<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-KSB/A
/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.
---------------------------------
(Name of Registrant as specified in its charter)
FLORIDA 59-2928366
------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
925 West Kenyon Avenue, Englewood, Colorado 80110
----------------------------------
(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
----
Securities registered pursuant to Section 12(g) of
the Act: Common Stock, $.001 par value.
------------------------------
(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
1
<PAGE>
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 June 26, 2000, 8,386,080 shares of the registrant's Common Stock were
outstanding and the aggregate market value of such Common Stock held by
non-affiliates was approximately $14,675,000.00 based on the closing price of
$1.75 per share on that date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for Registrant's Annual Meeting of
Stockholders scheduled to be held on July 28, 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 and
Registrant's Form 8-K filed on February 19, 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.
2
<PAGE>
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. 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
3
<PAGE>
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 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 offers 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-.
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
4
<PAGE>
system is not functioning properly. The SecureView-TM- systems come standard
with up to 21 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.
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
5
<PAGE>
- 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
- 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 competitively
priced VCR replacement device that fits existing analog CCTV systems. This
storage device will record video output digitally, and it will store up to 7
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.
6
<PAGE>
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.
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.
7
<PAGE>
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
8
<PAGE>
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 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 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
9
<PAGE>
is currently marketing its FaceView system and expects to have significant
installations of this product in 2000.
MARKETING AND CUSTOMERS
According to a published report by J.P.Freeman & Co., the market size for
products such as our SecureView-TM- line was $1.3 billion for factory and
service revenue in 1998. This market is growing at a rate of 11 - 13% per year
and is expected to double by 2004. 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 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.
10
<PAGE>
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.
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.
The Company's business plan depends on the development, production and sale
of its security products. While the Company plans to continue offering contract
electronic component assembly services, it will be converting its manufacturing
capacity to production of its security products.
MANUFACTURING AND SUPPLIERS
The Company does not manufacture any of the hardware in its systems;
rather, the Company assembles its systems by integrating
11
<PAGE>
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.,
Visionics, Inc. and Avasoft Corporation, authorized distributor for Microsoft
Corporation.
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
12
<PAGE>
Company's research and 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 $210,143 of research and development
expense.
EMPLOYEES
The Company employs 23 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
We are not subject to Government regulation in the manufacture and sale of
our products, and the components in our products. However, our resellers and end
users will be subject to numerous regulations that stem from proposed activities
in surveillance. Security and surveillance systems, including cameras, raise
privacy issues. Our products involve both video and audio, and add features for
facial identification. The regulations regarding the recordation and storage of
this data are uncertain and evolving. For example, under the Federal wiretapping
statute, the audio portion of our surveillance systems may not record people's
conversations without their consent. Further, there are state and federal laws
associated with recording video in non-public places. Shipments of our products
internationally may be regulated as to certain countries that raise national
security concerns. These laws are evolving.
ITEM 2. PROPERTIES
The engineering and manufacturing facility for our products is an 8,000
square foot facility located at 9693 Gerwig Lane Suite 0, Columbia, MD 21046. We
engineer, manufacture, assemble and ship from this facility. We also maintain an
executive office at 925 West Kenyon Avenue, Suite 15, Englewood, Colorado.
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
13
<PAGE>
acquisition of Xyros, the Company guarantied the repayment of these promissory
notes. The Company has settled this lawsuit by agreeing to pay $88,000 on or
before August 22, 2000.
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:
14
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fourth Quarter 1998................ 3.25 1.85
First Quarter 1999................. 6.35 2.0
Second Quarter 1999................ 5 2.25
Third Quarter 1999................. 3.15 1.75
Fourth Quarter 1999................ 3.65 1.75
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions
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/Div. of Fleet
Hill Thompson Magid & Co. Herzog, Heine, Geduld Securities Sharpe Capital
Paragon Capital Corporation Wilson-Davis & Co.
Sherwood Securities Corp. Global Financial Grp. Schwab Cap. Markets, L.P.
W. H. Myerson & Co. GVR Company Spencer Edwards, Inc.
Ladenburg,Thalmann & Co. Bear, Stearns & Co.
</TABLE>
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.
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
15
<PAGE>
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
REVENUE
The Company's revenue is derived from:
- sales of systems, included embedded software, and supplies from
maintenance services on the systems; and
- sales of contract electronic component and system assembly and test
services.
In 1999, of our $303,711 in total revenues, we derived $65,954 from sales
of security systems and $237,757 from sales of contract manufacturing and test
services. Seventy nine percent of our total revenue in 1999 was attributable to
our acquisition of ETMC, and ETMC's on-going revenue base. We plan to bring
three products in development, WebView-TM-, CareView-TM- and FaceView-TM-, to
market in 2000. In addition, the Company will be introducing enhancements and
upgrades to our SecureView-TM- product line in 2000. The Company expects that
these new product offerings will contribute to a growth in revenues in 2000.
NET SALES AND GROSS PROFIT.
Gross profit on sales for the year ended December 31, 1999, was $45,333.
