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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
{X} ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 {Fee Required}
For the fiscal year ended DECEMBER 31, 1999
{ } TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 {No Fee Required}
Commission file number: 001-15247
VIEW SYSTEMS, INC.
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(Name of Registrant as specified in its charter)
NEVADA 59-2928366
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(State or other jurisdiction (I.R.S. Employer Identification No
of incorporation or organization)
925 West Kenyon Avenue, Englewood, Colorado 80110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303)783-9153
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of
the Act: Common Stock, $.001 par value.
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(Title of class)
Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to the filing requirements for the past 90
days. Yes X No - -
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is 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. { X }
The Registrant's revenue for the fiscal year ended December 31, 1999 was:
$310,057.
As of March 28, 2000, 8,062,580 shares of the registrant's Common Stock were
outstanding and the aggregate market value of such Common Stock held by
non-affiliates was approximately $15,713,555 based on the closing price of $3.25
per share on that date.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for Registrant's Annual Meeting of
Stockholders scheduled to be held on June 30, 2000 have been incorporated by
reference in Part III of this Form 10-KSB. In addition, exhibits from the
Registrants registration statement filed on Form SB-2 on January 11, 2000 have
been incorporated by reference.
Transitional Small Business Disclosure Format (Check One): Yes ____; No _X___
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
View Systems, Inc. (the "Company") incorporated under Florida law on
January 26, 1989. The Company did not have material assets or active operations,
being essentially a shell corporation, until the fourth quarter of 1998. Prior
to start-up of operations, Julie Birns (975,200 shares) and Pamela Wilkinson
(974,800 shares), both Florida residents, were the primary shareholders. On
September 28, 1998, Julie Birns resigned as the sole Director, President,
Secretary and Treasurer of the Company and Gunther Than was elected the sole
Director, President, Secretary and Treasurer of the Company. Thereafter, the
Company began organizing activities, raising funds, purchasing working assets,
hiring staff, designing computer software and hardware and establishing a
corporate identity. During the months that followed start-up of active
operations, the Company began intensely developing a product line of digital
video systems for security and surveillance and acquired three businesses.
On October 6, 1998, the Company acquired all of the outstanding stock of
RealView Systems, Inc. ("RealView"), a Colorado corporation, pursuant to an
exchange whereby shareholders received 1.33 shares of non-registered, newly
issued restricted Company stock in exchange for 1 share of RealView stock.
Through this share exchange, Gunther Than received 1,046,800 shares of Company
common stock, and the rest of the Company's common stock was distributed to 24
other shareholders that exchanged their stock, the largest of which was Russ
Benefield (131,338 shares), View Technologies, Inc. (130,937 shares), Linda
Than, the wife of Gunther Than (66,700 shares) and Leokadia Than, the mother of
Gunther Than (200,000 shares). In total, the Company issued 2,000,000 shares of
its common stock to the former shareholders of RealView. RealView had developed
a software program for use in the real estate market, and had achieved limited
sales of this software program. RealView's software program used some innovative
image software compression techniques, which the Company believed it could
further develop for use with View Systems products. RealView had a license
agreement with a related company, View Technologies, Inc., to license its
compression software for use in non-medical markets. RealView had relationships
with scientists that the Company thought it could employ for the Company's
benefit. The Company determined the exchange ratio based on its evaluation of
the assets of the relative companies, their sales, level of development and
liabilities.
On February 25, 1999, the Company acquired all of the issued and
outstanding shares of Xyros Systems, Inc., a privately held Maryland
corporation, through a share exchange whereby 150,000 of the Company's
non-registered, restricted stock was exchanged for all of the shares of Xyros
Systems, Inc., with the following persons receiving most of the shares: Kenneth
C. Weiss (70,500), David Bruggeman (39,000) and Hal Peterson (32,250). Xyros had
developed a product called the RM-1600, which permitted remote monitoring and
storage of video captured by video cameras. The Company believed the engineering
in Xyros's products was superior and that the Company could improve upon it to
make a line of even better products. Because it had devoted substantially all of
its resources to research and development, prior to acquisition, Xyros had
achieved limited sales of its products and had an accumulated earnings deficit
of $91,155.00 through December 31, 1998. The Company absorbed much of the Xyros
staff and all of Xyros' intellectual property, integrating the engineering from
the RM-1600 products into the SecureView(TM) line of products. As part of the
acquisition, the Company guarantied certain debts of Xyros to its former
shareholders, officers and directors, namely a debt in the stated principal
amount of $75,000 to Hal Peterson, a debt in the stated principal amount of
$50,000 to Ken Weiss and a debt in the stated principal amount of $30,000 to
Dave Bruggeman. The Company determined the terms of this acquisition based on
its evaluation of the assets of the relative companies, their sales, level of
development and liabilities.
On May 25, 1999, the Company acquired all of the stock of Eastern Tech
Manufacturing Corp. ("ETMC") in exchange for 250,000 shares of the Company's
stock and cash payments or guaranties of cash payments to or for the benefit of
ETMC's sole shareholder, Larry Seiler.
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Subsequent to the acquisition, the Company satisfied its obligation to make cash
payments or guaranties of cash payments to or for the benefit of Lawrence Seiler
by the issuance of stock certificates totaling 170,000 shares of the Company's
common stock. In total, Lawrence Seiler received 480,000 shares of the Company's
common stock in exchange for the acquisition, and he agreed to certain
restrictions on the transferability of 250,000 shares of this common stock,
pursuant to a lock-up agreement. ETMC is a manufacturer of electronic hardware
and assemblies and had been operating in excess of 15 years. ETMC provided the
Company with a captive manufacturer, as well as additional assets and revenues.
ETMC is implementing a quality control plan which is in compliance with the
requirements of ISO 9002 and has consistently maintained high quality control
standards in its contract production work for large commercial and governmental
entities, having maintained certification under the quality control standards
specified in MIL-I-45208 and MIL-STD-2000. Through the acquisition of ETMC, the
Company hoped to strengthen its ability to meet large orders of its products, to
control the quality of its products, to manage its inventory, and to support its
products. The Company determined the terms of this acquisition based on its
evaluation of the assets of the relative companies, their sales, level of
development and liabilities.
The Company began making its first sales of the prototypes of its security
and surveillance products in March 1999. By the third quarter ended September
30, 1999, the Company had begun earning substantial revenues. Since inception of
active operations, the Company has focused its business on the development,
production and sale of a line of digital video products for surveillance and
security applications. Through ETMC, the Company also offers electronic
component manufacturing and testing services and the Company plans to offer
engineering design services.
BUSINESS OF REGISTRANT
The Company designs, markets and sells a family of closed circuit
television ("CCTV") digital recording and video management products
("Surveillance Products") and digital identification products ("Identification
Products") based on the Company's proprietary software. The Company uses an open
architecture design approach that allows compatibility with commercially
available computer and video hardware and software. The Company's manufacturing
division, Eastern Tech Manufacturing Corp., also offering contract electronic
component assembly and test services.
SURVEILLANCE PRODUCTS
In the fall of 1998, the Company began developing a new product
technology named SecureView(TM). This technology permits (i) digital video
recording and storage that eliminates the need for videotapes and video cassette
recorders ("VCRs") in surveillance environments, and (ii) enables
high-speed access, retrieval and playback of stored video across local area
networks and the Internet. The Company currently markets a line of products
incorporating its SecureView(TM) technology and began commercial shipments of
certain of these products in the first quarter of 1999. The Company also is
developing three products utilizing the SecureView(TM) technology, named
ViewStorage(TM), CareView(TM) and WebView(TM).
On May 25, 1999, the Company acquired Eastern Tech Manufacturing Corp.,
and has continued, and plans to continue, its business lines, namely providing
contract electronic component and finished electronic system assembly and
bench-testing services.
SECUREVIEW(TM) LINE OF PRODUCTS
The Company is selling SecureView(TM) as a line of digitally recorded,
remote monitoring systems that allow a user to view its existing closed circuit
television (CCTV) system remotely. Using SecureView(TM), a user can dial into
his CCTV system and view the video (and audio) output from the system's cameras
(and microphones). These systems store video (and audio) output on computer hard
discs, rather than VCR tapes, for retrieval real time or at a later date. The
images can be stored and retrieved selectively dependent on events and other
triggers from sensing devices such as motion detectors. The systems are also
programmable, in the sense that they can be pre-set to take certain actions when
certain events are sensed in the surveillance area. For example, they can be
programmed to begin recording when motion is sensed in a surveillance area or to
notify the user if the system is not functioning properly. The SecureView(TM)
systems come standard with 28 days storage. SecureView(TM) allows the user to
retrieve images through the use of sequenced indexing, as contrasted with a VCR,
where a user must search an entire tape to review a critical event, often fast
forwarding and rewinding. In addition, the Company's digital systems employ
video data compression saving space and time for transmission on low bandwidth
channels such as plain telephone twisted pair wiring.
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The SecureView(TM) Line of Products contains the following features:
- - Remotely monitor any number of cameras at different locations from your PC
- - Connects to an existing Closed Circuit Television system (CCTV)
- - Uses any and all of the communications protocols such as standard telephone
lines, LAN/WAN, ISDN, T1 etc. for signal transfer
- - Video can be monitored 24 hours a day by a security monitoring center
- - Independent unattended video recording from timer or other activation event
- - Allows uninterrupted "2-way" audio transmission while switching,
controlling and monitoring up to 16 cameras per unit
- - Advanced Digital compression transmits high resolution frames of video
dependent on the connection
- - Digital storage on the systems hard drive provides high resolution
recording and viewing even in remote playback
- - Local & remote recording, storage & playback for up to 30 days is available
- - ZOOMVIEW provides 2x, 3x, 4x zoom capability within the cameras field of
view
- - Allows you to select between "Continuous Recording" or "Guard Tour" for up
to seven days
- - "Guard Tour" allows a user to set the system to automatically review in
desired sequence cameras that are installed around a surveillance area and
provides the option to time and date stamp camera sequence
- - Provides remote software and system programmability
- - Remotely monitors itself to insure system functionality with alert messages
in the event of covert or natural interruption
- - Modular expansion system configuration
- - System detects and alerts user to image-loss detection.
- - Image detail control for faster frames or more detail of image.
- - ROI (region of interest) feature control
- - Real-time image "snap-shot" storage & printing.
- - Video image scaling from "thumbnail" to full screen.
- - Relay outputs to control external devices (e.g.: turning on the lights,
sounding an alarm, or locking a door when the unit receives a signal from a
motion sensor or button).
The benefits to the SecureView(TM) line of products include:
- - Equipment cost reduction by utilizing existing CCTV systems
- - Digital storage eliminates the need for costly VCRs, maintenance programs,
and tapes
- - Plug and play technology minimizes installation cost
- - Enables user to visually access and monitor business off-site
- - Security stamp (Watermark) on video assures Authenticity
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- - Adds higher level of employee security when connected to a 24 hour
monitoring station
VIEWSTORAGE(TM)
The Company is currently developing ViewStorage(TM) as a VCR replacement
device that fits existing analog CCTV systems. This storage device will record
video output digitally, and it will store 7, or more, days worth of video output
from cameras, without the burden of handling VCR tapes (typically 24 hours per
tape). Video recording can be programmed for continuous recording, timed "Guard
Tour" recording, or event driven recording. Unlike images stored on tape, images
stored on this VCR replacement device do not degrade over time. It also does not
require the on-going and expensive maintenance required by VCR recording
devices. ViewStorage(TM) is modular in nature in that it can be expanded to add
additional storage, up to an amount that meets the requirements of each
particular customer. ViewStorage(TM) also has features that replace other CCTV
security components, such as video multiplexers, sequencers, alarm controllers,
and video switches. This product has a unique "camera and date/time filtering"
feature which allows the user to immediately locate the video recorded on a
camera at a given time and date. The user controls ViewStorage(TM) from front
panel buttons or an infrared remote controller that controls the menu and setup
options displayed on a video review monitor. The Company expects to complete a
working prototype of ViewStorage(TM) by later in 2000, with a product release to
market by the third quarter of calendar year 2000.
CAREVIEW(TM)
The Company is developing CareView(TM) in response to the growing need for
monitoring the safety of children at home and in day care centers, and the
safety of the elderly in nursing homes. The Company is developing the CareView
system as an ideal option for the "care" facility, which system should provide
an additional revenue source for these facilities while at the same time
providing the users of the systems the ability to monitor the care given to
their loved ones. Using the CareView(TM) system, a user, be it a child's parent
or a nursing home resident's child, can use the internet to access the day care
center's Web Site and immediately view the video output produced by cameras
installed at the "care" facility.
For nursing and hospice care facilities, the CareView(TM) system allows
family and friends to view loved ones when they are not able to be there,
through 2-way audio capabilities just by accessing the facilities' Web site. The
functional features of the CareView product are:
- - Closed Circuit Cameras (4 to 8 depending upon system purchased) grab video
image.
