UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-30178
VIEW SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 59-2928366
(State of incorporation) (I.R.S. Employer Identification No.)
1100 Wilso Drive, Baltimore, Maryland 21223
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (410) 646-3000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB [ ]
Issuer's revenues for its most recent fiscal year: $569,952
The aggregate market value of the registrant's voting stock held by
non-affiliates on February 20, 2004 was approximately $14,952,497.
As of February 20, 2004 the issuer had 62,630,619 outstanding shares of its
common stock.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
PART I
Item 1. Description of Business...........................................3
Item 2. Description of Property...........................................9
Item 3. Legal Proceedings.................................................9
Item 4. Submission of Matters to a Vote of Security Holders..............10
PART II
Item 5. Market for Common Equity, Related Stockholder Matters
and Issuer Purchase of Securities................................10
Item 6. Management's Discussion and Analysis.............................12
Item 7. Financial Statements ............................................14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................34
Item 8A. Controls and Procedures..........................................34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act................34
Item 10. Executive Compensation...........................................35
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................36
Item 12. Certain Relationships and Related Transactions...................38
Item 13. Exhibits and Reports on Form 8-K.................................38
Item 14. Principal Accountant Fees and Services...........................38
Signatures................................................................40
In this report references to "View Systems," "we," "us," and "our" refer to
View Systems, Inc. and its subsidiaries.
FORWARD LOOKING STATEMENTS
This annual report contains certain forward-looking statements and any
statements contained in this annual report that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, words such as "may," "expect," "believe,"
"anticipate," "estimate" or "continue" or comparable terminology are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, and actual results may differ
materially depending on a variety of factors, many of which are not within
View Systems's control. These factors include but are not limited to economic
conditions generally and in the industries in which View Systems may
participate; competition within View Systems's chosen industry, including
competition from much larger competitors; technological advances; and failure
by View Systems to successfully develop business relationships.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Historical Development
We were incorporated in Florida on January 25, 1989, as Beneficial Investment
Group, Inc. and became active in September 1998 when we began development of
our product line and changed the company's name to View Systems, Inc. We
acquired three subsidiaries in 1998 and 1999 which resulted in additional
technology and manufacturing capabilities. In March 2002, we acquired
Milestone Technology, Inc. which held an exclusive license for a walk-through
detector that used patented magnetic technology developed by a federal lab.
In December 2003 we licensed a first responder video system developed by the
Idaho National Engineering and Environmental Laboratory at the request of
National Guard personnel to provide first response investigation and
surveillance capability.
Our Business
View Systems is a manufacturing company that acquires or develops leading edge
technologies and commercializes and markets them. Among the current products
are: ViewMax and MiniMax, which are digital video surveillance systems, and
SecureScan, a concealed weapons detection system. Other products include
FirstView, a hazardous material first response video transmitting system,
ViewLite, a flashlight transmission and recording system, and various
interfaces for biometrics, access control and telecommunications for the above
mentioned products.
Products and Services
SecureScan Concealed Weapons Detection System - This system is a walk-through
concealed weapons detector which uses advanced magnetic technology to
accurately pinpoint the location, size and number of concealed weapons. The
control unit for this walk-through portal is a personal computer based unit
which receives magnetic and video information and combines it in a manner that
allows the suspected location to be stored and referenced. SecureScan
products are distributed in two basic configurations, stand-alone units and
integrated door systems and in March 2003 we modified the design of the
SecureScan portal to allow portability.
SecureScan uses an array of advanced magnetic sensors, each with on-board
digital signal processing. The sensors communicate with SecondLOOK(TM)
software that spatially identifies objects and visually pinpoints the location
of the weapon with a red dot that is superimposed over a real time snapshot
image of the person walking through the portal. Along with the snapshot, a
graph displays the sensor data which automatically scales the signal strength
of the individual sensors and cross-references them to the video image. All
of this information is brought together on a video screen that displays the
image of the person, the location of the weapon and variable-sized target,
depending on the intensity of the magnetic signature.
SecureScan discriminates weapons from non-weapons by measuring differences in
total metallic mass and ferromagnetic composition. This system promotes
smooth traffic flow because it only detects the types of metals commonly found
in guns and knives. Personal possessions such as coins, keys or belt buckles
do not set off this alarm. However, settings can be adjusted to allow the
detection of high composite pistols, titanium and stainless steel guns, and
box cutters. Body cavity object identification is also available as well as
locating objects that have been covered or masked with aluminum foil or other
materials. This system reduces false alarms and eliminates use of hand wands
or resorting to a personal search.
Our SecureScan system differs from metal detectors that are widely used to
detect weapons because the metal detectors use active electromagnetic
induction to artificially create or transmit an ionizing field for metal
objects to act upon. This energy is similar in nature to the controversial
radiation related to the use of cellular phones, high-tension power lines,
etc. Many of these systems create enough stray electromagnetic induction to
interact
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with medical implants and heart pacemaker devices. In comparison, SecureScan
uses passive magnetic technology. This means special sensors are used to
measure the earth's naturally occurring magnetic field. When an object of a
specific mass passes through the sensors within the magnetic field, software
calculates the difference between the magnetic field strength with the object
inside the magnetic field and determines if the object is a weapon or not.
Since the SecureScan technology uses no transmitters to produce
electromagnetic induction, stray energy that can cause false alarms does not
exist.
The SecureScan weapons detection systems can be controlled via a central
monitoring station using a Windows(TM) operating system and Pentium(TM)
hardware. This can include additional closed circuit television, two-way
voice communication, door interlock, card-key and other biometric
identification or access control components.
SecureScan Concealed Weapons Detection technology was patented and FAA
approved and originally developed at a Department of Energy National
Laboratory by a grant from the National Institute of Justice. The Department
of Energy granted View Systems the exclusive worldwide rights to the
technology and ongoing improvements currently being funded by the National
Institute of Justice.
ViewMaxx Digital Video System - ViewMaxx provides a scalable, versatile and
expandable platform suited for the most demanding security and surveillance
tasks. It offers fully programmable, high resolution digital video recording
and real time monitoring of surveillance cameras that may be expanded to
include from 1 to 16 cameras per unit. VideoMaxx integrates with existing
video equipment and can be incorporated into any TCP/IP and/or dial-up
network.
ViewMaxx records video images digitally and permits their viewing remotely
over the customer's existing closed-circuit television. Digital recording
translates data to a computer readable format rather than conventional video
tape. We store the video output on computer hard disks rather than VCR tapes,
which allows the use of a calendar search tool to quickly play-back files with
simple point and click operations. This avoids the need to review an entire
VCR tape for a critical event, that often requires fast forwarding and
rewinding. In addition, our systems are programmable and are capable of being
customized to satisfy each customer's special requirements, be it coverage
which is continuous or only when events are detected.
ViewMaxx is programmable -- it can be pre-set to take actions when events are
detected in the surveillance area. For example, it can be programmed to begin
recording when motion is detected in a surveillance area or to notify the user
if the system is not functioning properly. Because of the programmable
recording features, this product can eliminate the unnecessary storage of
non-critical image and audio data. This capacity allows the user to utilize
the hard disk storage more efficiently.
MiniMaxx Digital Video Surveillance - This system is a reduced form factor
machine which creates a digital video recording which is compatible with
existing closed-circuit television, telecom and data networking equipment..
Like the ViewMaxx system it offers fully programmable, high resolution digital
video recording and real time monitoring of up to 4 channels. The video/data
may be queried and reviewed locally or from an authorized personal computer
with access to the remote viewing system.
Our ViewMaxx and MiniMaxx monitoring products include the following features:
.. use any and all forms of telecommunications, such as standard telephone
lines;
.. video can be monitored 24 hours a day by a security monitoring center;
.. local and remote recording, storage and playback for up to 28 days, with
optional additional storage capability;
.. cameras can be concealed in ordinary home devices such as smoke
detectors;
.. the system monitors itself to insure system functionality with alert
messages in the event of covert or natural interruption;
.. modular expansion system configuration allows user to purchase add-on
components at a later date; and
.. allows the user to set the system to automatically review an area in a
desired camera sequence.
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.. stores the video according to times or criteria specified by the
customer; accordingly, retrieves the visual data selectively in a manner
that the customer considers valuable or desirable;
.. triggers programmed responses to events detected in surveillance area,
such as break-ins or other unauthorized breaches of the secured area.
FirstView Wireless Camera System - In December 2003 View Systems obtained
exclusive licensing and marketing rights for the HAZMAT CAM technology from
the U.S. Department of Energy's Idaho National Engineering and Environmental
Laboratory. We intend to market this product as FirstView and expect to start
manufacture of this product in the second quarter of 2004.
FirstView is based on the HAZMAT CAM, which is a lightweight wireless camera
system that emergency response teams carry into ground zero. Images are
transmitted to a command post where the incident commanding officer and other
experts can see in real-time what the entry team sees while making a first
entry. The camera can be completely submerged for fast and easy
decontamination.
FirstView is able to transmit high quality video in the most difficult
environments. It uses a patented triple-diversity antenna system that
minimizes signal distortion in urban environments due to signal multi-pathing.
