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, 2004
[ ] 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: $476,319
As of March 8, 2005 the issuer had 76,812,922 outstanding shares of common
stock. The aggregate market value of the registrant's voting stock held by
non-affiliates on that date was approximately $7,253,438.
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.........................................10
Item 3. Legal Proceedings...............................................10
Item 4. Submission of Matters to a Vote of Security Holders.............10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........11
Item 6. Management's Discussion and Analysis............................13
Item 7. Financial Statements............................................17
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................37
Item 8A. Controls and Procedures.........................................37
Item 8B. Other Information...............................................37
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act...............37
Item 10. Executive Compensation..........................................38
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................39
Item 12. Certain Relationships and Related Transactions..................40
Item 13. Exhibits........................................................41
Item 14. Principal Accountant Fees and Services..........................41
Signatures...............................................................42
In this report references to "View Systems," "we," "us," and "our" refer to
View Systems, Inc. and its subsidiaries.
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission ("SEC") encourages companies to
disclose forward-looking information so that investors can better understand
future prospects and make informed investment decisions. This report contains
these types of statements. Words such as "may," "will," "expect," "believe,"
"anticipate," "estimate," "project," or "continue" or comparable terminology
used in connection with any discussion of future operating results or
financial performance identify forward-looking statements. You are cautioned
not to place undue reliance on the forward-looking statements, which speak
only as of the date of this report. All forward-looking statements reflect
our present expectation of future events and are subject to a number of
important factors and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORICAL DEVELOPMENT
View Systems was incorporated in Florida on January 25, 1989, as Beneficial
Investment Group, Inc. and became active in September 1998 when we began
development of our digital video product line and changed the company's name
to View Systems, Inc. Starting in 1999 we expanded our business operations
through a series of acquisitions. In February 1999 we acquired Xyros Systems,
Inc., a Maryland corporation, which owned hardware technology with remote
video monitoring capability and digital video storage and retrieval software.
In May 1999 we acquired Eastern Tech Manufacturing Corp, a Maryland
corporation, which is a contract manufacturer of board level electronic
hardware and cable assemblies.
In December 2001 we acquired a 6% interest in Milestone Technology, Inc. and
shortly thereafter entered into a joint venture agreement with Milestone
Technology to develop and enhance its concealed weapons technology. Milestone
Technology's primary product was a walk-through detector that used passive
magnetic detection technology to accurately pinpoint the location, size and
number of concealed weapons. On March 25, 2002 we acquired the remaining 94%
interest of Milestone Technology.
On July 25, 2003 View Systems incorporated View Systems, Inc. as a
wholly-owned Nevada corporation for the sole purpose of changing the domicile
of the company from Florida to Nevada. On July 31, 2003 articles of merger
were filed with the state of Nevada to complete the domicile merger.
OUR BUSINESS
View Systems acquires and/or develops technologies related to surveillance,
detection and security for the purpose of commercializing them. Digital video
recorder technology was our first developed product. We enhanced this product
line by developing interfaces with other various technologies, such as facial
recognition, access control cards and control devices such as magnetic locks,
alarms and other common security devices.
During the past two years we have expanded our product line to include a
concealed weapons detection systems and a hazardous material first response
wireless video transmitting system. We acquired exclusive licenses to
manufacture, use, sub-license and distribute technology and processes for the
concealed weapons detection technology and the first response wireless video
transmitting system from Bechtel BWXT Idaho, LLC. Bechtel BWXT Idaho, LLC
manages and operates the U.S. Department of Energy's Idaho National
Engineering and Environmental Laboratory ("Idaho Engineering Lab"). The
development of the concealed weapons detection technology was funded by the
National Institute of Justice and development was performed by the Idaho
Engineering Lab. The hazardous materials first response video transmitting
system was developed at the Idaho Engineering Lab through cooperative research
and development agreements at the request of various military organizations.
Products and Services
ViewMaxx Digital Video System
ViewMaxx is a high-resolution, digital video recording and real-time
monitoring system. This system can be scaled to meet a specific customer's
needs by using anywhere from one camera up to 16 surveillance cameras per each
ViewMaxx unit. The system uses a video capture card recording which
translates closed-circuit television analog video data (a format normally used
by broadcasters for national television programs) to a computer readable
digital format to be stored on direct access digital disk devices rather than
the conventional television format of video tape.
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VideoMaxx offers programmable recording features that can eliminate the
unnecessary storage of non-critical image data. This ability allows the user
to utilize the digital disk storage more efficiently. The ViewMaxx system can
be programmed to satisfy each customer's special requirements, be it coverage
which is continuous, or only when events are detected. For example, it can be
programmed to begin recording when motion is detected in a surveillance area,
or a smaller field of interest within the surveillance area, and can be
programmed to notify the user with an alarm or message.
Viewing of the stored digital images can be performed locally on the
computer's video display unit or remotely through the customer's existing
telecom systems or data network. It also uses a multi-mode search tool to
quickly play back files with simple point and click operations. The search
mode parameters can be set according to a specific monitoring need, such as:
certain times of day, selected areas of interest in the field of view or
breaches of limit areas. These features and abilities avoid the need to
review an entire, or many, VCR tapes for a critical event.
Our ViewMaxx 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;
. The system may be set to automatically review an area in a desired camera
sequence;
. Stores the video image according to time or a criteria specified by the
customer and retrieves the visual data selectively in a manner that the
customer considers valuable or desirable;
. The system may trigger programmed responses to events detected in a
surveillance area, such as break-ins or other unauthorized breaches of
the secured area.
. 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; and
. Modular expansion system configuration allows the user to purchase add-on
components at a later date.
SecureScan Concealed Weapons Detection System
This product is a walk-through concealed weapons detector which uses sensing
technology and artificial intelligence algorithms 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 of the weapon to be stored electronically and referenced. SecureScan
products are distributed in two basic configurations; stand-alone units and
integrated door systems.
Concealed weapons detection systems are used in a wide range of situations in
order to provide added security against violent crimes. In addition to the
well-known use of concealed weapons detection systems in public airports, such
weapons detection systems are increasingly being used in court houses, schools
and other public/governmental facilities that may be subject to threats or
attacks by various members of the public.