- - View Systems' SecureView(TM) acts as web server continually uploading video
for access from the web.
- - Communications Link: via the World Wide Web
- - Parent or Guardian can view video & audio on their computer at home or the
office (or from anywhere in the world), by using the proprietary View Web
Browser, accessing the care facility's Web site, and entering their secure
password.
With a typical CareView(TM) installation, video cameras are installed
around the care provider's public areas. The video is captured, compressed,
stored and made available on the Web. An authorized user can access the video on
their computer with the CareView(TM) Web Browser. Security is maintained by
requiring the user's name and password to validate the authorization.
The heart of CareView(TM) is a specialized PC Board, which the Company has
designed. The Company has developed a prototype of CareView(TM) and has
successfully tested it at its Columbia, Maryland facility. The Company is
currently planning on releasing CareView(TM) for beta testing in the field,
afterwhich the Company will release CareView(TM) to the market, which should
occur later in 2000.
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WEBVIEW(TM)
The Company is currently developing WebView(TM) as a low-priced retail
product that will allow a user to capture camera output from a limited number of
cameras and view that output remotely via a connection to a server connected to
the World Wide Web. WebView(TM) consists of a specialized PC card and software
that is web enabled. These products are ideal for the consumer who would like a
low cost way to monitor his/her assets remotely. The Company has developed an
alpha version of WebView(TM) and has successfully tested it in-house. The
Company plans some further refinement of the product, before beta testing it and
releasing it to the market later in 2000.
IDENTIFICATION PRODUCTS
The Company's Identification Products consist of the Company's proprietary
software combined with commercially available hardware components and vendor
software. Identification Products can record and store digital images in
computer databases, transmit such images to other control systems or printers,
and retrieve, analyze, reproduce and manipulate these images in a variety of
ways. The Company's Identification Products provide positive identification and
verification of an individual's identity for access control, security, retail
point-of-sale, human resource management and other control systems.
Identification Products are designed to enhance or replace existing film-based
identification systems.
The Company offers Identification Products with a variety of functions and
features targeted to a wide array of customers, ranging from large organizations
requiring a multi-location system operating across a local or wide area computer
network to small organizations requiring a single stand-alone system. In many
instances, the Company configures its systems to fit a particular customer's
needs. The Company's principal Identification Products are FaceView(TM) and
PlateView(TM).
PLATEVIEW(TM)
PlateView(TM) is a license plate recognition system that uses industry
leading optical character recognition technology to provide an additional means
of identifying individuals in a surveillance area. This system can be integrated
into an access control mechanism that can open gates or call an attendant to
compare an identification made from other data, such as a driver's license, with
the identification made with the license plate. In addition to identification
through license plate recognition, law enforcement personnel can use this system
to receive early warnings as to a number of items, including whether the
occupants in a car being stopped have warrants out for their arrest, whether the
license plate attached to a vehicle matches the vehicle's registration, or
whether there is a current outstanding warrant for a vehicle's occupant's
arrest.
The Company integrates optical character recognition software licensed from
Lead Technologies, Inc. in its proprietary software in order to deliver
PlateView(TM). The SecureView(TM) provides the platform on which the integrated
software package operates. The system is fully delivered and the Company has
been delivering it to the market beginning in 2000. The Company has
installations of this product that the Company is currently supporting.
FACEVIEW(TM)
FaceView(TM) is a self-contained facial identification system using the
most advanced biometrics technology to provide an access control system or an
enhanced system for tracking individuals in a surveillance area. Using cameras
installed in a surveillance area, this easy-to-use system captures an
individual's face. The system then converts this facial information into a
digital format that is then transmitted over phone lines to a computer
processing unit that compares the captured facial information against a database
of facial information, then delivers a quick and accurate identification if a
match is found. This resulting information can be used to track and identify
persons in a surveillance area.
There are many market applications requiring identity confirmations,
including Access Control, Guard Enhancement/Replacement, Gate Watch, Time and
Attendance, Criminal Identification, Terrorist Tracking, Vehicle tracking and
Banking applications. From an individual's face, FaceView(TM) allows you to
compare virtually any visual characteristic of an
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individual against a predetermined approved database, and then allows the proper
action to be taken in response to this comparison.
The Company licenses facial identification and database software for
FaceView(TM) from its partner, Visionics Corp., and integrates this software
into its own proprietary software. The advanced biometrics software developed by
Visionics Corp. captures facial information from live video and creates audit
trails, including components for automatic head finding, tracking, cropping,
image quality control and matching, and acts as a search engine against a
database of facial records and builds databases of time stamped facial records
from live or recorded video, checking those records against a watch list, in
real time
FaceView(TM) requires only one View Systems SecureView(TM) system, and a
local PC workstation (or network server). SecureView(TM) enhances FaceView(TM)
by allowing you to view your system from any location. One to four cameras on
the SecureView(TM) system can be scanned continuously for facial images. When a
face is detected in the field of view, the system processes the image and
creates a "Faceprint" digital code of the face. This code is then compared
against "Faceprint" digital codes previously stored in your database on the
local PC workstation or other network component.
Facial comparisons in conjunction with other double check methods such as
Id card scans can trigger events to occur, such as, opening a door, turning on
the lights, setting an alarm condition or notifying the PC operator (such as a
security guard) of the event. From an attended PC workstation, the operator can
also obtain additional profile information on the person identified, such as
name, address, or their status. This aids in the determination of their
eligibility for access. The user can set a "threshold" to determine how accurate
the match must be so that there is a high confidence that the person has been
identified accurately. FaceView(TM) can be programmed to interface with any
system implementing compatible facial identification database software. The
FaceView(TM) System will also play an important role in personal property
protection, corporate access control and in the business security market.
The Company has completed development of its FaceView system and has
successfully installed and beta tested it in the field. The Company is currently
marketing its FaceView system and expects to have significant installations of
this product in 2000.
MARKETING AND CUSTOMERS
According to studies accepted by its competitors in the industry, the
market size for closed circuit tv systems is at least $2,200,000,000 per year,
with this market size increasing at a rate of 12 - 15% per year. The increased
functionality that digital technology introduces to CCTV systems has made this a
very dynamic and rapidly growing market. The Company is distributing and will
distribute its SecureView(TM) line of products, with add-on features, such as
FaceView(TM), to this market through a network of value-added resellers, OEMs
and strategic partners. The Company has current ongoing VAR arrangements with 20
small and medium sized domestic and international resellers and is actively
selling its products through these distribution channels. In limited
circumstances, the Company has allowed its resellers to purchase limited
quantities of its products before requiring them to execute its standard
reseller agreement. The Company's standard reseller agreement is non-exclusive
and allows the reseller to purchase products from the Company at a discount to
its suggested retail prices. The Company requires its resellers to actively
market its products and the Company reserves the right to periodically audit its
resellers.
In addition to these resellers, the Company also is in discussions with
some very large security and law enforcement integrators about VAR and OEM
distribution agreements. In the short term, the Company will rely on its
existing value added reseller network to generate sales revenues; however, the
Company believes long term sales growth will be substantially driven by VAR and
OEM agreements with the larger companies. The Company is actively marketing its
SecureView(TM) line of products to commercial businesses, gaming casinos and
other outlets, law enforcement and residential users
The Company will also offer its CareView(TM) products through these same
distribution channels. Day care centers and nursing homes will be the primary
end users of these systems and the Company hopes to develop a revenue model that
is dependant on usage of the CareView(TM) system with its distributors. The
aging population and the large numbers of double income working families have
dramatically increased the number of facilities that could be installed with
CareView(TM). Based on discussion with industry groups, potential customers and
security system integrators, the Company believes the size of the market for
CareView(TM) is in the many multimillion-dollar range. As the public becomes
increasingly comfortable with computer use
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and multiple computers become more commonplace in the home and office, the
Company expects the market demand for this type of service to expand.
The Company plans to offer WebView(TM) for direct retail sale on the World
Wide Web and wholesale through retail distributors such as CompUSA, Best Buy,
and Circuit City and through its corporate website, www.viewsystems.com. The
Company plans to price these products at a level which is attractive to retail
consumers. After the Company has conducted beta site installation tests of this
product, the Company will attempt to negotiate retail distribution arrangements,
but there is no assurance the Company will be able to obtain such satisfactory
arrangements.
The market for ViewStorage(TM) consists of replacement of existing analog
CCTV components, including VCR recording devices and multiplexers. Based on its
discussions with industry leading security system integrators, the Company
believes the market size for ViewStorage(TM) is $1,600,000. The Company believes
it can profitably price this product at a level which will make owners of
existing CCTV systems want to buy ViewStorage(TM) as a way of reducing overall
CCTV system costs through elimination of on-going maintenance costs.
The Company's electronic component assembly and test division, ETMC, has
been in operation for over fifteen (15) years and has an established base of
clients for which it has long done business. Traditionally, ETMC has done
approximately 60% of its business for the commercial sector and 40% of its
business for the government sector. ETMC's diverse clients have included
Hewlett-Packard, IBM, Martin Marietta, Aero & Naval Systems, Maryland Government
Procurement Office, Lockheed Martin, and John Hopkins's Applied Physics Labs
under contract to NASA.
The market for the types of electronic component manufacturing and testing
services offered by ETMC is well established and the Company believes, based on
its discussions with representatives from its competitors, trade associations
and customers, that it is a multi-million dollar market. This market is subject
to cyclical swings. Currently, the Company believes the market demand for
electronic manufacturing and bench testing services is very good, and the
Company plans to take advantage of this climate to leverage its resources into
new and expanded service offerings and to expand its manufacturing base of
clients and business.
Historically, ETMC has limited itself to the electronic component assembly
and testing market in the Baltimore-Washington area; however, it plans to expand
its marketing to provide electronic component assembly services in other
geographic regions in this country and internationally. Moreover, the Company
plans to expand ETMC's service offerings to include engineering design services.
The market for these services is very large and is often serviced by the same
companies that provide electronic component assembly services. The Company
believes that it will be limited in its efforts to capture market share for its
service offerings only by the new equipment and machinery it can acquire, the
size of its production facilities and its engineering human resources.
COMPETITION
The markets for the Company's security products are extremely competitive.
Competitors include a broad range of companies that develop and market products
for the identification and video surveillance markets. Competitors in the market
for its identification products, such as FaceView(TM) and PlateView(TM),
include: (i) in film-based systems, Polaroid Corporation, and (ii) in
digital-based systems, Polaroid Corporation, Loronix Information Systems, Data
Card Corporation, Dactek International, Inc., Imaging Technology Corporation, G
& A Imaging, Goddard Technology Corporation and Laminex, Inc., as well as many
other organizations. Competitors in the surveillance market include numerous VCR
suppliers and digital recording suppliers including, Loronix Information
Systems, Inc., Sensormatic Corporation and NICE Systems, Ltd.
The Company believes that the principal competitive factors in the markets
for its security products include: system performance and functionality, price,
system configuration flexibility, ease-of-use, system maintenance costs,
quality, reliability, customer support and brand name. Larger more established
companies with substantially greater technical, financial and marketing
resources than the Company, such as Data Card Corporation, Sensormatic
Corporation and NICE Systems, Ltd., have an enhanced competitive position due in
part to their established brand name franchises. The Company believes that its
primary competitive strengths include system performance and functionality,
system configuration flexibility and ease-of-use.
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Like the markets for its security products, the markets for businesses that
provide contract electronic component assembly services is extremely
competitive. Many of the companies that provide competitive electronic component
manufacturing and testing services provide greater engineering services than
those currently being provided by ETMC. By providing these services, these
competitors put themselves in a better position to obtain manufacturing service
contracts. Essentially, these competitors leverage off of their engineering
services to attract and grow their manufacturing business and vice versa. The
Company hopes to develop the ability to provide complementary contract
engineering services. With the current robust state of the economy, in its
opinion, the demand for engineering design, development and manufacturing
services is high. The Company believes it is well positioned to expand its sales
revenues derived from electronic component manufacturing and testing services
and in complementary engineering design and development services.
MANUFACTURING AND SUPPLIERS
The Company does not manufacture any of the hardware in its systems;
rather, the Company assembles its systems by integrating commercially available
hardware and software together with its proprietary software. The Company
licenses software modules that is integrated into its proprietary software and
installed on its systems, and then licensed and distributed to end-users. This
software includes wavelet image compression/decompression software from Aware,
Inc., optical character recognition software from Lead Technologies, Inc.,
operating software from Microsoft Corporation, and facial recognition and
database software from Visionics, Inc. The Company believes that it can continue
to obtain components for its systems at reasonable prices from a variety of
sources. Although the Company has developed certain proprietary hardware
components for use in its SecureView products and purchased some components from
single source suppliers, the Company believes similar components could be
obtained from alternative suppliers without significant delay. There can be no
assurance, however, that the Company will be able to obtain needed components at
reasonable prices. The Company has distribution licenses with Aware, Inc., Lead
Technologies, Inc. and authorized distributor for Microsoft Corporation. The
Company currently has a beta site agreement with Visionics, Inc. and is
negotiating a distribution license. There can be no assurance, however, that the
Company will be able to obtain a distribution license at favorable prices from
Visionics, Inc.
