UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-30178
VIEW SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 59-2928366
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(State of incorporation) (I.R.S. Employer Identification No.)
1550 Caton Center Drive, Suite E, Baltimore, Maryland 21227
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(Address of principal executive offices)
Issuer's telephone number: (410) 242-8439
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common stock
Check whether the issuer 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: $476,319
As of March 8, 2005 the issuer had 76,812,922 outstanding shares of common
stock. The aggregate market value of the registrant's voting stock held by
non-affiliates on that date was approximately $7,253,438.
Documents incorporated by reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Explanatory Note
On October 12, 2005, we filed a registration statement on Form SB-2, and the
Securities and Exchange Commission ("SEC") conducted a full review of the Form
SB-2. The SEC requested that we expand the disclosures in this Form 10-KSB to
comply with its comments. As a result of this review we have restated our
financial statements for the year ended December 31, 2004. See Note 12 to the
financial statements for the explanation of the restatement. The disclosures
in this report are as of the initial filing date of March 30, 2005 and do not
include subsequent events.
TABLE OF CONTENTS
PART I
Item 1. Description of Business............................................3
PART II
Item 6. Management's Discussion and Analysis..............................10
Item 7. Financial Statements .............................................15
Item 8A. Controls and Procedures...........................................35
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act.................35
Item 10. Executive Compensation............................................36
Item 12. Certain Relationships and Related Transactions ...................37
Item 13. Exhibits .........................................................37
Signatures.................................................................38
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 SEC encourages companies to disclose forward-looking information so that
investors can better understand future prospects and make informed investment
decisions. This report contains these types of statements. Words such as
"may," "will," "expect," "believe," "anticipate," "estimate," "project," or
"continue" or comparable terminology used in connection with any discussion of
future operating results or financial performance identify forward-looking
statements. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this report.
All forward-looking statements reflect our present expectation of future
events and are subject to a number of important factors and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORICAL DEVELOPMENT
View Systems was incorporated in Florida on January 25, 1989, as Beneficial
Investment Group, Inc. and became active in September 1998 when we began
development of our digital video product line and changed the company's name
to View Systems, Inc. Starting in 1999 we expanded our business operations
through a series of acquisitions. In February 1999 we acquired Xyros Systems,
Inc., a Maryland corporation, which owned hardware technology with remote
video monitoring capability and digital video storage and retrieval software.
In May 1999 we acquired Eastern Tech Manufacturing Corp, a Maryland
corporation, which is a contract manufacturer of board level electronic
hardware and cable assemblies.
In December 2001 we acquired a 6% interest in Milestone Technology, Inc. and
shortly thereafter entered into a joint venture agreement with Milestone
Technology to develop and enhance its concealed weapons technology. Milestone
Technology's primary product was a walk-through detector that used passive
magnetic detection technology to accurately pinpoint the location, size and
number of concealed weapons. On March 25, 2002 we acquired the remaining 94%
interest of Milestone Technology.
On July 25, 2003 View Systems incorporated View Systems, Inc. as a
wholly-owned Nevada corporation for the sole purpose of changing the domicile
of the company from Florida to Nevada. On July 31, 2003 articles of merger
were filed with the state of Nevada to complete the domicile merger.
OUR BUSINESS
View Systems, Inc. develops, produces and markets computer software and
hardware systems for security and surveillance applications. Digital video
recorder technology was our first developed product. We enhanced this product
line by developing interfaces with other various technologies, such as facial
recognition, access control cards and control devices such as magnetic locks,
alarms and other common security devices.
During the past two years we have expanded our product line to include a
concealed weapons detection system and a hazardous material first response
wireless video transmitting system. We acquired exclusive licenses to
manufacture, use, sub-license and distribute technology and processes for the
concealed weapons detection technology and the first response wireless video
transmitting system from Bechtel BWXT Idaho, LLC. Bechtel BWXT Idaho, LLC
manages and operates the U.S. Department of Energy's Idaho National
Engineering and Environmental Laboratory ("Idaho Engineering Lab"). The
development of the concealed weapons detection technology was funded by the
National Institute of Justice and development was performed by the Idaho
Engineering Lab. The hazardous materials first response video transmitting
system was developed at the Idaho Engineering Lab through cooperative research
and development agreements at the request of various military organizations.
We will focus our marketing efforts for the concealed weapons detection
products on schools, municipal buildings, court houses, and correctional
facilities. We intend to market the first responder units to the National
Guard, police departments and fire departments.
Products and Services
ViewMaxx Digital Video System
ViewMaxx is a high-resolution, digital video recording and real-time
monitoring system. This system can be scaled to meet a specific customer's
needs by using anywhere from one camera up to 16 surveillance cameras per each
ViewMaxx unit. The system uses a video capture card recording which
translates closed-circuit television analog video data (a format normally used
by broadcasters for national television programs) to a computer readable
digital format to be stored on direct access digital disk devices rather than
the conventional television format of video tape.
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VideoMaxx offers programmable recording features that can eliminate the
unnecessary storage of non-critical image data. This ability allows the user
to utilize the digital disk storage more efficiently. The ViewMaxx system can
be programmed to satisfy each customer's special requirements, be it coverage
which is continuous, or only when events are detected. For example, it can be
programmed to begin recording when motion is detected in a surveillance area,
or a smaller field of interest within the surveillance area, and can be
programmed to notify the user with an alarm or message.
Viewing of the stored digital images can be performed locally on the
computer's video display unit or remotely through the customer's existing
telecom systems or data network. It also uses a multi-mode search tool to
quickly play back files with simple point and click operations. The search
mode parameters can be set according to a specific monitoring need, such as:
certain times of day, selected areas of interest in the field of view or
breaches of limit areas. These features and abilities avoid the need to
review an entire, or many, VCR tapes for a critical event.
Our ViewMaxx products include the following features:
.. Use any and all forms of telecommunications, such as standard telephone
lines;
.. Video can be monitored 24 hours a day by a security monitoring center;
.. Local and remote recording, storage and playback for up to 28 days, with
optional additional storage capability;
.. The system may be set to automatically review an area in a desired
camera sequence;
.. Stores the video image according to time or a criteria specified by the
customer and retrieves the visual data selectively in a manner that the
customer considers valuable or desirable;
.. The system may trigger programmed responses to events detected in a
surveillance area, such as break-ins or other unauthorized breaches of
the secured area.
.. Cameras can be concealed in ordinary home devices such as smoke
detectors;
.. The system monitors itself to insure system functionality with alert
messages in the event of covert or natural interruption; and
.. Modular expansion system configuration allows the user to purchase
add-on components at a later date.
SecureScan Concealed Weapons Detection System
This product is a walk-through concealed weapons detector which uses sensing
technology and artificial intelligence algorithms to accurately pinpoint the
location, size and number of concealed weapons. The control unit for this
walk-through portal is a personal computer based unit which receives magnetic
and video information and combines it in a manner that allows the suspected
location of the weapon to be stored electronically and referenced. SecureScan
products are distributed in two basic configurations; stand-alone units and
integrated door systems.
Concealed weapons detection systems are used in a wide range of situations in
order to provide added security against violent crimes. In addition to the
well-known use of concealed weapons detection systems in public airports, such
weapons detection systems are increasingly being used in court houses, schools
and other public/governmental facilities that may be subject to threats or
attacks by various members of the public.
One commonly used concealed weapons detection system is the electromagnetic
induction system. Essentially an electromagnetic induction system operates by
periodically broadcasting an electromagnetic pulse or series of pulses,
usually in the kilohertz range. The transmitted electromagnetic pulse induces
an electrical current, or currents, in electrically conductive objects
contained within the sensing area. The induced electrical current or currents
create their own electromagnetic signals which are then detected by a suitable
detector associated with this type of weapons detection system.
While electromagnetic induction systems of the type described above have been
used for decades as concealed weapons detection systems, they are not without
their problems. For example, such electromagnetic induction systems are
generally sensitive to the overall size, i.e., surface area of the object, not
its mass. Consequently, small, compact, but massive objects, such as a small
pistol, may not produce a "signature" that is significantly larger than the
signature produced by a light weight object of the same size, such as keys or
pocket change. Another problem associated with electromagnetic induction
systems is related to the fact that electromagnetic systems are sensitive to
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electrically conductive objects, regardless of whether they are magnetic or
non-magnetic. That is, electromagnetic systems tend to detect non-magnetic
objects, such as pocket change, just as easily as magnetic objects, such as
weapons. Consequently, electromagnetic systems tend to be prone to false
alarms. In many circumstances, such false alarms need to be resolved by
scanning the suspect with a hand-held detector in order to confirm or deny the
presence of a dangerous weapon.
