**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

| **ý** | **Annual report pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                        |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                  |
|       | **For the fiscal year ended June 30, 2003**                                                                                                                                                                                                                                                                                                                                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| o          | **Transition report under  Section 13 or 15(d) of the Securities Exchange Act of 1934**                                                                                                                                                                                                                                                                                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                  |
|       | **For the transition period from                                 to                              ** |
|       |                                                                                                                                                                                                                                                                                                                                                                                                  |
|       | **Commission File Number 33-58694**                                                                                                                                                                                                                                                                                                                                                                   |

 

**VITRIX, INC.**

(Name of small business issuer in its charter)

 

| **Nevada**                                                      |   | **13-3465289**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation of organization) |   | (I.R.S. Employer  Identification No.) |

 

**51 West Third Street, Suite 310, Tempe,Arizona 85281**

(Address of principal executive offices)

 

**(480) 296-0400**

(Issuer’s telephone number)

 

Securities registered under Section 12(b) of the ExchangeAct:  **None**

 

Securities registered under Section 12(g) of the Exchange Act:

**Common Stock, $.005 par value**

 

Check whetherthe issuer: (1) has filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.   Yes  ý     No  o

 

Check if thereis no disclosure of delinquent filers in response to Item 405 of Regulation S-Bis not contained in this form, and no disclosure will be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or any amendment tothis Form 10-KSB.  o

 

The issuer’srevenues for the fiscal year ended June 30, 2003 were $4,256,854.

 

The aggregatemarket value of the voting stock (based on the closing price on that date) heldby non-affiliates of the Registrant as of September 25, 2003 wasapproximately $4,800,000.

 

AtSeptember 20, 2003, the issuer had outstanding 12,106,557 shares of CommonStock, par value $.005 per share.

 

Transitional Small BusinessDisclosure Format:  Yes  o      No  ý

 

 

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**PART I**

 

**ITEM1.  Description Of Business.**

 

**General**

 

Vitrix, Inc.,a Nevada corporation (the “Company” or “Vitrix”), through its wholly ownedsubsidiary, Time America, Inc. (formerly known as Vitrix Incorporated), anArizona corporation (“Time America”), designs, develops, manufactures andmarkets a line of time and labor management software and hardwareproducts.  Our products are designed toimprove productivity by automating time and attendance, workforce scheduling andmanagement of labor resources.  We targetour product solutions at small to mid-sized companies from 25 to 2,000 plusemployees. Our solutions are offered in a 100% Web-based application serviceprovider (“ASP”) model, client/server, and PC-based applications.

 

Set forth below is timeline andoverview of the Company’s development and history:

 

•             June 6, 1988 —Richard Barrie Fragrances, Inc., a Nevada corporation, was formed on this datefor the purpose of developing, manufacturing and marketing fragrances,cosmetics, skin treatment and personal care products sold primarily throughdepartment and specialty stores and drugstores.

 

•             June 30, 1996 —Richard Barrie Fragrances sells substantially all of its properties and rightsto Parlux Fragrances, Inc. (the “Asset Sale”). During the period from the Asset Sale to April 1999, our operationswere limited to conducting administrative activities and discussions with thirdparties regarding possible business combinations.

 

•             July 1, 1996 —Following the Asset Sale, Richard Barrie Fragrances changes its name to FBRCapital Corporation and became a non-operating shell company.

 

•             April 15, 1999 —FBR Capital Corporation acquires the outstanding capital stock of VitrixIncorporated (a privately held Arizona corporation formed on April 26,1996) pursuant to the terms of an Exchange Agreement, dated as of such date, byand among FBR Capital Corporation, Vitrix Incorporated and certain of theVitrix Incorporated shareholders. Vitrix Incorporated becomes a majority owned subsidiary of FBR CapitalCorporation as a result of this transaction. FBR Capital Corporation issued an aggregate of 8,592,826 shares ofcommon stock and 10,000,000 shares of preferred stock in consideration for thepurchase of Vitrix Incorporated.  Thistransaction resulted in the shareholders of Vitrix Incorporated acquiringapproximately 80%****of the outstanding shares of common stock of FBR CapitalCorporation (assuming conversion of the preferred stock into common stock andexcluding outstanding options and warrants). The existing shareholders of FBR Capital Corporation held the remaining20% of its outstanding common stock. This transaction was accounted for as a recapitalization of VitrixIncorporated and the purchase of FBR Capital Corporation by VitrixIncorporated, since Vitrix Incorporated became the controlling company afterthe transaction.

 

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•             October 7, 1999— On this date we changed our name from FBR Capital Corporation to Vitrix, Inc.in order to associate the name of the parent corporation to our operatingsubsidiary Vitrix Incorporated.

 

•             March 28, 2001 —Vitrix, Inc. acquires Time America in a merger transaction pursuant to whichTime America is merged into our wholly-owned subsidiary, VitrixIncorporated.  This transaction wasaccounted for as a pooling of interests. As a condition to the merger, wesought and obtained the approval of our shareholders to effect a 1-for-10reverse stock split, which occurred on April 5, 2001.  We issued 3,147,914 shares of Vitrix, Inc.common stock (on a post reverse stock split basis) as consideration in themerger, which represented approximately 50% of Vitrix Inc.’s then issued andoutstanding capital stock.

 

•             April 17, 2001 —We changed the name of our wholly-owned subsidiary from Vitrix Incorporated toTime America, Inc. in order to capitalize on Time America’s name recognitiongained from its 13 year history in the time and attendance industry.

 

Vitrix, Inc.is a holding corporation.  Ouroperations are conducted through our wholly-owned subsidiary, TimeAmerica.  Unless the context indicatesotherwise, references to the Company in this report shall include both Vitrixand Time America.

 

# **Products and Services**

 

We design,develop, manufacture and market a line of time and labor management hardwareand software products targeting small, mid-sized, and enterprise levelcompanies. Our solutions are offered in a 100% Web-based licensed andapplication service provider (“ASP”) model, client/server configuration, and ina PC-based application.  Our productsare internally developed, proprietary software applications that maintain andautomate the process of collecting time sheet information, provide automatedinterfaces to the most popular payroll software solutions and enable users togenerate a variety of reports that help track and analyze how employees spendtheir time. Our products also automatically accrue vacation, sick and personaltime, and effectively replace the traditional punch clock with a fullyautomated system designed to improve workforce productivity and providesignificant savings to its users.  Ourcurrent products include:

 

**LaborManagement Solutions**

 

**100%Web-based Licensed and ASP Product**

 

***NETtime***

 

NETtime is a100% Web-based service deliverable to clients through both a licensed and ASPmodel.  It delivers the functionality ofHourTrack, its client/server predecessor, through Web distribution.  The main features of NETtime include:

 

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•**                                          HourTrackStructure –** By building on top of the HourTrack engine, NETtime has all ofthe functionality of HourTrack.  NETtimewas introduced with a robust feature set in the areas of time and attendance,leave management, job and task tracking, employee scheduling and data analysis.

 

•**                                          Customization****–** NETtime allows for customizationand flexibility.  Administrators andemployees determine exactly which data NETtime will display for them, allowingclients to work at optimum efficiency in the NETtime environment.  Additionally, NETtime will work in themanner required by clients.  Forexample, clients with a mobile workforce have the ability to access the NETtimepages using any Web-enabled cellular phone.

 

•**                                          Anytime,Anywhere****–** Because NETtime isdelivered via the Internet through any Web browser, it brings the user closerto our “anytime, anywhere” vision for performing or self-servicing humanresources tasks.  Wherever clients haveInternet access, they have access to NETtime and the functionality and wealthof information it provides.

 

•**                                          CustomerAccount Self-Service –** NETtime gives users the ability to view theiraccount status online.  They can evenorder additional Vitrix products, obtain system help, or contact a supportrepresentative directly from the NETtime website.

 

**Client/ServerApplications**

 

***HourTrack***

 

Our HourTrack product is a powerful workforce managementsolution that combines “client/server” software with a wide range of datacollection devices to automate the process of tracking, managing, auditing, andreporting the many aspects of employee time and attendance.  By replacing traditional punch clocks andpaper time sheets with a fully automated system, we believe HourTrack enablescompanies of all sizes to effectively manage their workforce, resulting insubstantial savings to the organization. The primary features of HourTrack include:

 

•**                                          Timeand Attendance –** HourTrack’s open architecture is easily customized toconform to an organization’s unique set of payroll policies and concerns.

 

•**                                          LeaveManagement –** Leave records for vacation, sick and personal time aremaintained by HourTrack.  It also trackshours that are specific to a certain organization (i.e. PTO, jury duty,training, etc.), and automates benefit accruals by using a company’s policiesto calculate how much benefit time an employee has earned.

 

•**                                          Joband Task Tracking –** In addition to tracking total time spent on the job,HourTrack enables employers to track the time employees spend on specific jobsand tasks. This powerful reporting feature assists companies with job costing,analysis and billing.

 

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•**                                          WorkforceScheduling –** HourTrack’s scheduling features help manage payroll costs andproductivity concerns by minimizing the likelihood of expensive overstaffingand the negative effects of understaffing. Schedule creation is performedwith the assistance of a unique visual interface, allowing administrators toview employees’ schedules in a convenient calendar format.

 

•**                                          StrategicReporting****–** HourTrack alsofeatures over 60 standard reports. These reports allow users to transform rawdata into helpful information that allows managers and executives to gainvaluable insight and more effectively manage their organizations. Reports canalso be used to share information such as time tracking, benefit usage, jobcosting, human resource functionality and employee scheduling with third-partyapplications and/or service bureaus.

 

***GENESIS SQL***

 

GENESIS SQL isan enterprise level software that helps clients optimize productivity and bettermanage their bottom line by automating not only time and attendance, but jobcosting, benefit administration, employee review processing, access control,bell ringing, and data collection needs. The main features of GENESIS SQL include:

 

•**                                          Timeand Attendance –** GENESIS SQL is easily customized to conform to anorganization’s unique set of payroll policies and concerns.

 

•**                                          LeaveManagement –** Leave records for vacation, sick and personal time aremaintained by GENESIS SQL.  It alsotracks hours that are specific to a certain organization (i.e. PTO, jury duty,training, etc.), and automates benefit accruals by using a company’s policiesto calculate how much benefit time an employee has earned.

 

•**                                          Joband Task Tracking –** In addition to tracking total time spent on the job,GENESIS SQL enables employers to track the time employees spend on specificjobs and tasks. Powerful reporting features assist with job costing, analysisand billing.

 

•**                                          WorkforceScheduling –** This feature has the same functionality as the Company’sHourTrack product.

 

•**                                          StrategicReporting****–** GENESIS SQLincludes over 140 standard reports.  Thereports can be used to share information such as time tracking, benefit usage,job costing, human resource functionality and employee scheduling withthird-party applications and/or service bureaus.

 

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**PC-BasedProducts**

 

***TA50 PRO***

 

TA50 PRO is a simple to use yet powerful time andattendance solution designed for companies with fewer than 200 employees.  TA50 PRO enables companies to automate theirtimekeeping and attendance tracking with built-in setup wizards and simplifieddaily operations.  The main features ofTA50 PRO include:

 

•**                                          Easeof Use –** TA50 PRO is auser-friendly menu-driven solution that uses color-coded screens to simplifyits use. All processes are clearly marked and follow a common operating themethroughout.

 

•**                                          Timeand Attendance**– TA50 PRO’s toolsrelieve payroll staff of time consuming, stressful procedures such as manualreview and calculation of time cards by automating the calculation of employeetime and wages.

 

•**                                          WorkforceScheduling**– TA50 PRO’s scheduling features help manage payroll costs andproductivity concerns by minimizing the likelihood of expensive overstaffingand the negative effects of understaffing.

 

•**                                          StrategicReporting** – TA50 PRO includes over 80 standard reports. This reportingfeature, which is also included in the Company’s TA100 PRO and GENESIS PROproducts, allows users to transform raw data into helpful information thatallows managers and executives to gain valuable insight and more effectivelymanage their organizations.

***TA50XL***

 

TA50XL is asimple to use time and attendance solution that includes the software featuresof TA50 PRO and an XL data terminal and accessories in a cost effectivepackage.

 

***TA100 PRO***

 

The TA100 PRO time andattendance solution is designed for companies with fewer than 500 employees andautomatically calculates employee time and wages using the client’s specificpayroll policies.  An optional featureof the TA100 PRO solution includes a Bell Control Module that allows a clientto define bell-ringing schedules and prompt terminals to activate a usersupplied bell, alarm, or other audible signaling device. The main features ofTA100 PRO include:

 

•**                                          Timeand Attendance**– TA100 PRO is easily customized to conform to anorganization’s unique set of payroll policies and concerns.

 

•**                                         ****Policy Management**–Rounding rules can be setup around start/stop times or the actual punch time toavoid overpaying employees.  Overtimecan be paid on a weekly, bi-weekly, or semi-monthly basis.

 

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•**                                          WorkforceScheduling**– This feature has the same functionality as the Company’s TA50PRO and GENESIS products.

 

•**                                          StrategicReporting** – TA100 PRO includes over 100 standard reports.  Reports can also be used to shareinformation such as time tracking, benefit usage, job costing, human resourcefunctionality and employee scheduling with third-party applications and/orservice bureaus.

 

***GENESIS PRO***

 

GENESIS PRO isan enterprise level PC-based software application that has the same feature setof GENESIS SQL, as discussed above in the client/server product section.

 

***Data CollectionOptions***

 

Our time andattendance product solutions include hardware for collecting employees’ clockin and out times.  Set forth below arethe various hardware devices designed to meet the challenges of a diverse setof work environments:

 

•**                                          BadgeTerminals** – These badge readers are well suited for a wide variety ofenvironments, from doctors’ offices to manufacturing plants. Employees clock inand out by simply sliding a badge through a scanner.