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company regards certain features of its products and documentation as
proprietary and relies on a combination of contract, copyright, trademark and
trade secret laws and other measures to protect its proprietary information. As
part of its confidentiality procedures, the Company generally (i) enters into
confidentiality and invention assignment agreements with its employees and
mutual non-disclosure agreements with its manufacturing representatives, dealers
and systems integrators, and (ii) limits access to and distribution of its
software, documentation and other proprietary information. The Company has no
patents and, while the existing copyright laws afford only limited protection,
the Company intends to apply for federal copyright registrations for any of its
software systems, for which it has not yet received federal copyright
registration. The Company believes that, because of the rapid pace of
technological change in the computer software industry, trade secret and
copyright protection are less significant than factors such as the knowledge,
ability and experience of the Company's employees, frequent product enhancements
and the timeliness and quality of support services.
The Company provides its software to end-users under non-exclusive
"shrink-wrap" licenses, which generally are nontransferable and have a perpetual
term. Although the Company does not make source code generally available to
end-users, it may, from time to time, enter into source code escrow agreements
with certain customers. The Company has also licensed certain software from
third parties for incorporation into its products.
RESEARCH AND DEVELOPMENT
The Company believes its success depends in large part on its ability to
enhance its current product line, develop new products, maintain technological
competitiveness and satisfy an evolving range of customer requirements. The
Company's research and development group is responsible for exploring new
applications of its core technologies and incorporating new technologies into
the Company's products. The Company's research and
9
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development resources have been directed primarily toward (i) developing new
products, (ii) improving the functionality and performance of the Company's
proprietary software, and (iii) designing and implementing the device drivers
necessary to maintain the Company's open architecture.
In 1999, the Company recognized $212,841 of research and development.
EMPLOYEES
The Company employs 22 persons including 3 persons in part-time positions.
The Company also employs 4 independent contractors who devote a majority of
their work to various projects of the Company. The Company's future success
depends in significant part upon the continued service of its key technical and
senior management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel in the future.
The Company has no collective bargaining agreements with any of its
employees. The Company believes its relations with its employees are good.
GOVERNMENT REGULATION
While as a product company, the Company is not subject to Government
regulation in the manufacture and sale of its products, and the components in
its products, its end users will be subject to numerous regulations that stem
from proposed activities in surveillance. Security and surveillance systems,
including cameras, raise privacy issues. Its products involve both video and
audio, and add features for facial identification, and the regulations regarding
the recordation and storage of this data are uncertain and evolving. For
example, recordation of audio without the consent of the person being recorded
is prohibited by the Federal Wiretapping Act. In addition, the Company's systems
are intended to function as security devices, and their malfunction may trigger
liability concerns. Domestically, its resellers are required to obtain state
licenses for the installation and service of its system in end user locations.
Shipments of these devices internationally may be regulated as to certain
countries that raise national security concerns. Efforts to comply with existing
regulations and avoid liability are compounded by the fact that such regulations
are being imposed, in part, by government agencies who are in the process of
formulating regulations and controls. The Company cannot predict the extent to
which its revenue and operations will be affected by such activity until
contracts have actively been secured and applicable regulations specified.
ITEM 2. PROPERTIES
The engineering and manufacturing facility for its products is an 8,000
square foot facility located at 9693 Gerwig Lane Suite 0, Columbia, MD 21046.
The Company leases this facility consistent with arms length, commercially
reasonable lease terms from Lawrence Seiler, past President of Eastern Tech
Manufacturing Corp. and current sales representative for the Company. The
Company engineers, manufactures, assembles and ships from this facility in
Columbia, Maryland. The Company also maintains an executive office at 925 West
Kenyon Avenue, Suite 15, Englewood, Colorado, which the Company leases from
MediaComm Marketing International, Inc. in accordance with arms length,
commercially reasonable lease terms.
ITEM 3. LEGAL PROCEEDINGS
Hal Peterson, a former Vice President of Sales and Marketing of Xyros and a
trust he controls filed suit against the Company on October 28, 1999. The
lawsuit alleges that the Company has not timely paid interest and other monies
due Hal Peterson, which Xyros had agreed to pay under two promissory notes made
by Xyros, in the original principal amounts of $45,000 and $30,000,
respectively. As part of its acquisition of Xyros, the Company guarantied the
repayment of these promissory notes. The outstanding principal under the
promissory notes was not due until December 31, 1999, and the dates for payment
of accrued interest are not specified. Prior to its acquisition of Xyros, that
company, which was controlled by Hal Peterson, had not paid interest on the
notes and the Company intended at the time of acquisition to pay the notes in
full when the Company had raised sufficient working capital to pay the notes.
The Company is defending the lawsuit. Notwithstanding this defense, the Company
intends to pay these promissory notes from the proceeds realized from exercise
of the warrants, whose shares upon exercise are being registered in this
offering. Hal Peterson beneficially owns a substantial stake in View Systems,
Inc. due to provisions he negotiated as part of its acquisition of Xyros.
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Several years prior to the Company's acquisition of Eastern Tech
Manufacturing Corp., the President of Eastern Tech, Lawrence Seiler, became
involved in a series of transactions arising out of his performance of a
contract for Boeing, Inc. that are the subject of a criminal indictment and
prosecution pending in the U.S. District Court of the District of Columbia.
Preliminary to this action, the Federal Bureau of Investigation, Washington
Field Office (the "FBI") seized certain assets they believed were involved in
the transactions in question. At one time, Eastern Tech had an interest in one
of the seized assets, namely a corporate bank account holding $63,572.21 titled
in the name of Eastern Tech. Eastern Tech has subsequently transferred all
right, title and interest in this bank account to Lawrence Seiler in exchange
for his forgiving an obligation of the corporation to pay him fees for services
he has rendered to Eastern Tech.
The Company acquired eastern Tech on May 25, 1999, and following this
acquisition, Lawrence Seiler was named the President of Eastern Tech. On
December 4, 1999, Lawrence Seiler was removed as President of Eastern Tech and
is now an independent sales representative to the Company. Eastern Tech is not a
party to the proceedings involving Lawrence Seiler.
The Company has inquired with the Assistant U.S. Attorney handling the
prosecution of Mr. Seiler's case whether Eastern Tech is the subject of a civil
or criminal investigation arising out of these events and has been advised that
the Company was not involved.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On August 4, 1998, the National Association of Securities Dealers ("NASD")
cleared the Company for an unpriced quotation on its Electronic Bulletin Board.
Thereafter, in October, 1998, the shares began appearing for priced quotation on
the NASD Electronic Bulletin Board and, ever since, have been traded in the OTC
market under the symbol "VYST" with a Standard and Poors Cusip # 926706102.
Prior to that time, there was no public market for the Company's common stock.
The Company is listed in the Standard and Poors Industrial manual. As of
December 31, 1999, the Company listed 187 Shareholders of record. The Company
estimates that there are approximately 900 beneficial owners of its common
stock. The high bids and low bids, from the National Quotation Bureau, for the
relevant time periods were:
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fourth Quarter 1998................ 3.25 1.85
First Quarter 1999................. 6.35 2.0
Second Quarter 1999................ 2.25 5
Third Quarter 1999................. 3.15 1.75
Fourth Quarter 1999................ 3.65 1.75
</TABLE>
According to the NASD, there were seventeen broker-dealers listed as
traders of the Company stock, as of December 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
Knight Securities, Inc. Wien Securities Corp. USCC Trading/A Division of Fleet
Hill Thompson Magid & Co., Inc. Herzog, Heine, Geduld, Inc. Securities
Sharpe Capital, Inc. Paragon Capital Corporation Wilson-Davis & Co.
Sherwood Securities Corp. Global Financial Group, Inc. Schwab Capital Markets, L.P.
W. H. Myerson & Co., Inc. GVR Company Spencer Edwards, Inc.
Ladenburg,Thalmann & Co., Inc. Bear, Stearns & Co., Inc.
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions
The Company's shares will be subject to Section 15(g) and Rule 15g-9 of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"), commonly
referred to as the "penny stock" rule. Section 15(g) sets forth-certain
requirements for transactions in penny stocks and title 15g-9(d)(1) incorporates
the definition of penny stock that is found in Rule 3a51-1 of the Exchange Act.
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The Commission generally defines penny stock to be any equity security that
has a market price less the $5.00 per share, subject to certain exceptions. Rule
3a51-1 provides that any equity security is considered to be penny stock unless
that security is: registered and traded on a national securities exchange
meeting specified criteria set by the Commission; authorized for quotation from
the NASDAQ stock Market; issued by a registered investment company; excluded
from the definition on the basis of price (at least $5.00 per share) or the
issuer's net tangible assets; or exempted from the definition by the Commission.
If the Company's shares are deemed to be a penny stock, trading in the shares
will be subject to additional sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors, who generally are persons with assets in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a special
suitability determination for the purchase of such security and must have
received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock. A broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, and current quotations for the securities. Finally, monthly
statements must be sent disclosing recent price information for the penny stocks
held in account and information on the limited market in penny stocks.
Consequently, these rules may restrict the ability of broker-dealers to trade
and/or maintain a market in the Company's Common Stock and may affect the
ability to shareholders to sell their shares.
The Company has never paid cash dividends on its Common Stock and
anticipates that, for the foreseeable future, it will continue to retain any
earnings for use in the operation of its business. Payment of cash dividends in
the future will depend upon the Company's earnings, bank loan covenants,
financial condition, contractual restrictions, restrictions imposed by
applicable law, capital requirements and other factors deemed relevant by the
Company's Board of Directors.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's audited financial statements and the notes thereto included
herein.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES AND GROSS PROFIT.
The Company moved from being a development stage company in 1998 to earning
substantial revenue in 1999. Gross profit on sales for the year ended December
31, 1999, increased to $51,579 from $10,547 in the year ended December 31, 1998.
This represents an approximate 390% increase in gross profit on sales. Gross
profit margin for the year ended December 31, decreased from 34% in 1998 to 17%
in 1999. At these low sales amounts, the Company considers the gross profit
margin fluctuation to be non-material. The gross profit margin should stabilize
with increased sales.
Operating expenses for the year ended December 31, 1999, increased to
$3,438,420 , compared with $254,104 in 1998. Most of the Company's operating
expenses, $2,626,900, in 1999 were attributable to the issuance of shares of the
Company's common stock as compensation and incentive, and as a means to attract
and retain qualified personnel. It does not represent actual cash outlays by the
Company. When adjusting for this expense item, our operating expenses from
actual cash outlays would be reduced to $1,357,010. Much of this expense can be
attributed to a significant company focus on sales, marketing, investor
relations and promotion, as well as research and development outlays that
increased to $212,841 in 1999. We plan to build a larger sales force in 2000, as
well as spending increasing amounts on trade shows, advertising and promotion
and, therefore, we expect to continue significant outlays in the areas of sales,
marketing, investor relations and promotions.
As a result of the foregoing, net loss was $3,932,331 for the year ended
December 31, 1999, compared to a net loss of $243,557 for the previous year.
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REVENUE
The Company's revenue is derived from (i) sales of systems, included
embedded software, and supplies from maintenance services on the systems; and
(ii) sales of contract electronic component and system assembly and test
services. In 1999, we derived $65,954 from sales of systems and $231,970 from
sales of contract manufacturing and test services. Revenue increased
approximately 900% from $31,438 in 1998 to $310,057 in 1999. The Company
attributes the increase in revenue from 1998 to 1999 to acquisition of Eastern
Tech Manufacturing Corporation ("ETMC"), and ETMC's on-going revenue base and
the introduction of its products to market. The Company plans to bring three
products in development, WebView(TM), CareView(TM) and FaceView(TM), to market
in 2000. In addition, the Company will be introducing significant enhancements
and upgrades to its SecureView(TM) product line in 2000. We expect these new
product offerings will contribute to a growth in revenues from sales of product
in 2000.
COSTS AND EXPENSES
COSTS OF PRODUCTS SOLD The cost of products and services sold, consisting
principally of the costs of hardware components, supplies and software
amortization, increased from $20,891 in 1998 to $258,478 in 1999, and
represented 83% of revenue in 1999 and 66% of revenue in 1998. The increase
resulted from higher total revenue and a shift in the Company's business lines
from the software for the real estate market that was produced by RealView
Systems, Inc. to security and surveillance systems and contract electronic
component assembly and test work. The Company is currently working on
engineering changes in its products that will lower component costs and,
therefore, costs of goods sold.