Our SecureScan system differs from electromagnetic induction systems because
the SecureScan system uses passive magnetic technology. When an object of a
specific ferro-magnetic mass passes by the magnetic sensors the surrounding
magnetic field is altered. The software calculates the difference between the
magnetic field strength with the object in the magnetic field inside the
sensors' range and the normal magnetic field strength. Then the system
displays the results in graph format on a video display unit. Since the
SecureScan technology does not use transmitters to produce electromagnetic
induction, stray energy that can cause false alarms does not exist.
The SecureScan portal uses an array of advanced magnetic sensors, each with
internal digital signal processors. The sensors communicate with the control
unit's software which spatially places identified magnetic anomalies and
visually places the location of the potential threat object with a red dot
that is superimposed over a real time snapshot image of the person walking
through the portal. Along with the snapshot, a graph displays the sensor data
which automatically scales the signal strength of the individual sensors and
cross-references them to the video image. All of this information is brought
together on a video screen that displays the image of the person, the location
of the weapon(s) and the size of the weapon(s), depending on the intensity of
the magnetic signature.
The SecureScan technology discriminates weapons from non-weapons by assuming
that possible threat objects will have ferromagnetic composition. The
SecureScan system promotes smooth traffic flow because it only detects the
types of ferrous metals commonly found in guns and knives, rather than
personal possessions such as coins, keys or belt buckles. This capability
reduces false alarms and eliminates the need to use hand wands or resort to a
personal search. In addition, the sensor settings can be adjusted to allow
the detection of high composite pistols, titanium and stainless steel guns,
and box cutters. Body cavity object identification is also available, as well
as locating objects that have been covered or masked with aluminum foil or
other materials. The SecureScan system operates faster than ordinary metal
detectors and can scan as high as 1,500 persons per hour.
The SecureScan weapons detection system can be controlled via a central
monitoring station using a Windows(TM) operating system and Pentium(TM)
hardware. This can include additional closed-circuit television, two-way
voice communication, door interlock, card-key and other biometric
identification or access control components. The functionality of the
SecureScan portal is increased by access control, database recording, video
capture and archiving of images.
The SecureScan concealed weapons detection technology was patented by the
Department of Energy and approved by the Federal Aviation Administration.
View Systems owns the exclusive worldwide rights to the SecureScan technology
and ongoing improvements currently being funded by the National Institute of
Justice.
In the third quarter of 2003 we brought the manufacturing of the SecureScan
product in house and made various modifications to prepare it for mass market
distribution. During 2004 we have been expending monies to achieve sensor
cost reductions and to make the system more robust. We strived to reduce
costs of the sensor boards in the portal uprights to facilitate a price point
reduction. A price point reduction is necessary to make the SecureScan more
competitive in its markets. In the fall of 2004 we contracted with outside
scientists to assist in sensor cost reduction. The scientists have had
positive results and we are in the process of integrating the new sensors into
our current SecureScan products.
In 2004 we introduced the SecureScan product to the venue and stadium market.
In February 2005 we tested the SecureScan at the pre-game venues of the Super
Bowl football game in Jacksonville, Florida. Our product was well received
for throughput and ease of use. During that installation, the portal scanned
up to 3,000 to 4,000 people and at various times throughput ranged from
approximately 600 to 1,200 persons per hour. There were 384 alarms triggered
by the sensitivity threshold, which is a small number compared to the number
of people scanned.
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Visual First Responder
In December 2003 View Systems obtained exclusive licensing and marketing
rights for the HAZMAT CAM technology from the U.S. Department of Energy's
Idaho National Engineering and Environmental Laboratory. We initially
marketed this product as FirstView Wireless Camera System, then changed the
name to Visual First Responder.
Visual First Responder is a lightweight, wireless camera system housed in a
tough, waterproof flashlight body. The camera system sends back real-time
images to a computer or video monitor at the command post located outside the
exclusion zone or containment area. Visual First Responder is able to
transmit high quality video in the most difficult environments. It uses a
patented triple-diversity antenna system that minimizes signal distortion in
urban environments. Traditional wireless videos use one antenna and a single
receiver. The problem with this configuration is that signals multi-path,
which means they bounce off other structures, like buildings, file cabinets,
etc., on the way to the receiver. This multi-pathing causes interference and
seriously degrades the video images. The Visual First Responder receiver
seeks the strongest signal from each of the three antennas and locks in that
signal, resulting in a more reliable and clearer image.
The image received from the Visual First Responder monitor or on the Visual
First Responder color LCD monitor, and can be easily recorded using a common
camcorder or VCR with video input. The camera can be completely submerged for
fast and easy decontamination. We also offer a unit with 360 degree coverage
of a target area.
Visual First Responder also uses Extension Link which is a separate
transmitter and receiving system that increases the operating range of the
Visual First Responder environmental factors. The Extension Link has
field-selectable channels to avoid interference at longer distances. We have
also incorporated a video encryption feature that allows first responders to
transmit on-scene video to the command post without the data being intercepted
by unwanted parties.
The complete Visual First Responder fully deployed by one person in a stand
alone configuration in less than 10 minutes. The system is battery operated
and can operate for eight continuous hours using one set of spare camera
batteries.
We have entered into a cooperative research and development agreement with the
Idaho Engineering Lab. This agreement allows us to use the research and
development resources of the Idaho Engineering Lab to further develop the
technology as driven by customer need. The cooperative research and
development agreement provides a means for View Systems to efficiently
continue to offer state of the art technology, yet concentrate on its
marketing and manufacturing operations.
Additional Products
We also offer integration of other products with SecureScan or ViewMaxx.
Biometric verification is a system for recognizing faces and comparing them to
known individuals, such as employees or individuals wanted by law enforcement
agencies. This product can be interfaced with SecureScan and/or ViewMaxx to
limit individual access to an area. SecureScan and/or ViewMaxx can be coupled
with magnetic door locks to restrict access to a particular area. We also
offer a central monitoring or video command center for SecureScan or ViewMaxx
products.
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.
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Markets
Our family of products offers government and law enforcement agencies,
commercial security professionals, private businesses and residential
consumers an enhanced surveillance and detection capacity. Management has
chosen to avoid the air passenger traffic and civilian airport market for
metal detection because we believe that a larger market exists in venues, such
as sporting events, concerts, and race tracks, and schools, courthouses and
municipal buildings, and law enforcement agencies.
Commercial business users represent the greatest potential users of our
surveillance and weapons detection products. Commercial businesses have
already realized the need for surveillance and using access control devices
for protection of employees, customers, and assets. Our products can curtail
crime and prevent loss caused by employees and others. The market for
surveillance technology includes many types of commercial buildings;
including, hospitals, schools, museums, retail, manufacturing and warehousing
facilities.
Our SecureScan products and technology can be used where there is a temporary
requirement for real-time weapons detection devices in areas where a permanent
installation is cost prohibitive or impractical. For example, our SecureScan
portal could be set up for special events, concerts, and conventions. Our
systems may reduce the need for a large guard force and can provide improved
pedestrian traffic flow into an event because individuals can be scanned
quickly and false alarms are reduced.
Schools have been very receptive and enthusiastic about the SecureScan portal
and its integration with School Technology Management's Comprehensive
Attendance/Security System. In early October 2003 we announced an alliance
with School Technology Management, Inc. to integrate and market its products
with ours. School Technology Management developed the Comprehensive
Attendance, Administration and Security System ("Comprehensive
Attendance/Security System"), which is designed to use a magnetic card swipe
system to monitor identification of students entering a school and to verify
each student's attendance. School Technology Management combined our
SecureScan portal with its card swipe system.
With the combined technology a student enters the portal and is scanned for
any threat objects and his or her identity is concurrently confirmed to school
security officers. During the spring semester of 2004, a subcontractor of the
National Institute of Justice conducted a study of the effectiveness of the
SecureScan portal in a school environment and the results were positive. The
combined technology has been tested in schools in New York and Philadelphia
and we have received very positive responses from those tests and have
experienced increased inquiries about our products and increased purchase
orders as a result of these tests. Management estimates that there are over
120,000 schools in the United States that may have problems with violence,
truancy and other safety considerations, which may be addressed by the
combined technology.