 

•**                                          HandPunchBiometric Terminals –**This device analyzes the biometric measurements of auser’s hand to verify their identity. Instead of using a badge, an employee clocks in and out by placing hisor her hand onto the scanner and awaiting verification.  This method eliminates losses due tobuddy-punching (the practice of clocking in or out for another employee).

 

•**                                          TelePunch**– The TelePunch solution allows employees to clock in and out for the day,for jobs, or for departments using any touch-tone telephone.  Clients who purchase this solution receive apre-configured, telephony server from us. This server runs our software, andallows callers to interact with HourTrack from a remote location.

 

•**                                          eWebClock**– eWebClock partially reduces a user’s total time and attendance productinvestment, by utilizing the Internet to collect employee clock in and out times.  By simply logging on to a Web page (via thelocal network or the World Wide Web), employees can clock in and out.

 

•**                                          PCTime Clock**– PC Time Clock, allows employees to clock in and out on aWindows-based computer.  This isgenerally beneficial in office environments where employees each have access totheir own desktop computer.

 

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•**                                          Webbrowser** – NETtime allows clients to access the service through a standardWeb browser.  The full range of actions(clocking in and out, transferring jobs and departments, etc.) and information(hours worked, schedules, status board, etc.) are available.

 

•**                                          Web-enabledcell phone**– A streamlined version of NETtime is available to clientsaccessing the service through a text-only browser, such as those operating oncell phones.  Essential services such asclocking in and out are available.

 

•**                                          TCP/IP-enabledhardware** – Customers may utilize TCP/IP-enabled hardware devices, such asbadge readers, to collect clock in and out data from their employees.

 

•**                                          Wirelessenabled hardware**– Allows clients to connect their time clocks to the hostsystem without the hassle of wiring. The wireless units are small, reliable andeasy to integrate into any existing system.

 

**Servicesand Support**

 

We maintain aprofessional service and technical support organization, which provides a suiteof maintenance and professional services. These services are designed to support Vitrix customers throughout thelife cycle of our products.  Ourprofessional services include implementation, training, and technicalconsulting.  Maintenance service optionsare delivered through our centralized support operation or through localservice personnel.  Our educationalservices offer a full range of curriculums, which are delivered through localtraining at our Tempe, Arizona headquarters or the Internet.  When necessary, we also may provide softwarecustomization services to meet any unique customer requirements.

 

**Marketingand Sales**

 

We market andsell our products to the small, mid-sized and enterprise markets in the UnitedStates and foreign countries through our direct sales and support organizationand through our Business Alliance and Reseller Program.  We believe the market for time and labormanagement products consists of the following three business segments:

 

•**                                         ***SmallBusinesses*.  This segment iscomprised of companies with fewer than 250 employees and one to threeadministrator(s) who perform time sheet edits and prepare employee hours forpayroll.

 

•**                                         ***Mid-SizedBusinesses*.  This segment iscomprised of companies with 250 to 1,000 employees.  These companies normally have two or more administrators whoperform time sheet edits and prepare employee hours from a single office.  In many cases multiple stations arenecessary for clocking in and out, however, all data is administered from acentral location.

 

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•**                                         ***EnterpriseBusinesses*.  Enterprisebusinesses generally have over 1,000 employees with multiple field offices,each of which have one or more administrators. Payroll is performed at a central or headquarters office.  An enterprise customer is analogous to acollection of mid-sized businesses requiring centralized data collection andstorage.

 

***Direct Sales***

 

The Companyhas five direct sales account managers responsible for designated geographicregions.  The account managers work inoffices in their respective regions. The primary markets for direct sales are the upper mid-sized andenterprise markets.  End users includecompanies in the manufacturing and service industries, and in the public andprivate sectors. For the fiscal years ended June 30, 2003 and 2002, theCompany’s direct sales efforts accounted for approximately 38% and 36% of theCompany’s total revenues, respectively.

 

***Partner Sales***

 

Partner salesare conducted through our Business Alliance and Reseller Programs. Our BusinessAlliance Program is a program that allows organizations to align with theCompany through the use of private label, OEM, or referral programs.

 

Our ResellerProgram is comprised of a network of approximately 250 value added resellerslocated throughout the United States and in certain foreign countries, whichmarket our products along with the resellers’ complementary productofferings.  The resellers typically sellto the small and mid-sized markets.  Forthe fiscal years ended June 30, 2003 and 2002, the Company’s resellersales accounted for approximately 62% and 64% of the Company’s total revenues,respectively.

 

***Backlog***

 

The Company believes that thedollar amount of backlog is not material to an understanding of its business assubstantially all of the Company’s product revenues in each quarter result fromorders received in that quarter.

 

**Manufacturingand Sources of Supply**

 

Theduplication of Vitrix software is performed internally.  The printing of documentation is primarilyoutsourced to suppliers. Although most of the parts and components includedwithin our products are available from multiple suppliers, certain parts andcomponents are purchased from single suppliers.  We have chosen to source these items from single suppliersbecause we believe that the supplier chosen is able to consistently provide uswith the highest quality product at a competitive price on a timely basis.  While to date we have been able to obtainadequate supplies of these parts and components, the inability to transition toalternate supply sources on a timely basis if required in the future, could resultin delays or reductions in product shipments, which could have a materialadverse effect on our business and operating results.

 

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**ProductDevelopment**

 

Our productdevelopment efforts are focused on enhancing and increasing the performance ofour existing products and developing new products. During fiscal 2003 and 2002,research and development expenses were $641,125 and $691,426,respectively.  We intend to continue tocommit resources to enhance and extend our product lines and develop interfacesto third party products.  Although weare continually seeking to further enhance our product offerings and to developnew products, there can be no assurance that these efforts will succeed, orthat, if successful, such product enhancements or new products will achievewidespread market acceptance, or that our competitors will not develop andmarket products that are superior to our products or achieve greater marketacceptance.  We also depend upon thereliability and viability of a variety of software development tools owned bythird parties to develop our products. If these tools prove inadequate or arenot properly supported, our ability to release competitive products in a timelymanner could be adversely impacted.

 

**ProprietaryRights**

 

We rely on acombination of trademarks, trade secret law and contracts to protect ourproprietary technology.  We generallyprovide software products to end-users under non-exclusive shrink-wrap licensesor under signed licenses, both of which may be terminated by Vitrix if the enduser breaches the terms of the license. These licenses generally require thatthe software be used only internally subject to certain limitations, such asthe number of employees, simultaneous users, computer model and serial number,features and/or terminals for which the end user has paid the required licensefee.  We authorize our resellers tosublicense software products to end users under similar terms.  In certain circumstances, we also makemaster software licenses available to end users which permit either a specifiedlimited number of copies or an unlimited number of copies of the software to bemade for internal use.  Some customerslicense software products under individually negotiated terms.  Despite these precautions, it may bepossible to copy or otherwise obtain and use our products or technology withoutauthorization.  In addition, effectivecopyright and******tradesecret protection may be unavailable or limited in certain foreign countries.

 

**Competition**

 

We providetime and attendance, data collection and labor management solutions that enablebusinesses to optimize their labor resources. The labor management industry is highly competitive.  Competition is increasing as businesses inrelated industries, such as human resources management, payroll processing andenterprise resource planning (“ERP”) enter the time and attendance market.  Advances in software development tools haveaccelerated the software development process and, therefore, enable competitorsto penetrate our markets more readily. Although we believe we have certain technological and other advantagesover our current competitors, maintaining those advantages will requirecontinued investment by the Company in research and development and marketingand sales initiatives.  There can be noassurance that we will have sufficient resources to make such investments or toachieve the technological advances necessary to maintain our competitiveadvantages.  Increased competition couldadversely affect our operating results through price reductions and/or loss ofmarket share.

 

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We competeprimarily on the basis of price/performance, quality, reliability and customerservice.  In the time and attendancemarket, we compete against firms that sell automated time and attendanceproducts to many industries, firms that focus on specific industries, and firmsselling related products, such as payroll processing, human resourcesmanagement, or ERP systems.  Our majorcompetitor, Kronos Corporation is substantially larger and has access tosignificantly greater financial resources than the Company.  Competitive market conditions could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**Employees**

 

As ofJune 30, 2003, we employed thirty-five individuals.  None of our employees are represented by aunion or other collective bargaining agreement, and we consider our relationswith our employees to be good.  We haveencountered competition for experienced technical personnel for productdevelopment, technical support and sales and expect such competition tocontinue in the future.  Any inabilityto attract and retain a sufficient number of qualified technical personnelcould adversely affect our ability to produce, support and sell products in atimely manner.

 

**ITEM2. Properties.**

 

Our executiveoffices are located in Tempe, Arizona and consist of approximately 6,800 squarefeet under a lease that will expire in December 2004. Our rental expensefor this facility in fiscal 2003 was approximately $185,000.  We believe our present facilities areadequate for our current requirements and that additional space will beavailable as needed in the future.

 

**ITEM3. Legal Proceedings.**

 

We are fromtime to time involved in legal proceedings arising from the normal course ofbusiness.  As of the date of thisreport, we were not currently involved in any legal proceedings.

 

**ITEM4. Submission Of Matters To A Vote Of Security Holders.**

 

No matter wassubmitted to vote of our security holders during the fourth fiscal quartercovered by this report.

 

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**PART II**

 

**ITEM5. Market For Common Equity And Related Stockholder Matters.**

 

**Marketfor Common Stock**

 

Our commonstock, par value $.005 per share (“Common Stock”), is traded on theOver-The-Counter electronic bulletin board (the “OTC Bulletin Board”)maintained by the NASD under the symbol “VRXI.OB”.  The quoted prices reflect inter-dealer prices without retailmark-up, markdown, or commissions and may not represent actual transactions.

 

The tablebelow reflects the high and low sales prices of our Common Stock for theperiods indicated as reported by the OTC Bulletin Board:

 

**Fiscal Year 2003**

 

| **Period**     |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| First quarter  |   | $        | 0.40   |    | $      | 0.17 |   |
| Second quarter |   | 0.30     |   | 0.16    |   |
| Third quarter  |   | 0.23     |   | 0.15    |   |
| Fourth quarter |   | 0.51     |   | 0.15    |   |
|                |        |          |        |         |        |  |  |

 

**Fiscal Year 2002**

 

| **Period**     |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| First quarter  |   | $        | 0.35   |    | $      | 0.20 |   |
| Second quarter |   | 0.22     |   | 0.10    |   |
| Third quarter  |   | 0.37     |   | 0.17    |   |
| Fourth quarter |   | 0.40     |   | 0.16    |   |
|                |        |          |        |         |        |  |  |

 

**Holders**

 

As ofSeptember 25, 2003, there were approximately 285 holders of record of ourCommon Stock.

 

**DividendPolicy**

 

To date, wehave not paid any cash dividends and our present policy is to retain earningsfor use in our business.

 

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The followingtable sets forth information regarding the number of shares of our common stockthat may be issued pursuant to our equity compensation plans or arrangements asof the end of fiscal 2003.

 

**EQUITYCOMPENSATION PLAN INFORMATION(1)**

 
|                                                       |   | **(a)**                                                                                              |   | **(b)**                                                                            |   | **(c)**                                                                                                                                                |    |
|------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| **Plan Category**                                          |   | **Number of  Securities  To Be Issued Upon  Exercise of Outstanding  Options, Warrants  and Rights** |   | **Weighted-Average  Exercise Price of  Outstanding Options,  Warrants and Rights** |   | **Number of  Securities  Remaining Available For  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected  in Column (a))** |    |
|                                                       |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                   |    |
| Equity  compensation plans approved by securityholders     |   | 485,781                                                                                              | (1)    | $                                                                                  | 3.14   |                                                                                                                                                   | 114,219 | (2) |
|                                                       |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                   |    |
| Equity  compensation plans not approved by securityholders |   | 1,005,928                                                                                            |   | $                                                                                  | 0.39   |                                                                                                                                                   | —  |   |
|                                                       |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                   |    |
| TOTAL                                                      |   | 1,491,709                                                                                            |   | $                                                                                  | 1.29   |                                                                                                                                                   | 114,219 |   |

 

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(1)          Represents shares ofcommon stock that may be issued pursuant to outstanding options granted underthe 1999 Equity Compensation Plan.

 

(2)          Represents shares ofcommon stock that may be issued pursuant to options available for future grantunder the 1999 Equity Compensation Plan.

 

**ITEM6. Management’s Discussion And Analysis Or Plan Of Operation.**

 

The followingdiscussion and analysis provides information that management believes isrelevant to an assessment and understanding of our results of operations andfinancial condition.  The followingselected financial information is derived from our historical financial statementsand should be read in conjunction with such financial statements and notesthereto set forth elsewhere herein and the “Forward-Looking Statements”explanation included herein.

 

**CriticalAccounting Policies**

 

Our discussionand analysis of our financial condition and results of operations is based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States.  The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamount of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amount ofrevenues and expenses for each period. Critical accounting policies are defined as policies that managementbelieves are (a) the most important to the portrayal of our financial conditionand

 

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results of operations; and (b)that require our most difficult, subjective or complex judgments, often as aresult of the need to make estimates about the effects of matters that areinherently uncertain.

 

Oursignificant accounting policies are described in the audited consolidatedfinancial statements and notes thereto included in Item 7.  We believe our most critical accountingpolicies are revenue recognition, software development costs and the allowancefor potentially uncollectible accounts receivable. This listing is not a comprehensive list ofall of our accounting policies.  Pleaserefer to Note 1 in the Notes to Consolidated Financial Statements for furtherinformation.

 

We derive ourrevenue from the sale of frontline labor management systems as well as sales ofapplication software, parts and components. Our systems consist of fully integrated software and intelligent datacollection terminals.  We also deriverevenues by providing maintenance, professional and educational services to ourcustomers.  We recognize revenues fromsales of our systems, application software, parts and components at the time ofshipment, unless we have has significant obligations remaining.  When significant obligations remain, revenueis not recognized until such obligations have been completed or are no longersignificant.  We recognize revenues fromour sales-type leases of systems at time of shipment.  Service revenues are recognized ratably over the contractualperiod or as the services are performed.