Gross profit margin on sales was 15% in 1999. At these modest sales amounts, the
Company considers the gross profit margin to not be a good indicator of future
profit margins. The gross profit margin should stabilize with increased sales.
Operating expenses for the year ended December 31, 1999, increased to
$3,988,668, compared with $89,824 in 1998. Approximately, $2,147,000 of our
operating expenses in 1999 were attributable to the issuance of shares of our
common stock as compensation and incentive, and as a means to attract and retain
qualified personnel. It does not represent actual cash outlays. Non-cash
expenses consisted of stock based compensation, write-off and amortization of
goodwill and other intangible assets, and totaled $2.9 million, so that actual
cash expenses incurred were approximately $1.1 million.
16
<PAGE>
As a result of the foregoing, net loss was $3,943,335 for the year ended
December 31, 1999, compared to a net loss of $89,824 for the previous year.
COSTS AND EXPENSES
COSTS OF PRODUCTS AND SERVICES SOLD. The cost of products and services
sold, consisting principally of the costs of labor, hardware components,
supplies and software amortization, was $258,378 in 1999, and represented 85% of
revenue. As product sales account for a larger percentage of overall sales, the
Company expects that our costs of goods and services sold will decline as a
percentage of total revenue. We anticipate that our profit margins on sales of
security systems will exceed our profit margins on sales of services. The
Company is currently working on engineering changes in our security products
that the Company expects will lower component costs for these products.
SALARIES AND BENEFITS. The Company spent $2,045,531 in salaries and
benefits in 1999. The Company organized and staffed up in 1999, converting many
independent contractors to employees. The Company booked $1,755,000 in expenses
associated with issuing shares of our common stock as a means of attracting,
retaining and providing incentive to employees. The Company believed these
expenses were necessary in the past and will continue to be necessary in the
future in order to attract qualified personnel and conserve cash during the
start-up phase.
SELLING, BUSINESS DEVELOPMENT, TRAVEL AND ENTERTAINMENT. Selling, business
development, travel and entertainment expenses increased from $12,191 in 1998,
to $269,450 in 1999, and represented 89% of total revenue in 1999. A significant
portion of these expenditures in 1999 related to the payment of 140,000 shares
to Bruce Lesniak as a way of attracting and providing incentive to him in
performing the job of Senior Vice President of Corporate Development. The
Company also spent $105,813 in 1999 in travel and entertainment expenditures,
mainly as a result of sales trips associated with sales efforts for our security
products.
RESEARCH AND DEVELOPMENT EXPENSE. The Company spent $210,143 in 1999 on
research and development costs. This represented 69% of 1999 revenues. The
Company expects to continue to fund new product development in 2000 at or above
the dollar levels expended in 1999.
INVESTOR RELATIONS EXPENSES. Investor relations expenses increased from
$45,415 in 1998 to $212,086 in 1999. Our filing to become a fully reporting
company became effective October 13, 1999. In addition, trading in our stock
increased significantly in 1999. As a result, the Company undertook more efforts
on investor relations in 1999. Included in this expense category is the issuance
of shares of our common stock to Columbia Financial Group with a value of
$200,000, in partial payment of their services in providing investor relations
support.
17
<PAGE>
PROFESSIONAL FEES. Professional fees increased from $9,500 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. During the year ended December 31,
1999, the Company wrote-off the remaining goodwill associated with the Company's
purchase of ETMC in the amount of $473,490. Management completed a thorough
review of the operations of ETMC and determined that ETMC had experienced a loss
of a significant portion of its revenue stream and, on a divisional basis, had
experienced operating and cash flow losses since the acquisition. Management
believes that although ETMC's business is cycical in nature and could recover,
the basis under which the goodwill was originally recorded no longer exists and
the goodwill should be eliminated. In addition, the Company had previously
capitalized $72,000 of software development costs for the program developed by
RealView Systems. As the Company is no longer marketing this program, the
Company wrote off the $72,000 in costs associated with this program in 1999.
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. 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 2018. 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 years ended December 31, 1999, or 1998.
LIQUIDITY AND CAPITAL RESOURCES.
During 1999, the Company funded its cash requirements primarily through
equity transactions. As of December 31, 1999, the Company had
18
<PAGE>
total assets of $1,559,421, and total liabilities of approximately $383,999,
resulting in equity of $1,175,422. The Company's principal uses of cash during
1999 were to:
- fund operating activities, including increased sales and marketing
activities;
- acquire businesses, property and equipment; and
- 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
$1,094,399 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 $1,553,120
consisted of proceeds received from the sale of stock or satisfaction of loans
from issuance of stock.
The Company has a demand loan payable to Columbia Bank that has been
reduced to an outstanding principal balance of approximately $70,000 as of
December 31, 1999. Beginning July 1, 2000 Columbia Bank will convert this loan
to an amortized loan that will be repaid over a one year term ending July 1,
2001.
As of the period ended December 31, 1999, we were disputing payment of
purported promissory notes in the stated principal amount of $110,000 held by
two former managers of Xyros. The notes purport to accrue interest at the rate
of 10% per annum. We have settled one of these disputes, by agreeing to pay
approximately $88,000 to Hal Peterson by August 22, 2000, or consent to entry of
judgment.
