUSE. The Board may terminate Employee's employment by Vitrix prior to the expiration of the term of employment for cause upon written notice to the Employee stating the facts constituting such cause, provided that Employee shall have 20 days following such notice to cure any conduct or act, if curable, alleged to provide grounds for termination for cause hereunder. In the event of termination for cause, Vitrix shall be obligated to pay the Employee only salary at the current rate due him through the date of termination pursuant 2 to this Section 6(a). For purposes of this Section 6(a), "cause" shall include (i) material neglect of duties; (ii) willful failure to abide by ethical and good faith instructions or policies from or set by the Board; (iii) Employee's material breach of this Agreement; (iv) the appropriation (or attempted appropriation) of a material business opportunity of Vitrix, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of Vitrix; (v) the misappropriation (or attempted misappropriation) of any of Vitrix's funds or property; or (vi) the conviction of, the indictment for (or its procedural equivalent), or the entering of a guilty plea or plea of no contest with respect to, a felony, or any other crime with respect to which imprisonment is a possible punishment. (b) DISABILITY. If during the term of this Agreement, Employee fails to perform his duties hereunder because of illness or other incapacity for a period of 90 consecutive days within any 180-day period, Vitrix shall have the right to terminate this Agreement, upon written notice to the Employee, without further obligation hereunder except for (i) payment to the Employee of salary at the current rate due him through the date of the termination; (ii) any bonus amount earned prior to the date of termination and (iii) any amounts payable pursuant to disability plans generally applicable to executive employees. In addition within 90 days after the end of the four fiscal quarters ending March 31, 2000 in the event termination pursuant to this Section 6(b) occurs, Employee shall be entitled to receive a bonus payment determined in accordance with Section 3(c), but prorated to the extent that Employee's employment was less than one full year. (c) DEATH. If the Employee dies during the term of this Agreement, this Agreement shall terminate immediately, and the Employee's legal representatives shall be entitled to receive the base salary due the Employee through the end of the month in which death occurs, and any other death benefits generally applicable to executive employees. In addition, within 90 days after the end of the four fiscal quarters ending March 31, 2000 Employee's death occurs, Employee's legal representative shall be entitled to receive a prorated bonus payment as set forth in Section 6(b). 7. CONFIDENTIALITY; NON-COMPETITION; NON-SOLICITATION. (a) CONFIDENTIAL INFORMATION. Employee acknowledges that Employee may receive, or contribute to the production of, Confidential Information. For purposes of this Agreement, Employee agrees that "Confidential Information" shall mean information or material proprietary to Vitrix or designated as Confidential Information by Vitrix and not generally known by non-Vitrix personnel, which Employee develops or of or to which Vitrix may obtain knowledge or access through or as a result of Employee's relationship with Vitrix (including information conceived, originated, discovered or developed in whole or in part by Employee). Confidential Information includes, but is not limited to, the following types of information and other information of a similar nature (whether or not reduced to writing) related to Vitrix's business: discoveries, inventions, ideas, concepts, research, development, processes, procedures, "know-how", formulae, marketing techniques and materials, marketing and development plans, business plans, customer names and other information related to customers, price lists, pricing policies, methods of operation, financial information, employee compensation, and computer programs and systems. Confidential Information also includes any information described above which 3 Vitrix obtains from another party and which Vitrix treats as proprietary or designates as Confidential Information, whether or not owned by or developed by Vitrix. Employee acknowledges that the Confidential Information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use. Information publicly known without breach of this Agreement that is generally employed by the trade at or after the time Employee first learns of such information, or generic information or knowledge which Employee would have learned in the course of similar employment or work elsewhere in the trade, shall not be deemed part of the Confidential Information. Employee further agrees: (1) To furnish Vitrix on demand, at any time during or after employment, a complete list of the names and addresses of all present, former and potential suppliers, financing or leasing sources, patients, customers and other contacts gained while an employee of Vitrix in Employee's possession, whether or not in the possession or within the knowledge of Vitrix. (2) That all notes, memoranda, documentation and records in