The image can be displayed on an existing video monitor or on the systems
color LCD monitor, and can be easily recorded using a common camcorder or VCR
with video input.
FirstView also uses Extension Link which is a separate transmitter and
receiving system that increases the operating range of the FirstView by five
to eight miles, depending on environmental factors. The Extension Link has
field-selectable channels to avoid interference.
The complete FirstView system is stored in four cases, weighing 146 pounds,
and can be fully deployed by one person in a stand alone configuration in less
than 10 minutes. The system is battery operated and can operate for five
continuous hours using one set of spare camera batteries.
Additional Products - We also offer other products that can be integrated
with SecureScan or ViewMaxx. Biometric Verification is a system for
recognizing faces and comparing them to known individuals such as employees or
wanted individuals. SecureScan and/or ViewMaxx can be coupled with magnetic
door locks to restrict access to a particular area. We also offer a central
monitoring or video command center for SecureScan or ViewMaxx.
In addition, we offer support services for our products which include:
.. calibration services using the Federal Aviation Administration approved
method,
.. on site consulting/planning with customer architect and engineers,
.. installation and technical support,
.. training and "Train the Trainer" programs, and
.. extended service agreements.
Market
Our family of products offers government and law enforcement agencies,
commercial security professionals, private businesses and residential
consumers an enhanced surveillance capacity. It also offers an efficient and
economical method to store, search and retrieve historically stored data.
Because our technology can be used for stakeouts and remote monitoring of
areas, we believe there is a market potential with law enforcement agencies.
Video transmission is just beginning to transform from what was
"closed-circuit" to a mix of methods that may expand into hard-wired,
telephone line, television cable and wireless link systems. It is expected
that this will expand user demand, create new product opportunities and
channels of distribution and expand the way in which other communication
services are used.
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Commercial - Commercial business users represent the greatest potential users
of our weapons detection products. Commercial businesses have already
realized the need for using access control devices for protection. Our
products provide observation of facilities for protection of employees,
customers, and assets. This can result in the curtailment of crime and loss
prevention by employees and others. The market for this technology is on the
rise for commercial buildings, including hospitals, schools, museums, and
retail, manufacturing and warehousing facilities.
Our products and technology can be used where there is a temporary requirement
for real-time weapons detection devices in areas where a permanent
installation is cost prohibitive, impractical or impossible. Examples of this
are special events, concerts, and conventions. Our systems reduce the need
for a large guard force and provide speedy detection for these events.
Educational - Schools have been very receptive and enthusiastic with the
SecureScan and its integration with a time and attendance system known as the
Comprehensive Attendance, Administration and Security System ("Comprehensive
Attendance/Security System"), described below in "Distribution." The
Comprehensive Attendance/Security System" has been installed in over 240 high
schools around the country by School Technology Management, Inc. and has been
integrated with our concealed weapons detection technology. We have received
very positive responses from schools in New York and Philadelphia. Management
estimates that there are over 120,000 schools in the United States that may
have problems with violence, truancy and other safety considerations.
Law Enforcement - The gathering of video and data images and weapons
detection is commonplace in law enforcement. We have installed our SecureScan
weapons detection products in a variety of court house situations. The data
is used to protect both the law enforcement officer and the suspect. It is
also used as a historical record for prosecution and event verification.
Residential - The residential home security user will purchase our products
from either commercial companies installing self-contained or centrally
monitored systems, or directly from retail distribution centers. Utilizing
our technology, individuals can run their own perimeter and interior
surveillance systems from their own home computer. Real time action at home
can be monitored remotely through a modem and the Internet. There is also the
capability to make real-time monitors wireless. An additional advantage of
our technology is that it allows for the storage of information on the home
computer and does not require a VCR. This capability reduces the expense and
time of the home installation and makes installation affordable for a majority
of homeowners.
Distribution
We manufacture several of the hardware components in our systems and assemble
our systems by combining other commercially available hardware and software
together with our proprietary software. We license software components that
are integrated into our proprietary software and installed in our systems. We
believe that we can continue to obtain components for our systems at
reasonable prices from a variety of sources. Although we have developed
certain proprietary hardware components for use in our products and purchased
some components from single source suppliers, we believe similar components
can be obtained from alternative suppliers without significant delay.
In early October 2003, we began production of our SecureScan Portals and at
the end of the 2003 year we completed the in-house manufacturing of 15
SecureScan portals. The SecureScan portal consists of two components; the
work station contains the software and display imagery, and the archway holds
the sensors which detect threat objects. Both components are either assembled
or manufactured internally at our facilities in Baltimore, Maryland. Once
complete, the portal is tested and shipped to its final destination.
In 2003 we were able to expand our ViewMaxx and MiniMax digital video
surveillance client base with sales to places like the Ronald McDonald house,
the University of Maryland Medical Center, and other restaurants and car
dealers. We have installed additional SecureScan portals in both Colorado and
West Virginia, and some of
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these customers have also bought our ViewMaxx as a wraparound product. In
addition, we currently have more than 18 proposals to East coast court houses
and other government facilities in Maryland, New York and West Virginia.
However, we cannot assure that we will realize any final sales from these
proposals.
We have ongoing reseller arrangements with small and medium sized domestic and
international resellers. Our reseller agreements grant a non-exclusive right
to sell our products. The reseller purchases our products at a discount from
the list price and the agreements are generally for a term of one year and
automatically renew for successive one-year terms unless terminated by notice
or in the event of breach.
Through our efforts in developing dealer network channels we acquired
Levitt-Safety, Ltd., established in 1934, as our reseller. Levitt-Safety,
Ltd. is one of the top three Canadian safety and security companies, and their
first SecureScan and ViewMaxx purchases were initially placed in the Canadian
Federation Building. We anticipate that Levitt-Safety, Ltd. will provide our
SecureScan and ViewMaxx to it's large sales force and we anticipate we will
likely train their marketing personnel. Management believes this relationship
will expand our market to include the Canadian military and government
clients.
In early October 2003 we announced an alliance with School Technology
Management to integrate and market its products with ours. School Technology
Management has developed the Comprehensive Attendance/Security System, which
is designed to use a magnetic card swipe system to monitor identification of
students entering a school and to verify each student's attendance. School
Technology Management combined our SecureScan portal with its card swipe
system. With the combined technology a student enters the portal and is
scanned for any threat objects and his or her identity is concurrently
confirmed to school security officers. The Comprehensive Attendance/Security
System has been installed in the Philadelphia School District and has been
shown to allow over 700 students to be identified and checked for threat
objects in under thirty minutes. The National Institute of Justice is
currently studying the Comprehensive Attendance/Security System in high risk
high schools in New York City.
School Technology Management is now licensed in 11 major cities across the
United States and has over 240 installations in major cities in the United
States, with over 140 located in schools in New York City. We believe our
relationship with School Technology Management will expand the market for our
products.
We have relatively large proposals out to two school systems which total over
300 portals. We anticipate knowing the resolution of these proposals in the
near future. If even one of the proposals is accepted we will need to
increase our manufacturing to provide 60 or more portals per month. Delivery
and installation of the integrated concealed weapons detection technology and
Comprehensive Attendance/Security System product would need to be ready for
installation before September.
During 2003 we partnered with Johnson Controls in the New York region and have
placed a Secure/Scan portal in their Wall Street building for continuous
demonstrations to its clients. In addition, our products have received
publicity through newspapers, television and trade publications which have
resulted in inquiries about our products. As a result, we have demonstrated
our products to large agencies and system integrators. We also have
experienced international interest from approximately thirteen countries and
sixteen companies. We anticipate full development and implementation of an
international marketing plan and personnel in 2004.
Backlog
As of March 15, 2004 we had a backlog of five SecureScan portals and eight
VideoMaxx systems. We measure backlog as orders for which a purchase order or
contract has been signed or a verbal commitment for order or delivery has been
made, but which has not yet been shipped and for which revenues have not been
recognized. We typically ship our SecureScan portals and VideoMaxx products
months after receiving an order. However, the SecureScan portal shipments may
require more lead-time and other shipments may be delayed for a variety of
reasons beyond our control, including:
.. additional time necessary to conduct portal inspections prior to
shipping,
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.. design or specification changes by the customer,
.. the customer's need to prepare the site,
.. additional fine tuning of the portal once it is installed, and
.. delays caused by other contractors on the project.
Competition
We believe the introduction of digital technology to video surveillance and
security systems is our market opportunity. We believe that many of the
established closed-circuit television companies have approached the design of
their digital closed-circuit television products from the standpoint of
integrating their digital products to existing security and surveillance
product offerings. These systems are closed, not easily integrated with other
equipment and not capable of upgrades as technology improves. We have
designed our systems such that they are open, compatible with other digital
and analog systems, and easily adaptable to technological advances that will
inevitably occur with digital technology. In addition, we have evaluated
price point competition and to ease the financial burden for schools and other
customers with budget constraints, we accept a down payment with remaining
payments due monthly for an agreed upon term.
The markets for our products are extremely competitive. Competitors include a
broad range of companies that develop and market products for the
identification and video surveillance markets. The competitors of the
SecureScan portal are Ranger Security Scaners, Inc. and Garrett Electronics,
Inc., in the United States, and an Italian company, CEIA SpA, which has the
most sophisticated electromagnetic induction product, which ranges in price
from $8,000 to $16,000.
