UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
For the fiscal year ended DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from ___________ to __________
Commission file number: __________
View Systems, Inc.
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(Name of Small Business Issuer in Its Charter)
Florida 59-2928366
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(State or Other Jurisdiction (I.R.S. Employer Identification No
of Incorporation or Organization)
3100 Wilso Drive, Baltimore, MD 21223
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(Address of principal executive offices) (Zip Code)
(410) 646-3000
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value.
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(Title of class)
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 the 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 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. [ ]
The Registrant's revenue for the fiscal year ended December 31, 2001 was
$1,391,929.
As of April 2, 2002, 28,439,620 shares of the registrant's Common Stock were
outstanding and the aggregate market value of such Common Stock held by
non-affiliates was approximately $10,522,659 based on the closing price of $.37
per share on that date.
PART I
ITEM 1. DESCRIPTION OF OUR BUSINESS
History
We incorporated in Florida in January, 1989 but did not become active until
September, 1998 when Gunther Than joined us as our president and we began
development of our product line. In October 1998, we acquired Real View Systems,
Inc. a company controlled by Gunther Than by which we acquired compression
technology and computer equipment. In February 1999, we acquired Xyros Systems,
Inc. by which we acquired remote monitoring and storage engineering, a highly
qualified employee staff and computer hardware and software. In May, 1999, we
acquired ETMC, a contract manufacturer of electronic hardware and assemblies
with 15 years of manufacturing experience which business we have continued to
date and whose facilities we use to manufacture our products. In March, 1999, we
made our first sales of our security and surveillance products. The potential
market for security and surveillance products and services throughout the world
is huge and has been enhanced by digital technology. In December of 2001 we
entered into a joint venture agreement with Milestone Technology to further
develop and enhance their Concealed Weapons Detection technology. This joint
venture enhances our product line and gives both companies a more comprehensive
product.
Overview
Surveillance devices are common today and are used as a proven method for
protection and risk management. We develop, produce and market digital security
and surveillance systems and products utilizing video based cameras and
microphones. Our security systems, which are marketed under the trade name
SecureView, record video images digitally and permit their viewing remotely over
the customer's existing CCTV systems together with audio output over ordinary
telephone lines. Digital recording connects data to a computer readable format
rather than on a conventional video tape. We store the video output on computer
hard disks rather than VCR tapes which significantly improves access to stored
data. In addition, our systems are programmable and are capable of being
customized to satisfy each customer's special requirements, be it coverage which
is continuous or when events are detected. Our digital systems also employ
digital video data compression which saves space and time for transmissions.
In addition to SecureView, our products include the following:
o ViewStorage which is a competitively priced programmable VCR
replacement device that records video output digitally for use
with existing CCTV systems and which will not degrade as tapes
do;
o PlateView which is a license plate recognition system that uses
optical character recognition technology to provide an additional
means of identifying individuals in a surveillance area for
commercial or law enforcement use;
o FaceView which is a system for recognizing faces and comparing
them to known individuals such as employees or wanted individuals
which are being sought for;
o WebView which is a low-priced retail product that allows a user
to capture and view remotely camera output from a limited number
of cameras via a connection to a server which in turn is
connected to the world-wide web for use by a customer desiring a
low cost way to monitor remote assets such as a home or boat;
o SecureScan is a single, stand-alone, Concealed Weapons Detection
Systems (CWD);
o CWD systems that integrate into existing facilities with security
systems;
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o CWD systems that form the framework of a new security system;
o Services:
- Calibration services using the FAA approved method,
- On site consulting/planning with customer architect and
engineer,
- Installation and technical support,
- Training and "Train the Trainer" programs, and
- Extended service agreements.
We currently market our products principally to commercial users for
monitoring facilities for the protection of employees, customers and assets
which leads to both the curtailment of crime and loss prevention. We also market
our products to residential users and law enforcement agencies. We currently
distribute and support our products through a network of value-added domestic
and international resellers which we intend to expand.
Industry Background
The increased functionality that digital technology brings to CCTV systems
has made this a dynamic and rapidly growing market. According to a report by J.
P. Freeman & Co., a privately held market research and consulting services
company that focuses on the security and surveillance industries, the market
size for CCTV systems was $1.3 billion for production and services revenues in
1998, which market was estimated to grow at a rate of 11-13% per year. The
report forecast this double-digit growth in the total market between now and
2004, with a possibility of further growth acceleration as the residential and
non-security commercial markets expand. According to the J. P. Freeman report,
an estimated $556 million of the total market in 1998 was derived from services,
such as installation and maintenance, which we do not provide. However, the
report predicted that service revenues in this market would grow at a slower
pace than the revenue growth of the product sector primarily because of the
ability to integrate digital systems with other commercial and residential
electronic systems.
Video transmission is just beginning to transform from what was
"closed-circuit" to a mix of methods that will widen into hard-wired, phone
line, TV cable and wireless link systems. It is expected that this will expand
user demand, create new product opportunities and channels of distribution and
expand the way in which other communication services are used.
Business Strategy
We distribute our SecureView line of products, with add-on features, to the
market through a network of value-added resellers. We are also in discussions
with security companies and law enforcement agencies with respect to
distribution agreements.
We have ongoing reseller arrangements with small and medium sized domestic
and international resellers. Our reseller agreements grant a non-exclusive right
to sell our products. The reseller purchases from us at a discount from list
price and on other terms and conditions in effect at the time of order. The
agreements are generally for a term of one year and automatically renew for
successive one year terms unless terminated by notice or in the event of breach.
Our core strategy is to continue to build products and deliver services
that are marketable while at the same time developing new products and
applications to anticipate and meet the expanding needs of our customers. We are
also attempting to create alliances with various specialty markets which require
the use of security systems.
SecureScan products will be distributed in two basic configurations,
stand-alone units and integrated door systems. Stand-alone systems will be
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distributed by security industry leaders. Cross marketing arrangements are under
discussion with InVision for distribution of SecureScan to the airline industry.
Extensive participation at leading trade shows is planned. Marketing will be
based upon education and technology pull. Technical presentations and meeting
participation will also underscore priority-marketing strategies for SecureScan.
Wide use of GSA contracting will help define public sector product
deployment. DOE National Laboratories are a natural first launch. Extensive
adoption in Washington D.C. buildings and Cabinet offices as well as the
Executive Branch are also early planned targets.
Our Products
We manufacture several of the hardware components in our systems. We
assemble our systems by combining additional commercially available hardware and
software together with our proprietary software. We license software components
that are integrated into our proprietary software and installed in our systems.
We believe that we can continue to obtain components for our systems at
reasonable prices from a variety of sources. Although we have developed certain
proprietary hardware components for use in our products and purchased some
components from single source suppliers, we believe similar components can be
obtained from alternative suppliers without significant delay.
We have software licensing agreements for (i) compression software
components, (ii) for facial recognition to possibly integrate into our
proprietary software, and (iii) integration of commercially available operating
systems software into our proprietary software for installation into our
products.
SecureView
SecureView is a line of digital CCTV recording and remote monitoring
systems. Our digital CCTV SecureView system:
o takes video images captured by cameras;
o digitizes the video;
o stores the video according to times or criteria specified by the
customer;
o retrieves the visual data selectively in a manner that the customer
considers valuable or desirable;
o transmits the video across computer networks or ordinary phone lines;
o has two way audio ability that can use real-time to communicate to the
location being monitored; and
o triggers programmed responses to events detected in surveillance area
such as break-ins or other unauthorized breaches of the secured area.
Our system stores video output on computer hard discs, rather than VCR
tapes. Storage on computer hard discs allows selective access to stored data.
With a VCR, a user must search an entire tape to review a critical event, often
fast forwarding and rewinding. With computer hard disc, a user can gain
immediate access to stored data by doing a controlled search for the desired
data. Our systems come standard with up to 28 days storage.