 

We provideinstallation services and certain warranties to our customers.  We also provide, without additional charge,certain software product enhancements for customers covered under softwaremaintenance contracts.  The provisionfor these expenses are made at the time revenues are recognized.

 

We capitalizesoftware development costs in accordance with Statement of Financial AccountingStandards No. 86, “Accounting for the Costs of Computer Software to be Sold,Leased, or Otherwise Marketed.” Capitalization of software development costsbegins upon the establishment of technological feasibility of the product.  The establishment of technologicalfeasibility and the ongoing assessment of the recoverability of these costsrequires considerable judgment by management with respect to certain externalfactors including, but not limited to, anticipated future gross productrevenue, estimated economic life, and changes in software and hardwaretechnology.  Amortization of capitalizedsoftware development costs begins when the products are available for generalrelease to customers and is computed on a product-by-product basis usingstraight-line amortization with useful lives of five years or, if less, theremaining estimated economic life of the product.  Amounts related to internal software development that could becapitalized under this statement were deemed immaterial.

 

We provide forpotentially uncollectible accounts receivable by use of the allowance method.The allowance is provided based upon a review of the individual accountsoutstanding, and our prior history of uncollectible accounts receivable.  It is our practice to record an estimatedallowance for sales returns and adjustments based on historical experience andto record individual charges for sales returns and adjustments directly torevenue as incurred.

 

14

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**Resultsof Operations**

 

**SELECTED FINANCIALINFORMATION**

 
|                               |   | **Fiscal  Years Ended June 30,** |      |
|------------------------------------|--------|---------------------------------------|-----------|
|                               |   | **2003**                              |      | **2002** |   |
|                               |   |                                  |      |   |   |
| Total Revenues                     |   | $                                     | 4,256,854 |   | $ | 3,285,315 |   |
| Costs of Revenues                  |   | 1,897,319                             |      | 1,557,736 |   |
| Gross Profit                       |   | 2,359,535                             |      | 1,727,579 |   |
| Sales and Marketing Expense        |   | 1,112,762                             |      | 903,112 |   |
| Research and Development Expense   |   | 641,125                               |      | 691,426 |   |
| General and Administrative Expense |   | 685,675                               |      | 741,820 |   |
| Net Loss                           |   | 152,728                               |      | 655,852 |   |
| Basic Loss per Share               |   | 0.02                                  |      | 0.09 |   |
|                                    |        |                                       |           |  |  |  |  |

 

**Comparison of the Fiscal Years EndedJune 30, 2003 and June 30, 2002**

 

*Revenues*.  Revenue for the fiscal year endedJune 30, 2003 (the “reporting period”), increased 30% to $4,256,854,compared to revenue of $3,285,315 for the fiscal year ended June 30, 2002(the “comparable period”).

 

*Product Sales. *Product sales for the reporting periodincreased 27% to $3,362,154 in the reporting period, compared to product salesof $2,650,310 in the comparable period. The increase was primarily attributable to the Company’s reseller salesoperations.  The Company believes thisincrease was principally the result of an increased marketing effort in thereseller sales operations.  During thereporting period the Company increased its attendance at industry trade showsand performed more reseller training programs than in the comparableperiod.  The Company also offered tworeseller sales incentive programs in the reporting period that were not offeredin the comparable period.

 

*Service Revenue. *Service revenue for the reporting periodincreased 41% to $894,700 in the reporting period, compared to service revenueof $635,005 in the comparable period. The increase was principally the result of the increase in product salesas services are generally sold in conjunction with product sales.

 

*Gross Profit*.  Gross profit as a percentage of revenues was55% in the reporting period and 53% in the comparable period.  The increase was attributable to an improvedprofit margin on services revenue in the reporting period.  Gross profit on product sales was 59% in thereporting and comparable period.  Grossprofit on service revenues was 41% in the reporting period compared to 28% inthe comparable period. The increase in gross profit percentage on servicesrevenue is primarily due to a 41% increase in services revenue in the reportingperiod while limiting the increase in cost of services to 16% in the reportingperiod over the comparable period.

 

15

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*Expenses*.  Total costs and expenses were $2,439,562, or57% of revenues, in the reporting period, compared to $2,336,358, or 71% ofrevenues, in the comparable period.  Thedecrease in costs and expenses as a percentage of revenue in the reportingperiod is primarily due to increasing revenues in the reporting period by 30%while reducing research and development and general and administrativeexpenses.  Sales and marketing expenseswere $1,112,762, or 26% of revenues, in the reporting period, compared to$903,112, or 28% of revenues, in the comparable period.  Research and development expenses were$641,125, or 15% of revenues, in the reporting period, compared to $691,426, or21% of revenues, in the comparable period. General and administrative expenses were $685,675, or 16% of revenues,in the reporting period, compared to $741,820, or 23% of revenues, in thecomparable period.

 

Other income(expense) was $(72,701) in the reporting period and $(81,141) in the comparableperiod.  The decrease in expense isprimarily due to a decrease in interest expense in the reporting period.

 

**Liquidityand Capital Resources**

 

As ofJune 30, 2003, the Company had working capital of $50,060, as compared to$17,505 at June 30, 2002.  Cash andcash equivalents at those dates amounted to $245,795 and $195,249,respectively.

 

*Operations*.  Net cash used by operations decreased to$180,141 in the reporting period, compared to net cash used by operations of$537,414 in the comparable period.  Thenet cash used in the current period was primarily attributable to the net loss,decreases in accounts payable and deferred revenue, and an increase ininventory, and was partially offset by a decrease in accounts receivable.  The Company was able to reduce its net cashused by operations by $357,273 in the current period primarily due to thedecrease in the net loss in the current period.

 

*Investment Activities*.  The Company used $32,343 and $33,788, topurchase property and equipment in the report period and comparable period,respectively.

 

*Financing Activities.*  During the reporting period, the Companyreceived net proceeds from long-term debt in the approximate amount of $32,000and $250,000 from the sale of common stock. During the comparable period, theCompany received net proceeds from long-term debt of approximately $120,000 andapproximately $495,000 from the sale of common stock.

 

Based on ourcurrent level of operations, we believe that our available cash and cashequivalents, cash received from operations, available credit and proceeds fromthe sale of common stock (as discussed below in “Recent Developments”) will besufficient to fund our working capital, capital expenditure requirements, andour debt service requirements as they come due, for the next twelve months. TheCompany may, however, seek to obtain additional capital through a line ofcredit at a financial institution or through additional debt or equityofferings during this time period.  Theraising of additional capital in public markets will primarily be dependentupon prevailing market conditions and the demand for the Company’s products andservices.  No assurance can be giventhat

 

16

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the Company will be able toraise additional capital, when needed or at all, or that such capital, ifavailable, will be on acceptable terms.

 

**RecentDevelopments**

 

InAugust 2003, the Company completed a private placement of 1,303,000 sharesof common stock, which generated proceeds of $547,260.  The Company will use the funds raised to finance key marketing initiativesand add personnel in the areas of sales, engineering and support services.

 

**CertainFactors That May Affect Future Operating Results**

 

Our actual operating resultsmay differ from those indicated by forward-looking statements made in thisAnnual Report and/or Form 10-KSB and presented elsewhere by management becauseof a number of factors, including the demand for our software solutions,level of competition, success in establishing and expanding our distributionchannels, success in attracting and retaining motivated and qualifiedpersonnel, ability to expand into existing and new domestic and internationalmarkets, development and marketing of new products and services, ability tocontrol costs, our ability to develop and market our products and services,competitive pricing pressure, ability to attract and retain strategic partners,managing growth and capital and general economic conditions.  Our operating results will be materially andadversely affected if we do not successfully address these and otherrisks.  Many of these factors are beyondour control.

 

*Growth andCapital Needs.*** **Thegrowth of our business could require us to expend funds in excess of the cashgenerated by our operations.  We mayneed to raise additional funds in the future in order to fund more rapidexpansion; to develop new and enhanced products; to increase customer supportor technical staff; to respond to competitive pressures; and to acquirecomplimentary businesses, technologies, or services.  We cannot predict the timing and amount of any such capitalrequirements at this time.  If we raiseadditional funds through the issuance of equity or convertible securities,existing stockholders may experience additional dilution and such securitiesmay have rights, preferences, or privileges senior to those of the rights ofour common stockholders.  There can beno assurance that we will be able to obtain additional financing on acceptableterms, or at all.  If adequate funds arenot available on acceptable terms, we may not be able to fund expansion,promote our products, take advantage of acquisition opportunities, develop orenhance products and services, or respond to competitive pressures.

 

We may wish to acquire complementary businesses, products, services, ortechnologies in the future.  We may notbe able to identify suitable acquisition candidates or make acquisitions oncommercially acceptable terms.  We mayhave difficulty integrating an acquired company’s personnel, operations,products, services, or technologies into our operations.  These difficulties could disrupt our ongoingbusiness, distract our management and employees, increase our expenses, andadversely affect our business.

 

*CompetitiveFactors***.** The market for software solutions is constantly evolving and extremelycompetitive.  We expect competition tointensify in the future. We compete with major domestic companies.  Many of these competitors have greatermarket recognition and substantially greater financial, technical, marketing,distribution, and other resources than we have, and we may be unable

 

17

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to compete effectively againstthem. Emerging companies also may increase their participation in the marketfor software applications such as that offered by the Company.

 

*Product Development and Technological Change*.Our success depends in part upon our ability to enhance our existing productsand services and to develop new products and services on a timely andcost-effective basis.  We cannot provideassurance that we will be able to successfully identify new opportunities anddevelop and bring to market new products and services in a timely and costeffective manner.  In addition, wecannot provide assurance that our products and services will not become obsolete,noncompetitive, or that they will sustain market acceptance.

 

We may not be able to adapt to rapidly changing technologies or we mayincur significant costs in doing so.** **The software industry is characterized by rapidly changingtechnologies, evolving industry standards, frequent new product and serviceintroductions, and changing customer demands. New turn key business solution products and services based on newtechnologies or new industry standards could render our existing products andservices obsolete and unmarketable.  Tobe successful, we must adapt to our rapidly evolving market by continuallyenhancing our products and services and introducing new products and servicesto address our users’ changing and increasingly sophisticated requirements.  We may use new technologies ineffectively orwe may fail to adapt our products and infrastructure to meet customerrequirements, competitive pressures, or emerging industry standards.  We could incur substantial costs if we needto modify our services or infrastructure. Our business could be materially and adversely affected if we incursignificant costs to adapt, or cannot adapt, to these changes.

 

*StrategicPartners.*** **Our success depends on forming relationshipswith affiliates, resellers and licensees.** **The success of our business model depends upon a constantrevenue stream generated by a high number of end-users.  Our business model contemplates attractingend-users by forming relationships with affiliates, resellers, and licenseesthat market our products and services. We believe that it will be less costly and more efficient for us toattract end-users through indirect distribution channels than to attempt toattract the end-users directly. Consequently, we must establish and maintain relationships withresellers and licensees.  We may not beable to attract additional affiliates, resellers, or licensees on acceptableterms, or at all.  Our business,financial condition and results of operations will be materially and adverselyaffected if we fail to establish and maintain relationships with affiliates,resellers, and licensees on a cost-effective basis.

 

**RecentAccounting Pronouncements**

 

InDecember 2002, the Financial Accounting Standards Board “FASB” issuedStatement of Financial Accounting Standards “SFAS” No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123.” This statement provides alternative methods of transitionfor a voluntary change to the fair value method of accounting for stock-basedcompensation. The statement amends the disclosure requirements of FASBStatement No. 123 to require prominent disclosure in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. The Companyaccounts for stock-based compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and

 

18

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complies with the disclosureprovisions of FASB Statement No. 123. The transition provisions are effectivefor fiscal years ending after December 15, 2002. The disclosure provisionsare effective for interim periods beginning after December 15, 2002. TheCompany implemented the required disclosure provisions in the three monthperiod ended March 31, 2003. The adoption of this statement is notexpected to have a material impact on the Company’s consolidated financialposition, results of operations or cash flows as the Company does notanticipate making the voluntary change to the fair value method of accountingfor stock-based compensation.

 

**Inflationand Seasonality**

 

The Companydoes not believe that its operations are significantly impacted byinflation.  The Company’s business isnot seasonal in nature.

 

**Forward-LookingInformation**

 

This AnnualReport on Form 10-KSB contains certain forward-looking statements andinformation which we believe are within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Theforward looking statements contained herein can be identified by the use offorward-looking terminology such as “believes,” “expects,” “may,” “will,”“should,” or “anticipates,” or the negative thereof or other variations thereonor comparable terminology, or by discussions of strategy that involve risks anduncertainties.  The Company wishes tocaution the reader that these forward-looking statements that are nothistorical facts, are only predictions. No assurances can be given that the future results indicated, whetherexpressed or implied, will be achieved. While sometimes presented with numerical specificity, these projectionsand other forward-looking statements are based upon a variety of assumptionsrelating to the business of the Company, which, although considered reasonableby the Company, may not be realized. Because of the number and range of assumptions underlying the Company’sprojections and forward-looking statements, many of which are subject tosignificant uncertainties and contingencies that are beyond the reasonablecontrol of the Company, some of the assumptions inevitably will notmaterialize, and unanticipated events and circumstances may occur subsequent tothe date of this report.  Examples ofuncertainties that could cause such differences include, but are not limitedto, the ability of the Company to attract and retain key personnel, especiallyhighly skilled technology personnel, the ability of the Company to secureadditional capital to finance its business plan, competition from othercompanies providing time and labor management hardware and software products,and the Company’s reliance on technology and information and telecommunicationsystems.  These forward-lookingstatements are based on current expectations and the Company assumes noobligation to update this information. Therefore, the actual experience of the Company and the results achievedduring the period covered by any particular projections or forward-lookingstatements may differ substantially from those projected.  Consequently, the inclusion of projectionsand other forward-looking statements should not be regarded as a representationby the Company or any other person that these estimates and projections will berealized, and actual results may vary materially.  There can be no assurance that any of these expectations will berealized or that any of the forward-looking statements contained herein willprove to be accurate.