Competitors in the video surveillance market include numerous VCR suppliers
and digital recording suppliers including, Loronix Information Systems, Inc.,
Sensormatic Corporation and NICE Systems, Ltd. and Integral Systems.
Trademark, Licenses and Intellectual Property
Certain features of our products and documentation are proprietary and we rely
on a combination of patent, contract, copyright, trademark and trade secret
laws and other measures to protect our proprietary information. As part of
our confidentiality procedures, we generally enter into confidentiality and
invention assignment agreements with our employees and mutual non-disclosure
agreements with our manufacturing representatives, dealers and systems
integrators. Notwithstanding such actions, a court considering these
provisions may determine not to enforce such provisions or only partially
enforce such provisions. We also limit access to, and distribution of, our
software, documentation and other proprietary information.
The SecureScan concealed weapons detection technology involves sensing
technology and data acquisition/analysis software subsystems. These
technologies have patents pending or issued. However, since the intellectual
property was developed by the federal government under a grant from the
National Institute of Justice, the patents belong to the government and we
were granted an exclusive license to commercialize, manufacture and market the
concealed weapons detection technology.
Governmental ownership of the patents is advantageous because the government
has prosecution and stewardship responsibilities for the life of the patents.
This is also true for continuations and improvements to the concealed weapons
detection technology under the ongoing contract between the Department of
Energy and National Institute of Justice. View Systems, as the licensee, has
rights to these improvements as well.
We have obtained software licensing agreements for
.. compression software components,
.. for facial recognition to possibly integrate into our proprietary
software, and
.. integration of commercially available operating systems software into
our proprietary software for installation into our products.
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Because the software and firmware (software imbedded in hardware) are in a
state of continuous development, we have not filed applications to register
the copyrights for these items. However, under law, copyright vests upon
creation of our software and firmware, and registration is not a prerequisite
for the acquisition of copyright rights. We take steps to insure that notices
are placed on these items to indicate that they are copyright protected. The
copyright protection for our software extends for the statutory period from
the date of first "publication," distribution of copies to the general public,
or from the date of creation, whichever expires first.
We provide software to end-users under non-exclusive "shrink-wrap" licenses,
which are automatic licenses executed once the package is opened. This type
of license has a perpetual term and is generally nontransferable. Although we
do not generally make source code available to end-users, we may, from time to
time, enter into source code escrow agreements with certain customers. We
have also licensed certain software from third parties for incorporation into
our products.
Research and Development
For the year ended December 31, 2003, we did not record research and
development expense and for the year ended December 31, 2002, we recorded
research and development expense of $118,396 related to development of our
concealed weapons detection technology.
We have cooperative research arrangements with the Department of Energy to
receive technical assistance and further enhancements of the concealed weapons
detection technology through contractual relationships between the Department
of Energy and the National Institute of Justice.
Government Regulation
We are not subject to government regulation in the manufacture of our products
or the components in our products. However, we are subject to certain
restrictions in the sale of our products to "unfriendly" countries and
countries designated as adversarial. In addition, our resellers and end users
may be subject to numerous regulations that stem from surveillance activities.
Security and surveillance systems, including cameras, raise privacy issues and
our products involve both video and audio, and added features for facial
identification. The regulations regarding the recording and storage of this
data are uncertain and evolving. For example, under the Federal wiretapping
statute, the audio portion of our surveillance systems may not record people's
conversations without their consent. Further, there are state and federal
laws associated with recording video in non-public places. Shipments of our
products internationally may be regulated as to certain countries that raise
national security concerns.
Employees
We employ 13 persons, including two persons in part-time positions. We also
employ two independent contractors who devote a majority of their work to a
variety of our projects. Our employees are not presently covered by any
collective bargaining agreement. Our relations with our employees are good,
and we have not experienced any work stoppages.
ITEM 2. DESCRIPTION OF PROPERTY
We also lease 5,800 square feet of space used for engineering design and
manufacturing in Baltimore, Maryland. The lease term ends in August 2005.
During the term of the lease, the base rent is approximately $2,300 per month,
with an annual rent escalator of 3%. Management believes this facility will
suit our needs for the future.
ITEM 3. LEGAL PROCEEDINGS
On May 8, 2003, View Systems, Inc. filed a complaint against Messrs. Steve
Williams and Paul Reep, former
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officers and shareholders of Milestone Technology, Inc. The complaint was
filed in the United States District Court for the District of Maryland
Division and the controversy is related to the ownership of Milestone
Technology, Inc. and the Concealed Weapons Detection System. View Systems
claims ownership of Milestone Technology, Inc. and the exclusive licensing
rights to the Concealed Weapons Detection System. Management and counsel
negotiated a settlement with Mr. Williams and Milestone Technology, Inc. in
July 2003 and we resolved the dispute with Mr. Reep and settled this action.
As a result of that settlement, the case has been dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We have not submitted a matter to a vote of security holders through the
solicitation of proxies, or otherwise, during the fourth quarter of the 2003
year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASE OF SECURITIES
Market Information
Our shares of common stock are traded on the NASD OTC Bulletin Board under the
symbol "VYST." The following table lists the quarterly high and low bid
prices of our common stock in the over-the-counter market for each quarter for
the two most recent fiscal years as reported by the OTC Bulletin Board
Historical Data Service. These over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-downs or commissions, and
may not necessarily represent actual transactions.
Year Quarter Ended High Bid Low Bid
---- ------------- -------- -------
2002 March 31 $ 0.82 $ 0.30
June 30 1.53 0.10
September 30 0.47 0.15
December 31 0.295 0.155
2003 March 31 $ 0.205 $ 0.08
June 30 0.145 0.04
September 30 0.19 0.06
December 31 0.65 0.17
Our common shares are subject to Section 15(g) and Rule 15g-9 of the
Securities and Exchange Act, commonly referred to as the "penny stock" rule.
The rule defines penny stock to be any equity security that has a market price
less than $5.00 per share, subject to certain exceptions. The rule provides
that any equity security is considered to be a penny stock unless that
security is:
.. registered and traded on a national securities exchange meeting
specified criteria set by the SEC;
.. authorized for quotation from the NASDAQ stock market;
.. issued by a registered investment company; or
.. excluded from the definition on the basis of share price or the issuer's
net tangible assets.
These rules may restrict the ability of broker-dealers to trade or maintain a
market in our common stock and may affect the ability of shareholders to sell
their shares. Broker-dealers who sell penny stocks to persons other than
established customers and accredited investors must make a special suitability
determination for the purchase of the security. Accredited investors, in
general, include individuals with assets in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 together with their spouse, and certain
institutional investors. The rules require the broker-dealer to receive the
purchaser's written consent to the transaction prior to the purchase and
require the broker-dealer to deliver a risk disclosure document relating to
the penny stock prior to the first
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transaction. A broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative, and current
quotations for the security. Finally, monthly statements must be sent to
purchasers customers disclosing recent price information for the penny stocks.
Holders
As of February 20, 2004 we had 332 stockholders of record.
Dividends
We have not paid cash or stock dividends and have no present plan to pay any
dividends. Instead, we intend to retain any earnings to finance the operation
and expansion of our business and payment of any cash dividends on our common
stock is unlikely.
Recent Sale of Unregistered Securities
The following discussion describes all securities sold by View Systems during
the past year.
On October 14, 2003 our board of directors authorized the issuance of an
aggregate of 190,000 common shares in consideration for services. We
authorized 100,000 shares to Ruediger Klose and 90,000 shares to Charlotte
DeLoof for services rendered under their employment agreements. We relied on
an exemption from registration for a private transaction not involving a
public distribution provided by Section 4(2) of the Securities Act.
On September 10, 2003, our board of directors authorized the issuance of an
aggregate of 950,000 common shares valued at $114,000 for services rendered to
View Systems. We issued 500,000 shares to Daniel W. Jackson for legal
services valued at $60,000. We issued 200,000 shares to William D. Smith for
services rendered to the company valued at $24,000. We issued 250,000 shares
to Barry Feldman for services rendered to the company valued at $30,000. We
relied on an exemption from registration for a private transaction not
involving a public distribution provided by Section 4(2) of the Securities
Act.
On September 2, 2003, our board of directors authorized the issuance of
1,150,000 common shares to Gunther Than in consideration for services rendered
to the company valued at $138,000. We relied on an exemption from
registration for a private transaction not involving a public distribution
provided by Section 4(2) of the Securities Act.
Starting on August 6, 2003 we conducted a Regulation D Rule 505 offering for
an aggregate offering amount of $1,500,000. As of December 1, 2003, we had
issued 14,320,000 common shares for a combination of cash and conversion of
debt valued at approximately $1,118,320. We relied on an exemption from the
registration requirements of the Securities Act of 1933 for a limited offering
provided by Section 3(b) and Regulation D.