One commonly used concealed weapons detection system is the electromagnetic
induction system. Essentially an electromagnetic induction system operates by
periodically broadcasting an electromagnetic pulse or series of pulses,
usually in the kilohertz range. The transmitted electromagnetic pulse induces
an electrical current, or currents, in electrically conductive objects
contained within the sensing area. The induced electrical current or currents
create their own electromagnetic signals which are then detected by a suitable
detector associated with this type of weapons detection system.
While electromagnetic induction systems of the type described above have been
used for decades as concealed weapons detection systems, they are not without
their problems. For example, such electromagnetic induction systems are
generally sensitive to the overall size, i.e., surface area of the object, not
its mass. Consequently,
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small, compact, but massive objects, such as a small pistol, may not produce a
"signature" that is significantly larger than the signature produced by a
light weight object of the same size, such as keys or pocket change. Another
problem associated with electromagnetic induction systems is related to the
fact that electromagnetic systems are sensitive to electrically conductive
objects, regardless of whether they are magnetic or non-magnetic. That is,
electromagnetic systems tend to detect non-magnetic objects, such as pocket
change, just as easily as magnetic objects, such as weapons. Consequently,
electromagnetic systems tend to be prone to false alarms. In many
circumstances, such false alarms need to be resolved by scanning the suspect
with a hand-held detector in order to confirm or deny the presence of a
dangerous weapon.
Our SecureScan system differs from electromagnetic induction systems because
the SecureScan system uses passive magnetic technology. When an object of a
specific ferro-magnetic mass passes by the magnetic sensors the surrounding
magnetic field is altered. The software calculates the difference between the
magnetic field strength with the object in the magnetic field inside the
sensors' range and the normal magnetic field strength. Then the system
displays the results in graph format on a video display unit. Since the
SecureScan technology does not use transmitters to produce electromagnetic
induction, stray energy that can cause false alarms does not exist.
The SecureScan portal uses an array of advanced magnetic sensors, each with
internal digital signal processors. The sensors communicate with the control
unit's software which spatially places identified magnetic anomalies and
visually places the location of the potential threat object 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(s) and the size of the weapon(s), depending on the intensity of
the magnetic signature.
The SecureScan technology discriminates weapons from non-weapons by assuming
that possible threat objects will have ferromagnetic composition. The
SecureScan system promotes smooth traffic flow because it only detects the
types of ferrous metals commonly found in guns and knives, rather than
personal possessions such as coins, keys or belt buckles. This capability
reduces false alarms and eliminates the need to use hand wands or resort to a
personal search. In addition, the sensor 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. The SecureScan system operates faster than ordinary metal
detectors and can scan as high as 1,500 persons per hour.
The SecureScan weapons detection system can be controlled via a central
monitoring station using a Windows operating system and Pentium hardware.
This can include additional closed-circuit television, two-way voice
communication, door interlock, card-key and other biometric identification or
access control components. The functionality of the SecureScan portal is
increased by access control, database recording, video capture and archiving
of images.
The SecureScan concealed weapons detection technology was patented by the
Department of Energy and approved by the Federal Aviation Administration.
View Systems owns the exclusive worldwide rights to the SecureScan technology
and ongoing improvements currently being funded by the National Institute of
Justice.
In the third quarter of 2003 we brought the manufacturing of the SecureScan
product in house and made various modifications to prepare it for mass market
distribution. During 2004 we have been expending monies to achieve sensor
cost reductions and to make the system more robust. We strived to reduce
costs of the sensor boards in the portal uprights to facilitate a price point
reduction. A price point reduction is necessary to make the SecureScan more
competitive in its markets. In the fall of 2004 we contracted with outside
scientists to assist in sensor cost reduction. The scientists have had
positive results and we are in the process of integrating the new sensors into
our current SecureScan products.
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In 2004 we introduced the SecureScan product to the venue and stadium market.
In February 2005 we tested the SecureScan at the pre-game venues of the Super
Bowl football game in Jacksonville, Florida. Our product was well received
for throughput and ease of use. During that installation, the portal scanned
up to 3,000 to 4,000 people and at various times throughput ranged from
approximately 600 to 1,200 persons per hour, with 384 alarms triggered by the
sensitivity threshold.
Visual First Responder
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 initially
marketed this product as FirstView Wireless Camera System, then changed the
name to Visual First Responder.
Visual First Responder is a lightweight, wireless camera system housed in a
tough, waterproof flashlight body. The camera system sends back real-time
images to a computer or video monitor at the command post located outside the
exclusion zone or containment area. Visual First Responder 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. Traditional wireless videos use one antenna and a single
receiver. The problem with this configuration is that signals multi-path,
which means they bounce off other structures, like buildings, file cabinets,
etc., on the way to the receiver. This multi-pathing causes interference and
seriously degrades the video images. The Visual First Responder receiver
seeks the strongest signal from each of the three antennas and locks in that
signal, resulting in a more reliable and clearer image.
The image received from the Visual First Responder monitor or on the Visual
First Responder color LCD monitor, and can be easily recorded using a common
camcorder or VCR with video input. The camera can be completely submerged for
fast and easy decontamination. We also offer a unit with 360 degree coverage
of a target area.
Visual First Responder also uses Extension Link which is a separate
transmitter and receiving system that increases the operating range of the
Visual First Responder environmental factors. The Extension Link has
field-selectable channels to avoid interference at longer distances. We have
also incorporated a video encryption feature that allows first responders to
transmit on-scene video to the command post without the data being intercepted
by unwanted parties.
The complete Visual First Responder fully deployed by one person in a stand
alone configuration in less than 10 minutes. The system is battery operated
and can operate for eight continuous hours using one set of spare camera
batteries.
We have entered into a cooperative research and development agreement with the
Idaho Engineering Lab. This agreement allows us to use the research and
development resources of the Idaho Engineering Lab to further develop the
technology as driven by customer need. The cooperative research and
development agreement provides a means for View Systems to efficiently
continue to offer state of the art technology, yet concentrate on its
marketing and manufacturing operations.