Our systems are programmable -- they can be pre-set to take actions when
events are detected in the surveillance area. For example, they can be
programmed to begin recording when motion is detected in a surveillance area or
to notify the user if the system is not functioning properly. Because of the
programmable recording features, our systems can eliminate the unnecessary
storage of non-critical image and audio data. This capacity allows the user to
utilize the hard disk storage more efficiently.
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Our digital systems employ video data compression. This saves space for
storage and time for transmission especially on low bandwidth channels such as
plain telephone wiring.
Our SecureView line of products include the following features:
o users can remotely monitor multiple locations from a remote PC;
o connects to existing CCTV systems allowing retrofit enhancements using
our systems;
o uses any and all forms of telecommunications, such as standard
telephone lines;
o video can be monitored 24 hours a day by a security monitoring center;
o allows uninterrupted "2-way" audio transmission while switching,
controlling and monitoring up to 16 cameras per unit;
o local and remote recording, storage and playback for up to 28 days,
with optional additional storage capability;
o cameras can be concealed in ordinary home devices such as in smoke
detectors;
o monitors itself to insure system functionality with alert messages in
the event of covert or natural interruption;
o modular expansion system configuration allows user to purchase add on
components at a later date; and
o allows the user to set the system to automatically review an area in
desired camera sequence.
SecureScan
The SecureScan CWD technology involves sensing technology and data
acquisition/analysis software subsystems. These technologies have patents
pending or issued. Since the intellectual property was developed by the federal
government under a grant from the NIJ, the patents belong to the government as
well. This 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 CWD technology under the ongoing contract
between DOE and NIJ. Milestone, as the licensee has rights to these improvements
as well.
SecureScan incorporates several important measurements to determine if
there is a weapon, (A) where the weapon is located, (B) what kind of weapon it
is, and (C) the identity of the person with the weapon. First, flux-gate
magnetometers qualify the measurement of the weapon. Second, spatial analysis
software calculates the exact location of the specific sensors involved in the
measurement. Third, software calculated magnetic disturbance against the density
of the material discovered. And fourth, high-resolution video grabs a frame of
the spatial data with the picture of the actual person in the portal. All of
this information is brought together on a video screen that displays the image
of the person, the location of the weapon and variable-sized target, depending
on the intensity of the magnetic signature. On the same display screen next to
the video window is a graph that can depict the precise signal strength of the
right and left sensor arrays. This is the only product capable of these
integrated functions.
PlateView
PlateView is a license plate recognition system that uses optical character
recognition technology to provide an additional means of identifying individuals
in a surveillance area. The system can be integrated into an access control
mechanism that can open gates or call an attendant to compare an identification
made from other data, such as a driver's license, with the identification made
with the license plate. Law enforcement personnel can use this system in traffic
enforcement. In addition to plate identification, officers can receive early
warnings as to a number of items, including whether the owner of a car being
stopped has outstanding arrest warrants or whether the license plate matches the
vehicle's registration. PlateView was brought to market in the first quarter of
2000.
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CareView & WebView
Parents' rising concerns about the safety of their children at home with a
baby sitter or nanny or in a day care center - as well as the treatment of a
loved one in a nursing home - have created the need for a way of monitoring
activities in these facilities. We are developing the CareView system as an
option for the care facility. Users of the WebView system access the Internet to
scan the day care center's web site and immediately view the video output
produced by cameras installed at the care facility.
For nursing and hospice care facilities, the CareView system allows family
and friends to view loved ones when they are not able to be at the care facility
-- just by accessing the facilities' web sites.
Markets
Our family of products offers government and law enforcement agencies,
commercial security professionals, private businesses and residential consumers
a dramatically enhanced surveillance capacity. It also offers a more efficient
and economical method to store, search and retrieve historically stored data.
Residential
The residential home security user will purchase our products from either
commercial companies installing either self-contained or centrally monitored
systems, or directly from retail distribution centers.
Utilizing our technology, individuals can run their own perimeter and
interior surveillance systems from their own home computer. Real time action can
be monitored remotely at homes through a modem and the Internet. There is also
the capability to make real-time monitors wireless. In turn, this reduces the
expense and time of the home installation and makes installation affordable for
a majority of homeowners.
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.
Commercial
Commercial business users represent the greatest potential users of our
surveillance products. Commercial businesses have already realized the need for
using surveillance devices for protection. Our products provide observation of
facilities for protection of employees, customers, and assets. This can result
in the curtailment of crime and loss prevention by employees and others. The
market for this technology is the same as the current market for analog CCTV
systems, including hospitals, schools, museums, and retail, manufacturing and
warehousing facilities.
Our system reduces the requirements for a guard force. In addition, lesser
number of security personnel are needed to monitor, verify and respond to
tripped alarms.
Our products and technology can be used where there is a temporary
requirement for real-time surveillance in areas where an analog CCTV system is
impractical or impossible. Examples of this are special events, concerts, and
conventions. Our systems reduce the need for a large guard force and provide
unobtrusive monitoring of these events.
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Law Enforcement
The gathering of video and data images is commonplace in law enforcement.
The data is used to protect both the law enforcement officer and the suspect. It
is also used as a historical record for prosecution and event verification.
Because our technology can be used for stakeouts and remote monitoring of
areas, we believe there is a market potential with law enforcement agencies. We
have been asked to submit proposals for license plate recognition systems that
help law enforcement identify people entering a surveillance area.
Law enforcement agencies are also frequently using robotic systems to
investigate and disarm explosive devices. The robotic systems are severely
limited in flexibility by the need to utilize CCTV systems with a VCR, which can
be overcome by the use of our digital technology.
Competition
Metal detectors that are widely used to detect weapons use active
electromagnetic induction (EMI) to artificially create or transmit an ionizing
field for metal objects to act upon. This energy is similar in nature to the
controversial radiation surrounding the use of cellular phones, high-tension
power lines, etc. Many of these systems create enough stray EMI to interact with
medical implants and heart pacemaker devices. While the real effects of EMI are
still being evaluated, many consumers are taking a conservative approach when
EMI is concerned.
SecureScan 2000 uses novel passive magnetic technology. This means special
sensors are used to measure the earth's naturally occurring magnetic field. When
an object of a specific mass passes through the sensors within the magnetic
field, software calculates the difference between the magnetic field strength
with the object inside the magnetic field and determines if the object is a
weapon or not. Since the system uses no transmitters to produce EMI, stray
energy that can cause false alarms does not exist.
It is this absence of EMI energy that enables the SecureScan to safely
integrate with other electrical and electronic systems. SecureScan is the only
CWD system that can be placed directly next to or embedded into an automatic
door for access control.
The competitors of the SecureScan product are Ranger and Garrett, in the
U.S. And the Italian Company, CEIA, who has the most sophisticated EMI product
that, is priced approximately $8,000. Ranger has just recently provided
detectors to some Los Angeles schools under a special contract for around $2,000
each. However, with the amount of body jewelry and body piercings on students, a
metal detector is of little value when security personnel are looking for knives
and, in particular, concealed razor blades. It is for this reason that the NIJ
has purchased SecureScan systems to be installed in New York schools this year.
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. Competitors in the market for our
identification product, PlateView, include Polaroid Corporation, Loronix
Information Systems, Data Card Corporation, Dactek International, Inc.
Competitors in the video surveillance market include numerous VCR suppliers and
digital recording suppliers including, Loronix Information Systems, Inc.,
Sensormatic Corporation and NICE Systems, Ltd.
We believe the introduction of digital technology to video surveillance and
security systems is our market opportunity. We believe that many of the
established CCTV companies have approached the design of their digital CCTV
products from the standpoint of integrating their digital products to existing
security and surveillance product offerings. These systems are closed, not
easily integratable with other equipment and not capable of upgrades as
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technology improves. We have designed our systems so that they are open,
compatible with other digital and analog systems, and easily adaptable to
technological advances that will inevitably occur with digital technology.