In connection with each of these isolated issuance's of our securities, we
believe that each purchaser:
.. was aware that the securities had not been registered under federal
securities laws;
.. acquired the securities for his/its own account for investment purposes
and not with a view to or for resale in connection with any distribution
for purposes of the federal securities laws;
.. understood that the securities would need to be indefinitely held unless
registered or an exemption from registration applied to a proposed
disposition; and
.. was aware that the certificate representing the securities would bear a
legend restricting their transfer.
Issuer Purchase of Securities
None.
11
Termination of Registered Offerings
Starting in December of 2000 through January 2003, we filed registration
statements on Form S-8 and Form SB-2. As of December 31, 2003 we have
completed all the offerings filed under the Securities Act of 1933 and have
terminated them.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Executive Overview
View Systems designs and develops computer software and hardware used in
conjunction with weapons detection and surveillance capabilities. We believe
that heightened attention to terrorist and other security threats may continue
to drive growth in the market for security products. Since start-up of
operations in September 1998, we have devoted most of our resources to the
development of digital video surveillance products. However, in March 2002 we
shifted the focus of our operations to the introduction of our SecureScan
Concealed Weapons Detection System.
Our revenues are primarily from sales of our SecureScan concealed weapons
detection portals and VideoMaxx Digitial Video. We rely on private financing
and sales of common stock to provide additional funding. We have incurred
losses for the past two fiscal years and have an accumulated deficit of
$14,505,017 at December 31, 2003. Management believes we will incur operating
losses for the near future. However, management expects projected sales
revenues and anticipated equity infusions and advances from management to be
sufficient to provide funding to sustain operations through 2004.
During the 2003 year, we reached a final settlement with the former owner and
current subsidiary, Milestone Technology, in the controversy related to the
SecureScan technology. This settlement allowed us to move forward with our
manufacturing process. This resulted in our single largest manufacturing run
of 20 portals which are due for delivery in the early part of January 2004.
We worked diligently to make engineering design changes to the concealed
weapons detection product to accommodate the price points required by
competitive pressures. The engineering design changes required locating new
sources for components and limited field testing.
In addition, we successfully obtained bridge financing and restructured our
executive management team during the 2003 year. We expanded our facilities
and modernized our assembly and manufacturing to allow up to 60 portals per
month to be built to meet expected demand.
New and revived marketing strategies have enabled View Systems to generate big
increases in ViewMaxx and MiniMaxx digital video surveillance systems over the
past four months. November and December resulted in over $47,000 per month in
revenue from these products. Installations of our digital video products in
prominent facilities, such as the Ronald McDonald House, University of
Maryland Medical Center, top restaurants and clubs, large car and auto repair
facilities have lead to news articles in a number of specific industry
magazines and publications. This exposure by third parties has opened up many
new sales opportunities for us.
For the 2004 year our primary challenge will be to more fully develop our
product line and our sales and distribution network. We also anticipate full
development and implementation of an international marketing plan and
personnel in 2004. Management believes that these changes, improvements and
new business alliances will lay the foundation for solid growth in 2004 and
thereafter.
Liquidity and Capital Resources
For the short term management believes that revenues and additional equity
financing will provide funds for operations. For the long term, management
expects that the development of our sales channels will increase our revenues;
however, we will continue to raise additional funds through loans and sales of
our common stock, as needed.
Operations - Our cash increased from $3,229 at December 31, 2002 to $19,899
at December 31, 2003. Net cash used by operating activities was $1,011,569
for the 2003 year, compared to net cash used by operating activities of
12
$1,438,325 for the 2002 year. Net cash provided from investing activities was
$76,869 for the 2003 year, and was related to advances from affiliated
entities. Net cash provided by investing activities for the 2002 year was
$38,832 and was primarily the result of the acquisition of $58,849 cash in the
Milestone Technology acquisition.
Financing - We have financed our operations primarily through private equity
financing. Net cash provided by financing activities for the 2003 year was
$951,370; consisting of debt financing of $817,820 and proceeds received from
sales of stock of $508,550. In comparison, net cash provided by financing
activities for the 2002 year was $1,329,378, primarily from proceeds from
sales of common stock.
We operate in a very competitive industry that requires continued large
amounts of capital to develop and promote our products. We currently estimate
we will need between $1 to $2 million to fully develop our products and
further expand our business operations. We intend to use any available cash
to expand our sales, marketing and promotional activities for the SecureScan
portals and to continue our product development efforts. We believe that it
will be essential to continue to raise additional capital, both internally and
externally, to compete in this industry. We cannot assure that we will be
able to obtain financing on favorable terms and we may be required to further
reduce expenses and scale back our operations. In addition to accessing the
public and private equity markets, we will pursue bank credit lines and
equipment leases for certain capital expenditures, if necessary.
Commitments and Contingent Liabilities
Our total current liabilities of $950,729 include accounts payable of
$648,714, accrued expenses of $115, 515, accrued interest of $55,000 and notes
payable of $131,500. At December 31, 2003 future minimum payments for
operating leases related to our principal office and manufacturing facility
were $49,181 through 2006. Rent expense was $61,047 for the 2003 year
compared to $58,513 for the 2002 year.
Off-balance Sheet Arrangements
None.
Results of Operations
The following discussions are based on the consolidated financial statements
of View Systems and its subsidiaries. These charts and discussions summarize
our financial statements for the years ended December 31, 2002 and 2003 and
should be read in conjunction with the financial statements, and notes
thereto, included with this report at Item II, Part 7, below.
Comparison of 2002 and 2003 Fiscal Year Operations
---------------------------------------------------
2002 2003
-------------- --------------
Revenues, net $ 446,009 $ 569,952
Cost of sales 378,600 257,632
Gross profit 67,409 312,320
Total operating expenses 2,980,509 1,547,585
Loss from operations (2,913,100) (1,560,265)
Total other income (expense) (1,010,369) (1,311,069)
Net income (loss) (3,923,469) (2,546,334)
Net earnings (loss) per share $ (0.11) $ (0.05)
13
Revenues for the 2003 year increased 27.8% compared to the 2002 year, but
costs of sales were reduced by 32.0% in the 2003 year compared to the 2002
year. The reduction in costs of sales was primarily the result of engineering
design changes to lower the costs of production of the SecureScan concealed
weapons detection product. We are continually working on engineering changes
in our security products that we expect will lower component costs for these
products. As a result of the reduction in cost of sales we recorded increased
gross profit for the 2003 year.
During the 2003 year total operating expense decreased 48.1% compared to the
2002 year. The decrease was the result of a 66.4% decrease in general and
administrative expenses, a 55.1% decrease in business development expenses, a
71.3% decrease in professional fees and a 11.0% decrease in salaries and
benefits. The reductions in these expenses resulted in a 46.4% decrease in
net operating loss.
Total other expense decreased in the 2003 year compared to the 2002 year
primarily as a result of bad debt expense of $948,432 in the 2002 year
compared to $71,000 bad debt expense in the 2003 year. Also, we recorded a
valuation/impairment loss of $888,658 for the 2003 year compared to a
valuation/impairment loss of $37,854 in the 2002 year. The impairment loss
for the 2003 year is related to a change in accounting principle from the
adoption of Statement of Financial Accounting Standards No 142, "Goodwill and
Other Intangible Assets," issued in June 2001, which addresses financial
accounting and reporting for acquired goodwill and intangible assets. The
adoption of SFAS No. 142, required the cessation of goodwill amortization for
2002 which decreased net loss for 2002 by $113,135, and the write off of
goodwill in 2003 resulting in a decreased net loss of $787,248.
As a result of the above changes, we recorded a 35.1% decrease in net loss
from the 2002 year compared to the 2003 year and decreased our loss per share
from $0.11 for the 2002 year to $0.05 for the 2003 year.
Factors Affecting Future Performance
We are currently dependent on the efforts of our
resellers for our continued growth.
We are in the process of developing and expanding our sales channels, but we
expect overall sales to remain down as we develop our marketing activities. We
are actively recruiting and adding other additional resellers and must
continue to recruit additional resellers and find other methods of
distribution to increase customers.
We may need additional external capital and may
be unable to raise it.
Based on our current growth plan we believe we may require $1 to $2 million
additional financing within the next twelve months to remain competitive in
our market. Our success will depend upon our ability to access equity capital
markets and borrow on terms that are financially advantageous to us. However,
we may not be able to obtain additional funds on acceptable terms. If we fail
to obtain funds on acceptable terms, then we might be forced to delay or
abandon some or all of our business plans or may not have sufficient working
capital to develop products, finance acquisitions, or pursue business
opportunities. If we borrow funds, then we could be forced to use a large
portion of our cash reserves, if any, to repay principal and interest on those
funds. If we issue our securities for capital, then the interests of
investors and shareholders will be diluted.
ITEM 7. FINANCIAL STATEMENTS
14
VIEW SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
15
C O N T E N T S
Accountants' Report .....................................................3
Balance Sheets ..........................................................4
Statements of Operations ................................................5
Statements of Stockholders' Equity.......................................6
Statements of Cash Flows ................................................7
Notes to the Financial Statements .......................................8
16
CHISHOLM, BIERWOLF & NILSON
Certified Public Accountants
A Limited Liability 533 W. 2600 S., Suite 250 Office (801) 292-8756
Company Bountiful, Utah 84010 Fax (801) 292-8809
______________________________________________________________________________
INDEPENDENT AUDITORS' REPORT
To the Audit Committee of the Board of Directors and Stockholders
View Systems, Inc.