any way incorporating or reflecting any Confidential Information shall belong exclusively to Vitrix, and Employee agrees to turn over all copies of such materials in Employee's control to Vitrix upon request or upon termination of Employee's employment with Vitrix. (3) That while employed by Vitrix and thereafter Employee will hold in confidence and not directly or indirectly reveal, report, publish, disclose or transfer any of the Confidential Information to any person or entity, or utilize any of the Confidential Information for any purpose, except in the course of Employee's work for Vitrix. (4) That any idea in whole or in part conceived of or made by Employee during the term of his employment, consulting, or similar relationship with Vitrix which relates directly or indirectly to Vitrix's current or planned lines of business and is made through the use of any of the Confidential Information of Vitrix or any of Vitrix's equipment, facilities, trade secrets or time, or which results from any work performed by Employee for Vitrix, shall belong exclusively to Vitrix and shall be deemed a part of the Confidential Information for purposes of this Agreement. Employee hereby assigns and agrees to assign to Vitrix all rights in and to such Confidential Information whether for purposes of obtaining patent or copyright protection or otherwise. Employee shall acknowledge and deliver to Vitrix, without charge to Vitrix (but at its expense) such written instruments and do such other acts, including giving testimony in support of Employee's authorship or inventorship, as the case may be, necessary in the opinion of Vitrix to obtain patents or copyrights or to otherwise protect or vest in Vitrix the entire right and title in and to the Confidential Information. (b) NON-COMPETITION. During the [24] months immediately following the Effective Date, Employee agrees that he shall not enter into or engage, directly or indirectly, whether on his own account or as a shareholder (other than as a less than 2% shareholder of a publicly-held company), partner, joint venturer, advisor, and/or agent, of any person, firm, corporation, or other entity, in any or all of the activities described in Sections 7(b)(1) through 7(b)(3) of this Agreement. 4 (1) Engaging in any business competitive with the business conducted by Vitrix during the term of Employee's employment hereunder in the United States. (2) Soliciting the past or existing customers, leasing or financing sources, or suppliers of Vitrix or using any Confidential Information (as defined in Section 7(a)) for the purpose of or which results in competition with Vitrix . (3) Soliciting the employment of any employees of Vitrix. (c) INJUNCTIONS. It is agreed that the restrictions contained in this Section 7 are reasonable, but it is recognized that damages in the event of the breach of any of the restrictions will be difficult or impossible to ascertain; and, therefore, Employee agrees that, in addition to and without limiting any other right or remedy Vitrix may have, Vitrix shall have the right to an injunction against Employee issued by a court of competent jurisdiction enjoining any such breach without showing or proving any actual damage to Vitrix. (d) PART OF CONSIDERATION. Employee also agrees, acknowledges, covenants, represents and warrants that he is fully and completely aware that, and further understands that, the foregoing restrictive covenants are an essential part of the consideration for Vitrix entering into this Agreement and for Vitrix entering into the Stock Agreement and that Vitrix is entering into this Agreement in full reliance on these acknowledgments, covenants, representations and warranties. (e) TIME AND TERRITORY REDUCTION. If the period of time and/or territory described above are held to be in any respect an unreasonable restriction, it is agreed that the court so holding may reduce the territory to which the restriction pertains or the period of time in which it operates or may reduce both such territory and such period, to the minimum extent necessary to render such provision enforceable. (f) SURVIVAL. The obligations described in this Section 7 shall survive any termination of this Agreement or any termination of the employment relationship created hereunder. 8. GOVERNING LAW AND VENUE. Arizona law shall govern the construction and enforcement of this Agreement and the parties agree that any litigation pertaining to this Agreement shall be in courts located in Maricopa County, Arizona. 9. CONSTRUCTION. The language in all parts of this Agreement shall in all cases be construed as a whole according to its fair meaning and not strictly for nor against any party. The Section headings contained in this Agreement are for reference purposes only and will not affect in any way the meaning or interpretation of this Agreement. All terms used in one number or gender shall be construed to include any other number or gender as the context may require. The parties agree that each party has reviewed this Agreement and has had the opportunity to have counsel review the same and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in the interpretation of this Agreement or any amendment or any exhibits thereof. 