Intellectual Property
Certain features of our products and documentation are proprietary and we
rely on a combination of patent, contract, copyright, trademark and trade secret
laws and other measures to protect our proprietary information. As part of our
confidentiality procedures, we generally enter into confidentiality and
invention assignment agreements with our employees and mutual non-disclosure
agreements with our manufacturing representatives, dealers and systems
integrators. Notwithstanding such actions, a court considering these provisions
may determine not to enforce such provisions or only partially enforce such
provisions. We also limit access to and distribution of our software,
documentation and other proprietary information.
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 in these items. However, under law, copyright vests upon creation of
our software and firmware, and registration is not a prerequisite for the
acquisition of copyright rights. We take steps to insure that notices are placed
on these items to indicate that they are copyright protected. The copyright
protection for our software extends for the statutory period from the date of
first "publication" (distribution of copies to the general public) or from the
date of creation, whichever expires first.
We provide software to end-users under non-exclusive "shrink-wrap" licenses
(or automatic license executed once the package is opened) which generally are
nontransferable and have a perpetual term. Although we do not generally make
source code available to end-users, we may, from time to time, enter into source
code escrow agreements with certain customers. We have also licensed certain
software from third parties for incorporation into our products.
Government Regulation
We are not subject to Government regulation in the manufacture and sale of
our products, and the components in our products. However, our resellers and end
users will be subject to numerous regulations that stem from proposed activities
in surveillance. Security and surveillance systems, including cameras, raise
privacy issues. Our products involve both video and audio, and added features
for facial identification. The regulations regarding the recordation and storage
of this data are uncertain and evolving. For example, under the Federal
wiretapping statute, the audio portion of our surveillance systems may not
record people's conversations without their consent. Further, there are state
and federal laws associated with recording video in non-public places. Shipments
of our products internationally may be regulated as to certain countries that
raise national security concerns. These laws are evolving.
Alliances exist with Lockheed Martin, through their Offset Program, as
Lockheed developed the CWD technology while they were prime contractor with the
Department of Energy. Milestone also has a Cooperative Research arrangement with
DOE to receive technical assistance and further enhancements of the CWD
technology through contractual relationships between DOE and NIJ. Discussions
for inserting SecureScan into foreign markets for "Offset Debt" retirement
include the remodeling of the Athens airport and products for the Athens Olympic
games in 2004. Lockheed and Milestone are also actively exploring Russia and
security for their "Nuclear City" where their nuclear weapons were built and are
being dismantled.
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Employees
We employ 23 persons including three persons in part-time positions. We
also employ four 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 commenced on April 1, 2001
and ends on April 30, 2006. During the term of the lease, the rent is $2,300 per
month and we are not responsible for the property taxes.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings that would have a
material effect on our operations.
ITEM. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our shares are traded on the Over-The-Counter Bulletin Board under the
symbol "VYST." The high and low bids for the periods indicated, according to
information from the National Quotation Bureau, were:
2001 High Low
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Quarter as of March 31, 2001 1.09 .47
Quarter as of June 30, 2001 .73 .41
Quarter as of September 30, 2001 .90 .14
Quarter as of December 31, 2001 1.21 .40
2000 High Low
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Quarter ended March 31, 2000 4.19 2.06
Quarter ended June 30, 2000 3.19 1.13
Quarter ended September 30, 2000 1.63 .44
Quarter ended December 31, 2000 .87 .37
As of April 12, 2002 we had 252 stockholders of record.
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. On April 23,
2002 the company was received the conditional symbol "E" on the end of its
trading symbol because of lateness in filing its Form 10-KSB for the fiscal year
ending December 31, 2001. Upon filing of this report, the company expects to be
reinstated.
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Dividend Policy
We have not declared or paid cash dividends or made distributions in the
past, and we do not anticipate that we will pay cash dividends or make
distributions in the foreseeable future. We intend to retain and invest future
earnings to finance our operations.
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Penny Stock Rules
As long as the price of our shares remains below $5.00 and we are unable to
obtain a listing of our stock on the NASDAQ System or other national stock
exchange, we will be subject to the "penny stock" rules. In general, the penny
stock rules impose requirements on securities brokers who sell such securities
to persons other than established customers and accredited investors (generally
those with assets in excess of $1,000,000, or annual incomes exceeding $200,000
or $300,000 together with their spouse), which tend to reduce the level of
trading activity in a stock. Among other things, these rules require that
securities brokers:
o make a special suitability determination before recommending a penny
stock;
o deliver a risk disclosure document prior to purchase;
o disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and,
if the broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market; and
o provide customers with monthly statements containing recent price
information.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common stock and may affect our ability to sell our common stock in
the secondary market.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
our financial statements and the accompanying notes.
Since start-up of operations in September 1998, we have devoted most of our
resources to the development, sale and marketing of digital video surveillance
and security products. We have generated limited revenues from our security
products to date, but are rapidly expanding our sales and distribution network.
At the same time we are working on delivering new products to market and
enhancing and upgrading our product line. Until we more fully develop our
product line and our sales and distribution network, we expect our operating
losses to continue. We have provided contract manufacturing services since May,
1999, when we acquired ETMC. ETMC had provided such services for more than 15
years and had an established customer base. We have continued the contract
manufacturing business line, while increasing ETMC's manufacturing capacity to
permit production of our products. In December of 2001, we entered into a joint
venture agreement with Milestone Technology to co-develop their Concealed
Weapons Detection portal. As part of the agreement we traded 500,000 of View
Systems common stock for 6% of Milestone and rights to the concealed weapons
detection technology.
Results Of Operations
Year Ended December 31, 2001, Compared To Year Ended December 31, 2000
Revenue
In 2000, our revenues totaled $661,789 of which $319,376 were derived from
sales of security systems and $342,413 from sales of contract manufacturing and
test services. In 2001, our revenues totaled $1,391,929, or an increase of 112%
over the prior year. The vast majority of our 2001 sales were international in
nature.
In 2001, we derived the preponderance of our revenues from sales of
security systems and only an immaterial amount from sales of contract
manufacturing and test services. This represents a major change from the prior
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year in which 52% of revenue derived from contract manufacturing and only 48% of
revenue was derived from sales of security systems.
Gross Profit And Operating Expenses
Gross profit on sales for the year ended December 31, 2000, was $225,479
compared to $819,572 for the year ended December 31, 2001, a 265% increase.
Gross profit margin was 34% in 2000 and 59% in 2001.
Operating expenses for the year ended December 31, 2000, were $2,429,761,
compared with $2,756,856 in 2001. Approximately, $582,000 of our operating
expenses in 2000 were attributable to the issuance of shares of our common stock
as compensation and incentive, and as a means to attract and retain qualified
personnel. As a result cash operating expenses in 2000 were only $1,847,761.
Approximately $729,483 of our operating expenses in 2001 were attributable to
the issuance of shares of our common stock as compensation resulting in cash
expenses of $2,027,373 for that year.
Net loss was $2,204,282 for 2000, or $.19 per share, compared to a net
loss of $1,937,284 or $.12 per share for the year 2001. The reduction in net
loss per share is mainly due to the increased number of shares outstanding.
Costs And Expenses
Costs Of Goods Sold. The cost of products and services sold, consisting
principally of the costs of hardware components and supplies, was $572,357 in
2001 as compared to $436,310 in 2000, and represented 41% of revenue in 2001 and
66% of revenue in 2000, a decrease of approximately 25%. As product sales in the
future account for a larger percentage of overall sales, we expect that our
costs of goods and services sold will increase as a percentage of total revenue
and stabilize in the mid 70% range. Our profit margins on sales of security
systems exceeds our profit margins on sales of services. We are currently
working on engineering changes in our security products that we expect will
further lower component costs for these products.