As of December 31, 1999, the Company had $(60,358) 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. With expected increased product sales, we
will need to make increased inventory expenditures. However, the terms of our
product sales requires a twenty five percent (25%) deposit on order. In
addition, we endeavor to keep inventory levels low. Therefore, we do not believe
that increased product sales, associated materials purchases and inventory
increases, will adversely affect liquidity.
The Company anticipates further capital expenditures for 2000 of
approximately $500,000. The Company is also exploring the purchase of the
commercial space we are leasing in Columbia, Maryland, plus adjoining space,
consisting of approximately 10,000 square feet. If we can obtain favorable
terms, we would purchase the building through debt financing.
19
<PAGE>
Under our outstanding employment and consulting agreements, we are
obligated to pay $228,000 in cash to Messrs. Than, Jiranek and Lesniak in salary
and fees during calendar year 2000. We are also obligated to issue common stock
to them with a value of $108,780. If we terminate the employment or engagement
of Messrs. Than, Jiranek and Lesniak without cause (including because of merger,
acquisition or change in control), we will be obligated to pay a total of
$792,780 in severance payments over a three year period.
We report each issuance of stock for less than fair market value as a
charge against earnings to the extent of fair market value. The obligation to
issue stock is a substantial capital commitment in year 2000 and subsequent
years.
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. We are registering 2,689,000 shares of common stock for resale
that can be obtained from exercising warrants held by the selling stockholders.
If the selling stockholders exercise all of their warrants, at the exercise
price of $2.00 per share, we will receive $5,378,000, which we will use for
working capital and to expand operations to execute our business plan. We
anticipate that the proceeds from the exercise of the warrants will fund
operations through approximately December 31, 2002.
Unless the range of trading prices of our common stock increases to over
$2.00 per share or we agree to lower the exercise price of the warrants, it is
unlikely that the warrants will be exercised.
The Company has an outstanding loan balance of $94,362 representing monies
that have been advanced to Gunther Than, our President & CEO, and his mother,
Leokadia Than. Mr. Than and Ms. Than have indicated that they have the ability
to repay these loans on demand. Moreover, Mr. Than has indicated that he will
loan monies to the Company that it may need to meet operating capital needs.
The Company owns 840,000 shares of MediaComm Broadcasting, Inc. MediaComm
is filing an application to be quoted and traded on the NASD OTCBB. If this
application is accepted, the Company will be able to make limited sales of
MediaComm shares in this public market.
ACQUISITION TREATMENT. In October 1998, the Company acquired RealView
Systems, Inc. and issued 2,000,000 shares to the existing shareholders of
RealView Systems in exchange for all of the outstanding shares of RealView
Systems. This acquisition was accounted for under the pooling of interests
accounting method. 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
20
<PAGE>
products, called the RM1600, and these products have been incorporated into the
SecureView product line. 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 have implemented a quality control plan that has
been certified to be in compliance with the requirements of ISO9002. The Company
accounted for the Xyros and ETMC business combination under the purchase
accounting method.
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 brand awareness of
SecureView
Although the Company have been selling products since March of 1999, it is
still developing these products and have generated limited revenues from these
products to date. In the quarter ended September 30, 1999, the Company began
earning substantial revenues. As of December 31, 1999, the Company had an
accumulated deficit of $4,166,087. The Company expects the operating losses to
continue until it develops a sufficient network of resellers and strategic
partners generating sales revenues to cover our operating expenses. A large part
of the Company's earnings deficit is due to the issuance of equity to attract,
retain and provide incentive to key personnel. This was done to preserve cash
resources. Thus, much of the Company's earnings deficit is not attributable to
actual cash outlays.
The Company hopes to use the cash raised from the exercise of warrants held
by selling shareholders to:
- bring our WebView-TM-, ViewStorage-TM- and CareView-TM- products to
market
- continue the Company's product development efforts
- expand the Company's sales, marketing and promotional activities for
the SecureView-TM- line of products
- increase the Company's 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
21
<PAGE>
raise additional capital, both internally and externally, to compete
in this industry.
The amount of capital that the needs to raise will depend upon many factors
primarily including:
- the rate of sales growth and market acceptance of the Company's
product lines
- the amount and timing of necessary research and development
expenditures
- the amount and timing of expenditures to sufficiently market and
promote the Company's products
- the amount and timing of any accessory product introductions
In addition to accessing the public and private equity markets, the Company will
pursue bank credit lines and equipment lease lines for certain capital
expenditures. The Company currently estimates it will need between $7 million
and $8 million to fully develop all of its products and launch its expanded
business operations in accordance with its current business plan.
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 Company has identified important factors in its filings with the
Securities and Exchange Commission that could cause actual results to differ
materially from those projected in any such forward-looking statements. These
filings are accessible on the Commission's website at WWW.SEC.GOV. You may
access these filings from this website or you may contact the Company and it
will provide you with those filings without charge. The risk factors identified
in those filings are incorporate by reference into this report.