5 10. NONDELEGABILITY OF EMPLOYEE'S RIGHTS AND OBLIGATIONS. The obligations, rights and benefits of Employee hereunder are personal and may not be delegated, assigned or transferred in any manner whatsoever, nor are such obligations, rights or benefits subject to involuntary alienation, assignment or transfer. This Agreement shall be assigned automatically to any entity merging with or acquiring Vitrix or its business. 11. SEVERABILITY. In the event any term or provision of this Agreement is declared by a court of competent jurisdiction to be invalid or unenforceable for any reason, this Agreement shall remain in full force and effect, and either (a) the invalid or unenforceable provision shall be modified to the minimum extent necessary to make it valid and enforceable or (b) if such a modification is not possible, this Agreement shall be interpreted as if such invalid or unenforceable provision were not a part hereof. 12. ATTORNEYS' FEES. Except as otherwise provided herein, in the event any party hereto institutes an action or other proceeding to enforce any rights arising out of this Agreement, the party prevailing in such action or other proceeding shall be paid all reasonable costs and attorneys' fees by the non-prevailing party, such fees to be set by the court and not by a jury and to be included in any judgment entered in such proceeding. 13. NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed duly given upon receipt if either personally delivered, sent by certified mail, return receipt requested, or sent by a nationally-recognized overnight courier service, addressed to the parties as follows: If to Vitrix: Vitrix Incorporated Attention: Hamid Shojaee 20 East University, Suite 304 Tempe, Arizona 85281 With a copy to: Squire, Sanders & Dempsey, LLP Attention: Christopher D. Johnson, Esq. or Ann-Marie Anderson, Esq. 40 North Central Avenue, Suite 2700 Phoenix, Arizona 85004 If to Employee: Philip R. Shumway 14656 South 20th Street Phoenix, Arizona 85048 With a copy to: ------------------------------- ------------------------------- ------------------------------- or to such other address as any party may provide to the other in accordance with this Section. 6 14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof (I.E., Employee's employment by Vitrix) and supersedes all prior or contemporaneous understandings or agreements in regard thereto. No modification or addition to this Agreement shall be valid unless in writing, specifically referring to this Agreement and signed by all parties hereto. No waiver of any rights under this Agreement shall be valid unless in writing and signed by the party to be charged with such waiver. No waiver of any term or condition contained in this Agreement shall be deemed or construed as a further or continuing waiver of such term or condition, unless the waiver specifically provides otherwise. IN WITNESS WHEREOF, the parties have executed this Agreement as of February 16, 1999. Vitrix Incorporated, an Arizona corporation: EMPLOYEE: By: /s/ Hamid Shojaee /s/ Philip R. Shumway ----------------------------- ------------------------ Its:CEO Philip R. Shumway 7 EX-10.7 4 1999 EQUITY COMPENSATION PLAN FBR CAPITAL CORPORATION 1999 EQUITY COMPENSATION PLAN 1. PURPOSE The purpose of the Plan is to advance the long-term interests of FBR Capital Corporation by (i) motivating executive personnel by means of long-term incentive compensation, (ii) furthering the identity of interests of participants with those of the shareholders of the Corporation through the ownership and performance of the Common Stock of the Corporation and (iii) permitting the Corporation to attract and retain executive personnel upon whose judgment the successful conduct of the business of the Corporation largely depends. Toward this objective, the Committee may grant stock options and restricted stock awards to Key Employees of the Corporation and its Subsidiaries, on the terms and subject to the conditions set forth in the Plan. 2. DEFINITIONS 2.1 "Administrative Policies" means the administrative policies and procedures adopted and amended from time to time by the Committee to administer the Plan. 2.2 "Award" means any form of stock option or restricted stock award granted under the Plan to a Participant by the Committee pursuant to such terms, conditions, restrictions and limitations, if any, as the Committee may establish by the Award Agreement or otherwise. 2.3 "Award Agreement" means a written agreement with respect to an Award between the Corporation and a Participant establishing the terms, conditions, restrictions and limitations applicable to an Award. To the extent an Award Agreement is inconsistent with the terms of the Plan, the Plan shall govern the rights of the Participant thereunder. 2.4 "Board" means the Board of Directors of the Corporation. 2.5 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 "Committee means the Compensation Committee of the Board, or such other committee designated by the Board, authorized to administer the Plan under Section 3 hereof. 2.7 "Common Stock" means Common Stock of the Corporation. 