Salaries And Benefits. We spent $794,166 in salaries and benefits in 2000.
We organized and staffed up in 2000, converting many independent contractors to
employees. In 2001, we spent $855,212 for salaries. We incurred expenses
associated with issuing shares of our common stock to employees of $582,552 in
2000 and $438,044 in 2001. We believe these expenses were necessary in the past
and will continue to be necessary in the future in order to attract qualified
personnel and conserve cash during our early years of operation.
Selling, Business Development, Travel And Entertainment. Selling, business
development, travel and entertainment expenses were $227,175 in 2000 and
$300,591 in 2001.
Research And Development Expense. We spent $132,300 in 2000 on research and
development and $26,734 in 2001. We expect to continue to fund new product
development in 2002 at or above the dollar levels expended in 2001.
Investor Relations Expenses. Investor relations expenses decreased from
$392,136 in 2000 to $231,578 in 2001. Included in this expense category is the
issuance of shares of our common stock to in 2001 to Columbia Financial Group,
LLC in payment of their services in providing investor relations support.
Professional Fees. Professional fees increased from to $359,131 in 2000 to
$402,312 in 2001. These fees include attorneys, accountants, management
consultants and programming contractors.
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Net Operating Loss
We have accumulated an aggregate of approximately $8 million of net
operating loss carry-forwards as of December 31, 2001, which may be offset
against taxable income in future years. The use of these losses to reduce income
taxes will depend on the generation of sufficient taxable income prior to their
expiration in the year 2019. In the event of certain changes in control, there
will be an annual limitation on the amount of net operating loss carry-forwards
which can be used. No tax benefit for these carry-forwards has been reported in
the financial statements for the years ended December 31, 2000 or 2001.
LIQUIDITY AND CAPITAL RESOURCES
Since the start-up of our operations in 1998, we have funded our cash
requirements primarily through equity transactions. We received $9,978,497 since
inception through the issuance of our common stock. We are not currently
generating cash from our operations in sufficient amounts to finance our
business and will continue to need to raise capital from other sources. We used
the proceeds from these sales of equity to fund operating activities, including,
product development, sales and marketing, and to invest in the acquisition of
technology, assets and business. As of December 31, 2001, we had total assets of
$ 2,598,712, an increase of $711,288 over last year's $1,887,424. Total
liabilities were $494,709, resulting in stockholders' equity of $2,104,003, an
increase from last year's $1,278,053 of $825,950.
During the year ended December 31, 2001, our cash decreased from $265,245
at December 31, 2000, to $73,344 at December 31, 2001. Net cash used in
operating activities was $1,815,920 for the year ended December 31, 2001,
including increases in accounts receivable of $783,213, decreases in inventory
of $39,695, decreases in accounts payable of $55,590, decreases in payroll
liabilities of $31,951 and increases in accrued interest of $11,000.
Net cash generated from financing activities during the year ended December
31, 2001 was $1,658,780, consisting of proceeds received from the sale of stock
of $1,765,000, less $70,189 advanced to stockholders, less payments made in the
amount of $36,031 on a promissory note.
As a result of the foregoing, as of December 31, 2001 we had positive net
working capital of $572,509, including $938,230 of trade accounts receivable and
$55,644 in inventory. We have provided and may continue to provide payment term
extensions to certain of our customers from time to time. As of December 31,
2001, we have not granted material payment term extensions.
Our inventory balance at December 31, 2001, was $55,644. We do not take
inventory on a quarterly basis, and we made inventory estimates based on annual
inventory determinations. However, the inventory at December 31, 2001 is based
on a physical count and valuation of materials on hand. With expected increased
product sales, we will need to make increased inventory expenditures. In
addition, we endeavor to keep inventory levels low. Therefore, we do not believe
that increased product sales, associated materials purchases and inventory
increases, will adversely affect liquidity.
Under our outstanding employment and consulting agreements, we are
obligated to pay Mr. Than $96,000 per year in salary and fees during calendar
year 2002. If we terminate the employment of Mr. Than because of merger,
acquisition or change in control, we will be obligated to pay him approximately
$2,000,000 in severance payments.
We believe that cash from operations and funds available will meet
anticipated operating capital expenditure and debt service requirements for the
next twelve months but that we will also be raising additional capital through
equity sales or debt financing.
We also have 3,850,000 outstanding warrants with various investors with an
exercise prices of $0.20 to $0.70 per share. If the warrant holders exercise all
of their warrants, at the stated exercise prices, we will receive $1,880,000,
which we will use for additional working capital. Dependent on market conditions
the warrant prices are sometimes renegotiated.
12
Plan Of Operation
The amount of capital that we need to raise will depend upon many factors
primarily including:
o the rate of sales growth and market acceptance of our product lines;
o the amount and timing of necessary research and development
expenditures;
o the amount and timing of expenditures to sufficiently market and
promote our products; and
o the amount and timing of any accessory product introductions.
We intend to use the cash raised from the private sale of shares and the
exercise of warrants held by the Selling Stockholders to the following:
o bring SecureScan and SecureView products to market;
o continue our product development efforts;
o expand our sales, marketing and promotional activities for the
SecureView line of products; and
o increase our engineering, production management, quality control, and
customer support staff.
We operate in a very competitive industry that requires continued large
amounts of capital to develop and promote our products. We believe that it will
be essential to continue to raise additional capital, both internally and
externally, to compete in this industry.
In addition to accessing the public and private equity markets, we will
pursue bank credit lines and equipment lease lines for certain capital
expenditures. We currently estimate we will need between $3 million and $4
million to fully develop all of our products and launch our expanded business
operations in accordance with our current business plan.
ITEM 7. FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's Financial
Statements contained in this report and is incorporated herein by this
reference. Specific financial statements can be found at the pages listed in the
following index.
Index To Financial Statements
View Systems, Inc.
-----------------
Page No.
--------
Report of Independent Auditors F-1
Consolidated Balance Sheet at December 31, 2001 F-2
Consolidated Statements of Operations for the
years ended December 31, 2001 and 2000 F-3
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 2001 and 2000 F-5
13
Notes to Consolidated Financial Statements F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Our directors, executive officers and key employees, their respective ages
and positions, and biographical information on them is set forth below.
Name Age Position Held
---- --- -------------
Gunther Than 53 President, CEO and Director since September 1998
Dr. Martin Maassen 56 Director since May, 1999; Chairman of the Board since April 2000
Dr. Michael L. Bagnoli 42 Director since May 1999, Secretary since July 2000
All directors hold office until the next annual stockholders meeting or
until their death, resignation, retirement or until their successors have been
elected and qualified. Vacancies in the existing board are filled by a majority
vote of the remaining directors.
Our executive officers are chosen by our Board of Directors and serve at
its discretion. There are no existing family relationships between or among any
of our directors or executive officers.
Gunther Than, President, Director and CEO
Gunther Than has served as our President and Chief Executive Officer since
September 1998. He also served as Chairman of the Board from September 1998 to
April 2000, and as a director since April 2000. From 1994 - 1998, Mr. Than was
the founder, President and CEO of RealView Systems, Inc. and View Technology,
Inc., software developers. Mr. Than continues as President, CEO and director of
View Technology, Inc. Prior to founding RealView Systems, Inc., Mr. Than held a
variety of executive business management positions. Mr. Than is a graduate of
the University of Wisconsin, with a dual degree in engineering physics and
applied mathematics.
Martin Maassen, M.D., Chairman of the Board
Dr. Maassen became a Director in May 1999. He became our Chairman of the
Board in April, 2000. 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 in Indiana since
1977. In addition to practicing medicine, he maintains an expertise in computer
technologies and their medical applications.