Additional Products
We also offer integration of other products with SecureScan or ViewMaxx.
Biometric verification is a system for recognizing faces and comparing them to
known individuals, such as employees or individuals wanted by law enforcement
agencies. This product can be interfaced with SecureScan and/or ViewMaxx to
limit individual access to an area. 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
products.
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In addition, we offer support services for our products which include:
. On site consulting/planning with customer architect and engineers,
. Installation and technical support,
. Training and "Train the Trainer" programs, and
. Extended service agreements.
Markets
Our family of products offers government and law enforcement agencies,
commercial security professionals, private businesses and residential
consumers an enhanced surveillance and detection capacity. Management has
chosen to avoid the air passenger traffic and civilian airport market for
metal detection because we believe that a larger market exists in venues, such
as sporting events, concerts, and race tracks, and schools, courthouses and
municipal buildings, and law enforcement agencies.
Commercial business users represent the greatest potential users of our
surveillance and weapons detection products. Commercial businesses have
already realized the need for surveillance and using access control devices
for protection of employees, customers, and assets. Our products can curtail
crime and prevent loss caused by employees and others. The market for
surveillance technology includes many types of commercial buildings;
including, hospitals, schools, museums, retail, manufacturing and warehousing
facilities.
Our SecureScan 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 or impractical. For example, our SecureScan
portal could be set up for special events, concerts, and conventions. Our
systems may reduce the need for a large guard force and can provide improved
pedestrian traffic flow into an event because individuals can be scanned
quickly and false alarms are reduced.
Schools have been very receptive and enthusiastic about the SecureScan portal
and its integration with School Technology Management's Comprehensive
Attendance/Security System. In early October 2003 we announced an alliance
with School Technology Management, Inc. to integrate and market its products
with ours. School Technology Management developed the Comprehensive
Attendance, Administration and Security System ("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. During the spring semester of 2004, a subcontractor of the
National Institute of Justice conducted a study of the effectiveness of the
SecureScan portal in a school environment and the results were positive. The
combined technology has been tested in schools in New York and Philadelphia
and we have received very positive responses from those tests. Management
estimates that there are over 120,000 schools in the United States that may
have problems with violence, truancy and other safety considerations, which
may be addressed by the combined technology.
The gathering of video and data images and weapons detection is commonplace in
law enforcement. Because our technology can be used for stakeouts and remote
monitoring of areas, we believe there is a market potential with law
enforcement agencies. A primary market for our SecureScan portal is federal
and state government courthouses, and county and municipal buildings. We have
installed our SecureScan weapons detection products in a variety of court
house situations. The Visual First Responder product's market includes state
National Guard units and first response agencies, such as; firemen, police
swat and homeland security response teams.
The residential home security user may purchase our products from either
commercial companies installing self-contained or centrally monitored systems,
or directly from retail distribution centers. However, at this time we do not
have retail agreements in place. Using our technology, individuals may run
their own perimeter and interior surveillance systems from their own home
computer. Real-time action at home can be monitored
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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 may reduce the expense and time of the
home installation and may make installation affordable for a majority of
homeowners.
Manufacturing
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 hold licenses for 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.
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 assembled and manufactured
internally at our facilities in Baltimore, Maryland. Once complete, the
portal is tested and shipped to its final destination. We also manufacture
the Visual First Responder in our Baltimore facility
Sales and Distribution
We have ongoing reseller arrangements with small- and medium-sized domestic
and international resellers. Our reseller agreements grant a non-exclusive
right to the reseller to purchase our products at a discount from the list
price and then sell them to others. These 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.
We are in the process of building a United States domestic network of
manufacturing representatives and dealers for the sale and distribution of our
products. We are seeking security consultants, specifiers and distributors of
security and surveillance equipment that sell directly to schools,
courthouses, government and commercial buildings. We plan to initially hire
four in-house regional sales persons, then we expect to develop a national
sales channel model and a distributor development program.
We also have experienced international interest from security related
resellers and system integrators. However, sales and shipments to overseas
are regulated by federal guidelines for export. We have chosen not to pursue
international markets, but intend to focus on domestic markets which are less
expensive to support and maintain.
Backlog
As of March 15, 2005 we had a backlog of seven Visual First Responders. 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 products months after receiving an order. However, we are
attempting to shorten this lead time to several weeks. Also, product shipments
may require more lead-time and may be delayed for a variety of reasons beyond
our control, including:
. additional time necessary to conduct product inspections prior to
shipping,
. design or specification changes by the customer,
. the customer's need to prepare the site, and
. delays caused by other contractors on the project.
Competition
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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 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. In the weapons detection
market, we compete with Ranger Security Scanners, Inc. and Garrett
Electronics, Inc. in the United States, and an Italian company, CEIA SpA,
which has the most sophisticated electromagnetic induction product. In the
video surveillance market we compete with numerous VCR suppliers and digital
recording suppliers, including, 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. We limit
access to, and distribution of, our software, documentation and other
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.
The SecureScan concealed weapons detection technology involves sensing
technology and data acquisition/analysis software subsystems that have patents
pending or issued to the U. S. Department of Energy. We hold an exclusive
license, D.O.E. License No. 03-LA-18, to commercialize, manufacture and market
the concealed weapons detection technology. 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 pay
royalties of 2% of the net sale price per SecureScan unit sold. We also hold
the exclusive license, D.O.E. License No. 03-LA-20, for the Visual First
Responder technology and will pay royalties of 4% of the net sale price per
each Visual First Responder unit sold.
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.
We have obtained software licensing agreements for
. software operating systems 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.
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. 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 20-year statutory period
from the date of first "publication," distribution of copies to the general
public, or from the date of creation, whichever occurs first.
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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 obtained licenses for certain software from third parties for
incorporation into our products.
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.
We also benefit from the recent "made in America" trade laws where non-United
States manufactures must secure waivers in order to sell security and
surveillance products to United States domestic end-users.
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.
Research and Development
For the year ended December 31, 2004 and 2003, we did not record research and
development expense. 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.
Employees
We employ 5 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 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 type of
facility will suit our needs for the future.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this report we are not a party to any material legal
proceedings.