Baltimore, Maryland
We have audited the accompanying consolidated balance sheet of View
Systems, Inc., and subsidiaries (the Company) as of December 31, 2003, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year then ended. These consolidated financial
statements are the responsibility of Company's management. Our responsibility
is to express an opinion on these financial statements based on our audit. The
consolidated financial statements of View Systems, Inc. for the year ended
December 31, 2002, were audited by other auditors whose report dated March 26,
2003 expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the accompanying consolidated balance sheet as of
December 31, 2003 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended present
fairly, in all material respects, the financial position of the Company as of
December 31, 2003, and the results of operations and cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred ongoing operating losses and does not currently have financing
commitments in place to meet expected cash requirements through 2003.
Additionally, the Company is in default on its debt obligations. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classifications of liabilities that may result
from the outcome of this uncertainty.
/s/ Chisholm, Bierwolf & Nilson, LLC
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
February 25, 2004
17
To the Audit Committee of the Board of
Directors and Stockholders
View Systems, Inc.
Baltimore, Maryland
We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity and cash flows of View Systems, Inc. and
Subsidiaries (the "Company") for the year ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of their operations and
their cash flows of View Systems, Inc. and Subsidiaries for the year ended
December 31, 2002 in conformity with accounting principles generally accepted
in the United States of America.
The financial statements referred to in the first paragraph have been
prepared assuming that the Company will continue as a going concern. The
Company has incurred ongoing operating losses and does not currently have
financing commitments in place to meet expected cash requirements through
2003. Additionally, the Company is in default on its debt obligations. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
/s/ Stegman & Company
Baltimore, Maryland
March 26, 2003
18
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
December 31,
2003
-------------
Current Assets
Cash $ 19,899
Accounts Receivable(Net of Allowance of $81,000) 225,088
Inventory 93,241
-------------
Total Current Assets 338,228
-------------
Property & Equipment (Net) 44,693
-------------
Other Assets
Licenses 1,626,854
Due from Affiliates 98,457
Deposits 4,819
-------------
Total Other Assets 1,730,130
-------------
Total Assets $ 2,113,051
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 648,714
Accrued Expenses 115,515
Accrued Interest 55,000
Notes Payable 131,500
-------------
Total Current Liabilities 950,729
-------------
Stockholders' Equity
Common Stock, Authorized 50,000,000 Shares,
$.001 Par Value, Issued and Outstanding 62,730,619 62,730
Additional Paid in Capital 15,604,609
Retained Earnings (Deficit) (14,505,017)
-------------
Total Stockholders' Equity 1,162,322
-------------
Total Liabilities and Stockholders' Equity $ 2,113,051
=============
The accompanying notes are an integral part of these
consolidated financial statements.
4
19
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended
December 31,
----------------------------
2003 2002
------------- --------------
Revenues, Net $ 569,952 $ 446,009
Cost of Sales 257,632 378,600
------------- --------------
Gross Profit (Loss) 312,320 67,409
------------- --------------
Operating Expenses
Business Development 155,130 345,686
General & Administrative 301,482 896,366
Professional Fees 542,612 757,304
Salaries & Benefits 873,361 981,153
------------- --------------
Total Operating Expenses 1,872,585 2,980,509
------------- --------------
Net Operating Income (Loss) (1,560,265) (2,913,100)
------------- --------------
Other Income(Expense)
Loss on Sale of Assets (14,839) -
Interest Expense (11,572) (24,083)
Bad Debt (71,000) (948,432)
Valuation/Impairment Loss (888,658) (37,854)
------------- --------------
Total Other Income(Expense) (986,069) (1,010,369)
------------- --------------
Net Income (Loss) $ (2,546,334) $ (3,923,469)
============= ==============
Net Income (Loss) Per Share $ (0.05) $ (0.11)
============= ==============
Weighted Average Shares Outstanding 51,529,119 34,677,576
============= ==============
The accompanying notes are an integral part of these
consolidated financial statements.
5
20
View Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit)
------------- ---------- ------------- -------------
Balance, December 31, 2001 20,193,620 $ 20,193 $ 10,119,024 $ (8,035,214)
Sales of common stock 8,550,000 8,550 1,283,650 -
Issuance of common stock
(employee and other
compensation) 11,820,000 11,820 1,195,239 -
Issuance of common stock
in exchange for remaining
interest in Milestone
Technology, Inc. 3,300,000 3,300 1,019,700 -
Issuance of common stock
in payment of a notes
payable 735,000 735 193,265 -
Net loss for the year
ended December 31, 2002 - - - (3,923,469)
------------- ---------- ------------- -------------
Balance, December 31, 2002 44,598,620 44,598 13,810,878 (11,958,683)
January - March 2003 -
shares issued for cash 676,999 677 85,873 -
January 2003 - shares
issued for services 445,000 445 51,755 -
July - September 2003 -
share issued for cash 3,220,000 3,220 318,780 -
September 2003 - shares
issued for payment of
notes payable 300,000 300 29,700 -
September 2003 - Stock
issued for services 500,000 500 59,500 -
September 2003 share
issued to employees 1,600,000 1,600 190,400 -
September 2003 - shares
issued for payment
of notes payable 10,800,000 10,800 755,520 -
October 2003 - shares
issued for services 190,000 190 9,310 -
Forgiveness of Debt by
subsidiary-contribution - - 193,293 -
October-December 2003 -
shares issued for cash 400,000 400 99,600 -
Net loss for the year
ended December 31, 2003 - - - (2,546,334)
------------- ---------- ------------- -------------
Balance, December 31, 2003 62,730,619 $ 62,730 $ 15,604,609 $(14,505,017)
============= ========== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
6
21
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
2003 2002
------------- -------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (2,546,334) $ (3,923,469)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 45,160 194,620
Impairment of Assets 888,658 -
(Gain) Loss on Disposal of Assets 14,839 -
Bad Debts 71,000 948,432
Stock Issued for Services 313,700 1,207,059
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (143,376) (74,498)
Inventories (21,916) 105,035
Prepaid expenses (655) -
Other Assets (2,287) -
Increase (Decrease) in:
Accounts Payable 211,747 93,496
Accrued Expenses 157,895 11,000
------------- -------------
Net Cash Provided(Used) by Operating Activities (1,011,569) (1,438,325)
Cash Flows from Investing Activities:
Purchase of property and equipment - (27,111)
Advances (to)/ receipt from related party 76,869 7,094
Cash element in Mileston Technology acquisition - 58,849
------------- -------------
Net Cash Provided (Used) by Investing Activities 76,869 38,832
Cash Flows from Financing Activities:
Funds advanced (to) from stockholders - 43,230
Proceed from debt financing 817,820 -
Proceeds from stock issuance 508,550 1,292,200
Principal Payments on Notes Payable (375,000) (6,052)
------------- -------------
Net Cash Provided (Used) by Financing Activities 951,370 1,329,378
------------- -------------
Increase (Decrease) in Cash 16,670 (70,115)
Cash and Cash Equivalents at Beginning of Period 3,229 73,344
------------- -------------
Cash and Cash Equivalents at End of Period $ 19,899 $ 3,229
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
7
22
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Year Ended
December 31,
---------------------------
2003 2002
------------- -------------
Cash Paid For:
Interest $ 572 $ 15,203
Income Taxes $ - $ -
Non-Cash Investing and Financing Activities:
Stock Issued in payment for Note Payable $ 796,320 $ 194,000
Stock Issued in exchange for net assets
of Milestone Technology, Inc as follows:
Accounts Receivable $ - $ 28,132
Inventory - 359,647
Fixed Assets - 188
Patents - 1,317,467
Accounts payable - (6,470)
Notes payable - (703,449)
Accrued interest - (28,843)
The accompanying notes are an integral part of these
consolidated financial statements.
8
23
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
View Systems, Inc. (the "Company") designs and develops computer software
and hardware used in conjunction with surveillance capabilities. The
technology utilizes the compression and decompression of digital inputs. In
March 2002, the Company acquired Milestone Technology, Inc., which has
developed a concealed weapons detection portal.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, Milestone Technology, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could
differ from the estimates that were used.
Revenue Recognition
The Company recognizes revenue when the product has been shipped. The
price of the product is fixed or determinable and collectibility is reasonably
assured.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in-first-out method (LIFO). All inventory as of
December 31, 2003 consisted of finished goods.
Property and Equipment
Property and equipment is recorded at cost and depreciated over their
useful lives, using the straight-line and accelerated depreciation methods.
Upon sale or retirement, the cost and related accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
included in the results of operations. The useful lives of property and
equipment for purposes of computing depreciation are as follows:
Equipment 5-7 years
Software tools 3 years
9
24
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Repairs and maintenance charges which do not increase the useful lives of
assets are charged to operations as incurred. Depreciation expense for the
years ended December 31, 2003 and 2002 amounted to $45,160 and $62,881,
respectively.
Goodwill
Goodwill represents the excess of the cost of assets acquired in the
business combinations accounted for under the purchase method of accounting
over the fair value of the net assets acquired at the dates of acquisition.