ITEM 7. FINANCIAL STATEMENTS
Information called for by this item is set forth in the Company's Financial
Statements contained in this report and is incorporated herein by this
reference. Specific financial statements can be found at the pages listed in the
following index.
INDEX TO FINANCIAL STATEMENTS
VIEW SYSTEMS, INC
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Summary Pro Forma Consolidated Financial
Information E-1
Independent Auditors' Report F-1
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
Consolidated Balance Sheet at December 31, 1999 F-2
Consolidated Statements of Operations for the F-3
years ended December 31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the
years ended December 31, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
INDEX TO FINANCIAL STATEMENTS
EASTERN TECH MANUFACTURING CORP.
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report G-1
Balance Sheet at June 30, 1998 G-2
Statements of Operations and
Retained Earnings for the years ended
June 30, 1998 and 1997 G-3
Statements of Cash Flows for the
years ended June 30, 1998 and 1997 G-4
Notes to Financial Statements G-5
Balance Sheet at March 31, 1999
(unaudited) G-7
Statements of Operations for the
Nine Months Ended March 31, 1999 and 1998
(unaudited) G-8
Statements of Cash Flow for
the Nine Months Ended March 31, 1999 and
1998 (unaudited) G-9
</TABLE>
INDEX TO FINANCIAL STATEMENTS
XYROS SYSTEMS, INC
-----------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Independent Auditors' Report H-1
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
Balance Sheet at December 31, 1998 H-2
Statements of Operations and
Accumulated Deficit for the years ended
December 31, 1998 and 1997 H-3
Statements of Cash Flows for the
years ended December 31, 1999 and 1998 H-4
Notes to Financial Statements H-5
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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, CEO, Director
Dr. Martin Maassen 56 Director, Chr. Bd.
Dr. David Barbara 49 Director
Dr. Michael L. Bagnoli 42 Director
Andrew L. Jiranek 38 VP, Secretary and General Counsel
Bruce Lesniak 41 Senior VP of Corp. Development
David Bruggeman 56 Vice President of Engineering
John Curran 58 Vice President of Manufacturing
Linda Than 46 Comptroller & CFO
</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.
24
<PAGE>
GUNTHER THAN, PRESIDENT, DIRECTOR AND CEO.
Gunther Than has served as the Company's President and Chief Executive
Officer since September, 1998. He also served as Chariman of the Board from
September, 1998 to April, 2000, and as a director since April, 2000. From 1994 -
1998, Mr. Than was the founder, President and CEO or RealView Systems and View
Technologies, Inc. Mr. Than continues as President, CEO and board member of View
Technologies.
Prior to founding RealView and View Technologies, Mr. Than held a variety
of business management positions including:
- Founder and President, EasyView Systems, Inc., a developer of software
for use in the furniture industry
- Founder and President, National Systems and Software, Inc., a retail
distributor of computer hardware and software
- General Manager, Rutland Biotech, Vancouver, Canada, a developer of
medical and health related proprietary products
- Vice President of Information Systems, Patterson Dental Corporation,
one of the largest U.S. dental product supply corporations
- Director of Information Systems, Salkin and Linoff, a Minneapolis
retailer of soft goods and ladies apparel, with $100 MM in sales and
over 500 retail outlets including Peck & Peck
- Manager of Systems and Programs, Fairway Foods, a $2 billion sales
division of Holiday Worldwide, Inc.
- 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.
BRUCE E. LESNIAK, SENIOR VICE-PRESIDENT OF CORPORATE DEVELOPMENT
Mr. Lesniak has been Senior Vice President of Corporate Development since
March, 1999. He is not an executive officer and is a consultant. Mr. Lesniak
will aid in developing a strategic business plan, creating strong partner
alliances and building sales and marketing infrastructure. Mr. Lesniak heads the
Company's corporate development, sales and marketing departments. Mr. Lesniak
has been active in the security industry for over 15 years. The last 14 years
were spent with the largest security system integrator in the U.S., ADT Security
Services. Mr. Lesniak was National Director of Business Development at ADT from
1997 to 1999. While at ADT, Mr. Lesniak's responsibilities included guiding
sales, implementing numerous new product releases and managing the largest and
most profitable sales territory in the company. Mr. Lesniak received an
undergraduate degree from Illinois State University.
25
<PAGE>
ANDREW L. JIRANEK, VICE PRESIDENT, SECRETARY AND GENERAL COUNSEL
Mr. Jiranek has been the Company's Vice President and Secretary since
June, 1999, and the Company's General Counsel since February, 1999. Prior to
joining us on February 1, 1999, Mr. Jiranek practiced law in the areas of
corporate and securities regulation. In March, 1998, Mr. Jiranek founded the
law firm of Jiranek & Harasti. From 1992 to 1998 he was an associate attorney
at the Washington, DC and Baltimore, Md. law firms of Niles, Barton & Wilmer
and Dickstein, Shapiro & Morin in the corporate departments. Mr. Jiranek
clerked for Chief Judge Truman Hobbs of the Middle District Court of Alabama
and was an attorney, U.S. Department of Justice, Honors Program. He received
his Juris Doctorate in 1987 from the College of William and Mary School of
Law and an Economics Degree in 1984 from Princeton University.