 

19

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**ITEM 7. Financial Statements.**

 

The financial statements and schedules areincluded herewith commencing on page F-1.

 
| Independent Auditors’ Report                                          |
|----------------------------------------------------------------------------|
|                                                                       |
| Consolidated Balance Sheet                                                 |
|                                                                       |
| Consolidated  Statements of Operations                                     |
|                                                                       |
| Consolidated  Statements of Changes in Stockholders’ Equity (Deficit) |
|                                                                       |
| Consolidated  Statements of Cash Flows                                     |
|                                                                       |
| Notes to  Consolidated Financial Statements                                |

 

20

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**INDEPENDENT AUDITORS’ REPORT**

 

 

 

To TheStockholders and Board of Directors of

Vitrix, Inc. andSubsidiary

 

We have auditedthe accompanying consolidated balance sheet of Vitrix, Inc. and subsidiary asof June 30, 2003, and the related consolidated statements of operations,changes in stockholders’ equity (deficit), and cash flows for the years endedJune 30, 2003 and 2002. These consolidated financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates of America. Those standards require that we plan and perform the auditsto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe our audits provide a reasonable basis forour opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Vitrix, Inc. andSubsidiary as of June 30, 2003, and the consolidated results of its operations,changes in stockholders’ equity (deficit), and its cash flows for the yearsended June 30, 2003 and 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
| Certified Public Accountants | /s/ Semple & Cooper, LLP |
|------------------------------|------------------------------|
|                         |                         |
| Phoenix, Arizona             |                         |
| September 22, 2003           |                         |

 

 

F-1

----

 

**VITRIX, INC. ANDSUBSIDIARY**

CONSOLIDATEDBALANCE SHEETS

 
|                                                                                                                 |   | **June 30,  2003** |      | **June 30,  2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|-------------------------|--------|
|                                                                                                                 |   |                    |      |                    |   |
| **ASSETS**                                                                                                           |   |                    |      |                    |   |
| **Current Assets:**                                                                                                  |   |                    |      |                    |   |
| Cash and cash equivalents (Note 1)                                                                                   |   | $                       | 245,795   |                    | $      | 195,249 |   |
| Accounts receivable – trade, net (Notes 1  and 2)                                                               |   | 551,576                 |      | 615,084                 |   |
| Inventory (Note 1)                                                                                                   |   | 232,815                 |      | 174,697                 |   |
| Prepaid expenses and other current assets                                                                            |   | 34,451                  |      | 47,708                  |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Total Current Assets**                                                                                             |   | 1,064,637               |      | 1,032,738               |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Property and equipment,  net (Notes 1 and 3)**                                                                     |   | 115,633                 |      | 142,984                 |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Total Assets**                                                                                                     |   | $                       | 1,180,270 |                    | $      | 1,175,722 |   |
|                                                                                                                 |   |                    |      |                    |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                             |   |                    |      |                    |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Current Liabilities:**                                                                                             |   |                    |      |                    |   |
| Current portion of long-term debt (Note 4)                                                                           |   | $                       | 283,148   |                    | $      | 134,068 |   |
| Accounts payable (Note 1)                                                                                            |   | 272,129                 |      | 355,381                 |   |
| Accrued liabilities                                                                                                  |   | 209,288                 |      | 214,641                 |   |
| Deferred revenue (Note 1)                                                                                            |   | 250,012                 |      | 311,143                 |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Total Current Liabilities**                                                                                        |   | 1,014,577               |      | 1,015,233               |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Long-term debt, less  current portion (Note 4)**                                                                   |   | 597,505                 |      | 733,555                 |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Total Liabilities**                                                                                                |   | 1,612,082               |      | 1,748,788               |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Commitments: (Note 6)**                                                                                            |   | —                  |      | —                  |   |
|                                                                                                                 |   |                    |      |                    |   |
| **Stockholders’ Equity  (Deficit): (Note 7)**                                                                   |   |                    |      |                    |   |
| Common stock, $.005 par value, 50,000,000  shares authorized, 10,656,057 and 9,105,828 shares issued and outstanding |   | 53,280                  |      | 45,529                  |   |
| Contributed capital                                                                                                  |   | 6,338,351               |      | 6,052,120               |   |
| Accumulated deficit                                                                                                  |   | (6,823,443              | )         | (6,670,715              | )      |
|                                                                                                                 |   |                    |      |                    |   |
| **Total Stockholders’  Equity (Deficit)**                                                                       |   | (431,812                | )         | (573,066                | )      |
|                                                                                                                 |   |                    |      |                    |   |
| **Total Liabilities and  Stockholders’ Equity (Deficit)**                                                       |   | $                       | 1,180,270 |                    | $      | 1,175,722 |   |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

F-2

----

 

**VITRIX, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                     |   | **Years Ended June 30,** |       |
|----------------------------------------------------------|--------|-------------------------------|------------|
|                                                     |   | **2003**                      |       | **2002** |   |
|                                                     |   |                          | ** ** |   | ** ** |
| **Revenues:**                                            |   |                          |       |   |   |
| Product sales                                            |   | $                             | 3,362,154  |   | $ | 2,650,310 |   |
| Services revenue                                         |   | 894,700                       |       | 635,005 |   |
|                                                     |   |                          |       |   |   |
| **Total Revenues**                                       |   | 4,256,854                     |       | 3,285,315 |   |
|                                                     |   |                          |       |   |   |
| **Cost of Revenues:**                                    |   |                          |       |   |   |
| Product                                                  |   | 1,366,973                     |       | 1,099,572 |   |
| Services                                                 |   | 530,346                       |       | 458,164 |   |
|                                                     |   |                          |       |   |   |
| **Total Cost of Revenues**                               |   | 1,897,319                     |       | 1,557,736 |   |
|                                                     |   |                          |       |   |   |
| **Gross Profit**                                         |   | 2,359,535                     |       | 1,727,579 |   |
|                                                     |   |                          |       |   |   |
| **Costs and Expenses:**                                  |   |                          |       |   |   |
| Sales and marketing                                      |   | 1,112,762                     |       | 903,112 |   |
| Research and development                                 |   | 641,125                       |       | 691,426 |   |
| General and administrative                               |   | 685,675                       |       | 741,820 |   |
|                                                     |   |                          |       |   |   |
| **Total Costs and Expenses**                             |   | 2,439,562                     |       | 2,336,358 |   |
|                                                     |   |                          |       |   |   |
| **Net Loss from Operations**                             |   | (80,027                       | )          | (608,779 | ) |
|                                                     |   |                          |       |   |   |
| **Other Income (Expense):**                              |   |                          |       |   |   |
| Interest expense                                         |   | (79,204                       | )          | (87,324 | ) |
| Other                                                    |   | 5,385                         |       | 1,993 |   |
| Interest income                                          |   | 1,118                         |       | 4,190 |   |
|                                                     |   |                          |       |   |   |
|                                                     |   | (72,701                       | )          | (81,141 | ) |
|                                                     |   |                          |       |   |   |
| **Income Before  Extraordinary Item**                    |   | (152,728                      | )          | (689,920 | ) |
|                                                     |   |                          |       |   |   |
| **Extraordinary Item - Gain  on extinguishment of debt** |   | —                        |       | 34,068 |   |
|                                                     |   |                          |       |   |   |
| **Net Loss**                                             |   | $                             | (152,728   | ) | $ | (655,852 | ) |
|                                                     |   |                          |       |   |   |
| **Basic Loss per Share  (Note 1)**                       |   | $                             | (0.02      | ) | $ | (0.09 | ) |
|                                                     |   |                          |       |   |   |
| **Weighted Average Number  of Shares Outstanding**       |   | 9,364,650                     |       | 7,344,280 |   |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

F-3

----

 

**VITRIX, INC. AND SUBSIDIARY**

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)FOR THE YEARS ENDED JUNE 30, 2003 AND 2002

 
|                                    |   | **Common Stock** |   | **Contributed  Capital** |   | **Accumulated  Deficit** |   | **Total**  |   |
|-----------------------------------------|--------|------------------|--------|--------------------------|--------|--------------------------|--------|------------|--------|
| **Shares**                              |   | **Amount**       |
|                                    |   |             |   |                     |   |                     |   |       |   |   |   |
| Balance at June 30, 2001           |   | 6,295,828        |   | $                        | 31,479 |                     | $      | 5,503,970  |   | $ | (6,014,863 | ) | $ | (479,414 | ) |
|                                    |   |             |   |                     |   |                     |   |       |   |   |   |
| Sale of common stock                    |   | 2,475,000        |   | 12,375                   |   | 482,625                  |   | —     |   | 495,000 |   |
| Conversion of debt from a related party |   | 300,000          |   | 1,500                    |   | 58,500                   |   | —     |   | 60,000 |   |
| Issuance of common stock for services   |   | 35,000           |   | 175                      |   | 7,025                    |   | —     |   | 7,200 |   |
| Net loss                                |   | —           |   | —                   |   | —                   |   | (655,852   | )      | (655,852 | ) |
| Balance at June 30, 2002           |   | 9,105,828        |   | $                        | 45,529 |                     | $      | 6,052,120  |   | $ | (6,670,715 | ) | $ | (573,066 | ) |
|                                    |   |             |   |                     |   |                     |   |       |   |   |   |
| Issuance of common stock for services   |   | 161,340          |   | 807                      |   | 43,175                   |   | —     |   | 43,982 |   |
| Sale of common stock                    |   | 1,388,889        |   | 6,944                    |   | 243,056                  |   | —     |   | 250,000 |   |
| Net loss                                |   | —           |   | —                   |   | —                   |   | (152,728   | )      | (152,728 | ) |
| Balance at June 30, 2003           |   | 10,656,057       |   | 53,280                   |   | 6,338,351                |   | (6,823,443 | )      | (431,812 | ) |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

F-4

----

 

**VITRIX, INC. AND SUBSIDIARY**

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                         |   | **Years Ended June 30,** |       |
|------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                         |   | **2003**                      |       | **2002** |   |
| **Increase (Decrease) in  Cash and Cash Equivalents:**                       |   |                          | ** ** |   | ** ** |
| **Cash flows from operating  activities:**                                   |   |                          |       |   |   |
| Net Loss                                                                     |   | $                             | (152,728   | ) | $ | (655,852 | ) |
| Adjustments to reconcile net loss to net  cash used by operating activities: |   |                          |       |   |   |
| Depreciation                                                                 |   | 59,694                        |       | 80,242 |   |
| Common stock, stock options and warrants  issued for services                |   | 43,982                        |       | 7,200 |   |
| Gain on extinguishment of debt                                               |   | —                        |       | (34,068 | ) |
| Changes in Assets and Liabilities:                                           |   |                          |       |   |   |
| Accounts receivable-trade                                                    |   | 63,508                        |       | (108,095 | ) |
| Inventory                                                                    |   | (58,118                       | )          | 72,853 |   |
| Prepaid expenses and other current assets                                    |   | 13,257                        |       | (4,837 | ) |
| Accounts payable                                                             |   | (83,252                       | )          | (76,557 | ) |
| Accrued liabilities                                                          |   | (5,353                        | )          | 27,806 |   |
| Deferred revenue                                                             |   | (61,131                       | )          | 153,894 |   |
| **Net cash used by  operating activities**                                   |   | (180,141                      | )          | (537,414 | ) |
|                                                                         |   |                          |       |   |   |
| **Cash flows from investing  activities:**                                   |   |                          |       |   |   |
| Purchase of property and equipment                                           |   | (32,343                       | )          | (33,788 | ) |
| **Net cash used by  investing activities**                                   |   | (32,343                       | )          | (33,788 | ) |
|                                                                         |   |                          |       |   |   |
| **Cash flows from financing  activities:**                                   |   |                          |       |   |   |
| Proceeds from long-term debt                                                 |   | 150,000                       |       | 560,000 |   |
| Repayment of long-term debt                                                  |   | (117,977                      | )          | (438,512 | ) |
| Repayment of capital leases                                                  |   | (18,993                       | )          | (27,623 | ) |
| Proceeds from issuance of stock                                              |   | 250,000                       |       | 495,000 |   |
| **Net cash provided by  financing activities**                               |   | 263,030                       |       | 588,865 |   |
|                                                                         |   |                          |       |   |   |
| Net change in cash and cash equivalents                                      |   | 50,546                        |       | 17,663 |   |
|                                                                         |   |                          |       |   |   |
| Cash and cash equivalents at beginning of  year                              |   | 195,249                       |       | 177,586 |   |
|                                                                         |   |                          |       |   |   |
| Cash and cash equivalents at end of year                                     |   | $                             | 245,795    |   | $ | 195,249 |   |
|                                                                         |   |                          |       |   |   |
| **Supplemental disclosure  of cash flow information:**                       |   |                          |       |   |   |
| Interest paid                                                                |   | $                             | 83,178     |   | $ | 91,642 |   |
| Income taxes paid                                                            |   | $                             | —     |   | $ | — |   |
| **Noncash investing and  financing activities:**                             |   |                          |       |   |   |
| Assets acquired by entering into capital  leases                             |   | $                             | —     |   | $ | 24,816 |   |
| Conversion of related party notes and  accrued interest to equity            |   | $                             | —     |   | $ | 60,000 |   |
| Gain on extinguishment of debt - principal  portion                          |   | $                             | —     |   | $ | 19,500 |   |

 

The Accompanying Notes are an Integral Partof the Consolidated Financial Statements

 

F-5

----

 

**VITRIX, INC. AND SUBSIDIARY**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1****Summary of Significant Accounting Policies, Nature ofOperations and Use of Estimates:**

 

***Nature of Business:***

 

Vitrix, Inc. (the Company or Vitrix) throughits wholly owned subsidiary, Time America, Inc. (previously known as VitrixIncorporated), provides Time & Labor Management Solutions. Vitrix productsimprove productivity by automating Time and Attendance, Workforce Scheduling,and the management of labor resources, with features such as employeeself-service, data capture technology, time sheet submittal, strategicreporting, and interface tools for payroll, human resources, resource planning,and third party application integration. Vitrix solutions are offered in a 100%Web-based Application Service Provider (ASP) product, PC based application, orin a client/server configuration.