Prior to the adoption of SFAS Nos. 141 and 142, the excess purchase price was
being amortized using the straight-line method over ten years. Effective
January 1, 2002 goodwill will no longer be amortized but rather tested for
impairment under the provision of SFAS No 142. As of December 31, 2003,
goodwill was determined to be impaired and was written off.
Licenses
In connection with the acquisition on Milestone, the Company received
various licenses to products developed by INEEL (Idaho National Engineering
and Environmental Laboratory). Milestone transferred the licenses to View
Systems, Inc., and in November 2003, two separate licenses were signed in the
name of View Systems with Bechtel BWXT Idaho, LLC (BBWI).
BBWI is the management and operating contractor of the INEEL under its
Contract No. DE-AC07-99ID13727 ("M&O Contract") and has the authorization,
right and ability to grant the license of the Agreement. The licenses allow
View Systems to commercially develop, manufacture, use, sell and distribute
processes and products embodying the U.S. Patent No. 6.150.810 "Method for
Detecting the Presence of a Ferromagnetic Object Using Maximum and Minimum
Magnetic Field Data", and U.S. Patent Application S/N 10/623,372,
"Communication Systems, Camera Devices, and Communication Methods".
The valuation of these licenses consist of the cost of acquiring
Milestone, i.e., the difference of the cost paid for the entity vs. the value
of the underlying assets and liabilities which was determined to be
$1,626,866. Consistent with SFAS No. 142, the license was analyzed to
determine if any impairment existed at December 31, 2003. It was determined
to not be impaired. Pursuant to SFAS No. 142, the license will not be
amortized, rather the valuation of this intangible will be reviewed
periodically.
10
25
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
Deferred income taxes are recorded under the assets and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences, measured by enacted tax rates, attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss carryforwards.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period the rate change becomes effective.
Valuation allowances are recorded for deferred tax assets when it is more
likely than not that such deferred tax assets will not be realized.
Research and Development
Research and development costs are expensed as incurred. Equipment and
facilities acquired for research and development activities that have
alternative future uses are capitalized and charged to expense over the
estimated useful lives.
Advertising
Advertising costs are charged to operations as incurred. Advertising
costs for the years ended December 31, 2003 and 2002 were $21,264 and $52,549.
Nonmonetary Transactions
Nonmonetary transactions are accounted for in accordance with Accounting
Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions"
which requires the transfer or distribution of a nonmonetary asset or
liability to be based generally, on the fair value of the asset or liability
that is received or surrendered, whichever is more clearly evident.
Financial Instruments
For most financial instruments, including cash, accounts receivable,
accounts payable and accruals, management believes that the carrying amount
approximates fair value, as the majority of these instruments are short-term
in nature.
11
26
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss
available to common stockholder by the weighted average number of common
shares outstanding. Diluted net loss per common share is computed by dividing
net loss available to common stockholders by the weighted average number of
common shares and dilutive potential common share equivalents then
outstanding. Potential common shares consist of shares issuable upon the
exercise of stock options and warrants. The calculation of the net loss per
share available to common stockholders for the years ended December 31, 2003
and 2002 does not include potential shares of common stock equivalents, as
their impact would be antidilutive.
2. BUSINESS PLAN
The Company has incurred and continues to incur, losses from operations.
For the years ended December 31, 2003 and 2002, the Company incurred net
losses of $2,546,334 and $3,923,469, respectively. During 2003 and 2002, the
Company implemented a strategy to reduce its cash used in operating activities
which included reductions in personnel and facilities expense. Additionally,
the Company has increased the efficiency of its processes and focused its
development efforts on products with greater sales potential.
To date, the Company has financed its operations primarily through
private financing. It is management's intention to finance 2004 operations
through an additional equity financing. There can be no assurance, however,
that this financing will be successful and the Company may be required to
further reduce expenses and scale back operations.
3. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 141, Business
Combinations ("SFAS No. 141"), issued in June 2001, addresses financial
accounting and reporting for business combinations which were initiated after
June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. The adoption of SFAS No. 141 did not have a material
impact on the Company's financial position or the results of operations.
12
27
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No 142, Goodwill and Other
Intangible Assets ("SFAS NO. 142"), issued in June 2001, addresses financial
accounting and reporting for acquired goodwill and intangible assets. The
provisions of SFAS No 142 are required to be applied starting with fiscal
years beginning after December 15, 2001. Early application is permitted for
entities wich fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not previously been issued.
Impairment losses for goodwill and indefinite-lived intangible assets that
arise due the initial application of this Statement (resulting from a
transitional impairment test) are to be reported as resulting from a change
in accounting principle. The adoption of SFAS No. 142, required the cessation
of goodwill amortization for 2002 which decreased net loss for 2002 by
$113,135, and the write off of goodwill in 2003 resulting in a decreased net
loss of $787,248.
Statement of Financial Accounting Standards No 143, "Accounting for Asset
Retirement Obligations ("SFAS No. 143"), issued in August 2001, addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and for the associated retirement
costs. SFAS No. 143, which applies to all entities that have a legal
obligation associated with the retirement of a tangible long-lived asset is
effective for fiscal years beginning after June 15, 2001. The adoption of
SFAS No. 143, did not have a material impact on the Company's financial
position or results of operations.
Statements of Financial Accounting Standards No. 144, Accounting for the
Impairment of Disposal of Long-Lived Assets ("SFAS No. 144"), issued in
October 2001, addresses financial accounting and reporting for the impairment
of disposal of long-lived assets. SFAS No. 144, which applies to all
entities, is effective for fiscal years beginning after December 15, 2001.
The adoption of SFAS No. 144, did not have a material impact on the Company's
financial position or results of operations.
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections, effective for fiscal years beginning May 15, 2002, or
later that rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements, and FASB
Statements No 44, Accounting for Intangible Assets of Motor Carriers. This
Statement Amends FASB Statement No. 4 and FASB Statement No 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions. This Statement also amends other existing
authoritive pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The
adoption of SFAS No. 145 did not have a material impact on the Company's
financial position or results of operations.
13
28
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
3. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, effective for exit or disposal
activities that are initiated after December 31, 2002. This Statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of
commitment to an exit or disposal plan. The adoption of SFAS did not have a
material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective
on a prospective basis for guarantees issued or modified after December 31,
2002. The application of the requirements of FIN No. 45 did not have a
material impact on the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure-an Amendment of FASB
Statement No. 123, effective for fiscal years ending after December 15, 2002.
This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of Statement No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The adoption of SFAS No. 148, did not have a material impact on the Company's
financial position or results of operations.
4. BUSINESS COMBINATION
The Company purchased 100% of the common stock of Milestone Technology,
Inc., effective March 25, 2002. The purchase was accomplished in two
transactions. The Company acquired 6% of Milestone in December 2001 in
exchange for 500,000 shares of the Company's common stock. In March 2002, the
Company acquired the remaining 94% of Milestone for 3,300,000 share of the
Company's common stock. Based on the market value of the Company's common
stock ($0.55 per share in December and $0.31 per share in March) the total
cost of the acquisition was $1,298,000.
Milestone Technology, Inc., is a developer of concealed weapons
detections systems. Its primary product is a walk-through detector that uses
advanced magnetic technology to accurately pinpoint the location, size, and
numbers of concealed weapons. Prior to its acquisition, Milestone Technology,
Inc., was considered to be a development stage enterprise.
14
29
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
5. DUE FROM AFFILIATED ENTITIES
The Company has advanced non-interest bearing funds of $98,458 as of
December 31, 2003 and 2002 to a related corporation, View Technologies, Inc.,
which is controlled by the Chief Executive Officer of the Company. There are
no formal repayment terms associated with this advance. The two companies
enter into various transactions throughout the year to provide working capital
to one another when necessary.
The Company has advanced non-interest bearing funds to one or its
officers in the amount of $24,869 as of December 31, 2002. The amount was
applied to the officers' wages in 2003, and there is no balance due at
December 31, 2003.
6. NOTES PAYABLE
Notes payable as of December 31, 2003 consist of the following:
Note payable - due to an individual, non-interest bearing
due on demand. $ 1,500
Note payable - due to an individual, non-interest bearing,
due on demand. 20,000
Notes payable - due former stockholder of Zyros Technology,
due on demand, interest at 10% per annum. 110,000
-------------
Total Notes Payable $ 131,500
=============
The notes payable due former stockholders of Xyros Technology, which was
acquired by the Company in 1999 was due December 31, 1999 but the Company has
negotiated to repay the loan as cash flow permits.
7. INCOME TAXES
The components of the net deferred tax asset and liability as of December
31, 2003 are as follows:
Effect of net operating loss carryforward $ 4,931,700
Less evaluation allowance (4,931,700)
----------------
Net deferred tax asset (liability) $ -
================
15
30
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
8. OPERATING LEASE
The Company leases office and warehouse space in Baltimore, Maryland
under a five-year noncancellable operating lease, expiring August 2005. Base
rent is $2,260 per month with an annual rent escalator of 3%. Rent expense
was $61,047 and $58,513 for the years ended December 31, 2003 and 2002,
respectively.