The gathering of video and data images and weapons detection is commonplace in
law enforcement. Because our technology can be used for stakeouts and remote
monitoring of areas, we believe there is a market potential with law
enforcement agencies. A primary market for our SecureScan portal is federal
and state government courthouses, and county and municipal buildings. We have
installed our SecureScan weapons detection products in a variety of court
house situations. The Visual First Responder product's market includes state
National Guard units and first response agencies, such as; firemen, police
swat and homeland security response teams.
The residential home security user may purchase our products from either
commercial companies installing self-contained or centrally monitored systems,
or directly from retail distribution centers. However, at this time we do not
have retail agreements in place. Using our technology, individuals may run
their own perimeter and interior surveillance systems from their own home
computer. Real-time action at home can be monitored 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.
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Manufacturing
We manufacture several of the hardware components in our systems and assemble
our systems by combining other commercially available hardware and software
together with our proprietary software. We hold licenses for software
components that are integrated into our proprietary software and installed in
our systems. We believe that we can continue to obtain components for our
systems at reasonable prices from a variety of sources. Although we have
developed certain proprietary hardware components for use in our products and
purchased some components from single source suppliers, we believe similar
components can be obtained from alternative suppliers without significant
delay.
The SecureScan portal consists of two components; the work station contains
the software and display imagery, and the archway holds the sensors which
detect threat objects. Both components are assembled and manufactured
internally at our facilities in Baltimore, Maryland. Once complete, the
portal is tested and shipped to its final destination. We also manufacture
the Visual First Responder in our Baltimore facility
Sales and Distribution
We have ongoing reseller arrangements with small- and medium-sized domestic
and international resellers. Our reseller agreements grant a non-exclusive
right to the reseller to purchase our products at a discount from the list
price and then sell them to others. These agreements are generally for a term
of one year and automatically renew for successive one-year terms unless
terminated by notice or in the event of breach.
We are in the process of building a United States domestic network of
manufacturing representatives and dealers for the sale and distribution of our
products. We are seeking security consultants, specifiers and distributors of
security and surveillance equipment that sell directly to schools,
courthouses, government and commercial buildings. We plan to initially hire
four in-house regional sales persons, then we expect to develop a national
sales channel model and a distributor development program.
We also have experienced international interest from security related
resellers and system integrators. However, sales and shipments to overseas
are regulated by federal guidelines for export. We have chosen not to pursue
international markets, but intend to focus on domestic markets which are less
expensive to support and maintain.
Backlog
As of March 15, 2005 we had a backlog of seven Visual First Responders. We
measure backlog as orders for which a purchase order or contract has been
signed or a verbal commitment for order or delivery has been made, but which
has not yet been shipped and for which revenues have not been recognized. We
typically ship our products months after receiving an order. However, we are
attempting to shorten this lead time to several weeks. Also, product shipments
may require more lead-time and may be delayed for a variety of reasons beyond
our control, including:
.. additional time necessary to conduct product inspections prior to
shipping,
.. design or specification changes by the customer,
.. the customer's need to prepare the site, and
.. delays caused by other contractors on the project.
Competition
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.
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The markets for our products are extremely competitive. Competitors include a
broad range of companies that develop and market products for the
identification and video surveillance markets. In the weapons detection
market, we compete with Ranger Security Scanners, Inc. and Garrett
Electronics, Inc. in the United States, and an Italian company, CEIA SpA,
which has the most sophisticated electromagnetic induction product. In the
video surveillance market we compete with numerous VCR suppliers and digital
recording suppliers, including, Sensormatic Corporation and NICE Systems, Ltd.
and Integral Systems.
Trademark, Licenses and Intellectual Property
Certain features of our products and documentation are proprietary and we rely
on a combination of patent, contract, copyright, trademark and trade secret
laws and other measures to protect our proprietary information. We limit
access to, and distribution of, our software, documentation and other
proprietary information. As part of our confidentiality procedures, we
generally enter into confidentiality and invention assignment agreements with
our employees and mutual non-disclosure agreements with our manufacturing
representatives, dealers and systems integrators. Notwithstanding such
actions, a court considering these provisions may determine not to enforce
such provisions or only partially enforce such provisions.
The SecureScan concealed weapons detection technology involves sensing
technology and data acquisition/analysis software subsystems that have patents
pending or issued to the U. S. Department of Energy. We hold an exclusive
license, D.O.E. License No. 03-LA-18, to commercialize, manufacture and market
the concealed weapons detection technology. However, since the intellectual
property was developed by the federal government under a grant from the
National Institute of Justice, the patents belong to the government and we pay
royalties of 2% of the net sale price per SecureScan unit sold. We also hold
the exclusive license, D.O.E. License No. 03-LA-20, for the Visual First
Responder technology and will pay royalties of 4% of the net sale price per
each Visual First Responder unit sold.
Governmental ownership of the patents is advantageous because the government
has prosecution and stewardship responsibilities for the life of the patents.
We benefit from any continuations and improvements to the concealed weapons
detection technology under the ongoing contract between the Department of
Energy and National Institute of Justice.
We have obtained software licensing agreements for
.. software operating systems components,
.. for facial recognition to possibly integrate into our proprietary
software, and
.. integration of commercially available operating systems software into
our proprietary software for installation into our products.
Because the software and firmware (software imbedded in hardware) are in a
state of continuous development, we have not filed applications to register
the copyrights for these items. However, under law, copyright vests upon
creation of our software and firmware. Registration is not a prerequisite for
the acquisition of copyright rights. We take steps to insure that notices are
placed on these items to indicate that they are copyright protected. The
copyright protection for our software extends for the 20-year statutory period
from the date of first "publication," distribution of copies to the general
public, or from the date of creation, whichever occurs first.
We provide software to end-users under non-exclusive "shrink-wrap" licenses,
which are automatic licenses executed once the package is opened. This type
of license has a perpetual term and is generally nontransferable. Although we
do not generally make source code available to end-users, we may, from time to
time, enter into source code escrow agreements with certain customers. We
have also obtained licenses for certain software from third parties for
incorporation into our products.
Government Regulation
We are not subject to government regulation in the manufacture of our products
or the components in our products. However, we are subject to certain
restrictions in the sale of our products to "unfriendly" countries and
countries
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designated as adversarial, which may limit our marketing to foreign countries.
In addition, our resellers and end users may be subject to numerous
regulations that stem from surveillance activities. We also benefit from the
recent "made in America" trade laws where non-United States manufactures must
secure waivers in order to sell security and surveillance products to United
States domestic end-users.
Security and surveillance systems, including cameras, raise privacy issues and
our products involve both video and audio, and added features for facial
identification. The regulations regarding the recording and storage of this
data are uncertain and evolving. For example, under the Federal wiretapping
statute, the audio portion of our surveillance systems may not record people's
conversations without their consent. Further, there are state and federal
laws associated with recording video in non-public places.
Research and Development
For the year ended December 31, 2004 and 2003, we did not record research and
development expense. We have cooperative research arrangements with the
Department of Energy to receive technical assistance and further enhancements
of the concealed weapons detection technology 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
under professional fees.
Employees
We employ 5 persons, including two persons in part-time positions. We also
employ two independent contractors who devote a majority of their work to a
variety of our projects. Our employees are not presently covered by any
collective bargaining agreement. Our relations with our employees are good,
and we have not experienced any work stoppages.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
EXECUTIVE OVERVIEW
Our revenues for the years ended December 31, 2003 and 2004 were primarily
from sales of our products. Management believes that heightened attention to
terrorism and other security threats will continue to drive growth in the
market for security products. We have incurred net losses for the past two
years, but have implemented strategies to reduce cash used in operating
activities. Also, we have increased the efficiency of our processes and
focused our development efforts on products with greater sales potential.
Our ViewMaxx Digitial Video products have been the primary source of revenues
since 1998. In the fourth quarter of 2003 we experienced a revitalization in
sales of these products. While sales were down in the first quarter of 2004
for the ViewMaxx Digitial Video products, sales have rebounded during the
second quarter of 2004. We have entered into new market segments with this
product and are concentrating on local sales and services.