 

***Pervasiveness ofEstimates:***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

***Cash and Major Supplier Concentrations:***

 

The Company maintains cash andcash equivalents at a financial institution. Deposits not to exceed $100,000 at the financial institution are insuredby the Federal Deposit Insurance Corporation. At June 30, 2003 and 2002, the Company had uninsured cash and cashequivalents of approximately $213,000 and $71,000, respectively.

 

For the year endedJune 30, 2003, the Company had three (3) major suppliers representingapproximately eighty percent (80%) of cost of product revenues.  At June 30, 2003, the amount due tothese suppliers included in accounts payable was $125,173.

 

For the year endedJune 30, 2002, the Company had three (3) major suppliers representingapproximately sixty-nine percent (69%) of cost of product revenues.  At June 30, 2002, the amount due tothese suppliers included in accounts payable was $142,928.

 

***Cash and CashEquivalents:***

 

Cash and cash equivalents areconsidered to be all highly liquid investments purchased with an initialmaturity of three (3) months or less.

 

***Inventory:***

 

Inventory is stated at the lower of cost (first-in, first-out method)or market.

 

***Property andEquipment:***

 

Property and equipment arerecorded at cost. Depreciation is provided for on the straight-line method overthe estimated useful lives of the assets. The average lives range from three tofive years. Maintenance and repairs that neither materially add to the value ofthe property nor appreciably prolong its life are charged to expense asincurred. Betterments or renewals are capitalized when incurred.  Property and equipment are reviewed eachyear to determine whether any events or circumstances indicate that thecarrying amount of the assets may not be recoverable.  Such review includes estimating future cash flows.  Property and equipment costs are expensedwhen determined not realizable.

 

F-6

----

 

The Company is the lessee ofcomputer equipment, with an original cost of approximately $25,000, under acapital lease agreement expiring in September 2004. The assets andliabilities under the capital lease agreement is recorded at the lower of thepresent 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 agreement is included indepreciation expense as noted above.

 

***Software DevelopmentCosts:***

 

The Company capitalizes software development costs in accordance withStatement of Financial Accounting Standards No. 86, “Accounting for the Costsof Computer Software to be Sold, Leased, or Otherwise Marketed.” Capitalizationof software development costs begins upon the establishment of technologicalfeasibility of the product.  Theestablishment of technological feasibility and the ongoing assessment of therecoverability of these costs requires considerable judgement by managementwith respect to certain external factors including, but not limited to,anticipated future gross product revenue, estimated economic life, and changesin software and hardware technology. Amortization of capitalized software development costs begins when theproducts are available for general release to customers and is computed on aproduct-by-product basis using straight-line amortization with useful lives offive years or, if less, the remaining estimated economic life of theproduct.  Amounts related to internalsoftware development that could be capitalized under this statement wereimmaterial.

 

***Revenue Recognition and Deferred Revenue:***

 

The Company derives itsrevenues from the sale of frontline labor management systems as well as salesof application software, parts and components. The Company’s systems consist of fully integrated software andintelligent data collection terminals. The Company also derives revenues by providing maintenance, professionaland educational services to its customers. The Company recognizes revenues from sales of its systems, applicationsoftware, parts and components at the time of shipment, unless the Company hassignificant obligations remaining.  Whensignificant obligations remain, revenue is not recognized until suchobligations have been completed or are no longer significant.  The Company recognizes revenues from itssales-type leases of systems at time of shipment.  Service revenues are recognized ratably over the contractualperiod or as the services are performed.

 

The Company providesinstallation services and certain warranties to its customers. It alsoprovides, without additional charge, certain software product enhancements forcustomers covered under software maintenance contracts.  The provision for these expenses are made atthe time revenues are recognized.

 

***Deferred IncomeTaxes:***

 

Deferred income taxes areprovided on an asset and liability method, whereby deferred tax assets arerecognized for deductible temporary differences and operating loss and taxcredit carryforwards and deferred tax liabilities are recognized for taxabletemporary differences. Temporary differences are the differences between thereported amounts of assets and liabilities and their tax basis. Deferred taxassets are reduced by a valuation allowance when, in the opinion of management,there is uncertainty of the utilization of the operating losses in futureperiods. Deferred tax assets and liabilities are adjusted for the effects ofchanges in tax laws and rates on the date of enactment.

 

F-7

----

 

***Fair Value of Financial Instruments:***

 

The carrying values of cash,cash equivalents, accounts receivable, accounts payable, accrued liabilitiesand current notes payable approximate their fair values because of the shortmaturity of these instruments.  Withrespect to long-term debt, based on the borrowing rates currently available tothe Company for similar bank and equipment loans and capitalized leases, theamounts reported approximate the fair value of the respective financialinstruments.

 

***LossPer Share:***

 

Diluted earnings per share arecomputed based on the weighted average number of shares of common stock anddilutive securities outstanding during the period.  Dilutive securities are options and warrants that are freelyexercisable into common stock at less than the prevailing market price.  Dilutive securities are not included in theweighted average number of shares when inclusion would increase the earnings pershare or decrease the loss per share. At June 30, 2003 and 2002, options and warrants to purchase1,491,170 and 1,445,187, respectively, shares of the Company’s common stockwere not included in the determination of diluted loss per share as their effectwas anti-dilutive.

 

***Stock-BasedCompensation:***

 

Thecompany has adopted FAS No. 123, “Accounting for Stock-BasedCompensation”.  Under FAS No. 123,companies can, but are not required to, elect to recognize compensation expensefor all stock-based awards using a fair value methodology. The Company hasadopted the disclosure-only provisions, as permitted by FAS No. 123. TheCompany applies APB Opinion No. 25 and related interpretations in accountingfor its stock-based plans.  Accordingly,there is no related compensation expense recorded in the Company’s financialstatements for the periods presented. Had compensation cost for stock-basedcompensation been determined based on the fair value of the options at thegrant dates consistent with the method of SFAS 123, the Company’s net loss andloss per share for the years ended June 30, 2003 and 2002 would have beenreduced to the pro forma amounts presented below:

 
|                                                                                                                                               |   | **Year Ended June 30,** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                                                                               |   | **2003**                     |     | **2002** |   |
| **Net loss:**                                                                                                                                      |   |                         |     |   |   |
| As reported                                                                                                                                        |   | $                            | (152,728 | ) | $ | (655,852 | ) |
| Deduct: Total stock-based employee  compensation expsense determined under the fair value based method for all  awards, net of related tax effects |   | (116,284                     | )        | (119,103 | ) |
|                                                                                                                                               |   |                         |     |   |   |
| Pro forma                                                                                                                                          |   | $                            | (269,012 | ) | $ | (774,955 | ) |
|                                                                                                                                               |   |                         |     |   |   |
| **Loss per share:**                                                                                                                                |   |                         |     |   |   |
| As reported                                                                                                                                        |   | $                            | (0.02    | ) | $ | (0.09 | ) |
| Pro forma                                                                                                                                          |   | $                            | (0.03    | ) | $ | (0.11 | ) |

 

F-8

----

 

***Recent Accounting Pronouncements:***

 

InDecember 2002, the Financial Accounting Standards Board “FASB” issuedStatement of Financial Accounting Standards “SFAS” No. 148, “Accounting forStock-Based Compensation - Transition and Disclosure - an amendment of FASBStatement No. 123.” This statement provides alternative methods of transitionfor a voluntary change to the fair value method of accounting for stock-basedcompensation. The statement amends the disclosure requirements of FASBStatement No. 123 to require prominent disclosure in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results. The Companyaccounts for stock-based compensation arrangements in accordance with theprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and complies with the disclosure provisions of FASBStatement No. 123. The transition provisions are effective for fiscal yearsending after December 15, 2002. The disclosure provisions are effectivefor interim periods beginning after December 15, 2002. The Companyimplemented the required disclosure provisions in the three month period endedMarch 31, 2003. The adoption of this statement is not expected to have amaterial impact on the Company’sconsolidated financial position, results of operations or cash flows as the Companydoes not anticipate making the voluntary change to the fair value method ofaccounting for stock-based compensation.

 

**Note 2**

**Accounts Receivable -Trade:**

 

At June 30, 2003 and 2002accounts receivable – trade consists of:

 
|                            |   | **2003** |    | **2002** |   |
|---------------------------------|--------|----------|---------|----------|--------|
|                            |   |     |    |     |   |
| Accounts receivable - trade     |   | $        | 606,576 |     | $      | 670,084 |   |
| Less:                           |   |     |    |     |   |
| Allowance for doubtful accounts |   | (15,000  | )       | (30,000  | )      |
| Allowance for sales returns     |   | (40,000  | )       | (25,000  | )      |
|                            |   |     |    |     |   |
|                            |   | $        | 551,576 |     | $      | 615,084 |   |

 

The Company provides forpotentially uncollectible accounts receivable by use of the allowance method.The allowance is provided based upon a review of the individual accountsoutstanding, and the Company’s prior history of uncollectible accountsreceivable. It is the Company’s practice to record an estimated allowance forsales returns and adjustments based on historical experience and to recordindividual charges for sales returns and adjustments directly to revenue asincurred.

 

F-9

----

 

**Note 3**

**Property and Equipment:**

 

At June 30, 2003 and 2002property and equipment consists of:

 
|                              |   | **2003** |    | **2002** |   |
|-----------------------------------|--------|----------|---------|----------|--------|
|                              |   |     |    |     |   |
| Computers, software and equipment |   | $        | 312,909 |     | $      | 378,985 |   |
| Furniture and fixtures            |   | 46,659   |    | 57,620   |   |
| Leasehold improvements            |   | 15,103   |    | 15,103   |   |
|                              |   | 374,671  |    | 451,708  |   |
| Less: accumulated depreciation    |   | (259,038 | )       | (308,724 | )      |
|                              |   |     |    |     |   |
|                              |   | $        | 115,633 |     | $      | 142,984 |   |

 

Depreciation expense was$59,694 and $80,242, respectively, for the years ended June 30, 2003 and2002.

 

**Note 4**

**Long-term Debt:**

 

At June 30, 2003 and 2002 long-term debt consists of thefollowing:

 
|                                                                                                                                                                                                                                                                                                        |   | **2003** |    | **2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                                                                                                                                                                                                                        |   |     |    |     |   |
| 10% promissory note to a related party, 60  monthly principal and interest payments of $6,600 through October 2006;  followed by a balloon payment of approximately $315,000.  Collateralized by all assets of the  Company.                                                                      |   | $        | 440,954 |     | $      | 476,856 |   |
|                                                                                                                                                                                                                                                                                                        |   |     |    |     |   |
| Promissory note to a related party,  interest at prime plus 1 percent, monthly interest only payments through  November 2001 followed by twenty four monthly principal and interest  payments of approximately $9,000. Due in full in October 2004.  Collateralized by all assets of the Company. |   | 277,557  |    | 359,632  |   |
|                                                                                                                                                                                                                                                                                                        |   |     |    |     |   |
| $400,000  revolving line of credit with a shareholder, expiring on December 31,  2003, interest at 10%. Interest only payments due monthly.  Collateralized by all assets of the  Company.                                                                                                        |   | 150,000  |    | —   |   |
|                                                                                                                                                                                                                                                                                                        |   |     |    |     |   |
| Capital leases payable, interest at rates  ranging from 15% to 24%, payable in monthly installments of principal and  interest, maturing through September 2004.                                                                                                                                       |   | 12,142   |    | 31,135   |   |
|                                                                                                                                                                                                                                                                                                        |   |     |    |     |   |
|                                                                                                                                                                                                                                                                                                        |   | 880,653  |    | 867,623  |   |
| Less: current portion                                                                                                                                                                                                                                                                                       |   | (283,148 | )       | (134,068 | )      |
|                                                                                                                                                                                                                                                                                                        |   |     |    |     |   |
| Long-term debt                                                                                                                                                                                                                                                                                              |   | $        | 597,505 |     | $      | 733,555 |   |

 

F-10

----

 

On January 13, 1994, theCompany entered into a series of 10% convertible subordinated promissory notesdue January 15, 1996 totaling $5,157,750. On June 30, 1996 simultaneous with the closing of an asset sale,the Company completed an exchange offer in the aggregate principal amount of$5,040,750 with certain holders of the notes. On October 21, 1996, the Company completed the extinguishments of$97,500 of the notes in exchange for cash and, common stock warrants leavingone remaining holder outstanding with a $19,500 note.  The Company has been unable to locate the beneficial owner ofthis note and recorded a gain on the extinguishment of the debt and accruedinterest during the year ended June 30, 2002.