Michael L. Bagnoli, D.D.S., M.D., Director and Secretary
Dr. Bagnoli became a Director in May 1999. He holds degrees as a medical
doctor and a dental specialist. Since 1988 he has practiced dentistry in the
specialty area of oral and masiofacial surgery for a physician group in
14
Lafayette, Indiana. He introduced in his practice arthroscopy surgery along with
the full scope of arthroplastic and total joint reconstruction. Dr. Bagnoli was
founder, CEO and president of a successful medical products company, Biotek,
Inc., which was sold in 1994.
Board of Directors Committees
Our board of directors has established an executive compensation committee
and an audit committee, the members of both of which are our independent
directors.
The audit committee is primarily charged with the review of professional
services provided by our independent auditors, the determination of the
independence of those auditors, our annual financial statements, and our system
of internal accounting controls. The audit committee also reviews such other
matters with respect to our accounting, auditing and financial reporting
practices and procedures as it finds appropriate or as is brought to its
attention, including our selection and retention of independent accountants.
The compensation committee is charged with the responsibility of reviewing
executive salaries, administering bonuses, incentive compensation and our stock
option plans and approving our other executive officer benefits. The
compensation committee also consults with our management regarding pension and
other benefit plans, and our compensation policies and practices in general.
Compensation of Directors
We compensate our independent directors, Messrs. Maassen and Bagnoli, by
the issuance of 5,000 shares of our common stock for each month of service. We
do not have any arrangement for compensating our directors in cash for the
services they provide in their capacity as directors, including services for
committee participation or for special assignments.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors and executive officers, and persons who own more
than 10% of the Company's Common Stock, are required to file with the Securities
and Exchange Commission initial reports of beneficial ownership and reports of
changes in beneficial ownership of any securities of the Company. To the
Company's knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 31, 2000, year-end reports on
Form 5 for Gunther Than, Martin Maassen and Michael L. Bagnoli, were filed late
and reports on Form 4 for each of Gunther Than, Martin Maassen and Michael L.
Bagnoli were not filed.
15
ITEM 10. EXECUTIVE COMPENSATION
No compensation was payable to any executive officer for any fiscal year
until the fiscal year ending December 31, 1999. No officer or director received
compensation in any fiscal year in excess of $100,000 with the exemption of
Gunther Than, currently our only executive officer. The following table sets
forth certain information concerning compensation for the years ending December
31, 1999 and December 31, 2000.
-------------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
Awards Payouts
------------------------- ------------------------
Securities
Under-
Other Restricted lying
Annual Stock Options/ LTIP All Other
Name and Year Salary Bonus Compensation Award(s) SARs Payouts Compensation
Principal Position ($) ($) ($) ($) (#) ($) ($)
------------------------------------------------------------------------------------------------------------------------------------
Gunther Than, 2000 $96,000 $110,400(1) -- 0
President and CEO --------------------------------------------------------------------------------------------------------
2001 $96,000 $110,400(1) -- 0
------------------------------------------------------------------------------------------------------------------------------------
(1) This amount represents 480,000 shares of our common stock valued at $.23 per
share which was market value less a discount based on the trading restrictions
on the date of issuance. The shares were granted to Mr. Than pursuant to his
employment agreement.
Employment Agreements
Mr. Than has an Executive Employment Agreement with us to serve as our
President and Chief Executive Officer, effective June 1, 1999, without a term
but terminable by either party on 60 days written notice. If the termination is
without cause, Mr. Than would be entitled to a severance of three years base
salary plus the bonus, if any, received in the year prior to termination. He is
also entitled to compensation in the amount of $10,000 per month and an annual
payment of 480,000 shares of our common stock. Mr. Than has a covenant not to
compete with the Company or to solicit any employee or client of the Company for
a period of one year after any termination of the Agreement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table lists as of December 31, 2001, the beneficial ownership
of our outstanding common stock by: our executive officer; each of our
directors; and executive officer and directors as a group. Except as specified
in the table below and in the following text, there is no person who presently
owns beneficially 5% or more of our outstanding common stock.
Beneficial ownership is determined in accordance with the rules of the SEC
and generally depends on voting or investment power with respect to the shares.
For purposes of calculating the percentages shown in the chart, each person
listed is also deemed to beneficially own any shares that would be issued by
contract or upon exercise of warrants or options currently exercisable or
exercisable within 60 days of the date of this prospectus. The persons named
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The inclusion of any shares as
beneficially owned does not constitute an admission of beneficial ownership of
those shares. The address of each person named below is the address of our
principal executive office.
16
Name of Beneficial Owner Shares Percent
------------------------ ------ -------
Gunther Than 2,262,714 11.2%
Martin J. Maassen 191,000 *
Michael Bagnoli 90,000 *
All Executive Officers and Directors as a Group 2,515,940 12.5%
(3 persons)
---------------------------------------
* Indicates beneficial ownership of less than 1% of the outstanding shares of
our common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information summarizes certain transactions we engaged in
during the past two years, or we propose to engage in, involving our executive
officers, directors, 5% stockholders or immediate family members of those
persons:
We advanced non-interest bearing loans to Gunther Than, consisting of
$96,2001 cash.
See "Executive Compensation" for a description of options and warrants
issued to Gunther Than.
ITEM 13. EXHIBITS, LISTS AND REPORTS OF FORM 8-K
(a) Exhibits
2.1 View Systems, Inc. Board of Directors Resolutions approving Acquisition
Agreement and Plan of Reorganization With RealView Systems, Inc;
Resolution of stockholders and Board of Directors of Real View Systems,
Inc. approving Acquisition Agreement and Plan of Reorganization With
Real View Systems, Inc. (1)
2.2 View Systems, Inc. Board of Directors Resolutions approving Acquisition
Agreement and Plan of Reorganization With RealView Systems, Inc;
Resolution of stockholders and Board of Directors of Real View Systems,
Inc. approving Acquisition Agreement and Plan of Reorganization With
Real View Systems, Inc. (1) View Systems, Inc. Acquisition Agreement
and Plan of Reorganization with Xyros Systems, Inc. (1)
2.3 View Systems, Inc. Acquisition Agreement and Plan of Reorganization
with ETMC(1)
2.4 Letter of Intent to Form Joint Venture Corporation Between NetServ
Caribbean, Ltd. and View Systems, Inc. (1)
3.1 Articles of Incorporation and all Articles of Amendment of View
Systems, Inc. (1)
3.2 By-Laws of View Systems, Inc. (1)
5.1 Consent of Counsel Regarding Legality.
10.1 Form of Subscription Agreement For 8/8/99 Rule 505 (Amended to Be Rule
506) Offering and Terms of Offering Pages From Private Placement
Memorandum, Dated August 8, 1999, Describing Rights of Subscribers. (1)
10.2 Form of Subscription Agreement For 11/11/99 Rule 506 Offering and Terms
of Offering Pages From Private Placement Memorandum, Dated November 11,
1999, Describing Rights of Subscribers. (1)
10.3 Subscription Agreement Between View Systems, Inc. and Lawrence Seiler
for 170,000 Shares, Granting Registration Rights to 100,000 Shares. (1)
