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, 2005
[ ] 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.)
1550 Caton Center Drive, Suite E, Baltimore, Maryland 21227
------------------------------------------------------ ---------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (410) 242-8439
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. [ ]
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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Issuer's revenues for its most recent fiscal year: $1,172,163.
As of March 29, 2006 the issuer had 90,702,422 outstanding shares of common
stock. The aggregate market value of the registrant's voting stock held by
non-affiliates on that date was approximately $12,820,571.
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...........................................11
Item 3. Legal Proceedings.................................................11
Item 4. Submission of Matters to a Vote of Security Holders...............11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..........11
Item 6. Management's Discussion and Analysis or Plan of Operation.........13
Item 7. Financial Statements..............................................20
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................38
Item 8A. Controls and Procedures...........................................38
Item 8B. Other Information.................................................38
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act.................38
Item 10. Executive Compensation............................................39
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................40
Item 12. Certain Relationships and Related Transactions....................42
Item 13. Exhibits..........................................................42
Item 14. Principal Accountant Fees and Services............................43
Signatures.................................................................44
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.
2
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 of technologies we use in our digital video
recorder technology products and in our concealed weapons 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, Inc. develops, produces and markets computer software and
hardware systems for security and surveillance applications. In 1998 digital
video recorder technology was our first developed product and 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. In 2003 we sold this product
to places like the Ronald McDonald house and the University of Maryland
Medical Center. Other installations included schools, restaurants, night
clubs, car washers and car dealers (license plate recognition was incorporated
into these types of installations), ranches and gas stations. In these
installations we integrated the digital video recorded technology with other
electronic devices and we gained knowledge of the security needs of a wide
range of businesses.
We expanded our product line in 2002 to include a concealed weapons detection
system we call SecureScan. We have penetrated four major market segments for
this product: correctional facilities, courts, probation offices and federal
facilities in the Mid-Atlantic states, the West Coast and the South. In 2003
we added a hazardous material first response wireless video transmitting
system to our product line we refer to as Visual First Responder. The markets
for these units are first responder units such as the National Guard, Coast
Guard, Army, state law enforcement agencies and fire departments.
Until 2005 we assembled all of our products in-house, but we currently
contract with third party manufacturers to manufacture the SecureScan and
Visual First Responder products.
Products and Services
SecureScan Concealed Weapons Detection 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 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.
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
3
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. Our marketing efforts and sales
have been to courthouses, schools, correction facilities, and other
public/governmental facilities, rather than public airports.
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,
including its mass. Consequently, 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 or greater
size, such as a cell phone or compact camera. 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, it does not pose a problem for pacemakers.
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 visual image allows the operator to determine
what the object is without the need to conduct a personal search to locate the
object and look at it.
The SecureScan technology discriminates weapons from non-weapons by assuming
that possible threat objects will have ferromagnetic composition. The
SecureScan system promotes rapid, 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. Body cavity object identification is also a feature, 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 1,200 persons per hour.
4
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.
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. 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.
During 2005 we contracted with the University of Northern Florida to design
new sensor boards for the SecureScan product which has allowed us to reduce
the installed sensor cost by a factor of four. The new lower costs allow us
to offer price points to the market which compete directly with traditional
metal detectors. We sell these units for an average retail price of
approximately $10,000 with a one year extended warranty. We feel the new
reduced price points and enhanced interface abilities will allow us to be more
competitive, along with the advantages of three to four times the throughput
rate, non-contact imaging and permanent visual storage, and a log of all
individuals scanned. We are making additional cost reductions through
economies of scale and larger scale integration by taking advantage of ongoing
computer component improvements.
In February 2006 we demonstrated a SecureScan II product with a precision
optical biometric fingerprint terminal. We had developed this product with
Sagem Morpho, a multi-biometric solutions provider. In March 2006 the Georgia
Courts placed a purchase order for three Secure Scan II units with fingerprint
identification capabilities. We expect the demand for biometric interfaces to
increase. In addition to verifying that an individual is not carrying guns,
knives and sometimes cameras, the units can perform multi-modal double and
triple identity checks, including, fingerprint, drivers license and employee
identification card verification.
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. 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.
5
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 sell this base product for approximately $18,000 retail, but
the cost can be as high as $30,500 depending on additional special features
such as the extension link and encryption capabilities.
In March 2006 we introduced the Visual First Responder M2. This new product
allows "hands-free" operation of the unit because it allows the person to wear
the unit as a helmet mounted monocle.
We have entered into a cooperative research and development agreement with the
Idaho Engineering Lab for the Visual First Responder. 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.
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.
ViewMaxx 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.
Depending on the features of a particular system the retail price can range
from approximately $1,500 up to $6,500.
6
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.
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.
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.
In addition to school security, 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, county and
municipal buildings, and correctional facilities. We have installed our
7
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 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 initially manufactured the SecureScan portal internally at our facilities
in Baltimore, Maryland. 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. In
August 2005 we contracted with Inter-Connect Electronics, Inc. to manufacture
and assemble our Visual First Responder units. We also contracted with Sports
Field Specialties, LLC, a sheet metal manufacturer, to build the SecureScan
product line. If certain quality control issues can be worked out, then
manufacturing agreements may allow us to reduce our current backlog for our
product lines. We continue to entertain other manufacturing alternatives to
insure the lowest possible cost while maintaining the highest possible
quality.
Our third party manufacturers create 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.
Sales and Distribution
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 hired four in-house
regional sales persons and intend to develop a national sales channel model
and a distributor development program.
We use mailings and telephone calls to contact potential representatives in a
geographical area with the intent to arrange a demonstration of our products
to these persons. We attend region specific trade shows such as sheriff's
conventions, court administrators meetings, civil support team and state
police shows. Then we demonstrate or give trial offers in the area until a
sale is completed. Once we have completed a sale in a specific market area,
then we expand that market by contacting correctional facilities, courthouses
and other municipal buildings. We ship our products to the customer and each
product has an unconditional 30 day warranty, during which time the product
can be returned for a complete refund.
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.
8
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. Previously, we had chosen not
to pursue international markets, but are now evaluating potential sales in the
Middle East. We intend to continue our focus on domestic markets which are
less expensive to support and maintain.
Backlog
As of December 31, 2005, we had a backlog of $200,000, down from $700,000 at
September 30, 2005. 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.
Major Customers
During the year ended December 31, 2005 we had one customer, Battelle Energy
Alliance, L.L.C., that accounted for $149,050, or 11.9%, of our revenues.
These sales were related to product sales of our Visual First Responder.
Battelle Energy Alliance, L.L.C. is a science and technology organization that
develops and commercializes technology and manages laboratories for the
National Laboratories, Department of Defense and other clients.