DAVID C. BRUGGEMAN, VICE PRESIDENT OF ENGINEERING
Mr. Bruggeman joined us in February, 1999, after we acquired Xyros Systems,
Inc., as Vice President of Engineering. He is not an executive officer. Mr.
Bruggeman manages the Company's engineering department and is responsible for
design and product development. Mr. Bruggeman has been designing in the computer
industry for over 37 years, with an emphasis on video and audio products in the
past ten years. He was Vice President Operations and founder of Xyros from 1997
through 1999. In 1995-1996 he was Vice President, Product Management of Systems
of Excellence, Inc., a publicly held video teleconferencing 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 Director of Project
Management and Advanced Programs for MELA Associates, Inc., a privately held
government contractor, where he directed the activities of a major U.S.
Department of Defense program as Program Manager.
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
reflected his operational responsibilities and authority. Effective June 16,
2000, Mr. Curran is no longer employed with the Company. Mr. Curran 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 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
26
<PAGE>
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 AND CHIEF FINANCIAL OFFICER
Ms. Than began has been functioning as the Company's Comptroller and Chief
Financial Officer for daily operations with responsibilities for bookkeeping,
payables, receivables, and other financial aspects of day to day operations
since September, 1998. She is not an executive officer. Since February 1994, Ms.
Than has also been the Comptroller and Business Manager for RealView Systems and
View Technologies.
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.
27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to instruction E(3) to Form 10-KSB, the information 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.
28
<PAGE>
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.
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
29
<PAGE>
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
10.25 (3) License Agreement With Visionics Corporation for FaceIt Developer
Kit, effective August 1996
10.26 (3) License Agreement Between Lead Technologies, Inc. and View
Systems, Inc. for Video OCR software
10.27 (3) License Agreement Between View Systems, Inc. and Annasoft Systems
for Microsoft Operating Software
30
<PAGE>
21. (1) Subsidiaries of Registrant.
23.1 (attached to report) Consent of Stegman & Company
23.2 (attached to report) Consent of Davis, Sita & Company
23.3 (attached to report) Consent of Stegman & Company
24.1 (attached to report) Power of attorney
27 (attached to report) 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.
(3) Incorporated by reference to Registrant's Form 10-K filed with the
Commission on March 30, 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: June 26, 2000
---------------------------------------
Andrew L. Jiranek, Vice President,
General Counsel, and Secretary
Date: June 26, 2000
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.
31
<PAGE>
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.
<TABLE>
<S> <C>
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 & Chief Financial Officer
</TABLE>
32
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following table provides summary pro forma consolidated financial
information for View Systems, Inc., Eastern Tech Manufacturing Corporation
and Xyros Systems, Inc. based on historical data for the year ended
December 31, 1999 which assumes that the acquisition of these companies was
consummated on January 1, 1999. The summary pro forma financial data do not
necessarily indicate the operating results which would have resulted from the
operation of View Systems, Inc. on a consolidated basis during the period
presented, nor does this pro forma data necessarily represent any future
operating results. In addition to this summary financial data, you should
also refer to the more complete financial information included elsewhere in
this prospectus, including more complete historical results for our acquired
businesses.
CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS DATA FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUE:
Sales and other income $ 704,322 $ 852,121
Cost of goods sold 588,163 681,231
----------- -----------
GROSS PROFIT ON SALES 116,159 170,890
OPERATING EXPENSES 4,107,475 418,189
----------- -----------
NET LOSS $(3,991,316) $ (247,299)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.68) $ (0.06)
=========== ===========
</TABLE>
-E-1-
<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.
As discussed in Note 14 to the accompanying consolidated financial
statements, the Company has restated its financial statements for the years
ended December 31, 1999 and 1998.
Baltimore, Maryland
May 22, 2000
- F-1 -
<PAGE>
VIEW SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
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:
Goodwill 735,079
Investments 28,000
Due from affiliated entity 90,990
Due from stockholders 74,362
Deposits 7,007
-----------
Total other assets 935,438
-----------
TOTAL ASSETS $ 1,559,421
===========
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 5,334,342
Accumulated deficit (4,166,087)
-----------
Total stockholders' equity 1,175,422
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,559,421
===========
</TABLE>
See accompanying notes.
- F-2 -
<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 $ 303,711 $ -
Cost of goods sold 258,378 -
----------- -----------
GROSS PROFIT ON SALES 45,333 -
----------- -----------
OPERATING EXPENSES:
Advertising and promotion 23,256 1,151
Amortization of goodwill - Xyros 66,839 -
Business development expense 140,000 -
Contributions 2,500 -
Depreciation 29,856 3,885
Dues and subscriptions 3,379 250
Employee compensation and benefits 2,045,531 -
Insurance 17,038 442
Interest 51,262 217
Investor relations 212,086 45,415
Miscellaneous expense 19,009 282
Office expenses 69,989 992
Professional fees 317,100 9,500
Rent 74,228 16,325
Repairs and maintenance 10,167 -
Research and development 210,143 -
Taxes - other 3,201 -
Telephone 28,398 -
Travel and entertainment 105,813 11,040
Utilities 13,383 325
Write-off of goodwill and other intangible assets 545,490 -
----------- -----------
Total operating expenses 3,988,668 89,824
----------- -----------
NET LOSS $(3,943,335) $ (89,824)
=========== ===========
LOSS PER SHARE:
Basic $ (0.68) (.02)
=========== ===========
Diluted $ (0.68) (.02)
=========== ===========
</TABLE>
See accompanying notes.