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 2004
year.
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
-------- ------------------- ----------- --------
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
2004 March 31 $ 0.37 $ 0.18
June 30 0.33 0.115
September 30 0.145 0.06
December 31 0.24 0.09
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 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 March 8, 2005 we had 336 stockholders of record, which does not include
"street accounts" of securities brokers.
DIVIDENDS
11
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 fourth quarter of 2004 through the date of this filing that have not been
previously disclosed.
On October 12, 2004 we issued an aggregate of 571,750 common shares to five
purchasers for $45,740. 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 October 12, 2004 we issued 160,000 common shares to Martin J. Maassen for
$12,500. 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 November 4, 2004 we issued an aggregate of 160,000 common shares to three
purchasers. We issued 100,000 shares to Lex Dalton, 20,000 shares to Maxwell
G. Levy and 40,000 shares to Duane R. Anderson. 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 December 6, 2004 we issued an aggregate of 3,251,820 common shares to
convert debt of $325,182. We issued 851,000 shares to Compass Equity
Partners, 1,151,000 to Niki Group, and 1,249,820 to First Equity Holdings
Corp. 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 January 4, 2005 we issued an aggregate of 275,000 common shares to three
purchasers for $27,500. We issued 100,000 shares to Lex Dalton, 25,000 shares
to Calvin L. McCollum and 150,000 shares to William Stamp. 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 January 10, 2005 we issued 128,000 common shares to Charles G. Davis III to
convert a debt for accounting services valued at $19,000. 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 February 10, 2005 we issued 30,000 common shares to H.J. Lurie for $3,000
cash. 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 February 16, 2005 we issued 51,000 common shares to Will Stamp for $5,100.
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.
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.
12
ISSUER PURCHASE OF SECURITIES
None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
EXECUTIVE OVERVIEW
Our revenues for the years ended December 31, 2003 and 2004 were primarily
from sales of our products. Management believes that heightened attention to
terrorism and other security threats will continue to drive growth in the
market for security products. We have incurred net losses for the past two
years, but have implemented strategies to reduce cash used in operating
activities. Also, we have increased the efficiency of our processes and
focused our development efforts on products with greater sales potential.
Our ViewMaxx Digitial Video products have been the primary source of revenues
since 1998. In the fourth quarter of 2003 we experienced a revitalization in
sales of these products. While sales were down in the first quarter of 2004
for the ViewMaxx Digitial Video products, sales have rebounded during the
second quarter of 2004. We have entered into new market segments with this
product and are concentrating on local sales and services.
During the 2003 year we completed our single largest manufacturing run of
SecureScan Concealed Weapons Detection portals by building 20 portals. We
worked diligently to make engineering design changes to the SecureScan product
to accommodate the price points required by competitive pressures. We
expanded this product line in late 2003 when we combined our SecureScan
technology with School Technology Management, Inc.'s student time and
attendance program. Second phase testing of the combined technology,
conducted in early 2004, produced positive results. These positive results
lead the National Institute of Justice to provide $500,000 to the U.S.
Department of Energy Idaho National Engineering and Environmental Laboratory
to further refine the sensor circuitry and develop new and more sensitive
magnetometers at a reduced cost. These changes will result in reduced
manufacturing costs, a wider portal opening size and improved object
recognition ability.
We rely on revenues, private financing and sales of common stock to fund our
operations. We have incurred losses for the past two fiscal years and have an
accumulated deficit of $15,691,496 at December 31, 2004. Our auditors have
expressed doubt that we can continue as a going concern based on these
factors. Management believes we will incur operating losses for the near
future while we continue to expand our product line and develop our sales and
marketing channels. Management continues to seek additional funding of up to
$1 million to continue our business plan development during the next twelve
months. However, we can not assure you that we will be successful at
obtaining the necessary funding to continue this development.
For the next twelve months our primary challenge will be to more fully develop
our product lines and our sales and distribution network. During the first
quarter of 2004 we increased our product lines when we entered into a
cooperative research and development agreement with the U.S. Department of
Energy's Idaho National Engineering and Environmental Laboratory ("Idaho
Engineering Lab") for our Visual First Responder. During the second quarter
of 2004 we set up a complete manufacturing line in the Baltimore, Maryland
facility for building, testing and further development of the Visual First
Responder product. We sold and delivered two Visual First Responder units to
organizations in Boston, Massachusetts who were involved with security for the
Democratic national convention and we have received additional orders for this
product. As recent as February 2005 we have received orders for five Visual
First Responder units for use by the Department of Defense.
Along with development of our product lines, we must establish a sales and
distribution channel program for the United States. Our emphasis will be on
marketing and sales programs through dealer channels, plus internal direct
sales for our products, where applicable. We intend to build a United States
domestic network of manufacturing representatives and dealers for the sale and
distribution of our products within the 48 states. Our initial focus will be
in the Mid-Atlantic and Northeast regions. In recent months we signed three
new dealers for
13
our products; however, we cannot assure you that we will be able to develop
these sales and distribution channels to a level which will result in
increased revenues or continued profitability. Some of the major distributors
of safety products who have become our dealers and manufacturer
representatives will be adding our products to their GSA schedules.
Another major emphasis for the next twelve months is to continue our
SecureScan manufacturing cost reduction objectives. We reduced manufacturing
costs of the SecureScan product by 25% in the first quarter of 2004. We
intend to select key expensive components of the SecureScan system and replace
them with performance equivalent, less expensive parts. The final phase of
the manufacturing cost reductions will be cost reduction per unit in the
fabrication of the gradiometer sensors. In addition, we anticipate completing
circuitry conversions to fully digital signal processing from digital to
analog and back to digital, along with replacing over-engineered housings in
the SecureScan portals. We also intend to reduce assembly time and testing
times to save additional manufacturing costs. The latest round of cost
reductions should decrease the manufacturing cost an additional 50% to the
$4,000 to $5,000 cost level with full digital and wireless communications
ability.
LIQUIDITY AND CAPITAL RESOURCES
For the short term, management believes that revenues, advances and sales of
our common stock will provide funds for operations and further development of
our business plan. For the long term, management expects that the development
of our sales and distribution channels will increase our revenues; however, we
will need to continue to raise additional funds through loans and sales of our
common stock, as needed.