Competition
We believe the introduction of digital technology to video surveillance and
security systems is our market opportunity. We believe that many of the
established closed-circuit television companies have approached the design of
their digital closed-circuit television products from the standpoint of
integrating their digital products to existing security and surveillance
product offerings. These systems are closed, not easily integrated with other
equipment and not capable of upgrades as technology improves. We have
designed our systems such that they are open, compatible with other digital
and analog systems, and 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.
9
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 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.
We enjoy the benefit of any continuations and improvements to the concealed
weapons detection technology performed by the government under the ongoing
contract between the Department of Energy and National Institute of Justice.
Our exclusive marketing agreement allows us to have cutting edge technology
without funding the research and development or patent applications.
We have obtained software licensing agreements for
.. software operating systems components,
.. fingerprint identification 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.
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, our products are subject to
certain government restrictions on sales to "unfriendly" countries and
countries designated as adversarial, which may limit our sales to the
international market. 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
10
enhancements of the concealed weapons detection technology and Visual First
Responder technology that are performed by the Department of Energy and the
National Institute of Justice. We also contract with engineers and other
third parties to develop or vary the design of our products and we record
these expenses as professional fees.
Employees
We employ 12 persons, including four sales executives, four engineers and two
office personnel. Two persons are part-time and we also contract with 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.
Investor Relations
On February 6, 2006 we entered into a consulting agreement with Elite Equity
Marketing, a Maryland limited liability company. We engaged Elite Equity to
provide consulting services for a term of three months in relation to
interactions between broker/dealers, shareholders and members of the public
and other matters related to investor/public relations, business modeling and
development and release of press articles. We agreed to pay Elite Equity
500,000 common shares along with 1,500,000 warrants exercisable in 500,000
increments starting in February 2005. Elite Equity has agreed to maintain
the confidentiality of secret, proprietary or non-public information. We
agreed to indemnify Elite Equity for legal and other expenses related to
litigation arising from the performance of its services and Elite Equity will
indemnify View Systems for legal and other expenses related to litigation
arising from Elite Equity's willful, negligent or inappropriate or illegal
representation or misrepresentation of the company.
ITEM 2. DESCRIPTION OF PROPERTY
We lease 4,600 square feet of office space in Baltimore, Maryland. The lease
term is three (3) years beginning on October 1, 2005, and expiring on
September 30, 2008. The base rent is approximately $3,000 per month subject
to an annual escalator of 3%. Management believes this facility will suit our
needs for the future. We also lease a sales, engineering and manufacturing
office in Jacksonville, Florida and a sales and engineering office in Los
Angeles, California.
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 2005
year.
PART II
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 range of 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. The high and low bid prices
were 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.
11
Year Quarter Ended High Bid Low Bid
---- ------------- -------- --------
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
2005 March 31 $ 0.165 $ 0.061
June 30 0.078 0.046
September 30 0.46 0.055
December 31 0.285 0.152
Our common shares are subject to Section 15(g) and Rule 15g-9 of the
Securities and Exchange Act of 1934 (the "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;
.. 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 stockholders to sell
their shares. The rules require broker-dealers who sell penny stocks to
persons other than established customers and accredited investors to make a
special suitability determination about the purchaser before 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 disclosing recent price information for the penny stocks.
HOLDERS
As of March 29, 2006 we had 349 stockholders of record, which does not include
shares held in "street accounts" of securities brokers that we estimate to be
approximately 4,500.
DIVIDENDS
We have not paid cash or stock dividends, have no present plan to pay any
dividends, and payment of any cash dividends on our common stock is unlikely.
Instead, we intend to retain any earnings to finance the operation and
expansion of our business
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 December 29, 2005, we issued 85,000 shares to Jennifer Seymour for $12,750,
we issued 120,000 shares to Tim Clark for $18,000 and we issued 85,000 shares
to John V. Addeo, Sr. 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 27, 2005, we authorized the issuance of options to purchase
2,500,000 shares to Business
12
Development Corporation, Inc., a Nevada corporation. Business Development
Corporation, Inc. provides consulting services related to financing, public
relations, business modeling and corporate development related to
acquisitions, mergers and financing. 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 23, 2005, we issued 100,000 shares to Mark Mintz for $15,000. 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 November 17, 2005, we issued 70,000 shares to Doug Coombs for $10,500. 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 October 6, 2005, we authorized the issuance of 10,000 shares per month to
John F. Alexander for engineering consulting. 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 issuances of our securities, we
believe that each purchaser:
.. was aware that the securities had not been registered under federal
securities laws;
.. acquired the securities for his/its own account for investment purposes
and not with a view to or for resale in connection with any distribution
for purposes of the federal securities laws;
.. understood that the securities would need to be indefinitely held unless
registered or an exemption from registration applied to a proposed
disposition; and
.. was aware that the certificate representing the securities would bear a
legend restricting their transfer.
ISSUER PURCHASE OF SECURITIES
None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
EXECUTIVE OVERVIEW
Our product lines are related to visual surveillance, intrusion detection and
physical security. Management believes that heightened attention to personal
threats potential large scale destruction and theft of property in the United
States and spending by the United States government on Homeland Security will
continue to drive growth in the market for security products.
During 2004 we increased our product lines to include our Visual First
Responder and during 2005 we had engineering design changes made to the
sensor boards for the SecureScan product to allow lower costs and to
accommodate the price points required by competitive pressures. Also, in 2005
we redesigned and outsourced the assembly and manufacture of the Visual First
Responder and SecureScan products.
During 2005 we continued to establish new partnerships, add active resellers
and dealers and we hired four sales representatives to build a United States
domestic network for the sale and distribution of our products within the 48
states. These developments have led to increased sales while at the same time
decreasing the cost of products. We intend to develop these sales and
distribution channels to a level that will result in increased revenues and
continued profitability. We have completed sales in the correctional facility
market, some Homeland Security departments and some sports venues.
For the next twelve months our primary challenge will be to add new products
and develop our sales and distribution network into additional regions and
markets in the United States and abroad. We intend to increase sales by
offering demonstrations of our products in specific geographical areas to
potential customers or at region specific trade
13
shows, such as sheriff's conventions, court administrators' meetings, civil
support team, state police shows and dealers shows. When a demonstration
results in a sale of one of our products, then we attempt to expand that
market by contacting other potential customers in the area, such as,
correctional facilities, courthouses and other municipal buildings. After
several sales in a particular geographic area management will decide whether
it is appropriate to open a sales and service office.