 

As of June 30, 2003 futureminimum payments due under the long-term debt agreements are as follows:

 

| **Year Ending  June 30,** |   |    |    |
|--------------------------------|--------|---------|---------|
|                           |   |    |    |
| 2004                           |   | $       | 273,680 |   |
| 2005                           |   | 231,244 |    |
| 2006                           |   | 44,860  |    |
| 2007                           |   | 318,727 |    |
|                           |   |    |    |
| Total                          |   | $       | 868,511 |   |

 

As of June 30, 2003 futureminimum lease payments due under the capital lease agreements, are as follows:

 

| **Year Ending  June 30,**                               |   |   |   |
|--------------------------------------------------------------|--------|--------|--------|
| 2004                                                         |   | $      | 11,051 |   |
| 2005                                                         |   | 2,763  |   |
|                                                         |   |   |   |
| Total minimum lease payments                                 |   | 13,814 |   |
| Less:   amount representing interest                    |   | (1,672 | )      |
| Present value of net minimum lease  payments                 |   | 12,142 |   |
| Less:   current maturities of capital lease obligations |   | (9,468 | )      |
| Long-term maturities of capital lease  obligations           |   | $      | 2,674  |   |

 

F-11

----

 

**Note 5**

**Income Taxes:**

 

As of June 30, 2003 and2002 deferred tax assets consist of the following:

 
|                              |   | **2003**   |      | **2002**   |   |
|-----------------------------------|--------|------------|-----------|------------|--------|
|                              |   |       |      |       |   |
| Federal loss carryforwards        |   | $          | 1,210,000 |       | $      | 1,150,000 |   |
| State loss carryforwards          |   | 300,000    |      | 290,000    |   |
| Other                             |   | 34,000     |      | 33,000     |   |
|                              |   | 1,544,000  |      | 1,473,000  |   |
| Less:   valuation allowances |   | (1,544,000 | )         | (1,473,000 | )      |
|                              |   |       |      |       |   |
|                              |   | $          | —    |       | $      | — |   |

 

The Company has established avaluation allowance equal to the full amount of the deferred tax assetsprimarily because of uncertainty in the utilization of net operating losscarryforwards.

 

As a result of stock ownershipchanges, the Company’s ability to utilize net operating losses in the futurecould be limited, in whole or part, under Internal Revenue CodeSection 382.  The Company wastreated as an S-Corporation for income tax purposes through May 13,1997.  As of June 30, 2003 theCompany’s federal net operating loss carryforwards was approximately $3,800,000and begins expiring in 2012 through 2022.

 

The Company’s tax expense(benefit) differed from the statutory rate primarily due to the $71,000 changein the deferred tax asset valuation allowance from June 30, 2002.

 

**Note 6**

**Commitments:**

 

The Company currently leasesoffice space in Tempe, Arizona and office equipment and services undernon-cancelable operating lease agreements which expire through June 2005.For the years ended June 30, 2003 and 2002, expense under theaforementioned non-cancelable operating lease agreements was approximately$205,000 and $210,000, respectively.

 

Future minimum lease paymentsdue under the operating lease agreements are as follows:

 

| **Year Ending  June 30,** |   |    |    |
|--------------------------------|--------|---------|---------|
| 2004                           |   | 192,946 |    |
| 2005                           |   | 104,230 |    |
|                           |   |    |    |
|                           |   | $       | 297,176 |   |
|                                |        |         |         |  |

 

F-12

----

 

**Note 7**

**Stockholders’ Equity:**

 

***StockOptions:***

 

On July 13, 1999, theBoard of Directors authorized the implementation of the 1999 EquityCompensation Plan.  The plan allows forthe award of incentive stock options, non-statutory stock options or restrictedstock awards to certain employees, directors, consultants and independentcontractors.  The Company has reservedan aggregate of 600,000 shares of common stock for distribution under theplan.  Incentive stock options grantedunder the plan may be granted to employees only, and may not have an exerciseprice less than the fair market value of 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.

 

A summary of the activity ofoptions under the plan and non-statutory options granted outside the planfollows:

 
|                              |   | **Number of  Options** |   | **Weighted Average  Exercise Price** |   |
|-----------------------------------|--------|------------------------|--------|--------------------------------------|--------|
|                              |   |                   |   |                                 |   |
| Outstanding at June 30, 2001 |   | 837,381                |   | $                                    | 2.25   |   |
| Granted                           |   | 286,000                |   | 0.23                                 |   |
| Exercised                         |   | —                 |   | —                               |   |
| Forfeited                         |   | (60,191                | )      | 1.40                                 |   |
|                              |   |                   |   |                                 |   |
| Outstanding at June 30, 2002 |   | 1,063,190              |   | $                                    | 1.75   |   |
|                              |   |                   |   |                                 |   |
| Granted                           |   | 288,000                |   | 0.21                                 |   |
| Exercised                         |   | —                 |   | —                               |   |
| Forfeited                         |   | (106,938               | )      | 0.73                                 |   |
|                              |   |                   |   |                                 |   |
| Outstanding at June 30, 2003 |   | 1,244,252              |   | $                                    | 1.49   |   |

 

Additional information aboutoutstanding options to purchase the Company’s common stock as of June 30,2003 is as follows:

 
|               |   | **Options Outstanding** |   | **Options Exercisable**                                     |   |
|--------------------|--------|-------------------------|--------|-------------------------------------------------------------|--------|
| **Exercise Price** |   | **Number of  Shares**   |   | **Weighted Avg.  Remaining  Contractural  Life (In Years)** |   | **Weighted Avg.  Exercise Price** |   | **Number of  Shares** |   | **Weighted Avg.  Exercise Price** |   |
|               |   |                    |   |                                                        |   |   |   |   |   |   |   |
| $22.50 - $13.10    |   | 6,300                   |   | 5.17                                                        |   | $ | 15.97 |   | 5,100 |   | $ | 16.45 |   |
| $9.40  - $7.50     |   | 104,000                 |   | 6.64                                                        |   | $ | 9.33 |   | 78,000 |   | $ | 9.33 |   |
| $3.40  - $2.20     |   | 139,523                 |   | 7.01                                                        |   | $ | 3.18 |   | 84,642 |   | $ | 3.06 |   |
| $1.10              |   | 44,936                  |   | 5.30                                                        |   | $ | 1.10 |   | 44,936 |   | $ | 1.10 |   |
| $0.44  - $0.40     |   | 434,492                 |   | 7.82                                                        |   | $ | 0.40 |   | 214,746 |   | $ | 0.40 |   |
| $0.32  - $0.14     |   | 515,000                 |   | 9.22                                                        |   | $ | 0.22 |   | 298,500 |   | $ | 0.24 |   |

 

F-13

----

 

Thecompany has adopted FAS No. 123, “Accounting for Stock-BasedCompensation”.  Under FAS No. 123,companies can, but are not required to, elect to recognize compensation expensefor all stock-based awards using a fair value methodology. The Company hasadopted the disclosure-only provisions, as permitted by FAS No. 123. TheCompany applies APB Opinion No. 25 and related interpretations in accountingfor its stock-based plans.  Accordingly,there is no related compensation expense recorded in the Company’s financialstatements for the periods presented. Had compensation cost for stock-basedcompensation been determined based on the fair value of the options at thegrant dates consistent with the method of SFAS 123, the Company’s net loss andloss per share for the years ended June 30, 2003 and 2002 would have beenreduced to the pro forma amounts presented below:

 
|                                                                                                                                               |   | **Year Ended June 30,** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                                                                               |   | **2003**                     |     | **2002** |   |
| **Net loss:**                                                                                                                                      |   |                         |     |   |   |
| As reported                                                                                                                                        |   | $                            | (152,728 | ) | $ | (655,852 | ) |
| Deduct: Total stock-based employee  compensation expsense determined under the fair value based method for all  awards, net of related tax effects |   | (116,284                     | )        | (119,103 | ) |
|                                                                                                                                               |   |                         |     |   |   |
| Pro forma                                                                                                                                          |   | $                            | (269,012 | ) | $ | (774,955 | ) |
|                                                                                                                                               |   |                         |     |   |   |
| **Loss per share:**                                                                                                                                |   |                         |     |   |   |
| As reported                                                                                                                                        |   | $                            | (0.02    | ) | $ | (0.09 | ) |
| Pro forma                                                                                                                                          |   | $                            | (0.03    | ) | $ | (0.11 | ) |

 

The fair value of option grantsis estimated as of the date of grant utilizing the Black-Scholes option-pricingmodel with the following weighted average assumptions for all grants, expectedlife of options of three (3) years, risk-free interest rates of seven percent(7%), volatility at twenty five percent (25%), and a zero percent (0%) dividendyield.  The weighted average fair valueat date of grant for options granted during the years ended June 30, 2003and 2002 approximated $.38 and $.50, respectively.

 

***Non-EmployeeStock Options and Warrants:***

 

In connection with its privateplacements of common stock during the year ended June 30, 2000 the Companyissued 366,625 common stock warrants. Each warrant entitles the holder to purchase one share of common stockat varying exercise prices depending on the round of funding.  The exercise price for the first round offunding was $3.50 per share and are exercisable until October 2002.  The exercise price for the second round offunding was $2.80 per share and are exercisable until February 2003.  The warrant agreement contains a priceadjustment provision that stated if the Company sells common stock at a pricebelow the exercise price of the warrants, the warrant exercise price would beadjusted to the price that the common stock was sold for.  As a result of the sale of common stockduring the year ended June 30, 2002 at $.20 per share, the warrantsexercise price has been adjusted to $.20. InOctober, 2000, the Company entered into a Warrant Exercise Agreement withcertain of its warrant holders under which participating holders of theCompany’s $3.50 per share and $2.80 per share warrants could exercise theirwarrants for one-half of the exercise price set forth in such warrants.  In addition to the reduction in exerciseprice, each holder who participated in the Warrant Exchange Agreement alsoreceived a new warrant agreement under the same terms as the warrant agreementjust exercised.  In connection with thisWarrant Exchange Agreement, the Company received approximately $122,000 from

 

F-14

----

 

theexercise of warrants to purchase 84,790 shares of common stock.  In connection with a February 2002private placement of common stock, the Company agreed to extend the term of147,500 of the above warrants for one year to a shareholder if the Company didnot file a registration statement with the Securities and Exchange Commissionto register the resale of the Common Stock purchased in the February 2002private placement by August 2002. The Company did not file a registration statement therefore the term ofthe warrants has been extended by one year. In September 2003 the 147,500 warrants were exercised in full.  The remaining 219,125 warrants expiredunexercised.

 

During the year endedJune 30, 2000 the Company granted 15,000 options to an individual forconsulting services.  The exercise priceof the options is $4.50 per share and are exercisable through August 2002.  The fair value of the options granted wasestimated at $11,500 at the date of grant using the Black-Scholes pricingmodel. In August 2002 the warrants expired unexercised.

 

The Company granted 414 optionsduring the year ending June 30, 2000 to an Institution for consultingservices in which a member of the Company’s Board of Directors is aPrincipal.  The exercise price of theoptions is $2.90 per share and are exercisable through November 2002.  The fair value of the options granted wasestimated at $500 at the date of grant using the Black-Scholes pricing model.In November 2002 the warrants expired unexercised.

 

During the year endedJune 30, 2001 the Company granted 12,000 warrants to an entity forconsulting services.  The exercise priceof the warrants ranges from $1.25 per share to $4.30 per share and areexercisable through March 2006. The fair value was $21,000 at the date of grant, determined based on thevalue of services performed.  As ofJune 30, 2003 none of the warrants have been exercised.

 

During the year ended June 30,2002 the Company granted 62,958 warrants to a related party in considerationfor entering into a promissory note agreement with the Company.  The exercise price of the warrant is $.25per share and is exercisable through September 2006.  As of June 30, 2003 none of thewarrants have been exercised.

 

During the year endedJune 30, 2002 the Company granted 25,000 warrants to a related party inconsideration for entering into a revolving line of credit agreement with theCompany.  The exercise price of thewarrant is $.15 per share and is exercisable through November 2006.  As of June 30, 2003 none of thewarrants have been exercised.

 

**Note 8**

**Subsequent Events:**

 

In August 2003, theCompany completed a private placement of common stock.  The Company sold 1,303,000 shares with netproceeds of $519,897.

 

F-15

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**ITEM8.  Changes In And Disagreements With Accountants On Accounting AndFinancial Disclosure.**

 

Not applicable.

 

**ITEM8A. Controls and Procedures.**

 

Based on an evaluation of the effectivenessof our disclosure controls and procedures (as defined in Rules 13a-15(e) or15d-15(e) under the Securities Exchange Act of 1934, as amended), our ChiefExecutive Officer and Chief Financial Officer have concluded that such controlsand procedures were effective as of the end of the period covered by thisreport.

 

In connection with such evaluation, no changein our internal control over financial reporting occurred during the fourthfiscal quarter of the period covered by this report that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART III**

 

**ITEM 9. Directors, Executive Officers,Promoters and Control Persons.**

 

Informationregarding the Company’s directors and executive officers is provided below.

 

THOMAS S. BEDNARIK.  Mr. Bednarik, age 53, has served asPresident, Chief Executive Officer and a director of the Company sinceFebruary 2000.  FromApril 1998 to February 2000, Mr. Bednarik served as Vice President ofSales and Support at NetPro Computing, Inc. Mr. Bednarik has extensive executive and sales management experience inthe information technology industry and has served in various executivemanagement capacities, including Chief Executive Officer, President, VicePresident and Executive Vice President, with firms such as Idea Corporation,Decision Data, Alcatel Information Systems and ITT Corporation.

 

CRAIG J. SMITH, CPA.  Mr. Smith, age 33, has served as theCompany’s Vice President of Finance and Administration and Chief FinancialOfficer since April 1999.  From1998 to 1999, Mr. Smith served as Controller of Pacific NumerixCorporation.  From 1993 to 1998, heserved as an Audit Manager of Semple & Cooper LLP.  Mr. Smith earned a masters in businessadministration from Arizona State University in 2000 and a Bachelor of Sciencedegree in finance and accounting from Minnesota State University-Mankato in1992.