10.4 Lock-Up Agreement With Lawrence Seiler.(1)
10.5 Subscription Agreement Between View Systems, Inc. and Leokadia Than.
(1)
10.6 Form of Subscription Agreement Between View Systems, Inc. and Jim Price
and Tim Rieu. (1)
17
10.7 Subscription and Investment Representation Agreement between View
Systems, Inc. and Rubin Investment Group, dated February 18, 2000. (2)
10.8 First Common Stock Purchase Warrant between View Systems, Inc. and
Rubin Investment Group, dated February 18, 2000. (2)
10.9 Second Common Stock Purchase Warrant between View Systems, Inc. and
Rubin Investment Group, dated February 18, 2000. (2)
10.10 Registration Rights Agreement between View Systems, Inc. and Rubin
Investment Group, dated February 18, 2000. (2)
10.11 Non-qualified Stock Option Agreement with Richard W. Gray. (6)
10.12 Amendment to First Purchase Common Stock Warrant, Dated February
18,2000, Second Purchase Common Stock Warrant, Dated February 18, 2000,
and Subscription and Investment Agreement, Dated February 18, 2000,
Between View Systems and Rubin Investment Group. (7)
10.13 View Systems, Inc. 2000 Restricted Share Plan (8)
10.14 Second Amendment to First Purchase Common Stock Warrant, Dated February
18, 2000, Second Purchase Common Stock Warrant, Dated February 18,
2000, and Subscription and Investment Agreement, Dated February 18,
2000, Between View Systems and Rubin Investment Group. (9)
10.15 View Systems, Inc. Employment Agreement with Gunther Than. (1)
10.16 View Systems, Inc. Employment Agreement with Andrew L. Jiranek. (1)
10.17 View Systems, Inc. Engagement Agreement with Bruce Lesniak. (1)
10.18 View Systems, Inc. Employment Agreement with David Bruggeman. (1)
10.19 Eastern Tech Mfg. Corp. Employment Agreement with John Curran. (1)
10.20 Lease Agreement Between View Systems, Inc. and Lawrence Seiler. (1)
10.21 Stock Redemption Agreement, dated May 27, 1999, Between View Systems,
Inc. and Gunther Than. (1)
10.22 Stock Redemption Agreement, dated September 30, 1999, Between View
Systems, Inc. and Gunther Than. (1)
10.23 View Systems, Inc. 1999 Restricted Share Plan. (1)
10.24 Restricted Share Agreement with Bruce Lesniak (Lesniak & Associates).
(1)
10.25 Restricted Share Agreement with John Curran. (1)
10.26 Restricted Share Agreement with David Bruggeman. (1)
10.27 Restricted Share Agreement with Gunther Than. (1)
10.28 Restricted Share Agreement with Andrew Jiranek. (1)
10.29 Restricted Share Agreement with Linda Than. (1)
10.30 View Systems, Inc. 1999 Employee Stock Option Plan. (1)
10.31 Non-qualified Stock Option Agreement with Gunther Than. (1)
10.32 Non-qualified Stock Option Agreement with Andrew Jiranek. (1)
10.33 Qualified Stock Option Agreement with Gunther Than. (1)
10.34 Qualified Stock Option Agreement with Andrew Jiranek. (1)
10.35 Promissory Notes from Xyros Systems, Inc. to Ken Weiss. (1)
10.36 Promissory Notes from Xyros Systems, Inc. to Hal Peterson. (1)
10.37 Loan Agreement Between Xyros Systems, Inc. and Columbia Bank. (1)
10.38 Letter From Columbia Bank Extending Term of Loan. (1)
10.39 License and Distribution Agreement with Visionics Corporation. (5)
10.40 License and Distribution Agreement with Lead Technologies, Inc. for
Video OCR Software. (3)
10.41 License and Distribution Agreement with Anasoft Systems for Microsoft
Operating System Software. (3)
10.42 License and Distribution Agreement with Aware, Inc. for Compression
Software. (3)
10.43 Typical Non-Exclusive Reseller Agreement. (5)
10.44 Schedule of Contracted Resellers. (5)
18
10.45 Agreement between View Systems, Inc. and Magnum Financial Services,
Inc., dated February 27, 2000. (5)
10.46 View Systems, Inc. Employment Agreement with Keith Company. (5)
16.1 Letter From Katz, Abosch, Windesheim, Gershman & Freedman, P.A. to View
Systems, Inc., dated April 11, 2000. (4)
21.1 Subsidiaries of Registrant. (1)
23.1 Consent of Davis, Sita & Company. (12)
23.2 Consent of Stegman & Company. (12)
23.3 Consent of Stegman & Company to incorporation by reference to other
filings.*
99.1 Consulting Agreement with Columbia Financial Group, LLC Granting
Warrants and Stock and Granting Piggyback Registration Rights. (1)
99.2 Consulting Agreement with Tom Cloutier Granting Warrants and
Registration Rights. (1)
99.3 Consulting Agreement with Guy Parr Granting Warrants and Registration
Rights. (1)
99.4 Form of Stock Certificate. (1)
99.5 Consulting Agreement with Magnum Worldwide Investments, Ltd. (1)
99.6 Consulting Agreement with Mid-West First National, Inc. (10)
99.7 Consulting Agreement with Pacific First National, Corp. (10)
99.8 Consulting Agreement with Columbia Financial Group, LLC (10)
99.9 Consulting Agreement with John Clayton (10)
99.10 Consulting Agreement with Magnum Financial Group, LLC (10)
99.11 Letter to Rubin Investment Group dated March canceling its warrants
(11)
------------------------------------------
(1) Incorporated By Reference from Registrant's Registration Statement on
Form SB-2 Filed With the Commission On January 11, 2000
(2) Incorporated By Reference From Registrant's Report on Form 8K, dated
February 19, 2000.
(3) Incorporated By Reference From Registrant's Report on Form 10KSB, Dated
March 30, 2000.
(4) Incorporated By Reference From Registrant's Report on Form 8K, Dated
April 13, 2000.
(5) Incorporated By Reference From Registrant's Statement on Form SB-2/A,
Dated April 27, 2000.
(6) Incorporated By Reference From Registrant's Form 10 QSB, Dated May
15,2000.
(7) Incorporated by Reference to Registrant's Registration Statement on
Form SB-2/A, dated June 7, 2000.
(8) Incorporated By Reference to Registrant's Definitive Proxy Statement On
Schedule 14A, dated May 3, 2000.
(9) Incorporated by reference to Registrant's Statement on Form SB 2/A,
dated July 20, 2000.
(10) Incorporated by reference to Registrant's Statement on Form SB 2, dated
February 12, 2001.
(11) Incorporated by reference to Registrant's Statement on Form SB 2/A,
dated March 28, 2001.
(12) Incorporated by reference to Registrant's Statement on Form S-8, dated
February 6, 2002.
*attached to Form 10-KSB
(b) Reports On Form 8-K
8-K filed in connection w/late filing
8-k filed in connection with Rubin Investment Group
19
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.
Date: April 26, 2002 By: /s/ Gunther Than
-----------------------------------------
Gunther Than,
President and Chief Executive Offices
SIGNATURES
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 April 26, 2002
--------------------------------------
Gunther Than,
President and Chief Executive Offices
/s/ Martin Maassen April 26, 2002
--------------------------------------
Martin Maassen,
Chairman of the Board
/s/ Michael Bagnoli April 26, 2002
--------------------------------------
Michael Bagnoli,
Director and Secretary
20
To 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, 2001, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 2001 and 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the accompanying consolidated balance sheet as of
December 31, 2001 and the related consolidated statements of operations, changes
in stockholders' equity and cash flows for the years ended December 31, 2001 and
2000 present fairly, in all material respects, the financial position of the
Company as of December 31, 2001, and the results of its operations and cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
Stegman & Company
Baltimore, Maryland
April 5, 2002
F-1
VIEW SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
ASSETS
CURRENT ASSETS:
Cash $ 73,344
Accounts receivable (net of allowance for
uncollectible accounts of $288,498) 938,230
Inventory 55,644
-----------
Total current assets 1,067,218
-----------
PROPERTY AND EQUIPMENT:
Equipment 332,967
Leasehold improvements 3,000
Software tools 34,571
Vehicles 46,832
-----------
Total property and equipment 417,370
Less accumulated depreciation 138,307
-----------
Net value of property and equipment 279,063
-----------
OTHER ASSETS:
Goodwill 781,248
Investments 275,000
Due from affiliated entity 105,552
Due from stockholders 88,099
Deposits 2,532
-----------
Total other assets 1,252,431
-----------
TOTAL ASSETS $ 2,598,712
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 345,657
Note payable - bank 6,052
Accrued interest 33,000
Note payable - other 110,000
-----------
Total current liabilities 494,709
-----------
STOCKHOLDERS' EQUITY:
Common stock - par value $.001, 50,000,000 shares
authorized, issued and outstanding - 20,193,031 20,193
Additional paid-in capital 10,119,024
Accumulated deficit (8,035,214)
-----------
Total stockholders' equity 2,104,003
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,598,712
===========
See accompanying notes.