During the 2003 year we completed our single largest manufacturing run of
SecureScan Concealed Weapons Detection portals by building 20 portals. We
worked diligently to make engineering design changes to the SecureScan product
to accommodate the price points required by competitive pressures. We
expanded this product line in late 2003 when we combined our SecureScan
technology with School Technology Management, Inc.'s student time and
attendance program. Second phase testing of the combined technology,
conducted in early 2004, produced positive results. These positive results
lead the National Institute of Justice to provide $500,000 to the U.S.
Department of Energy Idaho National Engineering and Environmental Laboratory
to further refine the sensor circuitry and develop new and more sensitive
magnetometers at a reduced cost. These changes will result in reduced
manufacturing costs, a wider portal opening size and improved object
recognition ability.
10
For the next twelve months our primary challenge will be to more fully develop
our product lines and our sales and distribution network. During the first
quarter of 2004 we increased our product lines when we entered into a
cooperative research and development agreement with the U.S. Department of
Energy's Idaho National Engineering and Environmental Laboratory ("Idaho
Engineering Lab") for our Visual First Responder. During the second quarter
of 2004 we set up a complete manufacturing line in the Baltimore, Maryland
facility for building, testing and further development of the Visual First
Responder product. We sold and delivered two Visual First Responder units to
organizations in Boston, Massachusetts who were involved with security for the
Democratic national convention and we have received additional orders for this
product. As recent as February 2005 we have received orders for five Visual
First Responder units for use by the Department of Defense.
Along with development of our product lines, we must establish a sales and
distribution channel program for the United States. Our emphasis will be on
marketing and sales programs through dealer channels, plus internal direct
sales for our products, where applicable. We intend to build a United States
domestic network of manufacturing representatives and dealers for the sale and
distribution of our products within the 48 states. Our initial focus will be
in the Mid-Atlantic and Northeast regions. In recent months we signed three
new dealers for our products; however, we cannot assure you that we will be
able to develop these sales and distribution channels to a level which will
result in increased revenues or continued profitability. Some of the major
distributors of safety products who have become our dealers and manufacturer
representatives will be adding our products to their GSA schedules.
Another major emphasis for the next twelve months is to continue our
SecureScan manufacturing cost reduction objectives. We reduced manufacturing
costs of the SecureScan product by 25% in the first quarter of 2004. We
intend to select key expensive components of the SecureScan system and replace
them with performance equivalent, less expensive parts. The final phase of
the manufacturing cost reductions will be cost reduction per unit in the
fabrication of the gradiometer sensors. In addition, we anticipate completing
circuitry conversions to fully digital signal processing from digital to
analog and back to digital, along with replacing over-engineered housings in
the SecureScan portals. We also intend to reduce assembly time and testing
times to save additional manufacturing costs. The latest round of cost
reductions should decrease the manufacturing cost an additional 50% to the
$4,000 to $5,000 cost level with full digital and wireless communications
ability.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred losses for the past two fiscal years and had a net loss of
$1,186,478 at December 31, 2004. We rely on private financing, revenues and
advances from related parties to fund our operations. 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 have expressed
substantial doubt that we can continue as a going concern based on these
operating losses. Management intends to focus our efforts on reduction of
manufacturing costs and expects revenues to increase as we develop our sales
and marketing channels. However, management also believes we will incur
operating losses for the near future and will need to rely on private
financing to satisfy our cash requirements.
Historically we have relied on private financing to supplement our revenues.
For the year ended December 31, 2003 ( "2003 year") we recorded revenues of
$569,952 and received $817,820 in debt financing and $508,550 in proceeds from
sales of our common stock. For the year ended December 31, 2004 ("2004
year"), we recorded revenues of $476,319, received $933,800 from debt
financing, $157,900 from sales of common stock and advances of $132,000 from
Gunther Than, our CEO.
We estimate that we will require additional financing of approximately $1
million to meet our needs for the next twelve months. Our goal is to use this
financing to increase ongoing operations to self-sustaining levels and
increase profits to the magnitude management feels is achievable.
We intend to use any available cash to develop our products and expand our
sales, marketing and promotional activities. Management believes that it will
be essential to continue to raise additional capital, both internally and
externally, to compete in our markets. We cannot assure you that we will be
able to obtain financing on favorable terms and we may be required to further
reduce expenses and scale back our operations. In addition to accessing the
11
public and private equity markets, we will pursue bank credit lines and
equipment leases for certain capital expenditures, if necessary.
COMMITMENTS AND CONTINGENT LIABILITIES
Our total current liabilities of $580,824 include accounts payable of
$265,776, accrued expenses of $100,548, accrued interest of $66,000 and notes
payable of $148,500. At December 31, 2004 future minimum payments for
operating leases related to our principal office and manufacturing facility
were $19,964 through 2006. Rent expense was $61,047 for the 2003 year
compared to $52,900 for the 2004 year.
OFF-BALANCE SHEET ARRANGEMENTS
None.
RESULTS OF OPERATIONS
The following discussions are based on the consolidated financial statements
of View Systems and its subsidiaries. These charts and discussions summarize
our financial statements for the years ended December 31, 2004 and 2003 and
should be read in conjunction with the financial statements, and notes
thereto, included in this report at Part II, Item 7, below.
Summary Comparison of 2004 and 2003 Fiscal Year Operations
------------------------------------------------------------
2004 2003
------------- ---------------
Revenues, net $ 476,319 $ 569,952
Cost of sales 257,179 257,632
Gross profit 219,140 312,320
Total operating expenses 1,369,474 2,832,243
Net operating income (loss) (1,150,334) (2,519,923)
Total other income (expense) (36,144) (26,411)
Net income (loss) (1,186,478) (2,546,334)
Net earnings (loss) per share $ (0.02) $ (0.05)
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.
Revenues for the 2004 year decreased 16.4% compared to the 2003 year primarily
as a result of the biggest manufacturing run of 20 SecureScan portals
occurring in the 2003 year, along with a resurgence of View Maxx product sales
in 2003. Sales of the SecureScan product line dropped in 2004 while we
focused our sales and marketing efforts on the Visual First Responder product
line.
The following chart provides a breakdown of our sales in 2004 and 2003.
12
Dec. 31, 2004 Dec. 31, 2003
------------- -------------
Secure Scan $ 24,800 $ 319,145
ViewMaxx 153,271 243,441
Visual First Responder 296,100 -
Service 2,148 7,366
Costs of sales remained relatively the same in the 2004 year compared to the
2003 year. However, management expects cost of sales to increase as we expand
our marketing efforts. As a result of the decrease in revenues our gross
profit decreased 29.8% for the 2004 year compared to 2003.
For the 2004 year total operating expense decreased 48.3% compared to the 2003
year. The 2004 decrease was the result of a 6.8% decrease in general and
administrative expenses, a 47.2% decrease in professional fees due to reduced
contracts with engineers, a 25.2% decrease in salaries and benefits and
recording $0 for business development expenses.
In addition, a valuation/impairment loss of $888,658 in the 2003 year compared
to no valuation/impairment loss for the 2004 year reduced total operating
expense for the 2004 year. The impairment loss for the 2003 year was related
to the adoption of Statement of Financial Accounting Standards No 142,
"Goodwill and Other Intangible Assets," issued in June 2001, which addressed
financial accounting and reporting for acquired goodwill and intangible
assets. Goodwill represents the excess of the cost of assets acquired in a
business combination accounted for under the purchase method of accounting
over the fair value of the net assets acquired at the date of acquisition.
Prior to the adoption of SFAS Nos. 141 and 142, the excess purchase price was
amortized using the straight-line method over ten years. Effective January 1,
2002, goodwill was no longer amortized but rather tested for impairment under
the provision of SFAS No 142. As of December 31, 2003, we determined that
goodwill related to the assets we had acquired in business combinations was
impaired and we wrote off that goodwill in 2003.
The reductions in these operating expenses resulted in a 45.6% decrease in net
operating loss. Management anticipates that business development expenses
will increase with the development of our sales and marketing activities, but
that the other operating expenses will remain relatively constant.
Total other expense increased in the 2004 year compared to the 2003 year
primarily as a result of increased interest expense related to interest on
loans. Interest expense may increase as we continue to rely on private
financing to fund our operations.
As a result of the above changes, we recorded a 53.4% decrease in net loss for
the 2004 year compared to the 2003 year and decreased our loss per share from
$0.05 for the 2003 year to $0.02 for the 2004 year.