The following is a schedule by year, of approximate future minimum lease
payments required under this lease:
Year ending December 31:
2004 $ 29,217
2005 19,964
2006 and Thereafter -
------------------
Total minimum future rental payments $ 49,181
==================
9. STOCK BASED COMPENSATION
During the years ended December 31, 2003 and 2002 the Company granted
restricted stock, incentive stock options, nonqualified stock options, and
warrants to employees, officers, and independent contractors and consultants.
Restricted Stock Grants
The Company's Board of Directors and stockholders have approved a
restricted share plan under which shares of the Company's common stock will be
granted to employees, officers and directors at the discretion of the Board of
Directors. During 2003 and 2002, the Company issued the following shares
under this Plan and additional shares at the discretion of the Board of
Directors:
2003 2002
-------------------------- --------------------------
Number Expense Number of Expense
of Shares Recognized of Shares Recognized
------------- ------------ ------------- ------------
Officers and employees 1,690,000 $ 196,500 4,950,000 $ 495,000
Independent contractors
and consultants 1,035,000 117,200 6,870,589 687,059
------------- ------------ ------------- ------------
Total 2,725,000 $ 313,700 11,820,589 $ 1,182,059
============= ============ ============= ============
Officers' and employees' compensation was based on the fair market value
of the common stock issued on the date of grant less a discount of 10% due to
the restricted nature of the grant. Independent contractors and consultants
expense was based on the estimated value of services rendered.
16
31
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
9. STOCK BASED COMPENSATION
Stock Options and Warrants
The Company adopted the 1999 Stock Option Plan during the year ended
December 31, 1999. The Plan reserves 4,500,000 shares of the Company's
unissued common stock for options. Options, which may be tax qualified and
non-qualified, are exercisable for a period of up to ten years at prices at or
above market price as established on the date of the grant.
A summary of the Company's common stock option activity and related
information for the years ended December 31, 2003 and 2002 is as follows:
2002
----------------------------------------
Weighted
Common Average Range of
Stock Exercise Exercise
Options Price Price
------------- ------------ -------------
Outstanding at beginning of year 107,690 $ 1.63 $ .01 - 2.07
Granted - - -
Exercised - - -
Expired/Cancelled - - -
------------- ------------ -------------
Outstanding at end of year 107,690 $ 1.63 $ .01 - 2.07
============= ============ =============
2003
----------------------------------------
Weighted
Common Average Range of
Stock Exercise Exercise
Options Price Price
------------- ------------ -------------
Outstanding at beginning of year 107,690 $ 1.63 $ .01 - 2.07
Granted - - -
Exercised - - -
Expired/Cancelled - - -
------------- ------------ -------------
Outstanding at end of year 107,690 $ 1.63 $ .01 - 2.07
============= ============ =============
The Company has issued warrants to purchase the Company's stock as
follows:
2002 & 2003
----------------------------------------
Weighted
Common Average Range of
Stock Exercise Exercise
Warrants Price Price
------------- ------------ -------------
Outstanding at beginning of year 3,850,000 $ 0.49 $ .20 - .70
Granted - - -
Exercised (3,850,000) 0.49 $ .20 - .70
Expired/Cancelled - - -
------------- ------------ -------------
Outstanding at end of
year 2002 & 2003 - $ - $ -
============= ============ =============
17
32
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
9. STOCK BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), but applies Accounting Principle Board Opinion
No. 25 and related interpretations. There were no stock options granted
during the years ended December 31, 2003 and 2002.
10. PROFESSIONAL FEES
The Company engages both technical and business consultants, as well as
accountants and attorneys, throughout the year for business support and
required services. Professional fees consist of the following for the years
ended December 31, 2003 and 2002.
2003 2002
----------------- -----------------
Accounting $ 50,055 $ 70,907
Legal 87,389 54,152
Management 51,901 514,129
Programming 28,267 118,116
----------------- -----------------
Total $ 217,612 $ 757,304
================= =================
11. LITIGATION
On May 8, 2003, the Company filed a complaint against two former officers
and shareholders of Milestone Technology, Inc., related to the ownership of
the Concealed Weapons Detection System. In July 2003, the complaint was
settled and the Company agreed to pay $375,000 including attorney fees of
$50,000. The liability is recorded in accounts payable at December 31, 2003.
The settlement also called for the cancellation of 1,050,000 shares issued to
one of the principals of Milestone.
18
33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In our current report on Form 8-K dated February 24, 2004, we reported that we
engaged Chisholm, Bierwolf & Nilson, LLC as our independent auditors. Our
former auditors, Stegman & Company, Certified Public Accountants, resigned as
our independent auditors on March 1, 2004.
ITEM 8A. CONTROLS AND PROCEDURES
Our Chief Executive Officer, who also acts in the capacity of principal
financial officer, reevaluated the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report and
determined that there continued to be no significant deficiencies in these
procedures. However, due to our change of auditors so close to the filing
deadline for this report, we were unable to provide the necessary information
to the new auditors in a timely manner without unreasonable effort and
expense. As a result, we were unable to file this report by the March 30,
2004 deadline.
Our Chief Executive Officer determined there were no changes made or
corrective actions to be taken related to our internal control over financial
reporting.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The name, age, position and biographical information of our executive officers
and directors are presented below. Our bylaws provide for a board of
directors consisting of up to seven persons. The term of office of each
director is one year or until his successor is elected and qualified.
Executive officers are chosen by our board of directors and serve at its
discretion. There are no family relationships between or among any of our
directors and executive officers.
Name Age Position Director Since
--------------------- ----- -------------------------------- ----------------
Gunther Than 56 Chief Executive Officer, September 1998
Treasurer, Chief Technology
Officer and Director
Barry S. Feldman 63 President, Chief Operating July 2003
Officer and Director
William D. Smith 68 Chairman of the Board and February 2003
Secretary
Dr. Michael L.
Bagnoli 48 Director May 1999
Dr. Martin Maassen 61 Director May 1999
Gunther Than - Gunther Than was appointed Treasurer in July 2003 and has
served as our Chief Executive Officer since September 1998. Formerly, he
served as President from September 1998 to May 2003 and had served
intermittently as Chairman of the Board from September 1998 to September 2003.
Mr. Than was the founder, President and CEO of RealView Systems, Inc. and
View Technology, Inc., software developers. Mr. Than continues as President,
CEO and director of View Technology, Inc. Mr. Than is a graduate of the
University of Wisconsin, with a dual bachelors degree in engineering physics
and applied mathematics.
Barry S. Feldman - Mr. Feldman joined View Systems as President in May 2003
and was appointed as a director and Chief Operating Officer in July 2003.
From April 2002 to April 2003 he was a partner and Sr. Vice-president
Corporate Relations for Summit Resource Group. From July 1998 to February
2002 he was Sr. Vice-president Corporate Relations for Columbia Financial
Group. Mr. Feldman has over 25 years experience with small business corporate
restructuring, management and financing. He holds a Bachelors of Science in
Business Management from Rutgers University.
William D. Smith - Mr. Smith was appointed as a Director and Secretary on
February 11, 2003. In September
34
2003 he was elected to serve for a one year term as Chairman of the Board to
supervise the restructuring of the company. He retired in 1984 from
McGraw-Hill Information Systems Company. He was employed as a industrial
engineer and he founded Numerax, Inc. which became a wholly-owned subsidiary
of McGraw-Hill Information Company in 1984. From 1995 to 1997 he served as
Chairman of the Board of View Technologies, Inc.
Dr. Michael L. Bagnoli - Dr. Bagnoli became a Director in May 1999. He
holds degrees as a medical doctor and a dental specialist. Since 1988 he has
practiced dentistry in the specialty area of oral and masiofacial surgery for
a physician group in Lafayette, Indiana. In his practice he introduced
arthroscopy surgery along with the full scope of arthroplastic and total joint
reconstruction. Dr. Bagnoli was founder, CEO and president of a successful
medical products company, Biotek, Inc., which was sold in 1994.
Dr. Martin Maassen- Dr. Maassen became a Director in May 1999, he formerly
served as our Chairman of the Board from April 2000 to September 2002. He is
board-certified in internal medicine and emergency medicine and has served as
a staff physician in the emergency departments of Jackson County, Deaconess,
Union and St. Elizabeth hospitals located in Indiana. In addition to
practicing medicine, he maintains an expertise in computer technologies and
their medical applications.
Audit Committee Financial Expert
Our board of directors has determined that we have one audit committee
financial expert serving on our audit committee. Ms. Susan Mrzlack serves on
our audit committee and is a certified public accountant and, pursuant to NASD
Rule 4200(a)(15), we believe Ms. Mrzlack is independent.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
executive officers and person who own more than ten percent of our common
stock to file initial reports of ownership and reports of changes in ownership
of our common stock with the SEC. Officers, directors and ten-percent or
greater beneficial owners are required by SEC regulations to furnish us with
copies of all Section 16(a) reports they file. Based upon review of the
copies of such forms furnished to us during the fiscal year ended December 31,
2003, and representations from reporting persons that Forms 5 were not
required, we believe Mr. Than filed late Forms 4 related to 13 transactions,
Mr. Feldman filed late a Form 4 for one transaction, Mr. Smith filed late
Forms 4 for two transactions, Mr. Maassen failed to file Forms 4 for six
transactions.