In 2006 we will add three additional products which relate to sensing enriched
nuclear material which may be used to build nuclear based explosive devices or
for creating radiological disasters. These sensing devices will be integrated
into our current products in addition to being used as stand alone handheld
portable detectors. These products are based on existing patents owned by the
United States government and are licensed exclusively to View Systems for the
purpose of commercializing them for the public good.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses for the past two fiscal years and had a net loss of
$2,243,976 at December 31, 2005. Approximately $1.5 million of this loss is
due to compensation expense recognized for shares issued for services. Our
revenues from product sales have been increasing but are not sufficient to
cover our operating expenses. Our auditors have expressed substantial doubt
that we can continue as a going concern. We are in default on some of our debt
obligations at December 31, 2005 but continue to make payments. We have some
financing commitments in place, but not enough to meet our expected cash
requirements for 2006.
Management intends to finance our 2006 operations with the revenue from
product sales and any cash short falls will be addressed through equity
financing. In December 2005 we completed a subscription agreement, discussed
below in "Commitments and Contingent Liabilities", that will provide for the
purchase of convertible promissory notes through $100,000 installments over a
five month period. We will use this cash for marketing, working capital, and
to enhance our presence in other geographical regions.
Historically, we have relied on private financing and revenues to satisfy our
cash requirements for working capital. For the year ended December 31, 2005 (
"2005") we received cash from revenues of $1,172,163, proceeds of $312,534
from sales of our common stock and relied on advances of $64,000 from Gunther
Than, our CEO. For the year ended December 31, 2004 ("2004"), we received
cash from revenues of $476,319, received proceeds of $933,800 from debt
financing, proceeds of $157,900 from sales of common stock, and received
advances from Mr. Than totaling $132,000. Due to the increase in revenues in
2005 we were less reliant on financing. Net cash provided by financing
decreased in 2005 to $338,034 from $1,003,700 in 2004.
We use our cash for working capital and at our current revenue levels we will
require an additional $500,000 during the last half of 2006 to cover our
operating costs of approximately $100,000 per month. These operating costs
include cost of sales, general and administrative expenses, salaries and
benefits and professional fees related to contracting engineers. The
engineering efforts were mainly applied to unit cost reduction of the
SecureScan product which has been reduced in cost by more than 50% from $8,450
to $4,200 per unit.
We also rely on the issuance of our common stock to pay for services and to
convert debt when cash is unavailable. In 2004 we issued 1,934,850 shares for
services valued at $353,604 and 5,221,050 shares for debt valued at $702,105.
In 2005 we issued 10,106,000 shares for services valued at $1,856,862 and
128,000 shares to convert debt of $19,000. As of the date of this filing we
have approximately 9,000,000 authorized common shares remaining and management
believes we will need to take the necessary steps to increase our authorized
common stock during 2006.
Management believes revenues will continue to increase but not to the point of
profitability in the short term. We will need to continue to raise additional
capital, both internally and externally, to cover cash shortfalls and 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 reduce our expenses and
scale back our operations.
14
COMMITMENTS AND CONTINGENT LIABILITIES
Our base rent for operating leases related to our principal office and
manufacturing facility is approximately $2,870 per month, with an annual rent
escalator of 3%. Rent expense was $81,216 for 2005 compared to $61,047 for
2004. At December 31, 2005, future minimum payments for operating leases
related to our office and manufacturing facility were $97,646 through December
31, 2008.
Our total current liabilities at December 31, 2005 included accounts payable
of $343,430, accrued expenses of $43,229, accrued interest of $77,000, accrued
royalties of 75,000, loans to an officer of 64,000 and notes payable of
$110,000.
At December 31, 2004 we were in default on our debt obligations and did not
have financing commitments in place to meet our expected cash requirements.
Our auditors expressed substantial doubt that we could continue as a going
concern based on these operating losses. To remedy this situation on
September 22, 2005, we arranged for three accredited investors to pay notes
payable of $237,357 that we owed to Niki Group, LLC and Compass Equity
Partners LLC. In consideration for the pay-off of this debt our board of
directors authorized the issuance of an aggregate of 2,390,000 shares to three
investors. Starr Consulting, Inc. received 597,500 shares for $60,000 paid on
the debt; Power Network, Inc. received 597,500 shares for $60,000 paid on the
debt; and YT2K, Inc. received 1,195,000 shares for $120,000 paid on the debt.
Subscription Agreement
We entered into a Subscription Agreement, dated December 23, 2005, with three
accredited investors; Starr Consulting, Inc., Active Stealth, LLC, and KCS
Referral Service LLC (the "Subscribers"). We agreed to sale and the
Subscribers agreed to purchase convertible promissory notes and warrants.
However, on January 6, 2006, the Subscribers consented to the removal of the
warrants from the subscription agreement, with the understanding that the
warrants would be reinstated after we increased our authorized common stock
and the shares underlying the warrants would be registered at a later date.
The Subscribers agreed to purchase up to an aggregate of $500,000 of 8%
promissory notes convertible into shares of our common stock at a per share
conversion price of $0.10. The notes are due and payable by December 31,
2006. The Subscribers agreed to purchase the promissory notes over a 5 month
period in $100,000 per month installments.
Starr Consulting, Inc. agreed to purchase convertible promissory notes in the
aggregate amount of $166,667, which may be converted into 1,666,667 shares of
our common stock. Active Stealth, LLC and KCS Referral Service LLC each
agreed to purchase convertible promissory notes in the aggregate amount of
$166,666, convertible into 1,666,666 common shares. On January 3, 2006, we
closed the first $100,000 installment under this agreement and Starr
Consulting purchased promissory notes valued at $33,334, Active Stealth
purchased promissory notes of $33,333 and KCS Referral Service purchased
promissory notes valued at $33,333. In March 2006 we terminated this
agreement with KCS Referral Service LLC.
The agreement provides for piggy back registration rights for the shares
underlying the convertible promissory notes. The agreement provides that we
must file a registration statement within 60 days of a request by any
Subscriber and cause the registration statement to become effective within 120
days of that request. We are obligated to maintain the effectiveness of the
registration statement until all the underlying shares have been sold by the
Subscribers. If we fail to obtain or maintain effectiveness of the
registration statement, then we are required to pay liquidated damages in an
amount equal to 2% of the purchase price of the convertible promissory notes
remaining unconverted and the purchase price of the shares issued upon
conversion of the notes owned of record by the holder of the notes for each 30
day period that the registration statement is not effective. We filed a
registration statement on Form SB-2 on October 12, 2005 to register the
underlying shares, but as of the date of this filing, the registration
statement has not been declared effective.
If we fail to issue shares within 10 business days after a request by a
Subscriber, then the Subscriber is entitled to a sum of money, whichever is
greater of either (i) multiplying the outstanding principal amount of the note
designated
15
by the Subscriber by 130%, or (ii) multiplying the number of shares
deliverable upon conversion of the amount of the note's principal and/or
interest at the conversion price that would be in effect on the deemed
conversion date by the highest closing price of the common stock on the
principal market for the period commencing on the deemed conversion date until
the day prior to the receipt of the payment.