SALARIES AND BENEFITS The Company spent $2,094,959 in salaries and benefits
in 1999, as opposed to no expenses in this category in 1998. The Company
organized itself and staffed up in 1999, converting many independent contractors
to employees. The Company booked $1,755,000 in expenses associated with issuing
shares of its common stock as a means of attracting, retaining and incentivizing
employees to work with the Company, which it felt was necessary in order to
attract qualified personnel and conserve cash during the start-up phase.
SELLING, BUSINESS DEVELOPMENT, GENERAL AND ADMINISTRATIVE. Selling,
business development, general and administrative expenses increased from $17,424
in 1998 to $269,450 in 1999, and represented 87% of total revenue in 1999 and
55% of total revenue in 1998. A significant portion of these expenditures in
1999 relating to the payment of 140,000 shares to Bruce Lesniak as a way of
attracting and incentivizing him in performing the job of Senior Vice President
of Corporate Development for the Company. The Company also spent $106,194 in
travel and entertainment expenditures in this category, mainly as a result of
sales trips associated with sale efforts for its security products.
RESEARCH AND DEVELOPMENT EXPENSE. The Company spent $212,841 in 1999 on
research and development costs. This would represent 69% of revenue for 1999.
The Company expects to continue to fund new product development in 2000 at or
above the dollar levels expended in 1999.
INVESTOR RELATIONS EXPENSE. Investor relation's expenses increased from
$45,415 in 1998 to $212,086 in 1999. The Company filed to become a fully
reporting Company, which filing became effective October 13, 1999. In addition,
trading in the Company's stock increased significantly in 1999. As a result, the
Company has needed to undertake more efforts on investor relations in 1999.
Included in this expense category is the issuance of shares of Company common
stock to Columbia Financial Group with a value of $200,000, in partial payment
of their services in providing investor relations support for the Company. The
Company expects the size of the public float in its stock will increase, as well
as the number of market makers and volume of trading. The Company believes that
these developments will increase the Company's need to continue making
significant expenditures in this area.
PROFESSIONAL FEES Professional fees increased from $10,819 in 1998 to
$317,100 in 1999. Of these expenses in 1999, the Company paid $80,100 in
programming fees to independent contractors and $110,000 to various consultants
for a marketing and promotional campaign associated with bringing the Company's
products to market in 1999.
WRITE OFF OF GOODWILL AND OTHER INTANGIBLE ASSETS The Company took a charge
against earnings in 1999 of $545,490. Based on a thorough review of its
operations, the Company wrote off the goodwill it had booked in connection with
its acquisition of Eastern Tech Manufacturing Corp. in the amount of $473,490.
In addition, the Company had previously
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<PAGE>
capitalized $72,000 on software development costs for the program developed in
RealView Systems, Inc. As the Company is no longer marketing this program, the
Company wrote off $72,000 in software development costs associated with this
RealView program in 1999.
ACQUISITION TREATMENT. The Company formed on January 26, 1989, under the
name of Beneficial Investment Group, Inc., changing its name to BIGI, Inc., on
July 21, 1998, and to View Systems, Inc., on September 22, 1998, after which the
Company began active operations. In October 1998, the Company acquired RealView
Systems, Inc., a Colorado corporation, and issued 2,000,000 shares to the
existing shareholders of RealView Systems in exchange for all of the outstanding
shares of RealView Systems. On February 25, 1999, the Company acquired Xyros
Systems, Inc., a Maryland corporation, issuing 150,000 shares to the
shareholders of Xyros and guarantying certain debts of Xyros. The Company's
acquisition of Xyros added staff and intellectual property to the Company. Xyros
had developed a line of products, called the RM1600, and these products have
been incorporated into the SecureView product line. The Company has accounted
for the acquisitions of both RealView and Xyros under the pooling of interests
accounting method. On May 25, 1999, the Company acquired Eastern Tech Mfg.
Corp., a Maryland corporation, issuing 250,000 shares to the sole shareholder of
ETMC and taking on certain debt obligations, which were later satisfied through
the issuance of shares at a ratio of 1 share for every $2.00 of debt obligation,
for a total of 170,000 shares. The acquisition of ETMC vertically integrates
manufacturing, enabling the Company to better manage the quality of its
products. View Systems and ETMC are implementing a quality control plan that is
in compliance with the requirements of ISO9002. ETMC has consistently maintained
high quality control standards in its contract production work for large
commercial and government entities, and has maintained certifications that it
produces in accordance with MIL-I-45208 and MIL-STD-2000. The Company accounted
for the ETMC business combination under the purchase accounting method. The
Company will continue ETMC electronic component assembly and test business and
expand its services to include engineering services. Its financial statements
consolidate the financial statements of Xyros, ETMC and RealView.
Stock Split and Change in Par Value. In July 1998, the Company increased
the number of authorized shares from 7,500 shares to 50,000,000 shares of common
stock, and changed the par value of each share of stock from $1.00 to $.001.
Also, in that month, the Company forward stock split its common stock 200:1,
thereby increasing the number of outstanding common stock shares from 5,000
shares to 1,000,000 shares. On September 30, 1998, the Company forward split its
common stock from 1,000,000 shares to 2,000,000 shares. In connection with the
RealView, Xyros and ETMC acquisitions, the Company issued 2,013,333, 150,000 and
250,000 shares, respectively. Unless otherwise noted in this statement, all
share amounts reflect the forward stock split, par value changes and
acquisitions. The Company has issued stock in connection with subscriptions of
the Company's stock for cash and the Company issued stock to key personnel as
compensation, which was deemed necessary to issue during its development stage.
At year end, the Company has 7,167,203 shares issued and outstanding.
NET OPERATING LOSS. The Company accumulated approximately $1.5 million of
net operating loss carry forwards as of December 31, 1999, which may be offset
against taxable income and income taxes in future years. The use of these losses
to reduce income taxes will depend on the generation of sufficient taxable
income prior to the expiration of the net operating loss carry forwards. The
carry forwards expire in the year 2013. In the event of certain changes in
control of the Company, there will be an annual limitation on the amount of net
operating loss carry forwards, which can be used. No tax benefit has been
reported in the financial statements for the year ended December 31, 1998, or
for the nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES. During 1999, the Company funded its cash
requirements primarily through equity transactions. The Company used the funds
from those transactions to fund investments in, and acquisition of, technology,
assets and companies, to provide working capital and for general corporate
purposes, including paying expenses the Company incurred in connection with the
development of the SecureView(TM) line of products. As of December 31, 1999, the
Company had total assets of $824,342, and total liabilities of approximately
$383,999, resulting in equity of $440,343. During 1999, the Company received
equity investments totaling $1,775,059. The Company's principal uses of cash
during 1999 were to (i) fund operating activities, including increased sales and
marketing activities; (ii) acquire businesses, property and equipment; and (iii)
invest in the development of its products.
During 1999, the Company's cash decreased from $169,899 at December 31,
1998 to $89,150 at December 31, 1999. Net cash used in operating activities was
$1,141,274 for the year ended December 31, 1999. Net cash used in investing
activities of $537,534 consisted primarily of $459,180 in funds advanced to
affiliated entities. Net cash generated from financing activities of $1,775,059
consisted primarily of proceeds received from the sale
14
<PAGE>
of stock. The Company has three short-term debt obligations. The Company owes
the principal amount of $110,000 to two former managers of Xyros, which the
Company acquired on February 25, 1999, and approximately $70,000 to Columbia
Bank. The loans to the former managers came due on December 31, 1999, and the
loan to Columbia Bank matured on February 1, 2000.
During 1998, the Company's cash increased from $7 at December 31, 1997 to
$169,899 at December 31, 1998. Net cash used in operating activities of $253,373
consisted primarily of a net loss of $243,557 and increases in accounts
receivable and inventory of $18,173, offset by decreases in prepaid expenses and
other assets, and increases in accounts payable and accrued liabilities of
$26,301. Net cash used in investing activities of $6,604 consisted of capital
expenditures. Net cash generated from financing activities of $429,860 consisted
primarily of proceeds from issuance of stock and loans provided by stockholders.
As of December 31, 1999, the Company had $(60,385) in net working capital,
including $93,278 of trade accounts receivable and $141,213 in inventory. Days
sales outstanding, calculated using an average accounts receivable balance, were
approximately 45 days as of December 31, 1999. The Company has provided and may
continue to provide payment term extensions to certain of its customers from
time to time. As of December 31, 1999, the Company has not granted material
payment term extensions.
The Company's inventory balance at December 31, 1999, and 1998 was $141,213
and $4,574, respectively.
The Company's principal sources of liquidity are its cash and cash
generated from operating activities. The Company anticipates capital
expenditures for 2000 of approximately $500,000. The Company is also exploring
the purchase of the commercial space it is leasing in Columbia, Maryland, plus
adjoining space, consisting of approximately 10,000 square feet. If it can
obtain favorable terms, it would purchase the building through debt financing.
The Company believes that cash from operations and funds available will not be
sufficient to meet anticipated operating and capital expenditures and debt
service requirements for the next twelve months and that the Company will be
materially dependent on raising additional capital through equity sales and/or
debt financing.
PLAN OF OPERATION. The Company has devoted most of its resources since
inception of operations to the research and development of the SecureView(TM)
line of products, the development of marketing and sales infrastructure, the
development of production capability and the development of brand awareness of
"SecureView.(TM)" Although the Company has been selling products since March of
1999, the Company is still developing these products and has generated limited
revenues of these products to date. In the third quarter ended September 30,
1999, the Company began earning substantial revenues. As of December 31, 1999,
the Company had an accumulated deficit of approximately $4,400,000. The Company
expects the operating losses to continue until the Company develops a sufficient
network of reseller, OEMs and strategic partners generating sales revenues to
cover its operating expenses. A large part of its earnings deficit is due to the
issuance of equity to attract, retain and incent key personnel within the
Company. This was done to preserve cash resources, and, thus, much of the
Company's earnings deficit is not attributable to actual cash outlays.
The Company will use the cash raised from the sale of securities in this
offering to bring its WebView(TM). ViewStorage(TM) and CareView(TM) products to
market, to continue its product development efforts, to expand its sales,
marketing and promotional activities for the SecureView line of products, and to
increase its engineering, production management, quality control, and customer
support staff. The Company operates in a very competitive industry that requires
continued large amounts of capital to develop and promote its products. The
Company believes that it will be essential to continue to raise additional
capital, both internally and externally, to compete in this industry.
The amount of capital that the Company needs to raise will depend upon many
factors, including, but not limited to, the rate of sales growth and market
acceptance of its product lines, the amount and timing of its necessary research
and development expenditures, the amount and timing of its expenditures to
sufficiently market and promote its products and the amount and timing of any
accessory product introductions. In addition to accessing the public equity
markets, the Company will pursue bank credit lines and equipment lease lines for
certain capital expenditures. The Company currently estimates we will need
between $7,000,000 to $8,000,000 million to fully develop all of its products
and launch its expanded business operations in accordance with its current
business plan. The actual amount of capital the Company will need to raise will
depend on a number of factors, including (i) its ability to negotiate favorable
prices for purchases of necessary parts and assemblies,
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<PAGE>
(ii) the number and composition of its resellers, OEMs and strategic partners,
(iii) the prices the Company can obtain for its products and services and costs
of servicing its products and delivering its services, and (iv) changes in
technology. In addition, the Company's costs and revenues could vary from the
amounts the Company expects or budgets, possibly by a material amount, and those
variations are likely to affect how much additional financing the Company will
need for its operations.
YEAR 2000 CONVERSION
Many computer systems may experience problems handling dates beyond 1999.
The Company was concerned that its computer hardware and software needed to be
modified prior to 2000 in order to remain functional. Therefore, the Company
assessed the readiness and compliance of its computer-based products available
for sale and of its computer-based systems used internally, and the Company
successfully implemented any system and programming changes necessary to address
year 2000 issues. The Company did not believe that the cost of such actions had
a material effect on the Company's results of operations or financial condition.
The Company did not experience a delay in, or increased costs associated with,
year 2000 testing and the implementation of any necessary year 2000 changes. In
its opinion, this testing and implementation of any year 2000 changes did not
adversely effect the operations, liquidity or financial condition of the
Company.
A key component of determining the Company's year 2000 state of readiness
was to identify those areas of operation where its products incorporate software
and hardware products supplied by third party vendors and, thus, where year 2000
problems may arise as a result of products supplied by third parties. Third
party software products include, but are not limited to: Microsoft, Inc.
software products, Lead Technologies, Inc. software products, Aware, Inc.
software products and Visionics, Inc. software products. Third party hardware
products include, but are not limited to: video capture cards, export cards,
network switches, motherboards, modems and various workstations. Because its
products are dependent, in certain respects, on products supplied by third party
vendors, an important part of the Company's year 2000 effort was to contact
those vendors who supply products that the Company considers critical to the
operation of its products and gauge their year 2000 compliance efforts. The
Company's tests to date indicate that certain third party supplied products do
not appear to adversely affect the performance of its products with respect to
the year 2000 issue.