2.8 "Corporation" means FBR Capital Corporation 2.9 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 2.10 "Key Employee" means an employee of the Corporation or a Subsidiary who holds a position of responsibility in a managerial, administrative or professional capacity, and whose performance, as determined by the Committee in the exercise of its sole and absolute discretion, can have a significant effect on the growth, profitability and success of the Corporation. 2.11 "Participant" means any individual to whom an Award has been granted by the Committee under this Plan. 2.12 "Plan" means the FBR Capital Corporation 1999 Equity Compensation Plan. 2.13 "Stock Exchange" means the stock exchange or other market price reporting system (if any) on which the Common Stock is traded or quoted designated by the Committee. 2.14 "Subsidiary" means a corporation or other business entity in which the Corporation directly or indirectly has an ownership interest of fifty percent or more. 3. ADMINISTRATION The Plan shall be administered under the supervision of the Committee. Members of the Committee shall serve at the pleasure of the Board of Directors, and may resign by written notice filed with the Chief Executive Officer or the Secretary of the Corporation. A vacancy in the membership of the Committee shall be filled by the appointment of a successor member by the Board of Directors. Until such vacancy is filled, the remaining members shall constitute a quorum and the action at any meeting of a majority of the entire Committee, or an action unanimously approved in writing, shall constitute action of the Committee. Subject to the express provisions of this Plan, the Committee shall have conclusive authority to construe and interpret the Plan, any Award Agreement entered into hereunder and to establish, amend and rescind Administrative Policies for the administration of this Plan and shall have such additional authority as the Board of Directors may from time to time determine to be necessary or desirable. 4. ELIGIBILITY Any Key Employee is eligible to become a Participant in the Plan. -2- 5. SHARES AVAILABLE The aggregate number of shares of the Corporation for which options and restricted stock awards may be granted under this Plan shall be 3,000,000; provided, however, that whatever number of shares shall remained reserved for issuance pursuant to the Plan at the time of any stock split, stock dividend or other change in the Corporation's capitalization shall be appropriately and proportionately adjusted to reflect such stock dividend, stock split or other change in capitalization. Such shares shall be made available from authorized but unissued or reacquired shares of the Corporation. Any shares for which an option or restricted stock award is granted hereunder that are released from such option or restricted stock award for any reason shall become available for other options and awards to be granted under this Plan. 6. TERM The Plan shall become effective upon adoption of the Plan by the Board of Directors of the Corporation. The Plan shall be submitted to the shareholders of the Corporation for approval within one year after its adoption by the Board of Directors and, if the Plan shall not be approved by the shareholders within said period, the Plan shall be void and of no effect. Any options or restricted stock awards granted under the Plan prior to the date of approval by the shareholders shall be void if such shareholders' approval is not obtained.. 7. PARTICIPATION The Committee shall select, from time to time, Participants from those Key Employees who, in the opinion of the Committee, can further the Plan's purposes and the Committee shall determine the type or types of Awards to be made to the Participant. The terms, conditions and restrictions of each Award shall be set forth in an Award Agreement. 8. STOCK OPTIONS (a) GRANTS. Awards may be granted in the form of stock options. Stock options may be incentive stock options within the meaning of section 422 of the Code or non-statutory stock options (i.e., stock options which are not incentive stock options), or a combination of both, or any particular type of tax advantage option authorized by the Code from time to time. (b) TERMS AND CONDITIONS OF OPTIONS. An option shall be exercisable in whole or in such installments and at such times as may be determined by the Committee; provided, however, that no stock option shall be exercisable more than ten years after the date of grant thereof. The option exercise price shall be established by the Committee, but such price shall not be less than the per -3- share fair market value of the Common Stock, as determined by the Committee, on the date of the stock option's grant subject to adjustment as provided in Sections 18 or 19 hereof. (c) RESTRICTIONS RELATING TO INCENTIVE STOCK OPTIONS. Stock options issued in the form of incentive stock options shall, in addition to being subject to all applicable terms, conditions, restrictions and/or limitations established by the Committee, comply with section 422 of the Code. Incentive Stock Options shall be granted only to employees of the Corporation and its subsidiaries within the meaning of Section 424 of the Code. The aggregate fair market value (determined as of the date the option is granted) of shares with respect to which incentive