 

TODD P. BELFER.  Mr. Belfer, age 35, has served as a directorof the Company since March 1999 and Chairman of the Board of Directorssince November 1999. Mr. Belfer also served as Chairman of the Board ofDirectors of Time America, Inc. (previously Vitrix Incorpated) fromApril 1996 until March 1999. Mr. Belfer co-founded Employee Solutions, Inc. in May 1990, andserved as its Executive Vice-President and as a director from 1991 to1996.  Mr. Belfer earned a Bachelor ofScience in Finance and Real Estate from the University of Arizona in 1989.

 

21

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LISE M. LAMBERT.  Ms. Lambert, age 46, has served as adirector of the Company since April 1999 and as director of Time America,Inc. (previously Vitrix Incorporated) from January 1998 toMarch 1999.  In 2003, Ms. Lambertjoined VistaCare, Inc. (VSTA), a Scottsdale-based health services company,where she serves as the Sr. Vice President of Strategic Planning and BusinessFormation. Since 1996, Ms. Lambert has also served as President of Relevant,Inc., a consulting company for the computer software industry.  In 1986, Ms. Lambert co-founded Mastersoft,Inc., where she served as Vice-President of Marketing from 1986 to 1990 andSenior Vice-President of Sales from 1990 to 1995. Ms. Lambert also serves asdirector for Involve Technology, Inc.  Ms.Lambert earned a Bachelor of Arts degree in education and a Masters degree indeafness and audiology from Smith College.

 

ROBERT W.ZIMMERMAN. Mr. Zimmerman, age 51, has served as a director of the Company sinceMarch 2001.  Mr. Zimmerman wasone of the original investors and directors of Time America, Inc. prior to itsmerger with the Company. Mr. Zimmerman is President, co-managing shareholder and attorney for Mallery &Zimmerman, S.C., a general practice law firm with offices in Milwaukee,Cedarburg, Green Bay, Stevens Point and Wausau, Wisconsin.  Mr. Zimmerman graduated from MarquetteUniversity in 1974 with majors in Accounting and Finance and from MarquetteUniversity Law School in 1977.  Afterlaw school Mr. Zimmerman worked in the Milwaukee office of Arthur Andersen& Co. in the tax department and received his Wisconsin CPA certificate.

 

ROBERT J. NOVAK.  Mr. Novak, age 58, has served as a directorof the Company since September 2003. Mr. Novak has been a member of Jennings, Strouss & Salmon, P.L.C., afull service law firm, since 1999.  Mr.Novak is the founder and owner of Novak Companies, Inc., a diversified group ofcompanies in real estate development, financing, management, equity financingand participation in private and public companies.  Mr. Novak also founded and owned Robert J. Novak &Associates, Ltd., a law firm, from 1987 to 1999.  Mr. Novak was also a founder, director and officer of MedicalSafety Products, Inc., a medical product developer, from 1987 to 2001.  Mr. Novak earned Bachelor of Arts degrees inpolitical science and economics from Drake University in 1967 and a JurisDoctorate from the University of Arizona in 1971.

 

**Compliancewith Section 16(a) of the Securities Exchange Act of 1934**

 

Section 16(a) of theSecurities Exchange Act of 1934, as amended, requires the Company’s directorsand executive officers, as well as persons beneficially owning more than 10% ofthe Company’s outstanding Common Stock, to file reports of ownership andchanges in ownership with the Securities and Exchange Commission (the “SEC”)within specified time periods.  Suchofficers, directors and shareholders are also required to furnish the Companywith copies of all Section 16(a) forms they file.

 

Based solely on its review ofsuch forms received by it, or written representations from certain reportingpersons, the Company believes that all Section 16(a) filing requirementsapplicable to its officers, directors and 10% shareholders were complied withduring the fiscal year ended June 30, 2003.

 

22

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**ITEM10.  Executive Compensation.**

 

The following tablesummarizes all compensation to the Company’s Chief Executive Officer and to theCompany’s other most highly compensated executive officers other than the ChiefExecutive Officer whose total annual salary and bonus exceeded $100,000(collectively, the “Named Officers”), for services rendered to the Company foreach of the fiscal years ended June 30, 2003, 2002 and 2001.

 

**SUMMARY COMPENSATION TABLE**

 
|                                                        |   |     |   | **Annual Compensation** |    | **Long Term  Compensation** |   |
|-------------------------------------------------------------|--------|----------|--------|-------------------------|---------|-----------------------------|--------|
|                                                        |   |     |   |                    |    | **Awards**                  |   |
| **Name and  Principal Position(1)**                         |   | **Year** |   | **Salary($)**           |    | **Bonus($)**                |   | **Other Annual  Compensation($)** |   | **Securities Underlying  Options/SARS (#)** |   |
|                                                        |   |     |   |                    |    |                        |   |   |   |   |   |
| Thomas S. Bednarik(2)President and Chief  Executive Officer |   | 2003     |   | $                       | 130,000 |                        | -0-    |   | -0- |   | 150,000 | (2) |
|                                                        | 2002   |     | $      | 130,000                 |    | -0-                         |   | -0- |   | 100,000 | (2) |
|                                                        | 2001   |     | $      | 118,750                 |    | $                           | 12,704 |   | -0- |   | 325,000 | (2) |
|                                                             |        |          |        |                         |         |                             |        |  |  |  |  |  |  |

 

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(1)                                  No other executive officer of the Companyreceived compensation in excess of $100,000 for the periods presented.

 

(2)                                  Mr. Bednarik was appointed President and ChiefExecutive Officer of the Company effective February 17, 2000.  Pursuant to the terms of an Incentive StockOption Agreement dated August 22, 2000, Mr. Bednarik was granted optionsto purchase 100,000 shares of the Company’s Common Stock at a per shareexercise price of $3.40.  Pursuant tothe terms of a Nonstatutory Stock Option Agreement dated April 17, 2001,Mr. Bednarik was granted options to purchase 225,000 shares of the Company’sCommon Stock at a per share exercise price of $0.40.  Pursuant to the terms of a Nonstatutory Stock Option Agreementdated December 31, 2001, Mr. Bednarik was granted options to purchase100,000 shares of the Company’s Common Stock at a per share exercise price of$0.17.  Pursuant to the terms of aNonstatutory Stock Option Agreement dated December 31, 2002, Mr. Bednarikwas granted options to purchase 50,000 shares of the Company’s Common Stock ata per share exercise price of $0.18. Pursuant to the terms of a Nonstatutory Stock Option Agreement datedApril 15, 2003, Mr. Bednarik was granted options to purchase 100,000shares of the Company’s Common Stock at a per share exercise price of $0.16.

 

23

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The following table setsforth information concerning individual grants of stock options made to theNamed Officers during the fiscal year ended June 30, 2003.

 

**OPTION GRANTS IN LAST FISCAL YEAR**

 
|                                                     |    | **Individual Grants******                                      |   |
|----------------------------------------------------------|---------|----------------------------------------------------------------|--------|
| **Name and  Principal Position**                         |    | **Number of  Securities  Underlying  Options  Granted (#)(1)** |   | **% of Total  Options  Granted to  Employees in  Fiscal Year** |   | **Exercise  Price  ($/Sh)** |   | **Expiration  Date****** |   | **Potential Realized Value  at Assumed Rates of  Annual Stock Price  Appreciation For  Option Term (2)** |   |
| **5% ($)**                                               |    | **10% ($)**                                                    |   |
|                                                     |    |                                                           |   |   |   |   |   |   |   |   |   |   |   |
| Thomas S. Bednarik,President and Chief Executive Officer |    | 50,000                                                         |   | 17 | % | $ | 0.18 |   | 12/2012 |   | $ | 5,700 |   | $ | 14,300 |   |
|                                                     | 100,000 |                                                           | 35     | % | $ | 0.16 |   | 4/2013 |   | $ | 10,100 |   | $ | 25,500 |   |

 

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(1)                                  Pursuant to the terms of a Nonstatutory StockOption Agreement dated December 31, 2002, Mr. Bednarik was granted optionsto purchase 50,000 shares of the Company’s Common Stock at a per share exerciseprice of $0.18.  The options vestedimmediately and have a term of ten years. Pursuant to the terms of a Nonstatutory Stock Option Agreement datedApril 15, 2003, Mr. Bednarik was granted options to purchase 100,000shares of the Company’s Common Stock at a per share exercise price of$0.16.  The options vest in fourincrements over one year and have a term of ten years.

 

(2)                                  Amounts represent hypothetical gains thatcould be achieved for the options if exercised at the end of the optionterm.  These gains are based on assumedrates of stock appreciation of 5% or 10% compounded annually from the date theoptions were granted to their expiration date and are not presented to forecastpossible future appreciation, if any, in the price of the Common Stock.  Actual gains, if any, on stock optionexercises are dependent on the future performance of the Common Stock, overallstock market conditions, as well as the option holder’s continued employmentthrough the vesting period.  The amountsreflected in this table may not necessarily be achieved.

 

**OptionExercise**

 

There were nooption exercises by the Named Officers during the fiscal year endedJune 30, 2003.

 

**EmploymentAgreements**

 

As ofFebruary 15, 2000, the Board of Directors approved the terms of Mr.Bednarik’s at-will employment with the Company for services as its Presidentand Chief Executive Officer.  Under theterms of a letter agreement, dated as of February 17, 2000,Mr. Bednarik receives a base salary of $115,000, which was increased to$130,000 effective April 2001.

 

Mr. Bednarikis also entitled to participate in the Company’s medical and dental plans, withthe Company paying 80% of the cost of Mr. Bednarik’s coverage and 50% of thecost of the medical

 

24

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coverage for Mr. Bednarik’sfamily.  Under the terms of the letteragreement, a portion of Mr. Bednarik’s unvested options become immediatelyvested in the event he is terminated without cause (as such term is defined inhis Option Agreements with the Company). In the event the Company is acquired or merged into another company, anyunvested options will become automatically vested.

 

**ITEM11.  Security Ownership Of CertainBeneficial Owners And Management.**

 

The following table setsforth certain information, as of September 1, 2003, concerning thebeneficial ownership of shares of Common Stock of the Company by (i) each personknown by the Company to beneficially own more than 5% of the Company’s CommonStock; (ii) each Director; (iii) each of the Named Officers; and (iv) allDirectors and executive officers of the Company as a group.  To the knowledge of the Company, all personslisted in the table have sole voting and investment power with respect to theirshares, except to the extent that authority is shared with their respectivespouse under applicable law.

 
| **Name and  Address of  Beneficial Owner (2)** |       | **Shares Beneficially Owned (1)** |        |
|------------------------------------------------|------------|-----------------------------------|-------------|
|                                           | **Number** |                              | **Percent** |   |
| Thomas S. Bednarik                             |       | 606,250                           | (3)         | 4.8 | % |
| Todd P. Belfer                                 |       | 1,233,627                         | (4)         | 10.2 |   |
| Lise M. Lambert                                |       | 112,663                           | (5)         | * |   |
| Robert W. Zimmerman                            |       | 187,675                           | (6)         | 1.5 |   |
| Robert J. Novak                                |       | 130,000                           |        | 1.1 |   |
| Craig J. Smith                                 |       | 77,494                            | (7)         | * |   |
| All directors and Named Officers as a group    |       | 2,347,709                         |        | 18.3 |   |
| Joseph L. Simek                                |       | 3,948,585                         | (8)         | 32.4 |   |
| Circle F. Ventures LLC                         |       | 986,111                           |        | 8.2 |   |

 

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* Less than 1.0%

 

(1)                                  A person is deemed to be the beneficial ownerof securities that can be acquired within 60 days from the date set forth abovethrough the exercise of any option, warrant or right.  Shares of Common Stock subject to options, warrants or rightsthat are currently exercisable or exercisable within 60 days are deemedoutstanding for computing the percentage of the person holding such options,warrants or rights, but are not deemed outstanding for computing the percentageof any other person.  The amounts andpercentages are based upon 12,106,557 shares of Common Stock outstanding as ofSeptember 1, 2003.

 

(2)                                  The address of each of the beneficial ownersis c/o Vitrix, Inc., 51 West Third Street, Suite 310, Tempe, Arizona 85281,except for Circle F. Ventures LLC whose address is 17797 North Perimeter Drive,Suite 105, Scottsdale, Arizona 85255 and Joseph L. Simek whose address is 611North Road, Medford, Wisconsin 54461.

 

(3)                                  Includes 487,500 shares of Common Stockunderlying unexercised options that were exercisable on September 1, 2003,or within 60 days thereafter.

 

25

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(4)                                  Includes 62,500 shares of Common Stockunderlying unexercised options that were exercisable on September 1, 2003or within 60 days thereafter.

 

(5)                                  Includes 78,469 shares of Common Stockunderlying unexercised options that were exercisable on September 1, 2003,or within 60 days thereafter.

 

(6)                                  Includes 47,500 shares of Common Stockunderlying unexercised options that were exercisable on September 1, 2003,or within 60 days thereafter.

 

(7)                                  Includes 50,494 shares of Common Stockunderlying unexercised options that were exercisable September 1, 2003, orwithin 60 days thereafter.

 

(8)                                  Includes 87,958 shares of Common Stockissuable upon exercise of warrants issued in consideration for entering intodebt agreements during the fiscal year ended June 30, 2002.

 

**ITEM12.  Certain Relationships And RelatedTransactions.**

 

Except as setforth below, the Company did not have any transactions during fiscal years 2003and 2002 with any director, director nominee, executive officer, securityholder known to the Company to own of record or beneficially more than 5% ofthe Company’s Common Stock, or any member of the immediate family of any of theforegoing persons, in which the amount involved exceeded $60,000.