The Company expects to release new versions of its products in the future.
The Company will continue to audit and test compliance with year 2000
performance of its internally developed products.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
The statements in this report may contain forward-looking statements. In
addition, the Company may from time to time make oral forward-looking
statements. The following are certain important factors that could cause actual
results to differ materially from those projected in any such forward-looking
statements.
CAPITAL REQUIREMENTS. The Company believes that, based on its current
projections, the Company will need to raise additional capital or the Company
will not have sufficient working capital to meet its requirements for at least
the next 12 months. The Company has outstanding warrants with Rubin Investment
Group, with an exercise price of $2.00, to purchase a total of 975,000 shares of
common stock (expiring July 18, 2000) and 500,000 shares of common stock
(expiring August 18, 2000), which, if exercised, would raise sufficient working
capital for at least the next 12 months. The Company plans to register the
shares that can be obtained upon exercise of the warrant on Form SB-2. There is
no assurance that Rubin Investment Group will exercise the warrants. However, to
the extent that the Company experiences growth generally, or the Company's line
of products generates high demand, or the Company receives extraordinary large
orders for certain products from large business, institutional or government
buyers, the Company's capital requirements may exceed the Company's available
capital resources. Additionally, the Company has suffered losses since
resumption of operations in the fourth quarter of 1998, and such losses, which
may occur in the foreseeable future, would diminish the Company's cash and cash
equivalents. There can be no assurance that the Company will be able to raise
equity or debt financing on favorable terms, or at all. If the Company fails in
such circumstances to raise additional capital as needed, the Company would
likely be required to reduce the scope of its product development, selling and
marketing activities and other operations, which would have a material adverse
effect on the Company's business, operating results and financial condition.
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DISTRIBUTION RELATIONSHIPS. The Company believes its success in penetrating
markets for its products depends in part on its ability to maintain distribution
relationships with manufacturing representatives, dealers and systems
integrators and to cultivate additional, similar relationships. There can be no
assurance that the Company will be successful in maintaining or expanding its
distribution relationships. The loss of certain distribution relationships could
have a negative impact on the Company's revenue stream. Further, there can be no
assurance that the businesses with whom the Company has developed such
relationships, some of whom have significantly greater financial and marketing
resources than the Company, will not develop and market products in competition
with the Company or will not otherwise discontinue their relationships with the
Company. In the past, the Company has received large verbal orders for its
products that have required it to ramp up production and incur significant
material costs in order to be in a position to fill the verbal orders. After
incurring these costs, the orders have not materialized or been reduced in
writing, requiring the Company to reevaluate its distribution relationship.
There can be no assurance that relationships we develop with various
distributors will be profitable or that they will honor their commitments.
COMPETITION. Certain of the Company's current and prospective competitors
have substantially greater technical, financial and marketing resources than the
Company. In addition, there can be no assurance that any of the Company's
products will be competitive in the face of advances in product technology
developed by the Company's current or future competitors.
LEGAL PROCEEDINGS. The Company is defending a lawsuit being brought by Hal
Peterson, a former officer of Xyros Systems, Inc., a company the Company
acquired on February 25, 1999, and a trust controlled by Hal Peterson, which the
Company believes it may have to resolve by substantial payments to him and/or
his trust. The Company has entered into settlement negotiations with Hal
Peterson and is attempting to resolve this matter. In addition, the Company has
not paid certain promissory notes made by Xyros Systems, Inc. to Ken Weiss. He
has not indicated he would bring suit; however, he has been inquiring about
payment. The past President of Eastern Tech Manufacturing Corp., Lawrence
Seiler, who is currently an independent sales representative for the Company,
has been indicted for actions he took several years prior to the Company's
acquisition of Eastern Tech Manufacturing Corp. The Assistant U.S. Attorney
prosecuting this case has advised the Company that Eastern Tech Manufacturing
Corp. is not part of the case and is not the subject of any civil or criminal
investigation, to his knowledge. There are no assurances, however, that Eastern
Tech Manufacturing Corp. will not become involved in a civil or criminal
proceeding in the future arising out of the events at issue in Lawrence Seiler's
case.
INTERNATIONAL SALES. The Company is seeking to expand its international
presence by developing new distribution channels in certain foreign countries
where it has not previously had a presence. International sales are subject to a
number of risks, including political and economic instability, unexpected
changes in regulatory requirements, tariffs and other trade barriers,
fluctuating exchange rates and the possibility of greater difficulty in accounts
receivable collection. There can be no assurance that these and other factors
will not have a material adverse effect on the Company's future international
sales, if any, and, consequently, the Company's business, operating results and
financial condition.
DEPENDENCE ON NEW PRODUCTS. The market for the Company's products is
characterized by ongoing technological development and evolving industry
standards. The Company's success will depend upon its ability to enhance its
current products and to introduce new products which address technological and
market developments and satisfy the increasingly sophisticated needs of
customers. For instance, the Company has released several products based on its
SecureView(TM) technology. There can be no assurance that the Company will be
successful in developing, marketing and selling sufficient volumes of its new
SecureView(TM) products or developing and marketing on a timely basis any other
fully functional product enhancements or new products that respond to the
technological advances by others. The Company is nearing completion of
developing and testing its CareView(TM), WebView(TM) and FaceView(TM) products
and plans to introduce them to the market in 2000. There also can be no
assurance that customers will accept the Company's new products.
MANAGEMENT AND EMPLOYEES. The Company's future success depends in
significant part upon the continued service of its key technical and senior
17
<PAGE>
management personnel and its continuing ability to attract and retain highly
qualified technical and managerial personnel in the future. The Company has in
the past encountered some difficulties in fulfilling its hiring needs in the
Columbia, Maryland and Denver, Colorado employment markets, and there can be no
assurance that the Company will be successful in hiring and retaining qualified
employees in the future. The Company has had to rely on the issuance of shares
of its common stock in order to attract, retain and incentivize key personnel
and consultants, all of which has been a drag on corporate earnings. The Company
plans to continue using this form of compensation for these purposes; however,
as the Company becomes more established in the marketplace, the Company hopes to
be able to lessen its reliance on stock compensation and lower the amount of
shares that must be paid out. There can be no assurance that the Company can
continue to build a qualified workforce without reliance on this stock issuance.
PROPRIETARY RIGHTS. The Company is not aware that its products, trademarks
or other proprietary rights infringe on the proprietary rights of any third
parties. There can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current or
future products. As the number of software products in the industry increases
and the functionality of these products further overlaps, the Company believes
that software developers may become increasingly subject to infringement claims.
Any such claims against the Company, with or without merit, could result in
costly litigation or might require the Company to enter into royalty or
licensing agreements. Such royalty and licensing agreements, if required, may
not be available on terms acceptable to the Company.
VARIABILITY OF OPERATING RESULTS. The Company's revenue and operating
results have fluctuated significantly from quarter to quarter, and may continue
to fluctuate, due to a combination of factors. These factors include relatively
long sales cycles for certain products, the timing or cancellation of orders
from major customers, the timing of new product introductions by the Company or
its competitors, the Company's use of third-party distribution channels, the
fulfillment of large one-time orders to particular customers and general
economic conditions and other factors affecting capital spending. For example, a
longer than expected sales cycle for the SecureView(TM) Products delayed
anticipated revenue. Additionally, the Company generally ships orders in the
quarter in which such orders are received, and accordingly, revenue in any
quarter is substantially dependent on the orders booked and shipped in that
quarter. The Company has typically recognized a substantial portion of its
revenue in the last month of the quarter, with much of this revenue concentrated
in the last two weeks of the quarter. Because the Company's operating expense
levels are relatively fixed and based, to some extent, on anticipated revenue
levels, a small variation in revenue can cause significant variations in
operating results from quarter to quarter and may result in losses. Further, the
Company has not yet achieved its earnings potential, developed out its business
plan or introduced major product offerings to the market. The Company's first
full year of operations under its current business plan was in 1999, and it did
not increase its sales and markets efforts significantly until the second
quarter of 1999. As a result, sales levels remain relatively low. Yet, the costs
the Company is incurring are based on much larger anticipated sales levels. Due
to all of the foregoing, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
PRODUCT OBSOLESCENCE. The Company's current products and products under
development are limited in number and concentrated primarily in the markets for
identification and surveillance products. The life cycles of the Company's
products are difficult to estimate due in large measure to changing and
developing technology as well as the unknown future effect of products
introduced by the Company's competition. Price reductions or declines in demand
for the Company's products, whether as a result of competition, technological
change or otherwise, would have a materially adverse effect on the Company's
business, operating results and financial condition.
SENSITIVE SERVICE ORDER DEMAND A majority of the Company's revenue in 1999
was derived from contract electronic component assembly and test services.
Historically, the demand for this type of work was responsive to economic
conditions. Currently, economic conditions are generally good and the demand for
this type of work is significant, particularly in the commercial sector. As a
result, the Company has been able to maintain good and reasonable profit margins
on this type of work. There is no assurance, however, that the demand for this
type of work will remain high or that the Company will continue to obtain good
profit margins on this type of contract service work.
18
<PAGE>
VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock
has experienced significant volatility, and is likely to continue to be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, the Company's failure to meet or exceed
published earnings estimates, changes in earnings estimates or recommendations
by securities analysts, announcements of technological innovations, new products
or new contracts by the Company or its existing or potential competitors,
developments with respect to patents, copyrights or proprietary rights, adoption
of new accounting standards affecting the software industry, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stock of technology
companies which have often been unrelated to the operating performance of such
companies. These broad market fluctuations may materially adversely affect the
market price of the Company's common stock. Further, the Company has issued a
substantial amount of non-registered, restricted stock which is not trading in
the public market, including: approximately 2,000,000 shares to the former
shareholders of RealView Systems, Inc., 150,000 shares to the former
shareholders to Xyros Systems, Inc., 420,000 shares to the former shareholder of
Eastern Tech Manufacturing Corp, 706,000 shares to key employees and consultants
under the View Systems, Inc. 1999 Restricted Share Plan and 550,000 shares to
its President, CEO and Chairman of the Board of Directors, Gunther Than. These
shares can be traded, subject to restrictions, in the public market after the
expiration of certain required holding periods. The recipients of these shares
will likely seek to sell them in the public market that may have the effect of
depressing the share price in the public market. There can be no assurance that
the trading price of the Company's Common Stock will not experience substantial
volatility in the future.
ITEM 7. FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's Financial
Statements contained in this report and is incorporated herein by this
reference. Specific financial statements can be found at the pages listed in the
following index.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheet at December 31, 1999 21
Consolidated Statements of Operations for the years ended
December 31, 1999 and 1998 22
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1999 and 1998 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998 24
Notes to Consolidated Financial Statements 26
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders
View Systems, Inc.
Columbia, Maryland
We have audited the accompanying consolidated balance sheet of View
Systems, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended December 31, 1999 and 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of View
Systems, Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998
in conformity with generally accepted accounting principles.
Stegman & Company
Baltimore, Maryland
March 17, 2000
20
<PAGE>
VIEW SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash $ 89,150
Accounts receivable 93,278
Inventory 141,213
---------
Total current assets 323,641
---------
PROPERTY AND EQUIPMENT:
Equipment 234,699
Furniture and fixtures 28,595
Leasehold improvements 4,000
Software tools 12,664
Vehicles 68,680
---------
348,638
Less accumulated depreciation 48,296
---------
Net value of property and equipment 300,342
---------
OTHER ASSETS:
Investments 28,000
Due from affiliated entity 90,990
Due from stockholders 74,362
Deposits 7,007
---------
Total other assets 200,359
---------
TOTAL ASSETS $824,342
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $174,106
Note payable - bank 69,730
Notes payable - stockholders 110,000
Accrued interest payable 11,000
Other accrued liabilities 19,163
---------
Total current liabilities 383,999
---------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01, 50,000,000 shares authorized,
issued and outstanding - 7,167,203 7,167
Additional paid-in capital 4,771,992
Accumulated deficit (4,338,816)
-----------
Total stockholders' equity 440,343
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 824,342
===========
</TABLE>
See accompanying notes.