While our revenues are increasing, we are unable to satisfy our operating
expenses. Net cash used by operating activities was $788,113 for the 2004
year compared to $1,011,569 for the 2003 year. Net cash provided from
investing activities was $76,869 for the 2003 year, and was related to
advances from affiliated entities.
FINANCING
We have financed our operations primarily through private financing and we are
in default on our debt obligations. We intend to finance our 2005 operations
through additional equity financing. Net cash provided by financing
activities for the 2004 year was $941,700, primarily from proceeds from sales
of common stock. 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 common stock of $508,550.
We estimate that we will require additional financing of approximately $1
million to meet our needs for the next twelve months. Our goal is to use this
financing to increase ongoing operations to self-sustaining levels and
increase profits to the magnitude management feels is achievable.
We intend to use any available cash to develop our products and expand our
sales, marketing and promotional activities. Management believes that it will
be essential to continue to raise additional capital, both internally and
externally, to compete in our markets. We cannot assure you 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 $647,423 include accounts payable of
$331,776, accrued expenses of $100,548, accrued interest of $66,000 and notes
payable of $149,000. At December 31, 2004 future minimum payments for
operating leases related to our principal office and manufacturing facility
were $19,964 through 2006. Rent expense was $61,047 for the 2003 year
compared to $52,900 for the 2004 year.
14
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, 2003 and 2004 and
should be read in conjunction with the financial statements, and notes
thereto, included with this report at Item II, Part 7, below.
Summary Comparison of 2003 and 2004 Fiscal Year Operations
----------------------------------------------------------
2003 2004
------------- -------------
Revenues, net $ 569,952 $ 476,319
Cost of sales 257,632 257,179
Gross profit 312,320 219,140
Total operating expenses 1,872,585 1,220,546
Loss from operations (1,560,265) (1,001,406)
Total other income (expense) (986,069) (185,072)
Net income (loss) (2,546,334) (1,186,478)
Net earnings (loss) per share $ (0.05) $ (0.02)
Revenues for the 2004 year decreased 16.4% compared to the 2003 year and costs
of sales remained relatively the same in the 2004 year compared to the 2003
year. As a result of the decrease in revenues our gross profit decreased
29.8% for the 2004 year compared to 2003.
For the 2004 year total operating expense decreased 34.8% compared to the 2003
year. The 2004 decrease was the result of a 6.8% decrease in general and
administrative expenses, a 47.2% decrease in professional fees, a 25.2%
decrease in salaries and benefits and recording $0 for business development
expenses. The reductions in these expenses resulted in a 35.8% decrease in
net operating loss.
Total other expense decreased in the 2004 year compared to the 2003 year
primarily as a result of recording a valuation/impairment loss of $888,658 in
the 2003 year compared to no valuation/impairment loss for the 2004 year. The
impairment loss for the 2003 year was 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
addressed 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 resulted in a decreased net loss of
$787,248.
As a result of the above changes, we recorded a 53.4% decrease in net loss for
the 2004 year compared to the 2003 year and decreased our loss per share from
$0.05 for the 2003 year to $0.02 for the 2004 year.
FACTORS AFFECTING FUTURE PERFORMANCE
Our independent auditors have expressed concern whether we can continue
as a going concern.
15
We have incurred ongoing operating losses and do not currently have financing
commitments in place to meet expected cash requirements for the next twelve
months. We are unable to fund our day-to-day operations through revenues
alone and management believes we will incur operating losses for the near
future while we seek financing commitments during the next twelve months to
fund further development of our business plan. While we have expanded our
product line and expect to establish new sales channels, we may be unable to
increase revenues to the point that we attain and are able to maintain
profitability.
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 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.
We are currently dependent on the efforts of our resellers for our
continued growth and must expand our sales channels to increase our
revenues.
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.
If we are unsuccessful in developing sales channels then we may have to
abandon our business plan. 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 not be able to compete successfully in our market because we have
a small market share and compete with large national and international
companies.
We estimate that we have less than a 1% market share of the surveillance and
weapons detection market. We compete with many companies that have greater
brand name recognition and significantly greater financial, technical,
marketing, and managerial resources. The position of these competitors in the
market may prevent us from capturing more market share. We intend to remain
competitive by increasing our existing business through marketing efforts,
selectively acquiring complementary technologies or businesses and services,
increasing our efficiency and reducing costs.
Our revenues are dependent in part upon our relationships and alliances
with government agencies and partners.
While we own exclusive licenses for the SecureScan technology, we are
dependent upon the continuation of the ongoing contract between the Department
of Energy and National Institute of Justice for continuations and improvements
to the concealed weapons detection technology. We are also reliant upon
School Technology Management for the continued integration of our SecureScan
technology with its Comprehensive Attendance/Security System for use in
educational facilities. If either of these entities should discontinue its
operations or research and development we may lose our competitive edge in our
market.
We must successfully introduce new or enhanced products and manage the
costs associated with producing several product lines to be successful.
Our future success depends on our ability to continue to improve our existing
products and to develop new products using the latest technology that can
satisfy customer needs. For example, our short term success will depend on
the continued acceptance of the VideoMaxx product line and the SecureScan
portal product line. We intend to invest a significant amount of our
financial resources for the development of the Visual First Responder
16
product line. We cannot be certain that we will be successful at producing
multiple product lines and we may find that the cost of production of multiple
product lines inhibits our ability to maintain or improve our gross profit
margins. In addition, the failure of our products to gain or maintain market
acceptance or our failure to successfully manage our cost of production could
adversely affect our financial condition.
We would be harmed if we were unable to use our manufacturing facility.
We assemble and manufacture our products at our facility located in Baltimore,
Maryland. If we were unable to continue manufacturing at this location due to
fire, prolonged power shortage or other natural disaster, then we would be
unable to supply products to our customers.