stock options are exercisable for the first time by an individual during any calendar year (under this Plan or any other plan of the Corporation or any Subsidiary which provides for the granting of incentive stock options) may not exceed $l00,000 or such other number as may be applicable under the Code from time to time. Any incentive stock option that is granted to any employee who is, at the time the option is granted, deemed for purposes of section 422 of the Code, or any successor provision, to own shares of the Corporation possessing more than ten percent of the total combined voting power of all classes of shares of the Corporation or of a parent or subsidiary of the Corporation, shall have an option exercise price that is at least one hundred ten percent of the fair market value of the shares at the date of grant and shall not be exercisable after the expiration of five years from the date it is granted. (d) ADDITIONAL TENTS AND CONDITIONS. The Committee may, by way of the Award Agreement or otherwise, establish such other terms, conditions, restrictions and/or limitations, if any, on any stock option Award, provided they are not inconsistent with the Plan including but not limited to provisions relating to (i) the vesting of such option, (ii) payments to be made to the Participant at the time of exercise of such option relating to any taxes associated with such exercise, (iii) requirements imposed on either the optionee or the Corporation (or both) to purchase or sell the Common Stock acquired upon exercise of such option, and (iv) the exercisability of such options upon the termination of optionee's employment. (e) PAYMENT. Upon exercise, a participant may pay the option exercise price of a stock option in cash or shares of Common Stock, or a combination of the foregoing, or such other consideration as the Committee may deem appropriate. The Committee shall establish appropriate methods for accepting Common Stock and may impose such conditions as it deems appropriate on the use of such Common Stock to exercise a stock option. 9. RESTRICTED STOCK AWARDS (a) GRANTS. Awards may be granted in the form of Restricted Stock Awards. Restricted Stock Awards shall be awarded in such numbers and at such times as the Committee shall determine. (b) AWARD RESTRICTIONS. Restricted Stock Awards shall be subject to such terms, conditions, restrictions, or limitations as the Committee deems appropriate including, by way of illustration but not by way of limitation, -4- restrictions on transferability, requirements of continued employment or individual performance or the financial performance of the Corporation. The Committee may modify, or accelerate the termination of, the restrictions applicable to a Restricted Stock Award under such circumstances as it deems appropriate. (c) RIGHTS AS SHAREHOLDERS. During the period in which any restricted shares of Common Stock are subject to the restrictions imposed under the preceding paragraph, the Committee may, in its discretion, grant to the Participant to whom such restricted shares have been awarded all or any of the rights of a shareholder with respect to such shares, including, by way of illustration but not by way of limitation, the right to vote such shares and to receive dividends. (d) EVIDENCE OF AWARD. Any Restricted Stock Award granted under the Plan may be evidenced in such manner as the Committee deems appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or certificates. 10. PAYMENT OF AWARDS Except as otherwise provided herein Award Agreements may provide that, at the discretion of the Committee, payment of Awards may be made in cash, Common Stock, a combination of cash and Common Stock, or any other form of property as the Committee shall determine. Further, the terms of Award Agreements may provide for payment of Awards in the form of a lump sum or installments, as determined by the Committee. 11. DIVIDENDS AND DIVIDEND EQUIVALENTS If an Award is granted in the form of a Restricted Stock Award, the Committee may choose, at the time of the grant of the Award, to include as part of such Award an entitlement to receive dividends or dividend equivalents, subject to such terms, conditions, restrictions or limitations, if any, as the Committee may establish. Dividends and dividend equivalents shall be paid in such form and manner and at such time as the Committee shall determine. All dividends or dividend equivalents which are not paid currently may, at the Committee's discretion, accrue interest or be reinvested into additional shares of Common Stock. 12. TERMINATION OF EMPLOYMENT The Committee shall adopt Administrative Policies determining the entitlement of Participants who cease to be employed by either the Corporation or Subsidiary whether because of death, disability, resignation, termination or retirement pursuant to an established retirement plan or policy of the Corporation or of its applicable Subsidiary. -5- 13. ASSIGNMENT AND TRANSFER The rights and interests of a Participant under the Plan may not be assigned, encumbered or transferred except, in the event of the death of a Participant, by will or the laws of descent and distribution, except as may be explicitly set forth in an Award Agreement. 