FACTORS AFFECTING FUTURE PERFORMANCE
Our independent auditors have expressed concern whether we can continue
as a going concern.
We have incurred ongoing operating losses and do not currently have financing
commitments in place to meet expected cash requirements for the next twelve
months. We are unable to fund our day-to-day operations through revenues
alone and management believes we will incur operating losses for the near
future while we seek financing commitments during the next twelve months to
fund further development of our business plan. While we have expanded our
product line and expect to establish new sales channels, we may be unable to
increase revenues to the point that we attain and are able to maintain
profitability.
We may need additional external capital and may be unable to raise it.
Based on our current growth plan we believe we may require $1 million
additional financing within the next twelve months to remain competitive in
our market. Our success will depend upon our ability to access equity capital
markets and borrow on terms that are financially advantageous to us. However,
we may not be able to obtain additional funds on acceptable terms. If we fail
to obtain funds on acceptable terms, then we might be forced to
13
delay or abandon some or all of our business plans or may not have sufficient
working capital to develop products, finance acquisitions, or pursue business
opportunities. If we borrow funds, then we could be forced to use a large
portion of our cash reserves, if any, to repay principal and interest on those
funds. If we issue our securities for capital, then the interests of
investors and shareholders will be diluted.
We are currently dependent on the efforts of our resellers for our
continued growth and must expand our sales channels to increase our
revenues.
We are in the process of developing and expanding our sales channels, but we
expect overall sales to remain down as we develop our marketing activities.
If we are unsuccessful in developing sales channels then we may have to
abandon our business plan. We are actively recruiting and adding other
additional resellers and must continue to recruit additional resellers and
find other methods of distribution to increase customers.
We may not be able to compete successfully in our market because we have
a small market share and compete with large national and international
companies.
We estimate that we have less than a 1% market share of the surveillance and
weapons detection market. We compete with many companies that have greater
brand name recognition and significantly greater financial, technical,
marketing, and managerial resources. The position of these competitors in the
market may prevent us from capturing more market share. We intend to remain
competitive by increasing our existing business through marketing efforts,
selectively acquiring complementary technologies or businesses and services,
increasing our efficiency and reducing costs.
Our revenues are dependent in part upon our relationships and alliances
with government agencies and partners.
While we own exclusive licenses for the SecureScan technology, we are
dependent upon the continuation of the ongoing contract between the Department
of Energy and National Institute of Justice for continuations and improvements
to the concealed weapons detection technology. We are also reliant upon
School Technology Management for the continued integration of our SecureScan
technology with its Comprehensive Attendance/Security System for use in
educational facilities. If either of these entities should discontinue its
operations or research and development we may lose our competitive edge in our
market.
We must successfully introduce new or enhanced products and manage the
costs associated with producing several product lines to be successful.
Our future success depends on our ability to continue to improve our existing
products and to develop new products using the latest technology that can
satisfy customer needs. For example, our short term success will depend on
the continued acceptance of the VideoMaxx product line and the SecureScan
portal product line. We intend to invest a significant amount of our
financial resources for the development of the Visual First Responder product
line. We cannot be certain that we will be successful at producing multiple
product lines and we may find that the cost of production of multiple product
lines inhibits our ability to maintain or improve our gross profit margins.
In addition, the failure of our products to gain or maintain market acceptance
or our failure to successfully manage our cost of production could adversely
affect our financial condition.
We would be harmed if we were unable to use our manufacturing facility.
We assemble and manufacture our products at our facility located in Baltimore,
Maryland. If we were unable to continue manufacturing at this location due to
fire, prolonged power shortage or other natural disaster, then we would be
unable to supply products to our customers.
14
ITEM 7. FINANCIAL STATEMENTS
VIEW SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
15
C O N T E N T S
Accountants' Report.......................................................17
Consolidated Balance Sheets...............................................18
Consolidated Statements of Operations.....................................19
Consolidated Statements of Stockholders' Equity...........................20
Consolidated Statements of Cash Flows..................................21-22
Notes to the Consolidated Financial Statements.........................23-34
16
Chisholm 533 West 2600 South, Suite 250
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, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of View Systems, Inc. as of
December 31, 2004 and 2003 and the result of its operations, and it's cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
ongoing operating losses and does not currently have financing commitments in
place to meet expected cash requirements through 2005. Additionally, the
Company is in default on its debt obligations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
outcome of this uncertainty.
As discussed in Note 12 to the consolidated financial statements, there was an
error in reporting a payment on a loan from an officer, resulting in a loan
receivable to this officer. This error was discovered by management s a result
of a regulatory review. Accordingly, the financial statements have been
restated to correct the errors and disclosures.
/s/ Chisholm, Bierwolf & Nilson, LLC
Chisholm, Bierwolf & Nilson, LLC
Bountiful, Utah
March 23, 2005, except for Note 12, 5, 6 and 11
dated January 20, 2006
47
View Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
ASSETS
December 31,
2004
-------------
(Restated)
Current Assets
Cash $ 173,486
Accounts Receivable(Net of Allowance of $20,054) 108,342
Inventory 61,197
-------------
Total Current Assets 343,025
-------------
Property & Equipment (Net) 14,803
-------------
Other Assets
Licenses 1,626,854
Due from Affiliates 98,457
Deposits 2,319
-------------
Total Other Assets 1,727,630
-------------
Total Assets $ 2,085,458
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable $ 265,776
Accrued Expenses 100,548
Accrued Interest 66,000
Notes Payable 148,500
-------------
Total Current Liabilities 580,824
-------------
Stockholders' Equity
Preferred Stock, Authorized 10,000,000 Shares,
$.01 Par Value, Issued and outstanding 0 -
Common Stock, Authorized 100,000,000 Shares,
$.001 Par Value, Issued and Outstanding 76,533,922 76,534
Additional Paid in Capital 17,119,596
Retained Earnings (Deficit) (15,691,496)
-------------
Total Stockholders' Equity 1,504,634
-------------
Total Liabilities and Stockholders' Equity $ 2,085,458
=============
The accompanying notes are an integral part of these
consolidated financial statements.