ITEM 7. FINANCIAL STATEMENTS
17
VIEW SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
18
C O N T E N T S
Accountants' Report........................................................F-3
Consolidated Balance Sheets ...............................................F-4
Consolidated Statements of Operations .....................................F-5
Consolidated Statements of Stockholders' Equity............................F-6
Consolidated Statements of Cash Flows......................................F-7
Notes to the Consolidated Financial Statements.............................F-8
19
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, 2004, and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for the years ended December 31, 2004 and 2003. 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.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). 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. The Company has determined that it is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. 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,
2004 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2004 and
2003 present fairly, in all material respects, the financial position of the
Company as of December 31, 2004, and the results of operations and cash flows
for the years then ended in conformity with U.S. generally accepted accounting
principles.
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 2004. 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
March 23, 2005
F-3
20
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
December 31,
2004
-------------
Current Assets
Cash $ 173,486
Accounts Receivable(Net of Allowance of $20,054) 108,342
Inventory 61,197
-------------
Total Current Assets 343,025
-------------
Property & Equipment (Net) 14,803
-------------
Other Assets
Licenses 1,626,854
Loans to shareholder 66,500
Due from Affiliates 98,457
Deposits 2,319
-------------
Total Other Assets 1,794,130
-------------
Total Assets $ 2,151,958
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 331,776
Accrued Expenses 100,548
Accrued Interest 66,000
Notes Payable 149,000
-------------
Total Current Liabilities 647,324
-------------
Stockholders' Equity
Preferred Stock, Authorized 10,000,000 Shares,
$.01 Par Value, Issued and outstanding 0 -
Common Stock, Authorized 100,000,000 Shares,
$.001 Par Value, Issued and Outstanding 76,533,922 76,534
Additional Paid in Capital 17,119,596
Retained Earnings (Deficit) (15,691,496)
-------------
Total Stockholders' Equity 1,504,634
-------------
Total Liabilities and Stockholders' Equity $ 2,151,958
=============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
21
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended
December 31,
---------------------------
2004 2003
------------- -------------
Revenues, Net $ 476,319 $ 569,952
Cost of Sales 257,179 257,632
------------- -------------
Gross Profit (Loss) 219,140 312,320
------------- -------------
Operating Expenses
Business Development - 155,130
General & Administrative 281,127 301,482
Professional Fees 286,323 542,612
Salaries & Benefits 653,096 873,361
------------- -------------
Total Operating Expenses 1,220,546 1,872,585
------------- -------------
Net Operating Income (Loss) (1,001,406) (1,560,265)
------------- -------------
Other Income(Expense)
Loss on Sale of Assets - (14,839)
Interest Expense (36,144) (11,572)
Bad Debt (148,928) (71,000)
Valuation/Impairment Loss - (888,658)
------------- -------------
Total Other Income(Expense) (185,072) (986,069)
------------- -------------
Net Income (Loss) $ (1,186,478) $ (2,546,334)
============= =============
Net Income (Loss) Per Share $ (0.02) $ (0.05)
============= =============
Weighted Average Shares Outstanding 68,924,152 51,529,119
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
22
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, 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)
Cancellation of shares (100,000) (100) (4,900) -
January - March 2004 -
shares issued for cash 244,500 245 34,755 -
January - March 2004 -
shares issued for services 932,000 932 203,048 -
April - June 2004 -
shares issued for cash 84,333 84 11,916 -
April - June 2004 - shares
issued for services 221,250 221 39,979 -
June 2004 - shares issued
for payment of notes
payable and accrued
interest 5,221,050 5,221 516,884 -
July - September 2004 -
shares issued for cash 100,000 100 19,900 -
July - September 2004 -
shares issued for services 781,600 782 108,642 -
September 2004 - shares
issued in settlement
of litigation 2,000,000 2,000 178,000 -
October - December 2004 -
shares issued for cash 1,066,750 1,067 89,833 -
December 2004 - shares
issued for payment of
notes payable and
accrued interest 3,251,820 3,252 321,930 -
Cost of issuance of
common stock - - (5,000) -
Net loss for the year
ended December 31, 2004 - - - (1,186,478)
------------- ---------- ------------- -------------
Balance, December 31, 2004 76,533,922 $ 76,534 $ 17,119,596 $(15,691,495)
============= ========== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
23
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
2004 2003
-------------- -------------
Cash Flows from Operating Activities:
Net Income (Loss) $ (1,186,478) $ (2,546,334)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 29,890 45,160
Impairment of Assets - 888,658
(Gain) Loss on Disposal of Assets - 14,839
Bad Debts 148,928 71,000
Accrued interest paid with stock 13,987 -
Stock Issued for Services 353,604 313,700
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (32,182) (143,376)
Inventories 32,044 (21,916)
Prepaid expenses - (655)
Other Assets 2,500 (2,287)
Increase (Decrease) in:
Accounts Payable (146,439) 211,747
Accrued Expenses (3,967) 157,895
-------------- -------------
Net Cash Provided(Used) by Operating Activities (788,113) (1,011,569)
Cash Flows from Investing Activities:
Advances (to)/ receipt from related party - 76,869
-------------- -------------
Net Cash Provided (Used) by Investing Activities - 76,869
Cash Flows from Financing Activities:
Funds advanced (to) from stockholders (62,000) -
Proceeds from debt financing 933,800 817,820
Proceeds from stock issuance 157,900 508,550
Cost of issuance of common stock (5,000) -
Principal Payments on Notes Payable (83,000) (375,000)
-------------- -------------
Net Cash Provided (Used) by Financing Activities 941,700 951,370
-------------- -------------
Increase (Decrease) in Cash 153,587 16,670
Cash and Cash Equivalents at Beginning of Period 19,899 3,229
-------------- -------------
Cash and Cash Equivalents at End of Period $ 173,486 $ 19,899
============== =============
The accompanying notes are an integral part of these
consolidated financial statements.
7
24
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Year Ended
December 31,
----------------------------
2004 2003
-------------- -------------
Cash Paid For:
Interest $ 25,144 $ 572
Income Taxes $ - $ -
Non-Cash Investing and Financing Activities:
Stock Issued in payment for Note Payable $ 833,300 $ 796,320
Stock issued in payment of accounts payable $ 200,000 $ -
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
25
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
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.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with maturities of three
months or less to be cash equivalents.