21
<PAGE>
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ----------
<S> <C> <C>
REVENUE:
Sales and other income $310,057 $ 31,438
Cost of goods sold 258,478 20,891
-------- ----------
GROSS PROFIT ON SALES 51,579 10,547
--------- ----------
OPERATING EXPENSES:
Advertising and promotion 23,256 3,959
Business development expense 140,000 -
Contributions 2,500 -
Depreciation 29,856 4,706
Dues and subscriptions 3,379 250
Employee compensation and benefits 2,094,959 -
Insurance 17,038 1,268
Interest 56,379 10,054
Investor relations 212,086 45,415
Miscellaneous expense 19,235 1,343
Office expenses 73,002 106,375
Professional fees 317,000 10,819
Rent 74,628 52,204
Repairs and maintenance 10,167 -
Research and development 212,841 -
Taxes - other 3,201 -
Telephone 28,398 -
Travel and entertainment 106,194 13,465
Utilities 14,201 4,246
--------- --------
Total operating expenses 3,438,420 254,104
--------- --------
LOSS BEFORE WRITE-OFF OF GOODWILL
AND OTHER INTANGIBLE ASSETS (3,386,841) (243,557)
WRITE-OFF OF GOODWILL AND
OTHER INTANGIBLE ASSETS 545,490 -
----------- ---------
NET LOSS $(3,932,331) $(243,557)
=========== =========
LOSS PER SHARE:
Basic $(0.68) (.06)
====== ====
Diluted $(0.68) (.06)
====== ====
</TABLE>
See accompanying notes.
22
<PAGE>
VIEW SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholders'
STOCK CAPITAL DEFICIT EQUITY
<S> <C> <C> <C> <C>
Balances at January 1, 1998 $4,150 $156,420 $(162,928) $(2,358)
Sale of common stock 167 249,833 - 250,000
Net loss - - (243,5587) (243,557)
---------- ---------- ---------- ---------
Balances at December 31, 1998 4,317 406,253 (406,485) 4,085
Sale of common stock 952 1,425,377 - 1,426,329
Redemption of common stock (191) (396,590) - (396,781)
Issuance of common stock (employee and
other compensation) 1,469 2,145,864 - 2,147,333
Issuance of common stock (ETMC acquisition) 250 787,250 - 787,500
Issuance of common stock (debt conversion) 370 403,838 - 404,208
Net loss - - (3,932,331) (3,932,331)
--------- ---------- ------------ -----------
Balances at December 31, 1999 $7,167 $4,771,992 $(4,338,816) $ 440,343
====== ========== =========== ==========
</TABLE>
See accompanying notes.
23
<PAGE>
VIEW SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,932,331) $(243,557)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 29,856 4,706
Write-off of goodwill and other intangible assets 545,490 -
Employee and other compensation paid through
the issuance of common stock 2,147,333 -
Employee compensation related to stock
options granted 87,420 -
Interest paid through issuance of common stock 33,000 -
Changes in operating assets and liabilities:
Accounts receivable (79,679) (13,599)
Inventory (136,639) (4,574)
Other assets (7,007) (22,650)
Accounts payable 144,035 23,386
Accrued interest 11,000 -
Other accrued liabilities 16,248 2,915
------------ -----------
Net cash used in operating activities (1,141,274) (253,373)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (50,354) (6,604)
Funds advanced to affiliated entities (459,180) -
Investment in MediaComm Broadcasting Systems, Inc. (28,000)
----------- ---------
Net cash used in investing activities (537,534) (6,604)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans provided by stockholders 177,000 179,869
Repayment of note payable - bank (5,270) -
Proceeds from sales of stock 1,426,329 250,000
---------- --------
Net cash provided by financing activities 1,598,059 429,869
---------- --------
NET (DECREASE) INCREASE IN CASH (80,749) 169,892
CASH AT BEGINNING OF YEAR 169,899 7
----------- --------
CASH AT END OF YEAR $ 89,150 $169,899
=========== ========
</TABLE>
24
<PAGE>
VIEW SYSTEMS, INC.
Statements of Cash Flows (Continued)
For the Years Ended December 31, 1999 And 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Schedule of noncash investing and financing transactions:
Common stock issued to effect purchase of
Eastern Tech Manufacturing, Inc. $787,500 $ -
======== ============
Debt issued to effect purchase of
Eastern Tech Manufacturing, Inc. $148,184 $ -
======== ============
Common stock issued for conversion of debt $404,208 $ -
======== ============
Common stock redeemed in exchange for receivable $396,781 $ -
======== ============
Cash paid during the period for:
Interest $45,379 $ -
======== ============
Taxes $ - $ -
======== ============
</TABLE>
See accompanying notes.
25
<PAGE>
VIEW SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
View Systems, Inc. (the "Company") designs and develops computer
software and hardware used in conjunction with surveillance capabilities. The
technology utilizes the compression and decompression of digital inputs.
Operations, from formation to June 30, 1999, have been devoted primarily to
raising capital, developing the technology, promotion, and administrative
function. As of July 1, 1999 the Company was no longer considered to be in the
development stage.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Real View Systems, Inc. ("Real
View"), Xyros Systems, Inc. ("Xyros") and Eastern Tech Manufacturing, Inc.
("ETMC"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. 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 and its subsidiaries recognize revenue and the related cost
of goods sold upon shipment of the product.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in-first-out method (LIFO).
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated over their
estimated useful lives, using the straight-line and accelerated depreciation
methods. Upon sale or retirement, the cost and related accumulated depreciation
are eliminated from the respective accounts, and the resulting gain or loss is
included in the results of operations. The useful lives of property and
equipment for purposes of computing depreciation are as follows:
Equipment 5 - 7 years
Software tools 3 years
Repairs and maintenance charges which do not increase the useful lives
of assets are charged to operations as incurred. Depreciation expense for the
years ended December 31, 1999 and 1998 amounted to $29,856 and $4,706,
respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and identifiable intangibles (including goodwill) to
be held and used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount should be addressed. Impairment
is measured by comparing the carrying value to the estimated undiscounted future
cash flows expected to result from use of the assets and their eventual
disposition.
26
<PAGE>
INCOME TAXES
Deferred income taxes are recorded under the asset and liability method
whereby deferred tax assets and liabilities are recognized for the future tax
consequences, measured by enacted tax rates, attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss carryforwards. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period the rate change becomes effective. Valuation allowances are
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Equipment and
facilities acquired for research and development activities that have
alternative future uses are capitalized and charged to expense over the
estimated useful lives.
ADVERTISING
Advertising costs are charged to operations as incurred. Advertising
costs for the years ended December 31, 1999 and 1998 were $23,256 and $3,959,
respectively.
NONMONETARY TRANSACTIONS
Nonmonetary transactions are accounted for in accordance with
Accounting Principles Board Opinion No. 29 ACCOUNTING FOR NONMONETARY
TRANSACTIONS which requires the transfer or distribution of a nonmonetary asset
or liability to be based, generally, on the fair value of the asset or liability
that is received or surrendered, whichever is more clearly evident.
FINANCIAL INSTRUMENTS
For most financial instruments, including cash, accounts receivable,
accounts payable and accruals, management believes that the carrying amount
approximates fair value, as the majority of these instruments are short-term in
nature.
NET LOSS PER COMMON SHARE
Basic net loss per common share ("Basic EPS") is computed by dividing
net loss available to common stockholders by the weighted average number of
common shares outstanding. Diluted net loss per common share ("Diluted EPS") 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, 1999 and
1998 does not include potential shares of common stock equivalents, as their
impact would be antidilutive.
SEGMENT REPORTING
The Company has determined that it does not have any separately
reportable operating segments as of December 31, 1999 and 1998.
2. FINANCIAL CONDITION
Since its inception, the Company has incurred significant losses and as
of December 31, 1999 had an accumulated deficit of $4.3 million. For the year
ended December 31, 1999 the Company's net loss, consisting primarily of non-cash
stock based compensation, was $3.9 million. The Company believes that it will
incur operating losses for the foreseeable future. There can be no assurance
that the Company will be able to generate sufficient revenues to achieve or
sustain profitability in the future. However, the Company believes that its
current cash and cash equivalents, along with sales revenue and anticipated
equity infusions, will be sufficient to sustain operations through December 31,
2000.
3. BUSINESS COMBINATIONS
On October 6, 1998, the Company completed its acquisition of Real View
located in Columbia, Maryland. As provided under the terms of the merger
agreement, Real View became a wholly owned subsidiary of the Company and each of
the outstanding shares of the
27
<PAGE>
common stock of Real View was converted into 1.33 shares of the Company's common
stock. The Company issued 2,000,000 shares of its common stock in connection
with the merger. This acquisition was accounted for as a pooling of interests
and all financial statements and financial information contained herein have
been restated to include the accounts and results of operations of Real View for
all periods presented.
On February 25, 1999, the Company acquired Xyros of Columbia, Maryland,
a developer of a computer based system that captures video and audio data
surveillance equipment, transmits and stores it within standard personal
computer systems. Under the terms of the merger agreement, each of the 100
shares of Xyros's common stock will be exchanged for 1,500 shares of the
Company's common stock. This acquisition is accounted for as a pooling of
interests and all financial statements and financial information contained
herein have been restated to include the accounts and results of operations of
Xyros for all periods presented.
In May of 1999, the Company completed its acquisition of ETMC, a
computer parts and accessories manufacturer. The business combination was
accounted for as a purchase in which each outstanding share of ETMC common stock
was converted into the right to receive a number of shares of the Company's
common stock. At closing, the purchase price (as defined in the agreement and
plan of merger) of $935,684 was paid by the issuance of 250,000 shares of common
stock and the assumption of liabilities for both legal fees and a non-compete
clause. The excess cost over net liabilities acquired of $495,344 was recorded
as goodwill and was subsequently amortized and written-off (see Note 7).
The following unaudited pro forma summary presents the consolidated
results of operations for the year ended December 31, 1999 of the Company as if
the business combination had occurred on January 1, 1999:
<TABLE>
<S> <C>
Revenue $ 958,147
Net loss $ (231,524)
Loss per share $ (0.05)
</TABLE>
The above amounts are based upon certain assumptions and estimates
which the Company believes are reasonable. The pro forma results do not
necessarily represent results that would have occurred if the business
combination had taken place at the date and on the basis assumed above.
4. INVENTORY
Inventories at December 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Finished goods $ 42,000
Work in process 32,563
Raw materials 66,650
---------
$ 141,213
---------
---------
</TABLE>
The Company did not have any inventory as of December 31, 1998.
5. DUE FROM AFFILIATED ENTITIES
The Company has advanced non-interest funds to its chief executive
officer, a member of his family and a related corporation controlled by the
Chief Executive Officer. There were no formal repayment terms associated with
these advances. The amount outstanding at December 31, 1999 was $165,352.
Of the $165,352 due from affiliates, $90,990 is due from a related
corporation - View Technologies, Inc. The two companies enter into various
transactions throughout the year to provide working capital to one another when
necessary.
28
<PAGE>
Additionally, the Company has entered into a licensing agreement with
View Technologies, Inc. Under the terms of this agreement, the Company will pay
a source code license fee for use of compression software in an amount equal to
5% of gross sales derived from use of the software. Payment of this fee will
cease when total fees of $50,000 have been paid. In addition, upon delivery of a
copy of the software to a customer, the Company will remit a sublicense fee
equal to 5% of gross sales to View Technologies, Inc. This software license
agreement commenced in October 1998 and has a ten year term. At December 31,
1999, the Company has yet to generate any sales with respect to this agreement.
6. INVESTMENTS
The Company owns approximately 14% of the common stock of a privately
held entity known as MediaComm Broadcasting Systems, Inc. ("MediaComm"). There
is no market for the entity's common shares, and it was impracticable to
estimate fair value of the Company's investment. The investment is carried on
the balance sheet at original cost of $28,000 or $.03 a share. Following is a
summary of pertinent information about the entity for the year at and for the
year ended June 30, 1999:
<TABLE>
<S> <C>
Total assets $28,129
-------
Total equity $26,630
-------
Net loss $(82,780)
-------
</TABLE>
7. INTANGIBLE ASSETS
In relation to the business combination with ETMC accounted for under
the purchase method of accounting, the Company recorded goodwill in the amount
of $495,344. This amount was based on the difference between the fair market
value of the Company's stock at the acquisition date and the fair value of
ETMC's net assets. During the fourth quarter of 1999, management conducted a
thorough review of ETMC's operations, including customer base, current
production capacity, and job order backlog. Based on this review, it was
determined that there was no basis for the amount of goodwill and the remaining
balance of $473,267 was written-off to expense.
Software development costs of $72,223 relating to internal costs
associated with a software product that the Company will not market were also
written-off to expense during 1999.
8. NOTE PAYABLE - BANK
One of the Company's subsidiaries has a demand note payable with a
bank having an outstanding balance of $69,730 as of December 31, 1999. The note
bears interest equivalent to the prime rate plus 2% per annum payable monthly
and is personally guaranteed by three stockholders and former officers of the
Company.
9. NOTE PAYABLE - STOCKHOLDERS
In connection with the acquisition of Xyros, the Company assumed
liabilities evidenced by notes payable to the stockholders of Xyros. The notes
carry an annual interest rate of 10% with interest paid monthly. The notes were
due December 31, 1999. The Company has not fulfilled its obligation to repay the
notes because of a dispute with the former Xyros stockholders.