18
View Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Year Ended
December 31,
---------------------------
2004 2003
------------- -------------
(Restated)
Revenues, Net $ 476,319 $ 569,952
Cost of Sales 257,179 257,632
------------- -------------
Gross Profit (Loss) 219,140 312,320
------------- -------------
Operating Expenses
Business Development - 155,130
General & Administrative 281,127 301,482
Professional Fees 286,323 542,612
Bad Debt 148,928 71,000
Salaries & Benefits 653,096 873,361
Valuation/Impairment Loss - 888,658
------------- -------------
Total Operating Expenses 1,369,474 2,832,243
------------- -------------
Net Operating Income (Loss) (1,150,334) (2,519,923)
------------- -------------
Other Income(Expense)
Loss on Sale of Assets - (14,839)
Interest Expense (36,144) (11,572)
------------- -------------
Total Other Income(Expense) (36,144) (26,411)
------------- -------------
Net Income (Loss) $ (1,186,478) $ (2,546,334)
============= =============
Net Income (Loss) Per Share $ (0.02) $ (0.05)
============= =============
Weighted Average Shares Outstanding 68,924,152 51,529,119
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
19
View Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit)
------------- ---------- ------------- -------------
Balance, December 31, 2002 44,598,620 $ 44,598 $ 13,810,878 $(11,958,683)
January - March 2003 -
shares issued for cash 676,999 677 85,873 -
January 2003 - shares
issued for services 445,000 445 51,755 -
July - September 2003 -
shares issued for cash 3,220,000 3,220 318,780 -
September 2003 - shares
issued for payment of
notes payable 300,000 300 29,700 -
September 2003 - shares
issued for services 500,000 500 59,500 -
September 2003 share
issued to employees 1,600,000 1,600 190,400 -
September 2003 - shares
issued for payment
of notes payable 10,800,000 10,800 755,520 -
October 2003 - shares
issued for services 190,000 190 9,310 -
Forgiveness of Debt by
subsidiary-contribution - - 193,293 -
October-December 2003 -
shares issued for cash 400,000 400 99,600 -
Net loss for the year
ended December 31, 2003 - - - (2,546,334)
------------- ---------- ------------- -------------
Balance, December 31, 2003 62,730,619 62,730 15,604,609 (14,505,017)
Cancellation of shares (100,000) (100) (4,900) -
January - March 2004 -
shares issued for cash 244,500 245 34,755 -
January - March 2004 -
shares issued for services 932,000 932 203,048 -
April - June 2004 -
shares issued for cash 84,333 84 11,916 -
April - June 2004 - shares
issued for services 221,250 221 39,979 -
June 2004 - shares issued
for payment of notes
payable and accrued
interest 5,221,050 5,221 516,884 -
July - September 2004 -
shares issued for cash 100,000 100 19,900 -
July - September 2004 -
shares issued for services 781,600 782 108,642 -
September 2004 - shares
issued in settlement
of litigation 2,000,000 2,000 178,000 -
October - December 2004 -
shares issued for cash 1,066,750 1,067 89,833 -
December 2004 - shares
issued for payment of
notes payable and
accrued interest 3,251,820 3,252 321,930 -
Cost of issuance of
common stock - - (5,000) -
Net loss for the year
ended December 31, 2004 - - - (1,186,478)
------------- ---------- ------------- -------------
Balance, December 31, 2004 76,533,922 $ 76,534 $ 17,119,596 $(15,691,495)
============= ========== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
20
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended
December 31,
---------------------------
2004 2003
------------- -------------
(Restated) (Restated)
Cash Flows from Operating Activities:
Net Income (Loss) $ (1,186,478) $ (2,546,334)
Adjustments to Reconcile Net Loss to Net Cash
Provided by Operations:
Depreciation & Amortization 29,890 45,160
Impairment of Assets - 888,658
(Gain) Loss on Disposal of Assets - 14,839
Bad Debts 148,928 71,000
Accrued interest paid with stock 13,987 -
Stock Issued for Services 353,604 313,700
Change in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (32,182) (143,376)
Inventories 32,044 (21,916)
Prepaid expenses - (655)
Other Assets 2,500 (2,287)
Increase (Decrease) in:
Accounts Payable (208,439) 211,747
Accrued Expenses (3,967) 157,895
------------- -------------
Net Cash Provided(Used) by Operating Activities (850,113) (1,011,569)
Cash Flows from Investing Activities:
Advances (to)/ receipt from related party - 76,869
------------- -------------
Net Cash Provided (Used) by Investing Activities - 76,869
Cash Flows from Financing Activities:
Proceeds from debt financing 933,800 817,820
Proceeds from stock issuance 157,900 508,550
Proceeds from related party advances 132,000 1,500
Payments on related party advances (132,000) (1,500)
Cost of issuance of common stock (5,000) -
Principal Payments on Notes Payable (83,000) (375,000)
------------- -------------
Net Cash Provided (Used) by Financing Activities 1,003,700 951,370
------------- -------------
Increase (Decrease) in Cash 153,587 16,670
Cash and Cash Equivalents at Beginning of Period 19,899 3,229
------------- -------------
Cash and Cash Equivalents at End of Period $ 173,486 $ 19,899
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
21
View Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
For the Year Ended
December 31,
---------------------------
2004 2003
------------- -------------
Cash Paid For:
Interest $ 25,144 $ 572
Income Taxes $ - $ -
Non-Cash Investing and Financing Activities:
Stock Issued in payment for Note Payable $ 833,300 $ 796,320
Stock issued in payment of accounts payable $ 200,000 $ -
The accompanying notes are an integral part of these
consolidated financial statements.
22
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
View Systems, Inc. (the "Company") designs and develops computer
software and hardware used in conjunction with surveillance capabilities. The
digital video technology utilizes the compression and decompression of digital
inputs. In March 2002, the Company acquired Milestone Technology, Inc., which
developed a concealed weapons detection portal.
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Milestone Technology, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with maturities of
three months or less to be cash equivalents.
Use of Estimates
----------------
Management uses estimates and assumptions in preparing financial
statements in accordance with accounting principles generally accepted in the
United States of America. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses. Actual results could
differ from the estimates that were used.
Revenue Recognition
-------------------
The Company 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
23
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2003 consisted of finished goods.
Property and Equipment
----------------------
Property and equipment is recorded at cost and depreciated over their
useful lives, using the straight-line and accelerated depreciation methods.
Upon sale or retirement, the cost and related accumulated depreciation are
eliminated from the respective accounts, and the resulting gain or loss is
included in the results of operations. The useful lives of property and
equipment for purposes of computing depreciation are as follows:
Equipment 5-7 years
Software tools 3 years
Repairs and maintenance charges which do not increase the useful lives
of assets are charged to operations as incurred. Depreciation expense for the
years ended December 31, 2004 and 2003 amounted to $29,890 and $45,160,
respectively.
Goodwill
--------
Goodwill represents the excess of the cost of assets acquired in the
business combinations accounted for under the purchase method of accounting
over the fair value of the net assets acquired at the dates of acquisition.
Prior to the adoption of SFAS Nos. 141 and 142, the excess purchase price was
being amortized using the straight-line method over ten years. Effective
January 1, 2002 goodwill will no longer be amortized but rather tested for
impairment under the provision of SFAS No 142. As of December 31, 2003,
goodwill was determined to be impaired and was written off.
Licenses
--------
In connection with the acquisition on Milestone, the Company received
various licenses to products developed by INEEL (Idaho National Engineering
and Environmental Laboratory). Milestone transferred the licenses to View
Systems, Inc., and in November 2003, two separate licenses were signed in the
name of View Systems with Bechtel BWXT Idaho, LLC (BBWI).
24
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BBWI is the management and operating contractor of the INEEL under its
Contract No. DE-AC07-99ID13727 ("M&O Contract") and has the authorization,
right and ability to grant the license of the Agreement. The licenses allow
View Systems to commercially develop, manufacture, use, sell and distribute
processes and products embodying the U.S. Patent No. 6.150.810 "Method for
Detecting the Presence of a Ferromagnetic Object Using Maximum and Minimum
Magnetic Field Data", and U.S. Patent Application S/N 10/623,372,
"Communication Systems, Camera Devices, and Communication Methods".
The valuation of these licenses consist of the cost of acquiring Milestone, ie
the difference of the cost paid for the entity vs. the value of the underlying
assets and liabilities which was determined to be $1,626,866. Consistent with
SFAS No. 142, the license was analyzed to determine if any impairment existed
at December 31, 2004. It was determined to not be impaired. Pursuant to SFAS
No. 142, the license will not be amortized, rather the valuation of this
intangible will reviewed periodically.
Income Taxes
------------
Deferred income taxes are recorded under the assets and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences, measured by enacted tax rates, attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss carryforwards.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period the rate change becomes effective.
Valuation allowances are recorded for deferred tax assets when it is more
likely than not that such deferred tax assets will not be realized.
Research and Development
------------------------
Research and development costs are expensed as incurred. Equipment and
facilities acquired for research and development activities that have
alternative future uses are capitalized and charged to expense over the
estimated useful lives.
Advertising
------------
Advertising costs are charged to operations as incurred. Advertising
costs for the years ended December 31, 2004 and 2003 were $10,214 and $21,264.
Nonmonetary Transactions
------------------------
Nonmonetary transactions are accounted for in accordance with Accounting
Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions"
which requires the transfer
25
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2004
and 2003 does not include potential shares of common stock equivalents, as
their impact would be antidilutive.
2. GOING CONCERN
The Company has incurred and continues to incur, losses from operations.
For the years ended December 31, 2004 and 2003, the Company incurred net
losses of $1,186,478 and $2,546,334, respectively. During 2004 and 2003, the
Company implemented a strategy to reduce its cash used in operating activities
which included reductions in personnel and facilities expense. Additionally,
the Company has increased the efficiency of its processes and focused its
development efforts on products with greater sales potential.
To date, the Company has financed its operations primarily through
private financing. Additionally, the Company is in default on its debt
obligations. It is management's intention to finance 2005 operations through
an additional equity financing. There can be no assurance, however, that this
financing will be successful and the Company may be required to further reduce
expenses and scale back operations. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
3. NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure-an Amendment of FASB
Statement No. 123, effective
26
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
for fiscal years ending after December 15, 2002. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
adoption of SFAS No. 148, did not have a material impact on the Company's
financial position or results of operations.