- F-3 -
<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> <C>
Balances at January 1, 1998 $ 4,000 $ 156,420 $ (132,928) $ 27,492
Sale of common stock 167 249,833 - 250,000
Net loss - - (89,824) (89,824)
----------- ----------- ----------- -----------
Balances at December 31, 1998 4,167 406,253 (222,752) 187,668
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 (Xyros acquisition) 150 562,350 - 562,500
Issuance of common stock (ETMC acquisition) 250 787,250 - 787,500
Issuance of common stock (debt conversion) 370 403,838 - 404,208
Net loss - - (3,943,335) (3,943,335)
----------- ----------- ----------- -----------
Balances at December 31, 1999 $ 7,167 $ 5,334,342 $(4,166,087) $ 1,175,422
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
- F-4 -
<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 $(3,943,335) $ (89,824)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 96,695 3,885
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 (93,278) -
Inventory (141,213) -
Other assets (7,007) -
Accounts payable 150,333 17,088
Accrued interest 11,000 -
Other accrued liabilities 19,163 -
----------- -----------
Net cash used in operating activities (1,094,399) (68,851)
----------- -----------
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/repayment of loans provided by stockholders 132,071 (6,599)
Repayment of note payable - bank (5,270) -
Proceeds from sales of stock 1,426,329 250,000
----------- -----------
Net cash provided by financing activities 1,553,130 243,401
----------- -----------
NET (DECREASE) INCREASE IN CASH (78,803) 167,946
CASH AT BEGINNING OF YEAR 167,953 7
----------- -----------
CASH AT END OF YEAR $ 89,150 $ 167,953
=========== ===========
</TABLE>
- F-5 -
<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 $ -
========== =======
Common stock issued to effect purchase of
Xyros Systems, Inc. $ 562,500 $ -
========== =======
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.
- F-6 -
<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 first-in-first-out method (FIFO).
- F-7 -
<PAGE>
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:
<TABLE>
<S> <C>
Equipment 5 - 7 years
Software tools 3 years
</TABLE>
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.
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
- F-8 -
<PAGE>
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 $4.2 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 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.
- F-9 -
<PAGE>
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 purchase.
Condensed financial information for Xyros for the two months ended February
28, 1999 and the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
TWO MONTHS
ENDED YEAR ENDED
FEBRUARY 28, 1999 DECEMBER 31, 1998
----------------- -----------------
(UNAUDITED)
<S> <C> <C>
Sales and other income $ 6,346 $ 31,438
Cost of goods sold 100 20,891
--------- ---------
Gross profit on sales 6,246 10,547
Operating expenses 62,081 186,567
--------- ---------
Net loss $ (55,835) $(176,020)
========= =========
</TABLE>
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 during the year ended December
31,199.
Condensed financial information for ETMC for the eleven months ended May
31, 1999 and the year ended June 30, 1998 ETMC's fiscal year is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS
ENDED YEAR ENDED
MAY 31, 1999 JUNE 30, 1998
-------------- -------------
(UNAUDITED)
<S> <C> <C>
Sales and other income $ 867,383 $ 820,683
Cost of goods sold 725,308 660,340
--------- ---------
Gross profit on sales 142,075 160,343
Operating expenses 107,584 164,085
--------- ---------
Net income (loss) $ 34,491 $ (3,742)
========= =========
</TABLE>
- F-10 -
<PAGE>
The following unaudited condensed pro form summary presents the
consolidated results of operations for the years ended December 31, 1999 and
1998 of the Company as if the purchase business combinations had occurred
January 1, 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Sales and other income $ 704,322 $ 852,121
Cost of goods sold 588,163 681,231
----------- -----------
Gross profit on sales 116,159 170,890
Operating expenses 4,107,475 418,189
----------- -----------
Net loss $(3,991,316) $ (247,299)
=========== ===========
</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 which 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.
- F-11 -
<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 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.
In relation to the business combination with Xyros accounted for under the
purchase method of accounting, the Company recorded goodwill in the amount of
$802,069. This amount was based on the difference between the fair market value
of the Company's stock at the acquisition date and the fair market value of
Xyros's net assets and is being amortized on a straight-line basis over a ten
year period. Amortization expense from the purchase date of February 25, 1999
through December 31, 1999 was $66,839.
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.
- F-12 -
<PAGE>
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:
<TABLE>
<S> <C>
Effect of net operating loss carryforward $ 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 carryforward. The
Company has net operating loss carryforwards 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>
- F-13 -
<PAGE>
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>
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:
<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>
- F-14 -
<PAGE>
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 these 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
----------------------- ------------------------
YEAR NET PER NET PER
ENDED LOSS SHARE LOSS SHARE
----- ----------- ------ ----------- ------
<S> <C> <C> <C> <C>
1999 $(3,943,335) $(0.68) $(4,209,848) $(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.