OFF-BALANCE SHEET ARRANGEMENTS
None.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. Estimates of
particular significance in our financial statements include annual tests for
impairment of our licenses. These estimates could likely be materially
different if events beyond our control, such as changes in government
regulations that affect the usefulness of our licenses or the introduction of
new technologies that compete directly with our licensed technologies affect
the value of our licenses.
We first determine the value of the license using a projected cash-flow
analysis to determine the present value of cash flows. The test is done using
assumptions as to various scenarios of increases and decreases in the revenue
stream and applying a discount rate of 6%. If the value achieved under these
various methods is less than the carrying value of the assets then it is
considered that an impairment has occurred and the asset's carrying value is
adjusted to reflect the impairment.
Management also makes estimates on the useful life of our licenses based on
the following criteria:
.. Whether other assets or group of assets are related to the useful life
of the licenses,
.. Whether any legal, regulatory or contractual provisions will limit the
use of the assets,
.. We evaluate the cost of maintaining the license,
.. We consider the possible effects of obsolescence, and
.. Whether there is maintenance or any other costs associated with the
license.
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, 2005 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 2005 and 2004 Fiscal Year Operations
----------------------------------------------------------
2005 2004
------------ -------------
Revenues, net $ 1,172,163 $ 476,319
Cost of sales 629,319 257,179
Gross profit (loss) 542,844 219,140
Total operating expenses 2,900,136 1,369,474
Loss from operations (2,357,292) (1,150,334)
16
Total other income (expense) (11,684) (36,144)
Net income (loss) (2,368,976) (1,186,478)
Net earnings (loss) per share $ (0.03) $ (0.02)
Revenue is considered earned when the product is shipped to the customer. The
concealed weapons system and the digital video system each require
installation and training. Training is a revenue source separate and apart
from the sale of the product. In those cases revenue is recognized at the
completion of the installation and training.
Our marketing efforts have increased sales of our SecureScan and Visual First
Responder and resulted in increased revenues for 2005 compared to 2004.
Management anticipates that increases in revenues will continue as we develop
our sales and marketing channels and establish local sales and service offices
in geographic areas where we have already completed sales. The increased net
revenues for 2005 resulted in an increased gross profit for 2005 compared to
2004.
The following chart provides a breakdown of our sales in 2004 and 2005.
Dec. 31, 2004 Dec. 31, 2005
------------- -------------
Secure Scan $ 24,800 $ 727,895
ViewMaxx 153,271 50,412
Visual First Responder 296,100 362,340
Service 2,148 31,516
Our backlog at December 31, 2005, was $200,000, down from $700,000 at
September 30, 2005. The reduction in backlog is primarily a result of
outsourcing our manufacturing. Our back log is more manageable and is in part
carried by the third party manufacturers because purchase orders are placed
with the manufacturers and they receive payment when we receive payment from
the customer. However, the delay between the time of the purchase order and
shipping of the product results in a delay of recognition of the revenue from
the sale. This delay in recognition of revenues will continue as part of our
results of operations.
Cost of sales include costs of products sold and shipping costs and were
approximately 54% of net revenues for both 2004 and 2005. Management
anticipates that the relative margins of each product line should remain
relatively the same during 2006.
For 2005 total operating expense increased in 2005 compared to 2004. The
increase in 2005 was primarily a result of $1,774,696 of professional fees
expense. Approximately $1.5 million of the professional fees expense is
related to consulting contracts with third parties for legal, corporate
development and investor relations services. Management anticipates that our
professional fees related to consulting contracts will decrease in the next
quarter due to the non-recurring nature of these third party consulting
contracts.
Total other expense for the 2005 and 2004 comparable periods was related to
interest on loans. Management anticipates interest expense to increase as a
result of the subscription agreement with the Subscribers, described above,
and our need to seek further private financing in the future to cover cash
shortfalls.
Management believes net losses will continue in the short term as we expand
our sales channels.
FACTORS AFFECTING FUTURE PERFORMANCE
Our independent auditors have expressed substantial doubt whether we can
continue as a going concern.
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. Our net loss for the year ended December 31, 2005 was
17
$2,368,976 and our net loss for the year ended December 31, 2004 was
$1,186,478. Our retained deficit was $18,060,472 at December 31, 2005. 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 expand our sales channels. 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. As a
result we rely on private financing to cover cash shortfalls.
We need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require approximately
$500,000 in additional financing within the next twelve months to develop our
sales channels. 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
loans. If we issue our securities for capital, then the interests of
investors and stockholders will be diluted.
We are currently dependent on the efforts of resellers for our continued
growth and must expand our sales channels to increase our revenues and
further develop our business plans.
We are in the process of developing and expanding our sales channels, but we
expect overall sales to remain down as we develop these sales channels. We are
actively recruiting additional resellers and dealers and have hired
in-house sales personnel for regional and national sales. We must continue to
find other methods of distribution to increase our sales. If we are
unsuccessful in developing sales channels we may have to abandon our business
plan.
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 the
Department of Energy and National Institute of Justice for continuations and
improvements to the Visual First Responder. 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 Visual First Responder and the SecureScan
portal 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
18
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.
Our directors and officers are able to exercise significant influence
over matters requiring stockholder approval.
Currently, our directors and executive officers collectively hold
approximately 58.8% of the voting power of our common and preferred stock
entitled to vote on any matter brought to a vote of the stockholders.
Specifically, Gunther Than, our CEO, holds approximately 57.0 % of the total
voting power as of the date of this report. Pursuant to Nevada law and our
bylaws, the holders of a majority of our voting stock may authorize or take
corporate action with only a notice provided to our stockholders. A
stockholder vote may not be made available to our minority stockholders, and
in any event, a stockholder vote would be controlled by the majority
stockholders. As a result, our minority stockholders may not have the
opportunity to approve or consent to corporate actions or other transactions.
This concentration of ownership may also have the effect of delaying or
preventing a change in control.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss
of investor confidence in our reported financial information.
Pursuant to proposals related to Section 404 of the Sarbanes-Oxley Act of
2002, beginning with our Annual Report on Form 10-KSB for the fiscal year
ending December 31, 2007, we will be required to furnish a report by our
management on our internal control over financial reporting. If we cannot
provide reliable financial reports or prevent fraud, then our business and
operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop
significantly.
In order to achieve compliance with Section 404 of the Act within the
prescribed period, we will need to engage in a process to document and
evaluate our internal control over financial reporting, which will be both
costly and challenging. In this regard, management will need to dedicate
internal resources, engage outside consultants and adopt a detailed work plan.