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
F-9
26
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
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, 2004 and 2003 amounted to $29,890 and $45,1260,
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, ie
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, 2004. 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 reviewed periodically.
F-10
27
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
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, 2004 and 2003 were $10,214 and $21,264.
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.
F-11
28
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
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, 2004 and 2003 does not
include potential shares of common stock equivalents, as their impact would be
antidilutive.
2. GOING CONCERN
The Company has incurred and continues to incur, losses from operations. For
the years ended December 31, 2004 and 2003, the Company incurred net losses of
$1,186,478 and $2,546,334, respectively. During 2004 and 2003, 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. Additionally, the Company is in default on its debt obligations.
It is management's intention to finance 2005 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. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
3. NEW ACCOUNTING PRONOUNCEMENTS
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.
F-12
29
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In December 2004, FASB issued a revision to SFAS 123 "Share-Based Payment".
This Statement is a revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment transactions. This Statement does not change the accounting guidance
for share-based payment transactions with parties other than employees
provided in Statement 123 as originally issued and EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services." This Statement
does not address the accounting for employee share ownership plans, which are
subject to AICPA Statement of Position 93-6, Employers' Accounting for
Employee Stock Ownership Plans. The Company does not believe adoption of this
revision will have a material impact on the Company's consolidated financial
statements.
In December 2004, FASB issued SFAS 153 "Exchanges of Nonmonetary Assets an
amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
Accounting for Nonmonetary Transactions, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that
do not have commercial substance. A nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company does not believe
adoption of SFAS 153 will have any impact on the Company's consolidated
financial statements
In December 2004, FASB issued SFAS 152 "Accounting for Real Estate
Time-Sharing Transactions an amendment of FASB Statements No. 66 and 67". This
Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate,
to reference the financial accounting and reporting guidance for real estate
time-sharing transactions that is provided in AICPA Statement of Position
(SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions. This
Statement also amends FASB Statement No. 67, Accounting for Costs and Initial
Rental Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in
F-13
30
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
SOP 04-2. This Statement is effective for financial statements for fiscal
years beginning after June 15, 2005. The Company does not believe adoption of
SFAS 152 will have any impact on the Company's consolidated financial
statements.
In November 2004, the FASB issued SFAS 151 "Inventory Costs an amendment of
ARB No. 43". This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges. . . ." This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. The provisions of this
Statement shall be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe adoption of SFAS
151 will have any impact on the Company's consolidated financial statements.
In December 2003, FASB issued a revision to SFAS 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits an amendment of FASB
Statements No. 87, 88, and 106". This Statement revises employers' disclosures
about pension plans and other postretirement benefit plans. It does not change
the measurement or recognition of those plans required by FASB Statements No.
87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits, and No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. This Statement retains the disclosure
requirements contained in FASB Statement No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosures to those in the original Statement 132 about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. The
required information should be provided separately for pension plans and for
other postretirement benefit plans. The Company does not believe adoption of
this revision will have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity." This new
statement changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity or classifications
between liabilities and equity in a section that has been know as "mezzanine
capital." It requires that those certain instruments be classified as
liabilities in balance sheets. Most of the guidance in SFAS 150 is effective
for all financial instruments entered into or modified after May 31, 2003.
The adoption of SFAS 150 did not have any impact on the Company's consolidated
financial statements.
F-14
31
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This
Statement is effective for contracts entered into or modified after June 30,
2003, with certain exceptions, and for hedging relationships designated after
June 30, 2003, with certain exceptions. The adoption of SFAS 149 did not have
any effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable
Interest Entities" (FIN 46), which addresses consolidation by business
enterprises of variable interest entities. FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
to certain entities in which equity investors do not have the Characteristics
of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has not
identified and does not expect to identify any variable interest entities that
must be consolidated.
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.
F-15
32
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
5. DUE FROM AFFILIATED ENTITIES
The Company has advanced non-interest bearing funds of $98,458 as of December
31, 2004 and 2003 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 of its officers in
the amount of $66,500 as of December 31, 2004.
6. NOTES PAYABLE
Notes payable as of December 31, 2004 consist of the following:
Note payable - due to an individual, non-interest
bearing due on demand. 500
Note payable - due to an individual, non-interest
bearing due on demand 9,500
Note payable - due to an individual, non-interest
bearing due on demand 3,000
Note payable - due to an individual, non-interest
bearing due on demand 11,000
Note payable - due to an individual, non-interest
bearing, due on demand 15,000
Notes payable - due former stockholder of Zyros
Technology, due on demand, interest at 10% per annum 110,000
------------
Total Notes Payable $ 149,000
============
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.
F-16
33
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
7. INCOME TAXES
The components of the net deferred tax asset and liability as of December 31,
2004 are as follows:
Effect of net operating loss carryforward $ 6,118,178
Less evaluation allowance (6,118,178)
---------------
Net deferred tax asset (liability) $ -
===============
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
$52,900 and $61,047 for the years ended December 31, 2004 and 2003,
respectively.
The following is a schedule by year, of approximate future minimum lease
payments required under this lease:
Year ending December 31:
2005 19,964
2006 and Thereafter -
------------
Total minimum future rental payments $ 19,964
============
9. STOCK BASED COMPENSATION
During the years ended December 31, 2004 and 2003 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 2004 and 2003, the Company issued the following shares under this Plan
and additional shares at the discretion of the Board of Directors:
F-17
34
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
9. STOCK BASED COMPENSATION(Continued)
Stock Options and Warrants
2004 2003
----------------------- ---------------------
Number Expense Number Expense
of Shares Recognized of Shares Recognized
----------- ----------- --------- -----------
Officers and employees 702,000 $ 144,480 1,690,000 $ 196,500
Independent contractors and
consultants 1,502,850 209,124 1,035,000 117,200
----------- ----------- --------- -----------
Total 2,204,850 $ 353,604 2,725,000 $ 313,700
=========== =========== ========= ===========
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.
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, 2004 and 2003 is as follows:
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
============= ============ =============
2004
----------------------------------------
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
============= ============ =============
F-18
35
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
9. STOCK BASED COMPENSATION (Continued)
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, 2004 and 2003.