14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION In the event of any change in the outstanding shares of Common Stock by reason of any reorganization, recapitalization, stock split, stock dividend, combination or exchange of shares merger, consolidation or any change in the corporate structure or shares of the Corporation, the maximum aggregate number and class of shares as to which Awards may be granted under the Plan and the shares issuable pursuant to then outstanding Awards (and the exercise price of any outstanding stock options) shall be appropriately adjusted by the Committee whose determination shall be final. 15. WITHHOLDING TAXES The Corporation or the applicable Subsidiary shall be entitled to deduct from any payment under the Plan, regardless of the form of such payment, the amount of all applicable income and employment tax required by law to be withheld with respect to such payment or may require the Participant to pay to it such tax prior to and as a condition of the making of such payment. In accordance with any applicable Administrative Policies it establishes, the Committee may allow a Participant to pay the amount of taxes required by law to be withheld from an Award by withholding from any payment of Common Stock due as a result of such Award, or by permitting the Participant to deliver to the Corporation shares of Common Stock having a fair market value, as determined by the Committee, equal to the amount of such required withholding taxes. 16. REGULATORY APPROVALS AND LISTINGS Notwithstanding anything contained in this Plan to the contrary, the Corporation shall have a no obligation to issue or deliver certificates of Common Stock evidencing Restricted Stock Awards or any other Award payable in Common Stock prior to (a) the obtaining of any approval from any governmental agency which the Corporation shall, in its sole discretion, determine to be necessary or advisable, and (b) the completion of any registration or other -6- qualification of said shares under any state or federal law, or ruling of any governmental body, that the Corporation shall, in its sole discretion, determine to be necessary or advisable. 17. NO RIGHT TO CONTINUED EMPLOYMENT OR GRANTS Participation in the Plan shall not give any Key Employee any right to remain in the employ of the Corporation or any Subsidiary. The Corporation or, in the case of employment with a Subsidiary, the Subsidiary, reserves the right to terminate the employment of any Key Employee at any time. The adoption of this Plan shall not be deemed to give any Key Employee or any other individual any right to be selected as a Participant, to be granted any Awards hereunder or if granted an Award in any year, to receive Awards in any subsequent year. 18. AMENDMENT The Corporation, by action of its Board of Directors, reserves the right to amend, modify or terminate at any time this Plan, or, by action of the Board with the consent of the Participant, to amend, modify or terminate any outstanding option agreement or restricted stock award, except that the Corporation may not, without further shareholder approval, increase the total number of shares as to which stock options may be granted under the Plan (except increases attributable to the adjustments authorized in section 14 hereof), change the employees or class of employees eligible to receive options, or materially increase the benefits accruing to Participants under the Plan. Moreover, no action may be taken by the Company (without the consent of the Participant) that will impair the validity of any option or restricted stock award then outstanding or that will prevent the incentive stock options issued or to be issued under this Plan from being "incentive stock options" under Sections 422 of the Code, or any successor provision. 19. GOVERNING LAW The Plan shall be governed by and construed in accordance with the laws of the State of Nevada, except as preempted by applicable Federal law. 20. NO RIGHT, TITLE, OR INTEREST IN CORPORATION ASSETS No Participant shall have any rights as a shareholder as a result of participation in the Plan until the date of issuance of a stock certificate in his name except, in the case of Restricted Stock wards, to the extent such rights are granted to the Participant under Section 9(c) hereof. To the extent any person acquires a right to receive payments from the Corporation under this Plan, such rights shall be no greater than the rights of an unsecured creditor of the Corporation. -7- 21. PAYMENT BY SUBSIDIARIES Settlement of Awards to employees of Subsidiaries shall be made by and at the expense of such Subsidiary. Except as prohibited by law, if any portion of an Award is to be settled in shares of Common Stock, the Corporation shall sell and transfer to the Subsidiary, and the Subsidiary shall purchase, the number of shares necessary to settle such portion of the Award. EX-27 5 FINANCIAL DATA SCHEDULE
5 1 U.S. DOLLARS YEAR JUN-30-1999 JUL-01-1998 JUN-30-1999 1 376,365 0 42,596 0 28,397 457,949 124,551 63,686 518,814 252,292 0 0 100,000 66,205 956,468 518,814 743,954 743,954 249,309 747,558 16,389 0 24,112 (269,302) 0 (269,302) 0 0 0 (269,302) 0.02 0
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