- F-15 -
<PAGE>
14. RESTATEMENT OF FINANCIAL STATEMENTS
The Company has restated its financial statements for the years ending
December 31, 1999 and 1998 to account for the acquisition of Xyros as a
purchase. The previous financial statements had accounted for this acquisition
as a pooling of interests. Accordingly, such statements have been restated as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ------------------------
AS AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Sales and other income $ 310,057 $ 303,711 $ 31,438 $ -
Cost of goods sold 258,478 258,378 20,891 -
Gross profit 51,579 45,333 10,547 -
Total operating expenses 3,983,910 3,988,668 254,104 89,824
Net loss (3,932,331) (3,943,335) (243,557) (89,824)
Net loss per share (basic and diluted) .68 .68 .06 .02
Balance Sheet Data:
Goodwill - 735,079 - -
Total assets 824,342 1,559,421 -
Additional paid-in capital 4,771,992 5,334,342 - -
Accumulated deficit (4,330,816) (4,166,087) - -
</TABLE>
- F-16 -
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Eastern Tech Manufacturing Corporation
We have audited the accompanying balance sheets of Eastern Tech
Manufacturing Corporation as of June 30, 1998 and 1997 and the related
statements of operations and retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Eastern Tech Manufacturing
Corporation as of June 30, 1998 and 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Davis, Sita & Company
June 2, 2000
-G- 1 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
BALANCE SHEET
JUNE 30, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 8,970 $ 6,538
Accounts receivable 33,138 71,590
Prepaid expenses 1,669 -
----------- -----------
Total current assets 43,777 78,128
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment, at cost 154,935 141,571
Less accumulated depreciation 83,879 81,970
---------- ----------
Cost less accumulated depreciation 71,056 59,601
---------- ----------
TOTAL ASSETS $ 114,833 $ 137,729
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 48,807 $ 67,961
Loans from stockholder 42,953 42,953
---------- ----------
Total current liabilities 91,760 110,914
---------- ----------
STOCKHOLDER'S EQUITY:
Common stock - par value $1.00
500 shares authorized, issued and outstanding 500 500
Retained earnings 22,573 26,315
---------- ----------
Total stockholder's equity 23,073 26,815
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 114,833 $ 137,729
========== ==========
</TABLE>
See Notes To Financial Statements
-G- 2 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
REVENUE:
Sales of assembled electronic components $ 820,683 $1,942,563
---------- ----------
COST OF SALES:
Material 484,961 1,307,755
Labor 175,379 310,205
----------- ----------
Cost of sales 660,340 1,617,960
----------- ----------
Gross profit 160,343 324,603
----------- ----------
OPERATING EXPENSES:
Salaries and benefits 43,844 61,480
Rent 43,029 101,015
Taxes (principally payroll) 26,981 42,144
Other operating expenses 25,683 88,895
Insurance 22,639 23,507
Depreciation 1,909 5,758
----------- ----------
Total operating expenses 164,085 322,799
----------- ----------
NET INCOME (LOSS) FOR THE YEAR (3,742) 1,804
RETAINED EARNINGS, BEGINNING OF YEAR 26,315 24,511
----------- ----------
RETAINED EARNINGS, END OF YEAR $ 22,573 $ 26,315
=========== ==========
</TABLE>
See Notes To Financial Statements
-G- 3 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,742) $ 1,804
Adjustments to reconcile net income to net cast
provided by operating activities:
Depreciation 1,909 5,758
Changes in operating assets and liabilities:
Accounts receivable 38,452 -
Prepaid expenses (1,669) -
Accounts payable (19,154) (44,762)
--------- ---------
Net cash provided by (used in) operating activities 15,796 (37,200)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,364) (31,883)
CASH FLOWS FROM FINANCING ACTIVITIES:
Funds advanced (to) from shareholders - 40,725
--------- ---------
NET INCREASE (DECREASE) IN CASH 2,432 (28,358)
CASH AT BEGINNING OF PERIOD 6,538 34,896
--------- ---------
CASH AT END OF PERIOD $ 8,970 $ 6,538
========= =========
</TABLE>
-G- 4 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Eastern Tech Manufacturing Corporation (The "Company") is a Maryland
corporation organized in May, 1985. The Company is engaged in the business of
assembling electronic components under various short-term, task oriented
contracts and purchase orders.
METHOD OF ACCOUNTING
The financial statements of the Company have been prepared on the accrual
basis of accounting. Under this method, certain revenues are recognized when
earned, and certain expense and purchases of assets are recognized when the
obligations if incurred.
MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue and the related cost of goods sold upon
shipment of the product.
ACCOUNTS RECEIVABLE
Management reflects as accounts receivable only those accounts which it
considers to be collectible. Uncollectible accounts are written off when
collection is in doubt.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed under
accelerated methods with useful lives ranging from 5 to 7 years. Expenditures
for major renewals and betterments which extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred
-G- 5 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
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.