Code of Ethics
We are in the process of adopting a code of ethics for our principal executive
and financial officers. In the meantime, our management intends to promote
honest and ethical conduct, full and fair disclosure in our reports to the
SEC, and compliance with applicable governmental laws and regulations.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation paid to our named executive
officers and directors in all capacities during the past three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Fiscal
Principal Position Year Salary Other
--------------------- -------- ----------------- -------------------
Gunther Than 2003 $ 100,000 (1) $ 138,000 (2)
CEO, Treasurer 2002 18,000 0
Director 2001 96,000 110,400 (3)
35
Barry Feldman 2003 $ 0 $ 50,000 (4)
President, COO 2002 0 0
and Director 2001 0 0
William D. Smith 2003 $ 0 $ 24,000 (5)
Secretary, 2002 0 0
Chairman of the Board 2001 0 0
(1) Represents accrued salary
(2) Represents 1,150,000 common shares issued as compensation.
(3) Represents 480,000 common shares issued as compensation.
(4) Represents 350,000 common shares issued as compensation.
(5) Represents 200,000 common shares issued as compensation.
Compensation of Directors
We compensate our independent directors, Messrs. Maassen and Bagnoli, with
5,000 shares of our common stock for each month of service. Messrs. Maassen
and Bagnoli each accrued 60,000 shares for the year ended December 31, 2003
which have not been issued to them. We do not have any arrangement for cash
compensation of our directors for the services they provide in their capacity
as directors, including services for committee participation or for special
assignments.
Employment Contracts
Mr. Than entered into an employment agreement with View Systems and agreed to
serve as our Chief Executive Officer, effective January 1, 2003. Mr. Than's
employment is "at will" we may terminate him with or without cause. Either
party may terminate his employment with a 30-day written notice or we may
terminate him immediately and provide Mr. Than with severance pay in an amount
equal to 30 days of salary as of the date of termination. Mr. Than will
receive an annual salary of $100,000 and 50,000 shares of common stock for
each month of service. Mr. Than has agreed to maintain the confidentiality of
our trade secrets and not to compete with the company or to solicit any
employee or client of the company during his employment and for a period of
one year after any termination of his employment.
On September 1, 2002 we entered into a consulting agreement with Mr. William
D. Smith to serve as Director of Client Services/Strategic Alliances
specifically in charge of government contract administration and technology
due diligence. Mr. Smith receives an annual salary of $24,000, plus 10,000
shares per month. The agreement is an "at will" employment agreement and Mr.
Smith may be terminated with or without cause. Either party may terminate his
employment with a 30-day written notice or we may terminate him immediately
and provide Mr. Smith with severance pay in an amount equal to 30 days of
salary as of the date of termination. Mr. Smith has agreed to maintain the
confidentiality of our trade secrets and not to compete with the company or to
solicit any employee or client of the company during his employment and for a
period of one year after any termination of his employment.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table lists the beneficial ownership of our management. We are
unaware of any person or group that beneficially owns 5% or more of our
outstanding common stock. Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power
with respect to the shares. Except as indicated by footnote, the persons
named in the table below have sole voting power and investment power with
respect to all shares of common stock shown as beneficially owned by them.
The percentage of beneficial ownership is based on 62,630,619 outstanding
shares as of February 20, 2004 and any
36
shares that each of the following persons may acquire within 60 days by the
exercise of warrants and/or options.
MANAGEMENT
Name and address of Amount of Percent of
beneficial owner beneficial ownership class
------------------------------- -------------------- ------------
Dr. Michael L. Bagnoli 570,000 (1) Less than 1%
40 Redwood Court
Lafayette, Indiana 47905
Barry Feldman 300,000 Less than 1%
1100 Wilso Drive
Baltimore, Maryland 21223
Dr. Martin Maassen 1,928,419 (2) 3.1%
1340 Fawn Ridge Drive
West Lafayette, Indiana 47906
William D. Smith 2,250,000 (3) 3.5%
2608 Creswell Road
Bel Air, Maryland 21015
Gunther Than 5,180,423 (4) 8.3%
1100 Wilso Drive
Baltimore, Maryland 21223
Directors and officers 10,228,842 16.1%
as a group
(1) Represents 500,000 shares owned by Mr. Bagnoli, 40,000 shares held
by his spouse, and 30,000 shares held by Mr. Bagnoli as trustee of
a trust.
(2) Represents 1,178,419 held by Mr. Maassen and 750,000 shares held
by his spouse
(3) Represents 1,250,000 shares held by Mr. Smith and options to buy
1,000,000 shares within the next 60 days.
(4) Represents 5,010,423 shares owned by Mr. Than and 170,000 shares
held by his spouse.
Securities Under Equity Compensation Plans
The following table lists the securities authorized for issuance under any
equity compensation plans approved by our shareholders and any equity
compensation plans not approved by our shareholders. This chart also includes
individual compensation arrangements.
37
EQUITY COMPENSATION PLAN INFORMATION
_____________________________________________________________________________
Number of
securities
remaining
available for
future issuance
under equity
Number of securities Weighted-average compensation
to be issued upon exercise price of plans (excluding
exercise of out- outstanding securities
standing options, options, warrants reflected
Plan category warrants and rights and rights in column (a))
(a) (b) (c)
______________________________________________________________________________
Equity
compensation
plans approved
by security
holders 14,545,589 $ 0.10 0
______________________________________________________________________________
Equity
compensation
plans not
approved by
security holders 107,690 1.63 4,392,310
______________________________________________________________________________
Total 14,653,279 $ 0.11 4,392,310
______________________________________________________________________________
Our shareholders approved the 2000 Restricted Share Plan and our board of
directors adopted the 1999 Stock Option Plan. The purpose of the plans is to
retain employees, management and consultants by granting options to employees,
directors, officers and consultants. Both plans have a term of 10 years. For
the 2000 Restricted Share Plan our board of directors granted 11,820,589
shares in the 2002 year and 2,725,000 shares in the 2003 year. Under the 1999
Stock Option Plan our board of directors reserved 4,500,000 shares and granted
options to purchase 107,690 shares before 2002. The options must be 100% of
the fair market value of our common stock on the date of grant and the options
expire after five years.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes transactions exceeding $60,000 we have
either engaged in during the last two years, or propose to engage in,
involving our executive officers, directors, more than 5% stockholders, or
immediate family members of these persons.
During the year ended December 31, 2002, we advanced $98,458 to View
Technologies, Inc., which is controlled by Gunther Than, our Chief Executive
Officer and director. There are no formal repayment terms associated with
this advance. View Systems and View Technologies, Inc. had entered into
various transactions throughout the 2002 year to provide working capital to
one another when necessary. These transactions between View Systems and View
Technologies were negotiated between related parties without "arms length"
bargaining and, as a result, the terms of these transactions may be different
than transactions negotiated between unrelated persons.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
3.1 Articles of Incorporation of View Systems, as amended (Incorporated
by reference to exhibit 3.1 to Form 10-QSB filed November 14, 2003)
3.2 By-Laws of View Systems (Incorporated by reference to exhibit 3.2 to
Form 10-QSB filed November 14, 2003)
10.1 View Systems, Inc. Employment Agreement with Gunther Than.
(Incorporated by reference to registration statement on Form SB-2,
filed January 11, 2000)
10.2 Employment agreement between View Systems and William D. Smith, dated
September 1, 2002.
10.3 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003.
21.1 Subsidiaries (Incorporated by reference to Form 10-KSB, filed March
31, 2003)
31.1 Chief Executive Officer Certification
38
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
Reports on Form 8-K
On March 2, 2004 we filed a current report on Form 8-K, dated February 24,
2004, under Item 4 related to the engagement of our independent auditor. On
March 3, 2004 we filed an amendment to this report related to the resignation
of our former auditor.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our former independent auditor, Stegman & Company, Certified Public
Accountants, billed an aggregate of $31,500 for the 2003 year and $31,000 for
the 2002 year for professional services rendered for the audit of our annual
financial statements and review of the financial statements included in our
quarterly reports.
Stegman & Company did not bill us audit-related fees, tax fees or other fees
for the past two fiscal years.
Our audit committee approves in advance the scope and cost of the engagement
of an auditor before the auditor renders audit and non-audit services.
Accordingly, we do not rely on pre-approval policies and procedures.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIEW SYSTEMS, INC.
/s/ Gunther Than
Date: April 14, 2004 By:___________________________________________
Gunther Than
CEO, Principal Financial Officer, Treasurer
and Director
In accordance with the Exchange Act this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Barry S. Feldman
Date: April 14, 2004 By: ________________________________________
Barry S. Feldman
President and Director
/s/ William D. Smith
Date: April 14, 2004 By:__________________________________________
William D. Smith
Chairman of the Board and Secretary
/s/ Dr. Martin J. Maassen
Date: April 14, 2004 By:__________________________________________
Dr. Martin J. Maassen
Director
/s/ Dr. Michael L. Bagnoli
Date: April 14, 2004 By:___________________________________________
Dr. Michael L. Bagnoli
Director
40