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
27
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
FASB Statement No. 66, Accounting for Sales of Real Estate, to reference
the financial accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position (SOP) 04-2,
Accounting for Real Estate Time-Sharing Transactions. This Statement also
amends FASB Statement No. 67, Accounting for Costs and Initial Rental
Operations of Real Estate Projects, to state that the guidance for (a)
incidental operations and (b) costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions. The accounting for those
operations and costs is subject to the guidance in
SOP 04-2. This Statement is effective for financial statements for fiscal
years beginning after June 15, 2005. The Company does not believe adoption of
SFAS 152 will have any impact on the Company's consolidated financial
statements.
In November 2004, the FASB issued SFAS 151 "Inventory Costs-an amendment
of ARB No. 43". This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges. . . ." This Statement requires that those items be
recognized as current-period charges regardless of whether they meet the
criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. The provisions of this
Statement shall be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe adoption of SFAS
151 will have any impact on the Company's consolidated financial statements.
In December 2003, FASB issued a revision to SFAS 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits-an amendment of
FASB Statements No. 87, 88, and 106". This Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It
does not change the measurement or recognition of those plans required by FASB
Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits, and No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. This Statement retains the
disclosure requirements contained in FASB Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it
replaces. It requires additional disclosures to those in the original
Statement 132 about the assets, obligations, cash flows, and net periodic
benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. The required information should be provided separately
for pension plans and for other postretirement benefit plans. The Company does
not believe adoption of this revision will have a material impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with characteristics of both Liabilities and Equity." This new
statement changes the accounting
28
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
3. NEW ACCOUNTING PRONOUNCEMENTS (Continued)
for certain financial instruments that, under previous guidance, issuers could
account for as equity or classifications between liabilities and equity in a
section that has been know as "mezzanine capital." It requires that those
certain instruments be classified as liabilities in balance sheets. Most of
the guidance in SFAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003. The adoption of SFAS 150 did not have
any impact on the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". This
Statement is effective for contracts entered into or modified after June 30,
2003, with certain exceptions, and for hedging relationships designated after
June 30, 2003, with certain exceptions. The adoption of SFAS 149 did not have
any effect on the Company's consolidated financial statements.
In January 2003, the FASB issued Interpretation 46, "Consolidation of
Variable Interest Entities" (FIN 46), which addresses consolidation by
business enterprises of variable interest entities. FIN 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", to certain entities in which equity investors do not have the
Characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
It applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company has not
identified and does not expect to identify any variable interest entities that
must be consolidated.
4. BUSINESS COMBINATION
The Company purchased 100% of the common stock of Milestone Technology,
Inc., effective March 25, 2002. The purchase was accomplished in two
transactions. The Company acquired 6% of Milestone in December 2001 in
exchange for 500,000 shares of the Company's common stock. In March 2002, the
Company acquired the remaining 94% of Milestone for 3,300,000 share of the
Company's common stock. Based on the market value of the Company's common
stock ($0.55 per share in December and $0.31 per share in March) the total
cost of the acquisition was $1,298,000.
Milestone Technology, Inc., is a developer of concealed weapons
detections systems. Its primary product is a walk-through detector that uses
advanced magnetic technology to accurately
29
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
4. BUSINESS COMBINATION (Continued)
pinpoint the location, size, and numbers of concealed weapons. Prior to its
acquisition, Milestone Technology, Inc., was considered to be a development
stage enterprise.
5. DUE FROM AFFILIATED ENTITIES (Restated)
The Company has advanced non-interest bearing funds of $98,458 as of
December 31, 2004 and 2003 to a related corporation, View Technologies, Inc.,
which is controlled by the Chief Executive Officer of the Company. There are
no formal repayment terms associated with this advance. The two companies
enter into various transactions throughout the year to provide working capital
to one another when necessary.
6. NOTES PAYABLE (Restated)
Notes payable as of December 31, 2004 consist of the following:
Note payable - due to an individual, non-interest bearing
due on demand 9,500
Note payable - due to an individual, non-interest bearing
due on demand 3,000
Note payable - due to an individual, non-interest bearing
due on demand 11,000
Note payable - due to an individual, non-interest bearing,
due on demand. 15,000
Notes payable - due former stockholder of Zyros Technology,
due on demand, interest at 10% per annum. 110,000
---------
Total Notes Payable $ 148,500
=========
The notes payable due former stockholders of Xyros Technology, which was
acquired by the Company in 1999 was due December 31, 1999 but the Company has
negotiated to repay the loan as cash flow permits.
30
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
7. INCOME TAXES
The components of the net deferred tax asset and liability as of
December 31, 2004 are as follows:
Effect of net operating loss carryforward $ 6,118,178
Less evaluation allowance (6,118,178)
---------------------
Net deferred tax asset (liability) $ -
=====================
8. OPERATING LEASE
The Company leases office and warehouse space in Baltimore, Maryland
under a five-year noncancellable operating lease, expiring August 2005. Base
rent is $2,260 per month with an annual rent escalator of 3%. Rent expense
was $52,900 and $61,047 for the years ended December 31, 2004 and 2003,
respectively.
The following is a schedule by year, of approximate future minimum lease
payments required under this lease:
Year ending December 31:
2005 19,964
2006 and Thereafter -
--------------
Total minimum future rental payments $ 19,964
==============
9. STOCK BASED COMPENSATION
During the years ended December 31, 2004 and 2003 the Company granted
restricted stock, incentive stock options, nonqualified stock options, and
warrants to employees, officers, and independent contractors and consultants.
Restricted Stock Grants
------------------------
The Company's Board of Directors and stockholders have approved a
restricted share plan under which shares of the Company's common stock will be
granted to employees, officers and directors at the discretion of the Board of
Directors. During 2004 and 2003, the Company issued the following shares
under this Plan and additional shares at the discretion of the Board of
Directors:
31
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
9. STOCK BASED COMPENSATION(Continued)
Stock Options and Warrants
---------------------------
2004 2003
----------------------- ---------------------
Number Expense Number Expense
of Shares Recognized of Shares Recognized
----------- ----------- --------- -----------
Officers and employees 702,000 $ 144,480 1,690,000 $ 196,500
Independent contractors and
consultants 1,502,850 209,124 1,035,000 117,200
----------- ----------- --------- -----------
Total 2,204,850 $ 353,604 2,725,000 $ 313,700
=========== =========== ========= ===========
Officers' and employees' compensation was based on the fair market value
of the common stock issued on the date of grant less a discount of 10% due to
the restricted nature of the grant. Independent contractors and consultants
expense was based on the estimated value of services rendered.
The Company adopted the 1999 Stock Option Plan during the year ended
December 31, 1999. The Plan reserves 4,500,000 shares of the Company's
unissued common stock for options. Options, which may be tax qualified and
non-qualified, are exercisable for a period of up to ten years at prices at or
above market price as established on the date of the grant.
A summary of the Company's common stock option activity and related
information for the years ended December 31, 2004 and 2003 is as follows:
2003
----------------------------------------
Weighted
Common Average Range of
Stock Exercise Exercise
Options Price Price
------------- ------------ -------------
Outstanding at beginning of year 107,690 $ 1.63 $ .01 - 2.07
Granted - - -
Exercised - - -
Expired/Cancelled - - -
------------- ------------ -------------
Outstanding at end of year 107,690 $ 1.63 $ .01 - 2.07
============= ============ =============
2004
----------------------------------------
Weighted
Common Average Range of
Stock Exercise Exercise
Options Price Price
------------- ------------ -------------
Outstanding at beginning of year 107,690 $ 1.63 $ .01 - 2.07
Granted - - -
Exercised - - -
Expired/Cancelled - - -
------------- ------------ -------------
Outstanding at end of year 107,690 $ 1.63 $ .01 - 2.07
============= ============ =============
32
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
9. STOCK BASED COMPENSATION (Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), but applies Accounting Principle Board Opinion
No. 25 and related interpretations. There were no stock options granted
during the years ended December 31, 2004 and 2003.
10. LITIGATION
On May 8, 2003, the Company filed a complaint against two former
officers and shareholders of Milestone Technology, Inc., related to the
ownership of the Concealed Weapons Detection System. In July 2003, the
complaint was settled and the Company agreed to pay $375,000 including
attorney fees of $50,000. The liability is recorded in accounts payable at
December 31, 2003. The settlement also called for the cancellation of
1,050,000 shares issued to one of the principals of Milestone. Other legal
actions are in the normal course of business.