10. 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. Other legal actions are in the normal course of
business.
F-19
36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
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 Chisholm, Bierwolf & Nilson,
LLC as our independent auditor. On March 3, 2004 we filed an amendment to
this report related to the resignation of our former auditor, Stegman &
Company, Certified Public Accountants.
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.
Our Chief Executive Officer determined there were no changes made or
corrective actions to be taken related to our internal control over financial
reporting.
ITEM 8B. OTHER INFORMATION
None.
PART III
-------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
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 at least one director. The term of office of each
director is until the next annual meeting of stockholders or until the
director's earlier death, resignation, or removal. However, if his term
expires, he continues to serve 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 57 Chief Executive Officer, Treasurer, September 1998
and Director
Michael L. Bagnoli 49 Secretary and Director May 1999
Martin Maassen 62 Director May 1999
Gunther Than - Gunther Than was appointed Treasurer in July 2003 and has
served as our Chief Executive Officer since September 1998. He served as our
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 Real View Systems, Inc. and View Technologies,
Inc., software developers. Mr. Than continues as President, CEO and director
of View Technologies, Inc. Mr. Than is a graduate of the University of
Wisconsin, with a dual bachelors degree in engineering physics and applied
mathematics.
Michael L. Bagnoli - Mr. Bagnoli became a Director in May 1999 and was
appointed Secretary in June 2004. 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. Mr. Bagnoli
was founder, CEO and president of a successful medical products company,
Biotek, Inc., which was sold in 1994.
Martin Maassen - Mr. 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,
2004, and representations from reporting persons that Forms 5 were not
required, we believe Mr. Than filed late Forms 4 related to 3 transactions,
Mr. Feldman filed late a Form 4 for one transaction, Mr. Smith filed late
Forms 4 for two transactions, and Mr. Maassen filed late Forms 4 for one
transaction and failed to file a Form 5 for one transaction.
CODE OF ETHICS
We have not adopted a code of ethics for our principal executive and financial
officers. However, 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 in all capacities during the past three fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
Fiscal
Name and Principal Position Year Salary Other
--------------------------- ------- -------------- -----------
Gunther Than 2004 $ 100,000 (1) $ 120,000 (2)
CEO, Treasurer 2003 100,000 (1) 138,000 (3)
Director 2002 18,000 0
(1) Represents accrued salary.
(2) Represents 600,000 common shares issued as compensation.
(3) Represents 1,150,000 common shares issued as compensation.
38
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
and 60,000 shares for the year ended December 31, 2004, 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
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.
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 16,750,439 $ 0.10 0
______________________________________________________________________________
Equity
compensation
plans not
approved by
security holders 107,690 1.63 4,392,310
______________________________________________________________________________
Total 16,858,129 $ 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.
Pursuant to the 2000 Restricted Share Plan our board of directors granted
11,820,589 shares in the 2002 year, 2,725,000 shares in the 2003 year and
2,204,850 for the 2004 year. Under the 1999 Stock Option Plan our board of
directors reserved
39
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.
BENEFICIAL OWNERS
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 76,812,922 outstanding
shares as of March 8, 2005 and any 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
---------------------------------- -------------------------- ------------
Michael L. Bagnoli 570,000 (1) Less than 1%
40 Redwood Court
Lafayette, Indiana 47905
Martin Maassen 2,288,419 (2) 2.9%
1340 Fawn Ridge Drive
West Lafayette, Indiana 47906
Gunther Than 4,294,140 (3) 5.6%
1100 Wilso Drive
Baltimore, Maryland 21223
Directors and officers 7,732,559 10.1%
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 1,538,419 held by Mr. Maassen and 750,000 shares held by his
spouse
(3) Represents 4,124,140 shares owned by Mr. Than and 170,000 shares held by
his spouse.
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.
On April 22, 2004 we issued 600,000 shares, valued at $120,000 to Gunther
Than, our CEO, in consideration for services provided to use. This
transaction was negotiated between related parties without "arms length"
bargaining and, as a result, the terms of this transaction may be different
than transactions negotiated between unrelated 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
No. Description
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 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003. (Incorporated by reference to exhibit 10.3 to Form
10-KSB, filed April 14, 2004)
21.1 Subsidiaries (Incorporated by reference to exhibit 21.1 to Form
10-KSB, filed March 31, 2003)
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for each of the last two fiscal years for
professional services rendered by our principal account for the audit of our
annual financial statement and review of financial statements included in
quarterly reports and services normally provided by the accountant in
connection with statutory and regulatory filings or engagements were $31,500
for fiscal year ended 2003 and $19,771 for fiscal year ended 2004.
AUDIT-RELATED FEES
Our auditor did not bill any fees in each of the last two fiscal years for
assurance and related services by the principal accountant that are reasonably
related to the performance of the audit or review of our financial statements
that are not reported above.
TAX FEES
The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for tax compliance,
tax advise, and tax planning were $-- for fiscal year ended 2003 and $ --for
fiscal year ended 2004.
ALL OTHER FEES
The aggregate fees billed for each of the last two fiscal years for products
and services provided by the principal accountant, other than the services
reported above were $0 for fiscal year ended 2003 and $-- for fiscal year
ended 2004.
PRE-APPROVAL POLICIES
Our audit committee makes recommendations to our board of directors regarding
the engagement of an auditor. Before the auditor renders audit and non-audit
services our board of directors approves the engagement. Our audit committee
does not rely on pre-approval policies and procedures.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
VIEW SYSTEMS, INC.
/s/ Gunther Than
Date: March 30, 2005 By:___________________________________________
Gunther Than, Chief Executive Officer
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/ Gunther Than
Date: March 30, 2005 ___________________________________________
Gunther Than, CEO, Principal Financial and
Accounting Officer, Treasurer and Director
/s/ Martin J. Maassen
Date: March 30, 2005 ___________________________________________
Martin J. Maassen
Director
/s/ Michael L. Bagnoli
Date: March 30, 2005 ____________________________________________
Michael L. Bagnoli
Director and Secretary
42