The matter is currently in litigation.
10. INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to difference between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The components of the net deferred tax asset and liability as of
December 31, 1999 are as follows:
29
<PAGE>
<TABLE>
<S> <C>
Effect of net operating loss carry forward $ 563,000
Less valuation allowance (563,000)
Net deferred tax asset (liability) $ -
============
</TABLE>
The Company has recorded a valuation allowance in an amount equal to
the deferred tax asset resulting from its net operating loss carry forward. The
Company has net operating loss carry forwards of approximately $1,500,000 at
December 31, 1999.
11. STOCK-BASED COMPENSATION
During the year ended December 31, 1999 the Company granted restricted
stock, incentive stock options, non-qualified stock options, and warrants to
employees, officers, and independent contractors and consultants.
RESTRICTED STOCK GRANTS
The Company's Board of Directors and stockholders have approved a
restricted share plan under which shares of the Company's common stock will be
granted to employees, officers, and directors at the discretion of the Board of
Directors. During 1999 the Company issued the following shares under this Plan
and additional shares at the direction of the Board of Directors:
<TABLE>
<CAPTION>
Number Expense
of Shares Recognized
---------- -----------
<S> <C> <C>
Officers and employees 1,100,000 $1,755,000
Independent contractors and consultants 369,000 392,333
---------- -----------
1,469,000 $2,147,333
========= ==========
</TABLE>
Officers' and employees' compensation in the amount of $1,755,000 was
based on the fair market value of the common stock issued on the date of the
grant less a discount of 10% due to the restricted nature of the grant.
Independent contractors and consultants expense of $392,333 was based on the
estimated value of services rendered.
STOCK OPTIONS AND WARRANTS
The Company adopted the 1999 Stock Option Plan during the year. 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 grant.
A summary of the Company's stock option activity and related
information for the year ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Common Weighted
Stock Average Range of
Options Exercise Price Exercise Prices
-------- -------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year - $ - $ -
Granted 504,860 1.56 0.01 - $2.07
Exercised - - -
Expired/cancelled - - -
------- -------- -------------
Outstanding at end of year 504,860 $1.56 0.01 - $2.07
======= ======== =============
</TABLE>
Additionally, the Company has issued warrants to purchase the Company's
stock as follows:
30
<PAGE>
<TABLE>
<CAPTION>
Common Weighted
Stock Average Range of
Warrants Exercise Price Exercise Prices
-------- -------------- ---------------
<S> <C> <C> <C>
Outstanding at beginning of year - $ - $ -
Granted 454,000 2.00 2.00
Exercised - - -
Expired/cancelled - - -
-------- ----- ------
Outstanding at end of year 454,000 $2.00 $2.00
======= ===== =====
</TABLE>
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. Compensation expense relating to the granting of
stock options at grant prices below the fair value at the date of grant was
$87,420 for the year ended December 31, 1999. The fair value of other equity
awards was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions for 1999: risk-free
interest rate of 5.97% - 6.09%; expected volatility of 70.0%; expected option
life of 2 years from vesting and an unexpected dividend yield of 0.0%. If the
Company had elected to recognize cost based on the fair value at the grant dates
consistent with the method prescribed by SFAS No. 123, net loss and loss per
share would have been changed to the pro forma amounts for the year ended
December 31, 1999 as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
Net Net
Year Income Per Income Per
Ended (Loss) Share (Loss) Share
----- ------ ----- ------ -----
<S> <C> <C> <C>
1999 $(3,932,330) $(0.68) $(4,198,843) $(0.72)
=========== ====== =========== ======
</TABLE>
12. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999 the Company redeemed 59,860
shares owned by the Chief Executive Officer for $50,000 in cash and the
elimination of $67,719 due to the Chief Executive Officer for a total
consideration of $117,719.
During the year ended December 31, 1999 the Company converted a note
payable and related accrued interest to a family member of the Chief Executive
Officer in the amount of $200,000 to 200,000 shares of the Company's common
stock.
13. SUBSEQUENT EVENT
On February 18, 2000 the Company sold to an accredited institutional
investment entity 800,000 shares of the Company's common stock, a warrant to
purchase (i) 1,000,000 shares of common stock during the five-month period
following February 18, 2000, at an exercise price of $2.00 per share, and (ii)
500,000 shares of common stock during the six-month period following February
18, 2000, at an exercise price of $2.00 per share, and another warrant to
purchase 1,000,000 shares of common stock during the three-year period following
February 18, 2000, at an exercise price of $2.00 per share. At closing, the
Company received $400,000. The shares were issued pursuant to Regulation D
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended. The securities purchased pursuant to the investment carry
demand and piggyback registration rights.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
31
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction E(3) to Form 10-KSB, the information required
by Item 9 of Form 10-KSB with respect to identification of directors is
incorporated by reference to the information contained in the sections captioned
"PROPOSAL NO. 1 - ELECTION OF DIRECTORS" and "COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT" in the registrant's definitive proxy statement for the 1999
annual meeting of stockholders to be filed with the Securities Exchange
Commission (the "Commission"). Additional information is as follows:
<TABLE>
<CAPTION>
Name Age Position Held
<S> <C> <C>
Gunther Than 52 President, Chief Executive Officer, Chairman of the Board
Dr. Martin Maassen 56 Director
Dr. David Barbara 49 Director
Dr. Michael L. Bagnoli 42 Director
Andrew L. Jiranek 38 Vice President, Secretary and General Counsel
Bruce Lesniak 41 Senior Vice President of Corporate Development
David Bruggeman 56 Vice President of Engineering
John Curran 58 Vice President of Manufacturing
Linda Than 46 Comptroller
</TABLE>
The biographies of the Directors, Officers and Key Personnel are set
forth below. All Directors hold office until the next annual shareholders
meeting or until their death, resignation, retirement or until their successors
have been elected and qualified. Vacancies in the existing Board are filled by a
majority vote of the remaining Directors.
GUNTHER THAN, PRESIDENT, DIRECTOR AND CEO.
Gunther Than has served as President, CEO and Chairman of the Board of
View Systems, Inc, since September 28, 1998. From May, 1994 to the present, Mr.
Than has also been President and CEO of View Technologies, Inc., a systems
development corporation providing computer network solutions for diagnostic
medical imagery. Mr. Than also has served as President of RealView Systems, Inc.
from April, 1994, to the present and, following its acquisition of Eastern Tech
Manufacturing Corp., Mr. Than became President and sole Director of Eastern Tech
Manufacturing Corp. Prior to View Systems, Inc., he was Vice President and a
Principal, from 1980 to 1984, of a large publicly held dental industry supplier.
At Patterson, Mr. Than was instrumental in an LBO of Patterson from Beatrice
Foods, in which $48,000,000 was borrowed from Security Pacific to procure in
excess of $80,000,000 in assets, with Smith Barney handling the transaction. The
system changes managed by Mr. Than facilitated repayment of the debt in less
than five years. Other business.
Prior to Patterson Dental Corporation, Mr. Than's career included:
General Manager at Rutland Biotech, Vancouver, Canada, a developer of medical
and health related proprietary products; Director of Information Systems of
Salkin and Linoff, a Minneapolis, MN retailer of soft goods and ladies apparel,
with $100MM in sales and over 500 retail outlets including Peck and Peck;
Manager of Systems and Programs, Fairway Foods, a $2MMM sales division of
Holiday Worldwide, Inc, and; Systems Programmer, Twin Disc, Inc, a Wisconsin
manufacturer of power transmissions for heavy equipment, ships and construction
implements.
Mr. Than is a graduate of the University of Wisconsin, with a dual
degree in engineering physics and applied mathematics. He has completed graduate
level studies toward a Ph.D. in mathematics at the University Of Wisconsin and
towards an MBA at Marquette University. Mr. Than founded RealView Systems, Inc.
in 1994 and was elected the sole Director and Officer of View Systems, Inc. in
September 1998. Subsequent to assuming control of View Systems, Inc., Mr. Than
oversaw the acquisitions of the Company of RealView Systems, Inc., Xyros
Systems, Inc and ETMC
32
<PAGE>
BRUCE E. LESNIAK, SENIOR VICE-PRESIDENT OF CORPORATE DEVELOPMENT
Mr. Lesniak joined the Company on March 1, 1999, as the Company's
Senior Vice-President of Corporate Development. He is paid as an independent
contractor consultant. He is not an executive officer; however, his title is
commensurate with his operational responsibility and authority. Mr. Lesniak has
been active in the security industry for over 15 years. The last 14 years were
spent with industry leader ADT Security Services. His most recent role as
National Director of Business Development aligned him with the industries
highest profile accounts. As a Senior Executive with ADT, Mr. Lesniak was
instrumental in driving market growth as he guided sales, implemented numerous
new product releases and directed the largest and most profitable region in the
company. Mr. Lesniak will aid View Systems in developing strategic business
plan, create strong partner alliances and build the sales and marketing
infrastructure. Mr. Lesniak received an undergraduate degree from Illinois State
University and is completing studies toward his Masters in Business
Administration. Mr. Lesniak heads corporate development, sales and marketing for
the Company. Mr. Lesniak works mainly out of his Milwaukee, Wisconsin office,
when not taking business trips for the Company. Mr. Lesniak is currently paid
as an independent outside consultant.
ANDREW L. JIRANEK, VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
Mr. Jiranek joined the Company on February 1, 1999, as Vice President,
Secretary and General Counsel. Prior to joining the Company, Mr. Jiranek
conducted a corporate law practice in Baltimore, Maryland with a firm he
founded, Jiranek & Harasti, where he concentrated on working with emerging
companies, particularly in the high technology industry. Mr. Jiranek continues
to maintain a limited relationship with this firm. Prior to that time, Mr.
Jiranek worked in the corporate and commercial department at Niles, Barton &
Wilmer from 1992 to 1998 and in the corporate and commercial department at
Dickstein, Shapiro & Morin from 1991 to 1992. He was a trial attorney in the
Honors Program at the Department of Justice from 1988 to 1991, and was a
judicial law clerk to the Chief Judge of the federal district court of
Montgomery, Alabama during 1987 and 1988. Mr. Jiranek assists the Company with
securities compliance, mergers and acquisition, strategic partnering, business
development, licensing and other contractual issues, including bid proposal, and
employment matters. He also assists with quality control and compliance with ISO
certification requirements for documentation and maintenance. He received his
Juris Doctorate in 1987 from the College of William and Mary School of Law where
he was a Editor for the Law Review and an Economics Degree in 1984 from
Princeton University.
DAVID C. BRUGGEMAN, VICE PRESIDENT OF ENGINEERING
Mr. Bruggeman joined the Company as Vice President of Engineering
following the Company's acquisition of Xyros Systems, Inc. on February 25, 1999.
He is a non-executive, operational officer. As such, he is responsible for
overseeing the hardware design and product development for the Company's
products. Prior to joining the Company, from 1997 to 1999, Mr. Bruggeman was
Vice President of Operations and a principal of Xyros Systems, Inc. From 1996 to
1997, Mr. Bruggeman was a Vice President of Product Management for Systems of
Excellence, Inc., a publically held video conferencing company, where he managed
all elements of the corporation's technical hardware and software design and
product support. From 1994 to 1995, Mr. Bruggeman was a Director of Project
Management and Advanced Programs for MELA Associates, Inc., a privately held
Section 8(a) government contractor, where he directed the activities of a major
U.S. Department of Defense program as Program Manager for the migration of
legacy financial applications to UNIX open systems MPP platform, design and
integration of open servers, test and evaluation of applications on IBM ES/9000
mainframes and UNIX systems. From 1992 to 1993, Mr. Bruggeman was Director of
Technologies where he directed the activities of the engineering group in the
development of the "FACE to FACE now" PC based video conferencing system.
JOHN CURRAN, VICE PRESIDENT OF MANUFACTURING
Mr. Curran joined the Company as Vice President of Manufacturing on
July 1, 1999. He is not an executive officer of the Company; however, his title
reflects his operational responsibilities and authority. He has thirty years of
diversified Electronic and Electromechanical Manufacturing Engineering
experience. Mr. Curran specializes in start-up manufacturing operations,
productivity, and quality assessments. From 1995 to 1999, Mr. Curran was a
Manufacturing Engineer with Novatec, Inc, a large privately held producer of
plastic molding equipment. From 1991 to 1995, he was a
33
<PAGE>
consultant in the electronic component assembly business specializing in startup
manufacturing operations, productivity and quality assessment. From 1989 to
1991, he was a Production Manager for Ant Telecommunications, Inc., a large
privately held telecommunications research and development company, coordinating
all subassembly contractors for in-line engineering changes and revision
upgrades. From 1984 to 1989, he was a Director of Operations with Gould, Inc., a
publicly traded electronic engineering firm, responsible for manufacturing
engineering, production and production planning and material control. From 1979
to 1984, he was a Senior Production Manager with COMSAT General Telesystems,
Inc., a large publicly traded telecommunications company, responsible for the
fabrication of all products in the manufacturing department. Mr. Curran is a
graduate of the University of Maine, receiving a bachelor's degree in business
administration in 1965.