During the course of our testing we may identify deficiencies which we may not
be able to remediate in time to meet the deadline imposed by the
Sarbanes-Oxley Act for compliance with the requirements of Section 404. In
addition, if we fail to achieve and maintain the adequacy of our internal
controls, as such standards are modified, supplemented or amended from time to
time, we may not be able to ensure that we can conclude on an ongoing basis
that we have effective internal controls over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective
internal controls, particularly those related to revenue recognition, are
necessary for us to produce reliable financial reports and are important to
helping prevent financial fraud.
19
ITEM 7. FINANCIAL STATEMENTS
VIEW SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
C O N T E N T S
Independent Accountant Firm Report.........................................21
Balance Sheets.............................................................22
Statements of Operations...................................................23
Statements of Stockholders' Equity.........................................24
Statements of Cash Flows................................................25-26
Notes to the Financial Statements.......................................27-37
20
Chisholm 533 West 2600 South, Suite 25
Bierwolf & Bountiful, Utah 84010
Nilson, LLC Phone: (801) 292-8756
Certified Public Accountants Fax: (801) 292-8809
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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., (the Company) as of December 31, 2005, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
the years ended December 31, 2005 and 2004. 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 audits.
We conducted our audits in accordance with standards of the PCAOB (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 is not required to have, nor were
we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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,
2005 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 2005 and
2004 present fairly, in all material respects, the financial position of the
Company as of December 31, 2005, and the results of operations and cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of View Systems, Inc. as of
December 31, 2005 and the result of its operations, and its cash flows for the
years ended December 31, 2005 and 2004 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
ongoing operating losses and does not currently have financing commitments in
place to meet expected cash requirements through 2006. Additionally, the
Company is in default on some of 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 1, 2006
21
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
-------
December 31,
2005
-------------
Current Assets
Cash $ 8,708
Accounts Receivable(Net of Allowance of $68,539) 280,001
Inventory 72,012
-------------
Total Current Assets 360,721
-------------
Property & Equipment (Net) 18,043
-------------
Other Assets
Licenses 1,626,854
Due from Affiliates 95,575
Deposits 7,291
-------------
Total Other Assets 1,729,720
-------------
Total Assets $ 2,108,484
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts Payable $ 343,430
Accrued Expenses 43,229
Accrued Interest 77,000
Accrued Royalties 75,000
Loans from Shareholder 64,000
Notes Payable 110,000
-------------
Total Current Liabilities 712,659
-------------
Stockholders' Equity
Preferred Stock, Authorized 10,000,000 Shares,
$.01 Par Value, Issued and outstanding 7,171,725 71,717
Common Stock, Authorized 100,000,000 Shares,
$.001 Par Value, Issued and Outstanding 90,775,752 90,776
Additional Paid in Capital 19,293,804
Retained Earnings (Deficit) (18,060,472)
-------------
Total Stockholders' Equity 1,395,825
-------------
Total Liabilities and Stockholders' Equity $ 2,108,484
=============
The accompanying notes are an integral part of these
consolidated financial statements.
22
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended
December 31,
---------------------------
2005 2004
------------- -------------
(Restated)
Revenues, Net $ 1,172,163 $ 476,319
Cost of Sales 629,319 257,179
------------- -------------
Gross Profit (Loss) 542,844 219,140
------------- -------------
Operating Expenses
General & Administrative 347,016 281,127
Professional Fees 1,774,696 286,323
Bad Debts 48,485 148,928
Salaries & Benefits 729,939 653,096
------------- -------------
Total Operating Expenses 2,900,136 1,369,474
------------- -------------
Net Operating Income (Loss) (2,357,292) (1,150,334)
------------- -------------
Other Income(Expense)
Interest Expense (11,684) (36,144)
------------- -------------
Total Other Income(Expense) (11,684) (36,144)
------------- -------------
Net Income (Loss) $ (2,368,976) $ (1,186,478)
============= =============
Net Income (Loss) Per Share $ (0.03) $ (0.02)
============= =============
Weighted Average Shares Outstanding 80,462,924 68,924,152
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
23
View Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Retained
Preferred Common Paid-in Earnings
Shares Amount Shares Amount Capital (Deficit)
------------- ----------- ------------- ---------- ------------- -------------
Balance, December 31, 2003 - $ - 62,730,619 $ 62,730 $ 15,604,609 $(14,505,018)
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 (15,691,496)
January - March 2005 -
shares issued for cash - - 155,000 155 15,345 -
January - March 2005 -
shares issued in payment
of accounts payable - - 128,000 128 18,872 -
January - March 2005 -
shares issued for services - - 1,805,000 1,805 191,335 -
April - June 2005 -
shares issued for cash - - 2,287,500 2,288 114,713 -
April - June 2005 -
shares issued for services - - 1,242,000 1,242 77,004 -
July - September 2005 -
shares issued for cash - - 612,000 612 55,588 -
July - September 2005 -
shares issued for services - - 150,000 150 37,998 -
July - September 2005 -
shares issued 7,171,725 71,717 - - - -
October - December 2005 -
shares issued for cash - - 953,330 953 122,880 -
October - December 2005 -
shares issued for services - - 6,909,000 6,909 1,540,473 -
Net loss for the year ended
December 31, 2005 - - - - - (2,368,976)
------------- ----------- ------------- ---------- ------------- -------------
Balance, December 31, 2005 7,171,725 $ 71,717 90,775,752 $ 90,776 $ 19,293,804 $(18,060,472)
============= =========== ============= ========== ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
24
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
---------------------------
2005 2004
------------- -------------
(Restated)
Cash Flows from Operating Activities:
Net Income (Loss) $ (2,368,976) $ (1,186,478)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 15,861 29,890
Bad Debts 48,485 148,928
Bad Debts recoveries
Accrued interest paid with stock - 13,987
Stock Issued for Services 1,928,633 353,604
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (220,144) (32,182)
Inventories (10,815) 32,044
Other Assets (4,972) 2,500
Increase (Decrease) in:
Accounts Payable 96,655 (208,439)
Accrued Expenses 28,681 (3,967)
------------- -------------
Net Cash Provided(Used) by Operating Activities (486,592) (850,113)
Cash Flows from Investing Activities:
Additions to fixed assets (19,102) -
Advances (to)/ receipt from related party 2,882 -
------------- -------------
Net Cash Provided (Used) by Investing Activities (16,220) -
Cash Flows from Financing Activities:
Funds advanced (to) from stockholders 64,000 -
Proceeds from debt financing - 933,800
Proceeds from stock issuance 312,534 157,900
Cost of issuance of common stock - (5,000)
Principal Payments on Notes Payable (38,500) (83,000)
------------- -------------
Net Cash Provided (Used) by Financing Activities 338,034 1,003,700
------------- -------------
Increase (Decrease) in Cash (164,778) 153,587
Cash and Cash Equivalents at Beginning of Period 173,486 19,899
------------- -------------
Cash and Cash Equivalents at End of Period $ 8,708 $ 173,486
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
25
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Year Ended
December 31,
---------------------------
2005 2004
------------- -------------
(Restated)
Cash Paid For:
Interest $ 684 $ 25,144
Income Taxes $ - $ -
Non-Cash Investing and Financing Activities:
Stock Issued in payment for Note Payable $ - $ 833,300
Stock issued in payment of accounts payable $ 19,000 $ 200,000
The accompanying notes are an integral part of these
consolidated financial statements.