11. RELATED PARTY TRANSACTIONS
In order for the Company to meet it's financial obligations, the
Company's president Gunther Than, loans the Company funds on occasion and is
repaid when funds are available. During 2004 and 2003 Mr. Than advanced the
Company a total of $132,000 and $1,500, respectively. Amounts paid back to Mr.
Than in 2004 and 2003 totaled $132,000 and $1,500, respectively, leaving
balances due as of December 31, 2004 and 2003 of $0.
12. RESTATEMENT OF FINANCIAL STATEMENTS
Pursuant to a regulatory review, the financial statements for the year
ended December 31, 2004 and 2003 have been restated. During 2004, the
Company's President loaned funds to the Company to meet it's financial needs,
however, a payment back to Mr. Than was incorrectly recorded as a loan
receivable to Mr. Than, leaving a receivable and payable in the same amount.
This officer receivable has been offset against accounts payable, and notes
payable wherein combined, Mr. Than had an identical balance. The restatement
caused a decrease in "Loans to Shareholder" of $66,500, leaving a $0 balance,
and caused a decrease in accounts payable of $66,000, and a decrease in Notes
payable of $500. The restatement also required a change to the cashflow
statement by removing funds paid to a shareholder and applied this change to
the accounts payable section. The financing section was also edited to include
the gross amounts loaned to the Company an paid back by Mr. Than for the years
2004 and 2003.
The statement of operations for the year ended December 31, 2004 and
2003 was restated for presentation reclassifications. Bad Debt expense in 2004
and 2003 of $148,928 and $71,000, respectively, and Impairment losses in 2003
of $888,658 were moved from other income and
33
VIEW SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
12. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
expense to operating expenses. The effect was a decrease in operating losses
of $148,928 and $959,658 for 2004 and 2003, respectively. There was no change
to Net Income for either year.
34
ITEM 8A. CONTROLS AND PROCEDURES
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 period covered by this report. Based on that
evaluation, he concluded that our disclosure controls and procedures were
effective.
Also, our Chief Executive Officer determined that there were no changes made
in our internal controls over financial reporting during the fourth quarter of
2004 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, position and biographical information of our executive officers
and directors are presented below. Our bylaws provide for a board of
directors consisting of at least one director. The term of office of each
director is until the next annual meeting of stockholders or until the
director's earlier death, resignation, or removal. However, if his term
expires, he continues to serve until his successor is elected and qualified.
Executive officers are chosen by our board of directors and serve at its
discretion. There are no family relationships between or among any of our
directors and executive officers.
Name Age Position Director Since
------------------- ----- ------------------------------------ --------------
Gunther Than 57 Chief Executive Officer, Treasurer, September 1998
and Director
Michael L. Bagnoli 49 Secretary and Director May 1999
Martin Maassen 62 Director May 1999
Gunther Than - Gunther Than was appointed Treasurer in July 2003 and has
served as our Chief Executive Officer since September 1998. He served as our
President from September 1998 to May 2003 and had served intermittently as
Chairman of the Board from September 1998 to September 2003. Mr. Than was the
founder, President and CEO of Real View Systems, Inc., 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. 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.
35
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that we have one audit committee
financial expert serving on our audit committee. Ms. Susan Mrzlack serves on
our audit committee and is a certified public accountant and, pursuant to NASD
Rule 4200(a)(15), we believe Ms. Mrzlack is independent.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our directors,
executive officers and person who own more than ten percent of our common
stock to file initial reports of ownership and reports of changes in ownership
of our common stock with the SEC. Officers, directors and ten-percent or
greater beneficial owners are required by SEC regulations to furnish us with
copies of all Section 16(a) reports they file. Based upon review of the
copies of such forms furnished to us during the fiscal year ended December 31,
2004, and representations from reporting persons that Forms 5 were not
required, we believe Mr. Than filed late Forms 4 related to 3 transactions,
Mr. Feldman filed late a Form 4 for one transaction, Mr. Smith filed late
Forms 4 for two transactions, and Mr. Maassen filed late Forms 4 for one
transaction and failed to file a Form 5 for one transaction.
CODE OF ETHICS
We have not adopted a code of ethics for our principal executive and financial
officers. However, our management intends to promote honest and ethical
conduct, full and fair disclosure in our reports to the SEC, and compliance
with applicable governmental laws and regulations.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation paid to our named executive
officers in all capacities during the past three fiscal years.
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation
Name and Principal Fiscal
Position Year Salary Other
---------------------- --------- ------------- -------------
Gunther Than 2004 $ 100,000 (1) $ 120,000 (2)
CEO, Treasurer 2003 100,000 (1) 138,000 (3)
Director 2002 18,000 0
(1) Represents accrued salary.
(2) Represents 600,000 common shares issued as compensation.
(3) Represents 1,150,000 common shares issued as compensation.
COMPENSATION OF DIRECTORS
We compensate our independent directors with 5,000 shares of our common stock
for each month of service. Messrs. Maassen and Bagnoli each accrued 60,000
shares for the year ended December 31, 2003 as independent directors as
defined by NASD Fule 4200(a)(15). Mr. Maassen accrued 60,000 shares for the
year ended December 31, 2004 and Mr. Bagnoli accrued 30,000 shares for the
2004 year. We have not issued the accrued shares to either director. 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.
36
EMPLOYMENT CONTRACTS
Mr. Than entered into an employment agreement with View Systems and agreed to
serve as our Chief Executive Officer, effective January 1, 2003. Mr. Than's
employment is "at will" we may terminate him with or without cause. Either
party may terminate his employment with a 30-day written notice or we may
terminate him immediately and provide Mr. Than with severance pay in an amount
equal to 30 days of salary as of the date of termination. Mr. Than will
receive an annual salary of $100,000 and 50,000 shares of common stock for
each month of service. Mr. Than has agreed to maintain the confidentiality of
our trade secrets and not to compete with the company or to solicit any
employee or client of the company during his employment and for a period of
one year after any termination of his employment.
ITEM 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 transaction 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 2004 Mr. Than advanced a total of $132,000 and during 2003 he advanced
$1,500. These amounts were paid back to him in the respective years and the
balance owed him is $0.
On April 22, 2004 we issued 600,000 shares, valued at $120,000 to Gunther
Than, our CEO, in consideration for services provided to use.
During the year ended December 31, 2002, we advanced $98,458 to View
Technologies, Inc., which is controlled by Gunther Than, our Chief Executive
Officer and director. View Technologies, Inc., is a private company that
develops software. Mr. Than devotes approximately 12 hours a week to this
company. Our Board is aware of his position in this company and believes that
there are no conflicts of interest resulting from his positions in both
companies. There are no formal repayment terms associated with the advance to
View Technologies. View Systems and View Technologies, Inc. had entered into
various transactions throughout the 2002 year to provide working capital to
one another when necessary. These transactions between View Systems and View
Technologies were negotiated between related parties without "arms length"
bargaining and, as a result, the terms of these transactions may be different
than transactions negotiated between unrelated persons.
ITEM 13. EXHIBITS
No. Description
------ -----------
3.1 Articles of Incorporation of View Systems, as amended
(Incorporated by reference to exhibit 3.1 to Form 10-QSB filed
November 14, 2003)
3.2 By-Laws of View Systems (Incorporated by reference to exhibit 3.2 to
Form 10-QSB filed November 14, 2003)
10.1 View Systems, Inc. 1999 Stock Option Plan (Incorporated by reference
to exhibit 10.16 to Form SB-2 filed January 11, 2000)
10.2 View Systems, Inc. 2000 Restricted Share Plan (Incorporated by
reference to registrant's definitive proxy statement on Schedule
14A, dated May 3, 2000)
10.3 Employment agreement between View Systems and Gunther Than, dated
January 1, 2003. (Incorporated by reference to exhibit 10.3 to Form
10-KSB, filed April 14, 2004)
21.1 Subsidiaries (Incorporated by reference to exhibit 21.1 to Form
10-KSB, filed March 31, 2003)
31.1 Chief Executive Officer Certification
31.2 Principal Financial Officer Certification
32.1 Section 1350 Certification
37
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: February 2, 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: February 2, 2006 _____________________________________________
Gunther Than, CEO, Principal Financial and
Accounting Officer, Treasurer and Director
/s/ Martin J. Maassen
Date: February 2, 2006 ______________________________________________
Martin J. Maassen
Director
/s/ Michael L. Bagnoli
Date: February 2, 2006 ______________________________________________
Michael L. Bagnoli
Director and Secretary
38