 

OnMarch 31, 2001, the Company borrowed $400,000 from Joseph L. Simek, asignificant stockholder of the Company. The loan bears interest at an annual rate of prime plus one percent (1%)and is secured by all of the Company’s assets. Principal and interest payments of approximately $8,500 are due monthly,with the outstanding principal balance due on October 1, 2004.  On November 2, 2001, Mr. Simek agreedto provide the Company with a $200,000 line of credit, which is also secured byall of the Company’s assets.  OnSeptember 24, 2002, Mr. Simek agreed to provide the Company with anadditional $200,000 line of credit, which is also secured by all of theCompany’s assets.  Borrowings under thelines of credit bear interest at an annual rate of 10%.  The lines of credit have a maturity date ofDecember 31, 2003.  AtJune 30, 2003, $277,557 was outstanding under the $400,000 loan and$150,000 was outstanding under the line of credit.

 

OnSeptember 4, 2001, the Company borrowed $500,000 from Francis Simek, thespouse of Mr. Simek.  This loan bearsinterest at an annual rate of 10% and is secured by all of the Company’sassets.  Principal and interest paymentsof $6,600 are due and payable monthly over a 60-month period.  At June 30, $476,856 was outstandingunder this loan.

 

In May 2003, Todd P.Belfer, Director, purchased 450,000 shares of Common Stock of the Company in aprivate placement transaction.

 

In May 2003, Circle F.Ventures LLC, a 5% security holder, purchased 111,111 shares of Common Stock ofthe Company in private placement transaction.

 

26

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**ITEM13. Exhibits And Reports on Form 8-K.**

 

(a)                                  Exhibits.The exhibits as indexed immediately following the signature page of this Reportare included as part of this Form 10-KSB.

 

(b)                                 Reportson Form 8-K.

 

(1)                                  Noreports were filed on Form 8-K during the fiscal quarter ended June 30,2003.

 

**ITEM14. Principal Accountant Fees and Services.**

 

The followingtable sets forth fees billed to us by our auditors during the fiscal yearsended June 30, 2002 and June 30, 2003 for: (i) services rendered forthe audit of our annual financial statements and the review of our quarterlyfinancial statements, (ii) services by our auditor that are reasonably relatedto the performance of the audit or review of our financial statements and thatare not reported as Audit Fees, (iii) services rendered in connection with taxcompliance, tax advice and tax planning, and (iv) all other fees for servicesrendered.

 
|   |   |                |   | **June 30,  2003** |   | **June 30,  2002** |   |
|--------|--------|---------------------|--------|-------------------------|--------|-------------------------|--------|
| (i)    |   | Audit Fees          |   | $                       | 25,400 |                    | $      | 23,100 |   |
| (ii)   |   | Audit  Related Fees |   | $                       | — |                    | $      | — |   |
| (iii)  |   | Tax Fees            |   | $                       | 3,000  |                    | $      | 7,250 |   |
| (iv)   |   | All Other  Fees     |   | $                       | 500    |                    | $      | 1,600 |   |

 

27

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SIGNATURES

 

In accordancewith Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                            | VITRIX, INC.                                                                              |
|---------------------------------|-------------------------------------------------------------------------------------------|
|                            |                                                                                      |
|                            | /s/ Thomas  S. Bednarik                                                                   |   |
|                            | Thomas S.  Bednarik, President and Chief Executive  Officer (Principal Executive Officer) |
| Dated:  September 29, 2003 |                                                                                      |

 

28

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In accordancewith the Securities Exchange Act of 1934, this Report has been signed below bythe following persons on behalf of the Registrant and in the capacities and onthe dates indicated.

 

POWER OF ATTORNEY

 

KNOWN ALL MENBY THESE PRESENTS, that each person whose signature appears below constitutesand appoints Thomas S. Bednarik and Craig J. Smith, and each of them, his trueand lawful attorneys-in-fact and agents, with full power of substitution andresubstititon for him or her and in his or her name, place and stead, in anyand all capacities, to sign any and all amendments to this Annual Report onForm 10-KSB, and to file the same, with all exhibits thereto, and other documentsin connection therewith with the Securities and Exchange Commission, grantingunto said attorneys-in-fact and agents, and each of them, full power andauthority to do and perform each and every act and thing requisite andnecessary to be done in and about the premises, as fully and to all intents andpurposes as he might or could do in person hereby ratifying and confirming allthat said attorneys-in-fact and agents, or his substitute or substitutes, maylawfully do or cause to be done by virtue hereof.

 
| **Signatures**           |   | **Title**                      |                         | **Date** |
|--------------------------|--------|--------------------------------|------------------------------|----------|
|                     |   |                           |                         |     |
| /s/ Thomas  S. Bednarik  |   |                           | President,  CEO and Director |     | September 29,  2003 |
| Thomas S.  Bednarik      |   | (Principal  Executive Officer) |                         |     |
|                     |   |                           |                         |     |
| /s/ Craig J.  Smith      |   |                           | Chief  Financial Officer     |     | September 29,  2003 |
| Craig J.  Smith          |   | (Principal  Financial Officer) |                         |     |
|                     |   |                           |                         |     |
| /s/ Todd P.  Belfer      |   |                           | Chairman of  the Board       |     | September 29,  2003 |
| Todd P.  Belfer          |   |                           |                         |     |
|                     |   |                           |                         |     |
| /s/ Lise M.  Lambert     |   |                           | Director                     |     | September 29,  2003 |
| Lise M.  Lambert         |   |                           |                         |     |
|                     |   |                           |                         |     |
| /s/ Robert  W. Zimmerman |   |                           | Director                     |     | September 29,  2003 |
| Robert W.  Zimmerman     |   |                           |                         |     |
|                     |   |                           |                         |     |
| /s/ Robert  J. Novak     |   |                           | Director                     |     | September 29,  2003 |
| Robert J.  Novak         |   |                           |                         |     |

 

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CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO RULES 13A-14 AND 15D-14OF THE SECURITIES EXCHANGE ACT OF 1934

 

I, Thomas S. Bednarik,President and Chief Executive Officer of Vitrix, Inc. (the “Company”), certifythat:

 

(1)                                  Ihave reviewed this Annual Report on Form 10-KSB for the fiscal year endedJune 30, 3003 (the “Report”);

 

(2)                                  Basedon my knowledge, the Report does not contain any untrue statement of a materialfact or omit to state a material fact necessary in order to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading; and

 

(3)                                  Basedon my knowledge, the financial statements, and other financial informationincluded in the Report, fairly present in all material respects the financialcondition and results of operations of the Company as of, and for, the periodsrepresented in the Report.

 

(4)                                  TheCompany’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Rules13a-15(e) and 15d-15(e) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company andhave:

 

(a)                                  designedsuch disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to me by others within those entities, particularly during theperiod in which the periodic report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the Company’s disclosure controls and procedures andpresented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by thisAnnual Report based on such evaluation; and

 

(c)                                  disclosedin this Annual Report any change in the Company’s internal control overfinancial reporting that occurred during the Company’s most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting; and

 

I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the Company’s auditors and to the auditcommittee of the board of directors (or persons fulfilling the equivalentfunction): (i) all significant deficiencies in the design or operation ofinternal control over financial reporting which are reasonably likely toadversely affect the Company’s ability to record, process, summarize and reportfinancial information; and

 

(ii)                                  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal control over financialreporting.

 
| Dated:  September 29,  2003 |
|--------------------------------------------|
|                                       |   |
| By:                                        |   | /s/ Thomas  S. Bednarik |   |
|                                       | Thomas S.  Bednarik |
|                                       | President  and Chief Executive Officer |
|                                            |  |  |  |

 

30

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CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO RULES 13A-14 AND 15D-14OF THE SECURITIES EXCHANGE ACT OF 1934

 

I, Craig J. Smith, VicePresident - Finance and Administration and Chief Financial Officer of Vitrix,Inc. (the “Company”), certify that:

 

(1)                                  Ihave reviewed this Annual Report on Form 10-KSB for the fiscal year endedJune 30, 3003 (the “Report”);

 

(2)                                  Basedon my knowledge, the Report does not contain any untrue statement of a materialfact or omit to state a material fact necessary in order to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading; and

 

(3)                                  Basedon my knowledge, the financial statements, and other financial informationincluded in the Report, fairly present in all material respects the financialcondition and results of operations of the Company as of, and for, the periodsrepresented in the Report.

 

(4)                                  TheCompany’s other certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange Rules13a-15(e) and 15d-15(e) and internal control over financial reporting (asdefined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company andhave:

 

(a)                                  designedsuch disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that materialinformation relating to the Company, including its consolidated subsidiaries,is made known to me by others within those entities, particularly during theperiod in which the periodic report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the Company’s disclosure controls and procedures andpresented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by thisAnnual Report based on such evaluation; and

 

(c)                                  disclosedin this Annual Report any change in the Company’s internal control over financialreporting that occurred during the Company’s most recent fiscal quarter thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting; and

 

I have disclosed, based on our most recent evaluation of internalcontrol over financial reporting, to the Company’s auditors and to the auditcommittee of the board of directors (or persons fulfilling the equivalentfunction): (i) all significant deficiencies in the design or operation ofinternal control over financial reporting which are reasonably likely toadversely affect the Company’s ability to record, process, summarize and reportfinancial information; and

 

(ii)                                  anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Company’s internal control over financialreporting.

 
| Dated:   September 29,  2003 |
|--------------------------------------------------|
|                                             |   |
| By:                                              |   | /s/ Craig J.  Smith |   |
|                                             | Craig J.  Smith |
|                                             | Vice  President - Finance and Administration and Chief Financial Officer |
|                                                  |  |  |  |

 

31

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**EXHIBIT INDEX**

 
| **Exhibit  Number** |   | **Description**                                                                                                                              |   | **By Reference  from  Document** |   | **No. in  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                                        |   | E                                |   | 3.1.6                |
|                |   |                                                                                                                                         |   |                             |   |                 |
| 3.1.7               |   | Registrant’s  Amendment to Articles of Incorporation, dated October 7, 1999.                                                       |   | F                                |   | 3.1                  |
|                |   |                                                                                                                                         |   |                             |   |                 |
| 3.2                 |   | Amended  Bylaws of the Registrant                                                                                                            |   | C                                |   | 3.2                  |
|                |   |                                                                                                                                         |   |                             |   |                 |
| 4.1                 |   | Registrant’s  Form of Common Stock Certificate                                                                                          |   | A                                |   | 4.1                  |
|                |   |                                                                                                                                         |   |                             |   |                 |
| 10.6                |   | 1999 Equity  Compensation Plan                                                                                                               |   | E                                |   | 10.7                 |
|                |   |                                                                                                                                         |   |                             |   |                 |
| 10.7.1              |   | Lease  Agreement, dated September 3, 1999, between LAFP Phoenix, Inc., as  lessor, and the Registrant, as lessee.                       |   | F                                |   | 10.1                 |
|                |   |                                                                                                                                         |   |                             |   |                 |
| 10.7.2              |   | First  Amendment to Office Lease Agreement, dated March 28, 2000, between LAFP  Phoenix, Inc., as lessor and the Registrant, as lessee. |   | G                                |   | 10.1                 |

 

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| **Exhibit  Number** |   | **Description**                                                                                                                                                                                                                                              |   | **By Reference  from  Document** |   | **No. in  Document** |
|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|----------------------|
| 10.8                |   | Securities  Purchase Agreement, dated September 21, 1999, between Circle F Ventures,  LLC and the Registrant.                                                                                                                                           |   | F                                |   | 10.2                 |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.10               |   | Merger  Agreement, dated March 28, 2001 by and among Vitrix, Inc., Vitrix  Incorporated, and Time America, Inc.                                                                                                                                         |   | H                                |   | 2.1                  |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.12               |   | Letter from  BDO Seidman, LLP, dated June 4, 2001, regarding its concurrence or  disagreement with the statements made by the registrant in the current report  concerning the resignation or dismissal as the registrants’ principal  accountant. |   | I                                |   | 16                   |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.13               |   | Promissory  Note Agreement dated September 4, 2001 between Vitrix, Inc. and Frances  L. Simek                                                                                                                                                           |   | J                                |   | —               |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.14               |   | Security  Agreement dated September 4, 2001 between Vitrix, Inc. and Frances L.  Simek                                                                                                                                                                  |   | J                                |   | —               |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.15               |   | Warrant to  purchase common stock agreement dated September 4, 2001 between Vitrix,  Inc. and Frances L. Simek                                                                                                                                          |   | J                                |   | —               |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.16               |   | Promissory  Note Agreement dated March 31, 2001 between Time America, Inc and Joseph  L. Simek                                                                                                                                                          |   | K                                |   | —               |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 10.17               |   | Revolving  Credit Agreement dated November 2, 2001 between Vitrix, Inc and Joseph  L. Simek                                                                                                                                                             |   | K                                |   | —               |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 31                  |   | Certification  pursuant to Rules 13a-14(a) and 15d-14(a)(5) of the Securities Exchange Act  of 1934                                                                                                                                                          |   | Filed herewith                   |   | —               |
|                |   |                                                                                                                                                                                                                                                         |   |                             |   |                 |
| 32                  |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                           |   | Filed herewith                   |   | —               |

 

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A.           FormS-18 Registration Statement No. 33-25704-NY.

B.             Form10-K Annual Report of the Registrant for the fiscal year ended June 30,1991.

C.             Form10-KSB Annual Report of the Registrant for the fiscal year ended June 30,1994.

D.            Form8-K Current Report reporting event on June 28, 1996.

E.              Form10-KSB Annual Report of the Registrant for the fiscal year ended June 30,1999.

F.              Form10-QSB Quarterly Report of the Registrant for the fiscal quarter endedSeptember 30, 1999.

G.             Form10-QSB Quarterly Report of the Registrant for the fiscal quarter endedMarch 31, 2000.

H.            Form8-K Current Report reporting event on April 13, 2001.

I.                 Form8-K Current Report reporting event on June 6, 2001.

J.                Form10-KSB Annual Report of the Registrant for the fiscal year ended June 30,2001

K.            Form10-KSB Annual Report of the Registrant for the fiscal year ended June 30,2002

 

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