26
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
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.
Accounts Receivable
-------------------
Accounts receivable consists of amounts due from customers. Management
periodically reviews the open accounts and makes a determination as to the
ultimate collectibility of each account. Once it is determined that
collection is in doubt the account is written off as a bad debt. In order to
provide for accounts that may become uncollectible in the future, the Company
has established an allowance for doubtful accounts. The balance of the
allowance for doubtful accounts is based on management's judgment and the
Company's prior experience with managing accounts receivable.
27
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
-------------------
The Company has three main products, namely the concealed weapons
detection system, the visual first responder system and the Viewmaxx digital
video system. In all cases revenue is considered earned when the product is
shipped to the customer. The concealed weapons system and the digital video
system each require installation and training. The customer can engage us for
installation and training, which is a revenue source separate and apart from
the sale of the product. In those cases revenue is recognized at the
completion of the installation and training. However, the customer can also
self install or can engage another firm to provide installation and training.
Each product has an unconditional 30 day warranty, during which time the
product can be returned for a complete refund. Prior to the issuance of
financial statements management reviews any returns subsequent to the end of
the accounting period which are from sales recognized during the accounting
period, and makes appropriate adjustments as necessary. Product prices are
fixed or determinable and products are only shipped when 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, 2005 consisted of finished goods.
Property and Equipment
----------------------
Property and equipment is recorded at cost and depreciated over their
useful lives, using the straight-line and accelerated depreciation methods.
Upon sale or retirement, the cost and related accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
included in the results of operations. The useful lives of property and
equipment for purposes of computing depreciation are as follows:
Equipment 5-7 years
Software tools 3 years
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, 2005 and 2004 amounted to $15,861 and $29,890,
respectively.
28
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2005. It was determined to not be
impaired. Pursuant to SFAS No. 142, the license will not be amortized, rather
the valuation of this intangible will be reviewed periodically.
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.
29
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advertising
-----------
Advertising costs are charged to operations as incurred. Advertising
costs for the years ended December 31, 2005 and 2004 were $26,024 and $10,214.
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 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, 2005
and 2004 does not include potential shares of common stock equivalents, as
their impact would be antidilutive. The following reconciles amounts reported
in the financial statements:
Income Shares Per-share
(Numerator) (Denominator) Amount
------------- ------------- --------
Year ended December 31, 2005
----------------------------
Income (loss) from continuing operations
which is the amount that is available
to common stockholders $ (2,243,976) 80,462,924 $ (0.03)
Basic and fully diluted earning per share $ (0.03)
30
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net Loss Per Common Share
-------------------------
Year ended December 31, 2004
----------------------------
Income (loss) from continuing operations
which is the amount that is available
to common stockholders $ (1,186,478) 68,924,152 $ (0.02)
Basic and fully diluted earning per share $ (0.02)
As of December 31, 2005 and 2004 there were unexercised options for
107,690 shares. However due to operating losses in both years, these shares
are considered to be antidilutive in nature.
2. GOING CONCERN
The Company has incurred and continues to incur, losses from operations.
For the years ended December 31, 2005 and 2004, the Company incurred net
losses of $2,368,976 and $1,186,478, respectively. During 2005 and 2004, the
Company implemented marketing and information strategies to increase public
awareness of its products and thereby sales. It also was able to reduce the
per unit cost of manufacturing its products. Additionally, the Company has
increased the efficiency of its processes and focused its development efforts
on products with greater sales potential.
Historically, the Company has financed its operations primarily through
private financing however increases in sales revenue during 2005 made a
significant contribution to working capital. It is management's intention to
finance operations during 2006 primarily through increased sales although
there will still be a need for additional equity financing. There can be no
assurance, however, that this financing will be successful and the Company may
be required to further reduce expenses and scale back operations.
3. NEW ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued statement No. 154, "Accounting Changes and
Error Corrections", a replacement of APB Opinion No. 20, "Accounting Changes"
and a replacement of FASB Statement No. 3, "Reporting Accounting Changes in
Interim Financial Statements". FASB 154 changes the accounting for, and
reporting of, a change in accounting principle. The statement requires
retrospective application to prior period's financial statements of voluntary
changes in accounting principles and changes required by new accounting
standards when the standard does not include specific transition provisions,
unless it is impracticable to do so.
31
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. NEW ACCOUNTING PRONOUNCEMENTS
statement is effective for accounting changes and corrections of errors in
fiscal years beginning after December 15, 2005. Earlier application is
permitted for accounting changes and corrections of errors during fiscal years
beginning after June 1, 2005.
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.
32
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
3. NEW ACCOUNTING PRONOUNCEMENTS
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 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.
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.
33
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
5. DUE FROM AFFILIATED ENTITIES
The Company has advanced non-interest bearing funds of $95,575 as of
December 31, 2005 and $98,478 as of December 31, 2004 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. Management does not believe the advance to be uncollectible.
6. NOTE PAYABLE
Notes payable as of December 31, 2005 consist of $110,000 due former
stockholder of Xyros Technology. The loan is due on demand, interest at 10%
per annum.
The note , which was acquired by the Company in 1999 was due December 31, 1999
but the Company has negotiated to repay the loan as cash flow permits.
7. INCOME TAXES
The components of the net deferred tax asset and liability as of
December 31, 2005 are as follows:
Effect of net operating loss carryforward $ 8,363,154
Less evaluation allowance (8,363,154)
--------------
Net deferred tax asset (liability) $ -
==============
The components of income tax expense (benefit) are as follows:
Year ended December 31,
2005 2004
--------------- --------------
Net loss per financial statements which
approximates net loss per income
tax returns $ (2,368,976) $ (1,186,478)
Income tax expense (benefit) applying
prevailing Federal and state income
tax rates (914,898) (458,218)
Less valuation allowance 914,898 458,218
--------------- --------------
Net income tax expense (benefit) $ - $ -
=============== ==============
Net income tax benefit is not recognized at this time because there is
no reasonable expectation that the benefit will be realized in the future.