LINDA THAN, COMPTROLLER
Ms. Than began functioning as the Business Manager and Comptroller for
daily operations of the Company with responsibilities for bookkeeping, payables,
receivables, and other financial aspects of day to day operations in September,
1998. She is not an executive officer; however, her title reflects her
operational responsibilities and authority. She works mainly out of the
Company's Denver, Colorado offices. Prior to assuming this position, from 1994
to 1998, Ms. Than was the Comptroller and Business Manager for RealView Systems,
Inc., and View Technologies, Inc. Ms. Than continues to function as Business
Manager and Comptroller for RealView Systems, Inc. and View Technologies, Inc.
From 1990 to 1994, Ms. Than served as business manager for a group dental
practice where her duties included physician recruitment and bottom line
performance of the business. Ms. Than continues to have limited involvement with
this dental practice. Linda Than is the wife of Gunther Than.
Additional directors of the Company are:
DAVID MICHAEL BARBARA, JR. M.D.
Dr. Barbara has held a variety of executive positions with hospitals in
Lafayette, Indiana and has been a surgeon with a 120-physician multi-specialty
clinic since 1986. For the past five years, he has been a partner in two
privately held pathology physician groups, where he has assumed administrative
and business duties. He holds a BA from Xavier University and MD from the
University of Kentucky, and is a board certified surgeon.
MARTIN MAASSEN, MD
Dr. Maassen is board-certified in Internal Medicine and Emergency
Medicine and has served as a Staff Physician in the Emergency Departments of
Jackson County, Deaconess, Union and St. Elizabeth hospitals in Indiana since
1977. In addition to practicing medicine he maintains an expertise in computer
technologies and their medical applications. He holds a Bachelors and a MD
degree from Indiana University.
MICHAEL L. BAGNOLI, D.D.S., M.D.,
Dr. Bagnoli holds (joint/dual) degrees as a medical doctor and a dental
specialist. Since 1988 he has practiced dentistry in the specialty area of oral
and masiofacial surgery with a private physician group in Lafayette, Indiana.
Through his practice, he introduced arthroscopic surgery along with the full
scope of arthroplastic and total joint reconstruction to the community. Dr.
Bagnoli was founder, CEO and president of a successful medical products company,
Biotek, Inc., which sold to a larger interest in 1994.
ITEM 10. EXECUTIVE COMPENSATION
Pursuant to instruction E(3) to Form 10-KSB, the information required
by Item 10 of Form 10-KSB with respect to executive compensation is incorporated
by reference to the information contained in the section captioned "EXECUTIVE
COMPENSATION" in the registrant's definitive proxy statement for the 2000 annual
meeting of stockholders to be filed with the Commission.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to instruction E(3) to Form 10-KSB, the information
34
<PAGE>
required by Item 11 of Form 10-KSB with respect to security ownership of certain
beneficial owners and management is incorporated by reference to the information
contained in the section captioned "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" in the registrant's definitive proxy statement for the
2000 annual meeting of stockholders to be filed with the Commission.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction E(3) to Form 10-KSB, the information required
by Item 12 of Form 10-KSB with respect to certain relationships and related
transactions is incorporated by reference to the information contained in the
section captioned "CERTAIN TRANSACTIONS WITH MANAGEMENT" in the registrant's
definitive proxy statement for the 2000 annual meeting of stockholders to be
filed with the Commission.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
2.1 (1) Resolution of Shareholders of RealView Systems, Inc. and
Resolution of Board of Directors of View Systems, Inc. Approving and Evidencing
View Systems, Inc. Acquisition Agreement and Plan of Reorganization With
RealView Systems, Inc.
2.2 (1) View Systems, Inc. Acquisition Agreement and Plan of
Reorganization With Xyros Systems, Inc.
2.3 (1) View Systems, Inc. Acquisition Agreement and Plan of
Reorganization With ETMC.
2.4 (1) Letter of Intent to Form Joint Venture Corporation Between
Netserv Caribbean, Ltd. and View Systems, Inc.
3.1 (1) Articles of Incorporation and all Articles of Amendment of
View Systems, Inc.
3.2 (1) By-Laws of View Systems, Inc..
4.1 (1) Agreement with Columbia Financial Group Granting Warrants and
Stock and Granting Piggyback Registration Rights.
4.2 (1) Form of Subscription Agreement For 8/8/99 Rule 505 (Amended to
Be Rule 506) Offering and Terms of Offering Pages From Private Placement
Memorandum, Dated August 8, 1999, Describing Rights of Subscribers.
4.3 (1) Form of Subscription Agreement For 11/11/99 Rule 506 Offering
and Terms of Offering Pages From Private Placement Memorandum, Dated November
11, 1999, Describing Rights of Subscribers.
4.4 (1) Subscription Agreement Between View Systems, Inc. and Lawrence
Seiler for 170,000 Shares, Granting Registration Rights to 100,000 Shares.
4.5 (1) Lock-Up Agreement With Lawrence Seiler.
4.6 (1) Consulting Agreement with Tom Cloutier Granting Warrants and
Registration Rights
4.7 (1) Consulting Agreement with Guy Parr Granting Warrants and
Registration Rights
4.8 (1) Form of Stock Certificate.
4.9 (1) Consulting Agreement with Magnum Worldwide Investments, Ltd.
35
<PAGE>
4.10 (1) Escrow Agreement with Bank For Proceeds of Offering (To Be
Provided By Amendment)
4.11 (1) Subscription Agreement Between View Systems, Inc. and
Leokadia Than
4.12 (1) Form of Subscription Agreement Between View Systems, Inc. and
Jim Price and Tim Rieu
4.13 (2) Subscription and Investment Representation Agreement between
View Systems, Inc. and Rubin Investment Group, dated February 18, 2000
4.14 (2) First Common Stock Purchase Warrant between View Systems,
Inc. and Rubin Investment Group, dated February 18, 2000
4.15 (2) Second Common Stock Purchase Warrant between View Systems,
Inc. and Rubin Investment Group, dated February 18, 2000
4.16 (2) Registration Rights Agreement between View Systems, Inc. and
Rubin Investment Group, dated February 18, 2000
10.1 (1) View Systems, Inc. Employment Agreement with Gunther Than
10.2 (1) View Systems, Inc. Employment Agreement with Andrew L.
Jiranek
10.3 (1) View Systems, Inc. Engagement Agreement with Bruce Lesniak
10.4 (1) View Systems, Inc. Employment Agreement with David Bruggeman
10.5 (1) Eastern Tech Mfg. Corp. Employment Agreement with John Curran
10.6 (1) Lease Agreement Between View Systems, Inc. and Lawrence
Seiler
10.7 (1) Stock Redemption Agreement, dated May 27, 1999, Between View
Systems, Inc. and Gunther Than
10.8 (1) Stock Redemption Agreement, dated September 30, 1999,
Between View Systems, Inc. and Gunther Than
10.9 (1) View Systems, Inc. 1999 Restricted Share Plan
10.10 (1) Restricted Share Agreement with Bruce Lesniak (Lesniak &
Associates)
10.11 (1) Restricted Share Agreement with John Curran
10.12 (1) Restricted Share Agreement with David Bruggeman
10.13 (1) Restricted Share Agreement with Gunther Than
10.14 (1) Restricted Share Agreement with Andrew Jiranek
10.15 (1) Restricted Share Agreement with Linda Than
10.16 (1) View Systems, Inc. 1999 Employee Stock Option Plan
10.17 (1) Non-qualified Stock Option Agreement with Gunther Than
10.18 (1) Non-qualified Stock Option Agreement with Andrew Jiranek
10.19 (1) Qualified Stock Option Agreement with Gunther Than
10.20 (1) Qualified Stock Option Agreement with Andrew Jiranek
10.21 (1) Promissory Notes from Xyros Systems, Inc. to Ken Weiss
10.22 (1) Promissory Notes from Xyros Systems, Inc. to Hal Peterson
10.23 (1) Loan Agreement Between Xyros Systems, Inc. and Columbia Bank
10.24 (1) Letter From Columbia Bank Extending Term of Loan
36
<PAGE>
10.25 License Agreement With Visionics Corporation for FaceIt Developer
Kit, effective August 1996
10.26 License Agreement Between Lead Technologies, Inc. and View
Systems, Inc. for Video OCR software
10.27 License Agreement Between View Systems, Inc. and Annasoft
Systems for Microsoft Operating Software
13.1 (1) 10Q-SB for Third Quarter, 1999 (Incorporated By Reference To
Earlier Filing)
21. (1) Subsidiaries of Registrant.
23.1 Consent of Stegman & Company
27 Financial Data Schedule for the year ended December 31, 1999.
- --------------------------------------------------------------------------------
(1) Incorporated by reference to Registrant's Registration Statement on
Form SB-2 filed with the Commission on January 11, 2000.
(2) Incorporated by reference to Registrant's Form 8-K filed with the
Commission on February 19, 2000.
(b) REPORTS ON FORM 8-K
NONE
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.
By: /s/Andrew L. Jiranek Date: March 30, 1999
---------------------------------------
Andrew L. Jiranek, Vice President,
General Counsel, and Secretary
Date: March 30, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Andrew L. Jiranek, jointly and severally,
his or her respective attorney-in-fact, with the power of substitution, for each
other in any and all capacities, to sign any amendments to this Report on Form
10-KSB, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
respective substitute or substitutes, may do or cause to be done by virtue
hereof.
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.
37
<PAGE>
By: /s/Gunther Than Date: March 30, 2000
---------------------------------------
Gunther Than, President,
Chief Executive Officer and
Chairman of the Board
By: /s/ Andrew L. Jiranek Date: March 30, 2000
---------------------------------------
Andrew L. Jiranek, Vice President,
General Counsel, and Secretary
By: /s/ Martin J. Maassen Date: March 30, 2000
---------------------------------------
Martin J. Maassen, Director
By: /s/ David Barbara Date: March 30, 2000
---------------------------------------
David Barbara, Director
By: /s/ Michael Bagnoli Date: March 30, 2000
---------------------------------------
Michael Bagnoli, Director
By: /s/ Linda Than Date: March 30, 2000
---------------------------------------
Linda Than, Comptroller
EXHIBIT 10.25
LICENSE AGREEMENT WITH VISIONICS CORPORATION
FOR FACEIT DEVELOPER KIT, EFFECTIVE AUGUST 1996
EXHIBIT 10.26
LICENSE AGREEMENT BETWEEN LEAD
TECHNOLOGIES, INC. AND VIEW SYSTEMS, INC. FOR VIDEO OCR SOFTWARE
EXHIBIT 10.27
LICENSE AGREEMENT BETWEEN VIEW
SYSTEMS, INC. AND ANASOFT SYSTEMS FOR MICROSOFT OPERATING SOFTWARE
38
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
View Systems, Inc.:
We consent to incorporation by reference in the registration statement
on Form SB-2 and the annual report on Form 10-KSB of View Systems, Inc. of our
report dated March 17, 2000, relating to the consolidated balance sheet of View
Systems, Inc. and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1999.
/s/ Stegman and Company
Baltimore, Maryland
March 29, 1999
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31,1999 STATEMENTS OF OPERATIONS,
STATEMENTS OF STOCKHOLDER'S EQUITY AND STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001075857
<NAME> VIEW SYSTEMS, INC.
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 89,150 0
<SECURITIES> 0 0
<RECEIVABLES> 93,278 0
<ALLOWANCES> 0 0
<INVENTORY> 141,213 0
<CURRENT-ASSETS> 323,641 0
<PP&E> 348,638 0
<DEPRECIATION> 48,296 0
<TOTAL-ASSETS> 824,342 0
<CURRENT-LIABILITIES> 383,999 0
<BONDS> 0 0
0 0
0 0
<COMMON> 7,167 0
<OTHER-SE> 440,343 0
<TOTAL-LIABILITY-AND-EQUITY> 824,342 0
<SALES> 310,057 31,438
<TOTAL-REVENUES> 310,057 31,438
<CGS> 258,478 20,891
<TOTAL-COSTS> 258,478 20,891
<OTHER-EXPENSES> 3,382,041 244,050
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 56,379 10,054
<INCOME-PRETAX> (3,386,841) (243,557)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> (545,490) 0
<CHANGES> 0 0
<NET-INCOME> (3,932,331) (243,557)<F1>
<EPS-BASIC> (0.68) (.06)
<EPS-DILUTED> (0.68) (.06)
<FN>
<F1>INCLUDES $1,755,000 IN EXPENSES FOR ISSUANCE OF STOCK AS COMPENSATION
</FN>
</TABLE>