F-2
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
------------ -------------
REVENUE:
Sales of security systems $ 1,391,929 $ 342,413
Sales of contract assembly services - 319,376
------------- ------------
Total Sales 1,391,929 661,789
Cost of goods sold 572,357 436,310
----------- ------------
GROSS PROFIT ON SALES 819,572 225,479
----------- ------------
OPERATING EXPENSES:
Advertising and promotion 46,671 20,931
Amortization of goodwill 113,135 113,135
Bad debts 226,111 14,010
Business development expense 269,540 133,393
Contributions - 10,347
Depreciation 60,755 44,765
Directors' fees 111,316 -
Dues and subscriptions 5,045 2,573
Employee compensation and benefits 855,212 794,166
Insurance 29,328 21,088
Interest 17,421 23,338
Investment loss 28,000 -
Investor relations 231,578 392,136
Loss from abandoned leasehold 17,999 -
Miscellaneous expense 10,692 13,692
Office expenses 96,992 94,846
Professional fees 402,312 359,131
Rent 102,611 121,951
Repairs and maintenance 14,243 9,148
Research and development 26,734 132,300
Taxes (other than income) 9,151 5,249
Telephone 32,953 35,807
Travel 31,051 72,851
Utilities 18,006 14,904
----------- ------------
Total operating expenses 2,756,856 2,429,761
----------- ------------
NET LOSS $(1,937,284) $ (2,204,282)
=========== ============
LOSS PER SHARE:
Basic $(0.12) $(0.19)
====== ======
Diluted $(0.12) $(0.19)
====== ======
See accompanying notes.
F-3
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
Additional Total
Common Paid-in Accumulated Stockholders'
Stock Capital Deficit Equity
----------- ------------- --------------- ----------------
Balances at January 1, 2000 $ 7,167 $5,334,342 $(3,893,648) $ 1,447,861
Sales of common stock 2,843 1,448,097 - 1,450,940
Stock options exercised 88 894 - 982
Issuance of common stock (employee
and other compensation) 1,383 581,169 - 582,552
Net loss for the year ended
December 31, 2000 - - (2,204,282) (2,204,282)
-------- ----------- ----------- -----------
Balances at December 31, 2001 11,481 7,364,502 (6,097,930) 1,278,053
Sales of common stock 5,500 1,759,500 - 1,765,000
Issuance of common stock (employee
and other compensation) 2,712 720,522 - 723,234
Issuance of common stock in
exchange for minority interest in
Milestone Technology, Inc. 500 274,500 - 275,000
Net loss for the year ended
December 31, 2001 - - (1,937,284) (1,937,284)
-------- ----------- ----------- -----------
Balances at December 31, 2001 $20,193 $10,119,024 $(8,035,214) $ 2,104,003
======== =========== =========== ===========
See accompanying notes.
F-4
VIEW SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (1,937,284) $(2,204,282)
Adjustments to reconcile net income to net cash
provided by operating activities:
Bad debt expense 226,111 14,010
Depreciation and amortization 173,890 157,900
Loss from abandoned leasehold 17,999 -
Investment loss 28,000 -
Employee and other compensation paid through
the issuance of common stock 723,234 582,552
Changes in operating assets and liabilities:
Accounts receivable (1,009,324) (75,749)
Inventory 39,695 45,874
Other assets (1,700) 6,175
Accounts payable (55,590) 227,141
Accrued interest 11,000 11,000
Payroll taxes payable (31,951) 12,788
---------- -----------
Net cash used in operating activities (1,815,920) (1,222,591)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (34,761) (67,479)
Funds advanced to affiliated entities - (14,562)
---------- -----------
Net cash used in investing activities (34,761) (82,041)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from/(repayment of) loans provided by stockholders (70,189) 56,452
Repayment of note payable - bank (36,031) (27,647)
Proceeds from sales of stock 1,765,000 1,451,922
---------- -----------
Net cash provided by financing activities 1,658,780 1,480,727
---------- -----------
NET (DECREASE) INCREASE IN CASH (191,901) 176,095
CASH AT BEGINNING OF YEAR 265,245 89,150
---------- -----------
CASH AT END OF YEAR 73,344 $ 265,245
========== ===========
F-5
VIEW SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
(Continued)
2001 2000
--------- ------
Schedule of noncash investing and financing transactions:
Common stock issued to effect purchase of minority
interest in Milestone Technology, Inc. $275,000 $ -
======== =======
Cash paid during the period for:
Interest $ 6,421 $12,338
=========================
Taxes $ - $ -
===== =======
See accompanying notes.
F-6
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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
utilizing the compression and decompression of digital inputs.
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Real View Systems, Inc. ("Real
View"), Xyros Systems, Inc. ("Xyros") and Eastern Tech Manufacturing, Inc.
("ETMC"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could differ
from the estimates that were used.
Revenue Recognition
-------------------
The Company recognizes revenue when the product has been shipped, the
price of the product is fixed or determinable and collectibility is reasonably
assured.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 summarizes
certain of the SEC's views in applying accounting principles generally accepted
in the United States of America to revenue recognition in financial statements.
The Company adopted SAB 101 in the fourth quarter for the year ended December
31, 2000. The adoption of SAB 101 had no impact on the Company's financial
position or results of operation.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in-first-out method (LIFO).
F-7
Property and Equipment
----------------------
Property and equipment is recorded at cost and depreciated over their
estimated useful lives, using the straight-line and accelerated depreciation
methods. Upon sale or retirement, the cost and related accumulated depreciation
are eliminated from the respective accounts, and the resulting gain or loss is
included in the results of operations. The useful lives of property and
equipment for purposes of computing depreciation are as follows:
Equipment 5 - 7 years
Software tools 3 years
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, 2001 and 2000 amounted to $60,755 and $44,765,
respectively.
Income Taxes
------------
Deferred income taxes are recorded under the asset 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, 2001 and 2000 were $46,671 and $20,931,
respectively.
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.
Net Loss Per Common Share
-------------------------
Basic net loss per common share is computed by dividing net loss
available to common stockholders 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
F-8
warrants. The calculation of the net loss per share available to common
stockholders for the years ended December 31, 2001 and 2000 does not include
potential shares of common stock equivalents, as their impact would be
antidilutive.
2. FINANCIAL CONDITION
Since its inception, the Company has incurred significant losses from
operations and as of December 31, 2001 had an accumulated deficit of $8,035,214.
For the year ended December 31, 2001 the Company's net loss from operations was
approximately $1.9 million. The company expects operational losses to continue
at least through the year ended December 31, 2002. These losses have been funded
through equity transactions consisting of common stock sales and the exercise of
warrants.
In order to fund its operations through December 31, 2002 the Company
intends to
o Call contractually due warrants.
o Develop increased sales revenue through its existing customer
base and through its acquisition of Milestone Technology, Inc.
o Use temporary funding from executive management and board
members.
It is management's belief that cash available through these sources
will be sufficient to fund operations through December 31, 2002.
3. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
that intangible assets acquired in a purchase method business combination must
be recognized and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. The provisions of SFAS Nos. 141 and
142 were adopted by the Company as required effective July 1, 2001, and January
1, 2001, respectively. The adoption of SFAS No. 141 had no effect on the
financial position or results of operations of the company as previously
reported. Application of the nonamortization provisions of SFAS No. 142 is
expected to reduce non-cash expenses by approximately $113,000 in 2002 as
compared to 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
to be Disposed Of and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business (as
previously defined in that opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses in
long-lived assets held for use and long-lived assets to be disposed of by sales,
while also resolving significant implementation issues associated with SFAS No.
121. The provisions of SFAS No. 144 are effective for years beginning after
December 15, 2001, and its adoption is not expected to affect the financial
position or results of operations of the Company.
F-9
4. INVENTORY
Inventories at December 31, 2001 consisted of the following:
Work in process $17,790
Raw materials 37,854
-------
$55,644
5. GOODWILL
Goodwill represents the excess of the cost of assets acquired in
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 provisions of SFAS No. 142.
6. INVESTMENTS
During 2001 the company purchased a 6% interest in Milestone
Technology, Inc. for 500,000 shares of common stock which on the date of the
purchase was selling for $0.55 per share. The investment is reflected on the
financial statements at its cost which was $275,000. Milestone Technology, Inc.
is engaged in the business of developing and selling weapons detection systems.
Subsequent to December 31, 2001 the Company purchased the remaining 94% of
Milestone for an additional 3,300,000 shares of the company's common stock.
The Company also owns approximately 14% of the common stock of a
privately held entity known as MediaComm Broadcasting Systems, Inc. As of
December 31, 2001 the Company determined that its investment had little or no
value. Accordingly, the Company has reflected its original investment of $28,000
as a loss on the accompanying financial statements.
7. DUE FROM AFFILIATED ENTITY
The Company has advanced non-interest bearing funds of $105,552 as of
December 31, 2001 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 transaction throughout the year to provide working capital to one
another when necessary.
8. DUE FROM OFFICERS
The Company has advanced non-interest bearing funds to its corporate
officers in the amount of $88,099 as of December 31, 2001. There are no
repayment terms associated with this advance.
9. NOTE PAYABLE - BANK
One of the Company's subsidiaries has a note payable with a bank having
an outstanding balance of $6,052 as of December 31, 2001. The note bears
interest equivalent to the prime rate plus 2% per annum payable monthly and is
personally guaranteed by three stockholders and former officers of the Company.
The Company is obligated to make monthly principal payments of $5,000.
10. NOTE PAYABLE - OTHERS
In connection with the acquisition of Xyros, the Company assumed
liabilities evidenced by notes payable to the stockholders of Xyros. The notes
carry an annual interest rate of 10% with interest paid monthly. The notes were
due December 31, 1999, but the Company has negotiated to repay the loans as cash
flow permits.
F-10
11. INCOME TAXES
The components of the net deferred tax asset and liability as of
December 31, 2001 are as follows:
Effect of net operating loss carryforward $ 2,760,000
Less valuation allowance (2,760,000)
-----------
Net deferred tax asset (liability) $ -
===========
12. OPERATING LEASE
The Company is leasing office and warehouse space under an operating
lease for a term of five years beginning in May of 2001. Minimum future rental
payments under a non-cancelable operating lease having remaining terms in excess
of one year as of December 31, 2001 for each of the next five years and in the
aggregate are as follows:
Year ending December 31
2001 $ 18,000
2002 27,540
2003 28,366
2004 29,217
2005 30,094
2006 10,130
--------
Total minimum future rental payments $143,347
========
13. STOCK-BASED COMPENSATION
During the years ended December 31, 2001 the Company granted restricted
stock, incentive stock options, non-qualified 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 2001 and 2000 the Company issued the following shares under
this Plan and additional shares at the direction of the Board of Directors:
2001 2000
--------------------------------- -------------------------------
Number Expense Number Expense
of Shares Recognized of Shares Recognized
--------- ---------- --------- ----------
Officers and employees 1,607,500 $438,044 580,000 $244,310
Independent contractors
and consultants 1,104,500 285,190 803,000 338,242
--------- -------- ---------- --------
2,712,000 $723,234 1,383,000 $582,552
========= ======== ========= ========
Officers' and employees' compensation was based on the fair market
value of the common stock issued on the date of the grant less a discount of 10%
due to the restricted nature of the grant. Independent contractors and
consultants expense of was based on the estimated value of services rendered.
Stock Options and Warrants
--------------------------
The Company adopted the 1999 Stock Option Plan during the year
ended December 31, 1999. The Plan reserves 4,500,000 shares of the Company's
unissued common stock for options. Options, which may be tax qualified and
F-11
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 grant.
A summary of the Company's stock option activity and related
information for the year ended December 31, 2001 is as follows:
2001
-------------------------------------------------------------------
Common Weighted
Stock Average Range of
Options Exercise Price Exercise Prices
------- -------------- ---------------
Outstanding at beginning of year 107,690 $1.63 $0.01 - $2.07
Granted - - -
Exercised - - -
Expired/cancelled - - -
-------
Outstanding at end of year 107,690 $1.63 $0.01 - $2.07
======= ===== =============
2000
-------------------------------------------------------------------
Common Weighted
Stock Average Range of
Options Exercise Price Exercise Prices
------- -------------- ---------------
Outstanding at beginning of year 504,860 $1.56 $0.01 - $2.07
Granted - - -
Exercised (87,250) .01 .01
Expired/cancelled (309,920) 2.00 2.00
--------
Outstanding at end of year 107,690 $1.56 $0.01 - $2.07
======= ===== =============
The Company has issued warrants to purchase the Company's stock as follows:
2001
-------------------------------------------------------------------
Common Weighted
Stock Average Range of
Options Exercise Price Exercise Prices
------- -------------- ---------------
Outstanding at beginning of year 2,989,000 $1.97 $0.01 - $2.07
Granted 8,250,000 .48 .20 - .70
Exercised 4,600,000) .32 .20 - .40
Expired/cancelled (2,789,000) - -
----------
Outstanding at end of year 3,850,000 $ .49 $.20 - $.70
========= ===== ===========
F-12
2001
-------------------------------------------------------------------
Common Weighted
Stock Average Range of
Options Exercise Price Exercise Prices
------- -------------- ---------------
Outstanding at beginning of year 454,000 $2.00 $2.00
Granted 3,200,000 1.85 $0.50 - $2.25
Exercised (665,000) .50 .50
Expired/cancelled - - -
---------
Outstanding at end of year 2,989,000 $1.97 $1.25 - $2.25
========= ===== =============
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 year
ended December 31, 2001.
14. CONCENTRATION OF CREDIT RISK
The Company maintains a checking account in a commercial bank. Cash in
this checking account at times exceeded $100,000. The checking account is
insured by the Federal Deposit Insurance Corporation up to $100,000.
15. SUBSEQUENT EVENT
As discussed in Note 7 to the financial statements, 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 shares of the Company's common stock. Based on the then
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-13
Summarized unaudited financial statements for Milestone Technology,
Inc. as of and for the year ended December 31, 2001 are as follows:
Balance Sheet (Unaudited)
As of December 31, 2001
Assets
Current assets 399,232
Fixed assets 3,810
Licenses and patents 1,000,000
----------
Total assets $1,403,042
==========
Liabilities and Stockholders' Equity
Notes payable - current $ 620,000
Other current liabilities 183,000
Notes payable - long-term 184,000
----------
Total liabilities 987,000
Stockholders' equity 416,042
----------
Total liabilities and stockholders' equity $1,403,042
==========
Statement of Operations (Unaudited)
For the Year Ended December 31, 2001
Revenue $ 24,290
---------
Expenses:
Product development 328,318
Operating expenses 158,775
--------
Total expenses 487,093
--------
Net loss for the year $(462,803)
=========
F-14