34
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
8. PREFERRED STOCK
In July 2005 the Company issued 7,171,725 shares of Series A Preferred
Stock in payment of services. The issuance had been previously authorized by
the Board of Directors. Each share of Series A Preferred Stock has a
liquidation preference, in the event of liquidation of the corporation, of
$0.01 per share before any payment or distribution is made to the holders of
common stock. The Series A Preferred has no conversion rights into common
stock. Each share is entitled to fifteen votes and shall be entitled to vote
on any matters brought to a vote on the common stock shareholder.
9. OPERATING LEASE
The Company leases office and warehouse space in Baltimore, Maryland
under a three-year noncancellable operating lease, expiring October 2008.
Base rent is $2,872 per month with an annual rent escalator of 3%. Rent
expense was $81,216 and $61,047 for the years ended December 31, 2005 and
2004, respectively.
The following is a schedule by year, of approximate future minimum lease
payments required under this lease:
Year ending December 31:
2006 34,464
2007 35,762
2008 27,420
----------
Total minimum future rental payments $ 97,646
==========
10. STOCK BASED COMPENSATION
During the years ended December 31, 2005 and 2004 the Company granted
restricted stock, incentive stock options, nonqualified stock options, and
warrants to employees, officers, and independent contractors and consultants.
35
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
10. STOCK BASED COMPENSATION
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 2005 and 2004, the Company issued the following shares
under this Plan and additional shares at the discretion of the Board of
Directors:
2005 2004
----------------------- -----------------------
Number Expense Number Expense
of Shares Recognized of Shares Recognized
----------- ----------- ----------- -----------
Officers and employees 2,907,000 $ 294,540 702,000 $ 144,480
Independent contractors
and consultants 7,199,000 1,562,376 1,502,850 209,124
----------- ----------- ----------- -----------
Total 10,106,000 $1,856,916 2,725,000 $ 353,604
=========== =========== =========== ===========
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.
Stock Options and Warrants
--------------------------
The Company adopted the 1999 Stock Option Plan during the year ended
December 31, 1999. The Plan reserves 4,500,000 shares of the Company's
unissued common stock for options. Options, which may be tax qualified and
non-qualified, are exercisable for a period of up to ten years at prices at or
above market price as established on the date of the grant.
A summary of the Company's common stock option activity and related
information for the years ended December 31, 2005 and 2004 is as follows:
2004
------------------------------------------
Common Weighted
Stock Average Range of
Options Exercise Price Exercise 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
========== ============== =================
36
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
10. STOCK BASED COMPENSATION
2005
------------------------------------------
Common Weighted
Stock Average Range of
Options Exercise Price Exercise Price
---------- -------------- ----------------
Outstanding at beginning of year 107,690 $ 1.63 $ .01 - 2.07
Granted - - -
Exercised - - -
Expired/Cancelled - - -
---------- -------------- ----------------
Outstanding at end of year 107,690 $ 1.63 $ .01 - 2.07
========== ============== ================
The Company has 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, 2005 and 2004.
11. RELATED PARTY TRANSACTIONS
In order for the Company to meet its financial obligations, the
Company's President, Gunther Than, loans the Company funds on occasion and is
repaid when funds are available. During 2005 and 2004 Mr. Than advanced to
Company a total of $64,000 and $132,000, respectively. Amounts paid back to
Mr. Than in 2005 totaled $0 in 2005 and $132,000 in 2004, leaving balances due
as of December 31, 2005 and 2004 of $64,000 and $0, respectively.
12. RECLASSIFICATION
The statement of operations for the year ended December 31, 2004 was
adjusted for presentation reclassifications. Bad debt expense in the amount
of $148,928 was moved from other income and expenses to operating expenses.
The effect was a decrease in the loss from operations of $148,928. There was
no change to net income for the year.
37
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
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Exchange
Act is recorded, processed, summarized and reported within the periods
specified in the rules and forms of the SEC. This information is accumulated
and communicated to our executive officers to allow timely decisions regarding
required disclosure.
Our Chief Executive Officer, who also acts in the capacity of principal
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the fiscal year 2005. He concluded that our
disclosure controls and procedures were not effective as of December 31, 2005.
His evaluation identified a weakness in our disclosure controls and procedures
with respect to accounting entries related to loans receivable and payable to
our executive officers. An error was made in 2004 where a payment from Mr.
Than was incorrectly recorded as a loan to Mr. Than. As a result of this
error, we were required to restate our financial statements for the year ended
December 31, 2004 and the interim quarterly financial statements for 2005.
Management is taking steps to implement appropriate corrective action
including, but not limited to, changes to the way we process advances and
payments to a director and executive officer.
Other than the actions described above, there has been no change in our
internal control over financial reporting during the year ended December 31,
2005 that has materially affected, or is reasonably likely to materially
affect, 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 58 Chief Executive Officer, Treasurer, September 1998
and Director
Michael L. Bagnoli 50 Secretary and Director May 1999
Martin Maassen 63 Director May 1999
38
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., a company that
developed compression technology and computer equipment. Real View Systems
was acquired by View Systems in 1998. Mr. Than is the founder, President and
CEO of View Technologies, Inc., a software development company, and he
continues in those positions. 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. From
September 1995 to the present he is a staff physician at Lafayette Emergency
Care, P.C. located in Lafayette, Indiana. 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,
2005, and representations from reporting persons whether Forms 5 were not
required, we believe Mr. Than filed late three Forms 4 related to 16
transactions. Mr. Maassen filed late two Forms 4 related to 7 transactions.
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.
39
SUMMARY COMPENSATION TABLE
---------------------------
Annual Compensation
Fiscal
Name and Principal Position Year Salary Other
------------------------------ ------- ------------- --------------
Gunther Than 2005 $100,000 (1) $ 0
CEO, Treasurer 2004 100,000 (1) 120,000 (2)
Director 2003 100,000 (1) 138,000 (3)
Michael L. Bagnoli 2005 $ 0 $ 12,000 (4)
Director and Secretary 2004 0 0
2003 0 0
(1) Represents accrued salary.
(2) Represents 600,000 common shares issued as compensation.
(3) Represents 1,150,000 common shares issued as compensation.
(4) Represents 120,000 common shares issued as compensation.
COMPENSATION OF DIRECTORS
We compensate our independent directors with 5,000 shares of our common stock
for each month of service. We determined independence in accordance with by
NASD Rule 4200(a)(15). 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. As
an independent director Mr. Maassen accrued 60,000 shares for the year ended
December 31, 2005. As of the date of this filing, we have not issued the
accrued shares to Mr. Maassen.
EMPLOYMENT CONTRACTS
Mr. Than entered into an employment agreement with us and agreed to serve as
our Chief Executive Officer, effective January 1, 2003. Mr. Than's employment
is "at will" and 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
thirty (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 at the year ended December
31, 2005.
40
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 0 $ 0. 00 0
------------------------------------------------------------------------------
Equity
compensation
plans not
approved by
security
holders 107,690 1.63 4,392,310
------------------------------------------------------------------------------
Total 107,690 $ 1.63 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 during 2002, 2,725,000 shares in 2003 and 2,204,850 for the
2004 year. Under the 1999 Stock Option Plan our board of directors reserved
4,500,000 shares and granted options to purchase 107,690 shares before 2002.
The options must be 100% of the fair market value of our common stock on the
date of grant and the options expire after five years.
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 90,702,422 outstanding
shares of common stock as of March 29, 2006 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 Title of Amount of Percent of
beneficial owner class beneficial ownership class
------------------------- ---------- -------------------- ------------
Michael L. Bagnoli Common 720,000 (1) Less than 1%
40 Redwood Court
Lafayette, Indiana 47905
Martin Maassen Common 2,449,919 (2) 2.7%
1340 Fawn Ridge Drive
West Lafayette, Indiana
47906
Gunther Than Common 4,819,140 (3) 5.3%
1550 Caton Center Drive, Preferred 7,171,725 100%
Suite E
Baltimore, Maryland 21227
41
Directors and officers Common 7,989,059 8.8%
as a group Preferred 7,171,725 100%
(1) Represents 610,000 shares held by Mr. Bagnoli, 40,000 shares held
by his spouse and 70,000 shares held by a trust.
(2) Represents 1,699,919 held by Mr. Maassen and his spouse and
750,000 shares held by his spouse
(3) Represents 4,649,140 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. These transactions 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.
Our CEO, Gunther Than, loans funds to View Systems on occasion in order for us
to meet our financial obligations. He is repaid when funds are available.
During 2005 Mr. Than advanced $64,000 and in 2004 he advanced a total of
$132,000. We owe him $64,000 as of December 31, 2005.
In April 2005 we issued an aggregate of 1,800,000 shares of common stock to
Gunther Than, our Chief Executive Officer and director, in accordance with his
employment agreement. Of those shares, 1,200,000 shares were in lieu of wages
of $100,000 and 600,000 shares were issued in accordance with the 50,000
shares a month requirement in his employment contract. In April 2004 we
issued 600,000 shares to Mr. Than in accordance with his employment agreement.
In June 2005, our board of directors authorized the issuance of 7,171,725
shares of Series A Preferred Stock to Mr. Than in consideration for conversion
of notes payable of $48,000 and services rendered to the company valued at
$23,717. The 7,171,725 shares of Series A Preferred represent 107,575,875
votes on any matter brought to a stockholder vote. Prior to this transaction
Mr. Than held 7.5% of the voting power of the common stock. Immediately after
this transaction, Mr. Than held 60.9% of the total voting power of the common
and Series A Preferred.
Mr. Than is the President and CEO of View Technologies, Inc., a private
company that develops software. Mr. Than devotes approximately 12 hours a
week to View Technologies, Inc. Our Board is aware of his position in View
Technologies, Inc. and believes that there are no conflicts of interest
resulting from his positions in both companies. During 2004 we advanced
non-interest bearing funds of $98,478 to View Technologies, Inc. and during
2005 we issued $95,575 to View Technologies, Inc. There are no formal
repayment terms associated with this advance. The companies enter into
various transactions throughout the year to provide working capital to one
another when necessary.
On June 21, 2005, we issued 522,000 shares of common stock to Martin J.
Maassen for advances to the company of $52,000 and we issued 230,000 shares of
common stock to Michael L. Bagnoli for direct investments to the company of
$11,000 and director and other services rendered to the company.
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)
4.1 View Systems, Inc. 2005(b) Professional/Consultant Compensation Plan,
dated November 7, 2005 (Incorporated by reference to exhibit 4.1 to
Form S-8 filed November 8, 2005)
42
4.2 Subscription Agreement between View Systems, Inc. and Starr
Consulting, Inc., Active Stealth, LLC, and KCS Referral Service LLC,
dated December 23, 2005 (Incorporated by reference to exhibit 4.1 of
Form 8-K, filed January 6, 2006)
10.1 View Systems, Inc. 1999 Stock Option Plan (Incorporated by reference
to exhibit 10.16 to Form SB-2 filed January 11, 2000)
10.2 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003 (Incorporated by reference to exhibit 10.3 for Form
10-KSB, filed April 14, 2004)
10.3 Lease agreement between View Systems and MIE Properties, Inc., dated
August 3, 2005 (Incorporated by reference to exhibit 10.2 to Form
10-QSB, filed November 10, 2005)
10.4 Consulting Agreement between View Systems and Business Development
Corporation, dated December 27, 2005. (Incorporated by reference to
exhibit 10.4 to Form SB-2, as amended, filed February 2, 2006)
10.5 Engagement between View Systems and John F. Alexander, dated October
6, 2005 (Incorporated by reference to exhibit 10.5 to Form SB-2, as
amended, filed February 2, 2006)
10.6 Consulting Agreement between View Systems and Elite Equity Marketing,
dated February 6, 2006
21.1 Subsidiaries (Incorporated by reference to exhibit 21.1 for 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
The following table presents the aggregate fees billed for each of the last
two fiscal years by our principal accountant, Chisholm, Bierwolf & Nilson, LC,
Certified Public Accountants, in connection with the audit of our financial
statements and other professional services rendered by that firm.
2005 2004
----------- -----------
Audit fees $ 15,000 $ 19,771
Audit-related fees 0 0
Tax fees 0 0
All other fees $ 0 $ 0
Audit fees represent the professional services rendered for the audit of our
annual financial statements and the review of our financial statements
included in quarterly reports, along with services normally provided by the
accountant in connection with statutory and regulatory filings or engagements.
Audit-related fees represent professional services rendered 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 under audit fees.
Tax fees represent professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning. All other fees represent
fees billed for products and services provided by the principal accountant,
other than the services reported for the other categories.
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.
43
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: April 13, 2006 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: April 13, 2006 ______________________________________________
Gunther Than, CEO, Principal Financial and
Accounting Officer, Treasurer and Director
/s/ Martin J. Maassen
Date: April 13, 2006 ______________________________________________
Martin J. Maassen
Director
/s/ Michael L. Bagnoli
Date: April 13, 2006 ______________________________________________
Michael L. Bagnoli
Director and Secretary
44