INCOME TAXES
The Company is subject to Federal and state corporate income taxes on its
net taxable income. As of June 30, 1998 the Company owed no Federal or state
income taxes.
NOTE 2 - LOANS FROM STOCKHOLDER
At June 30, 1998 and 1997, the Company had borrowed $42,953 from its
principal stockholder. The loans are unsecured and payable on demand. There is
no provision for interest.
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company leased its office and manufacturing facility from its principal
stockholder under a month-to-month arrangement. Rent paid to the stockholder
amounted to $43,029 for the year ended June 30, 1998 and $101,015 for the year
ended June 30, 1997.
NOTE 4 - SUBSEQUENT EVENT
During May 1999 all of the Company's outstanding common stock was purchased
by View Systems, Inc. for $935,684. The purchase price was paid for with 250,000
shares of View's common stock. The transaction also included the assumption of
various liabilities and legal fees by View as well as a non-compete clause.
-G- 6 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 9,537
Accounts receivable 35,261
Inventory 30,210
--------
Total current assets 75,008
--------
PROPERTY AND EQUIPMENT:
Equipment, at cost 154,935
Less accumulated depreciation 86,874
--------
Net value of equipment 68,061
--------
TOTAL ASSETS $143,069
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,076
Loans from stockholder 101,816
Other accrued liabilities 3,350
--------
Total current liabilities 120,242
--------
STOCKHOLDER'S EQUITY
Common Stock - par value $1.00, 1000 shares authorized,
100 shares issued and outstanding 500
Retained earnings 22,327
--------
Total stockholder's equity 22,827
--------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $143,069
========
</TABLE>
-G- 7 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---- ----
(unaudited) (unaudited)
<S> <C> <C>
REVENUE:
Sales of assembled electronic components $ 716,250 $ 615,512
--------- ---------
COST OF SALES:
Material 423,089 363,721
Labor 197,651 131,534
--------- ---------
Cost of sales 620,740 495,255
--------- ---------
Gross profit 95,510 120,257
--------- ---------
OPERATING EXPENSES:
Salaries and benefits 20,977 35,250
Rent 28,000 30,576
Payroll and other taxes 20,236 22,420
Other operating expenses 26,543 34,298
--------- ---------
Total operating expenses 95,756 122,544
--------- ---------
NET LOSS
(246) (2,287)
RETAINED EARNINGS AT BEGINNING OF PERIOD 22,573 26,315
--------- ---------
RETAINED EARNINGS AT END OF PERIOD $ 22,327 $ 24,028
========= =========
</TABLE>
-G- 8 -
<PAGE>
EASTERN TECH MANUFACTURING CORPORATION
STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (246) $ (2,287)
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 2,995 1,432
Changes in operating assets and liabilities:
Accounts receivable (2,123) 27,067
Inventory (30,210) -
Prepaid expenses 1,669 -
Accounts payable (33,731) (13,365)
Other accrued liabilities 3,350 -
--------- ---------
(58,296) 11,847
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIS - Purchase
of property and equipment - 10,023
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Funds advanced (to) from stockholder 58,863 -
--------- ---------
NET INCREASE (DECREASE) IN CASH 567 1,824
CASH AT BEGINNING OF PERIOD 8,970 6,538
--------- ---------
CASH AT END OF PERIOD $ 9,537 $ 8,362
========= =========
</TABLE>
-G-9-
<PAGE>
To the Board of Directors and Stockholders
Xyros Systems, Inc.
Columbia, Maryland
We have audited the accompanying balance sheet of Xyros Systems, Inc.
as December 31, 1998 and the related statements of operations and accumulated
deficit and cash flows for the years ended December 31, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Xyros Systems, Inc.
as December 31, 1998, and the results of its operations and cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
Stegman & Company
Baltimore, Maryland
May 31, 2000
-H-1-
<PAGE>
XYROS SYSTEMS, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,946
Accounts receivable 13,599
Inventory 4,574
----------
Total current assets 20,119
----------
PROPERTY AND EQUIPMENT:
Computer hardware 1,666
Software 2,438
----------
4,104
Less accumulated depreciation (821)
----------
Net value of property and equipment 3,283
----------
TOTAL ASSETS $ 23,402
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 6,298
Note payable - bank 65,000
Notes payable - stockholders 155,000
Other accrued liabilities 2,915
----------
Total current liabilities 229,213
----------
----------
STOCKHOLDERS' EQUITY
Common Stock - par value $1.00, 1000 shares authorized,
100 shares issued and outstanding 100
Accumulated deficit (205,911)
----------
Total stockholders' equity (205,811)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 23,402
----------
----------
</TABLE>
See accompanying notes.
-H-2-
<PAGE>
XYROS SYSTEMS, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
REVENUE:
Sales and other income $ 31,438 $ --
Cost of goods sold 20,891 --
--------- ---------
GROSS PROFIT ON SALES 10,547 --
--------- ---------
OPERATING EXPENSES:
Advertising and promotion 2,819 --
Depreciation 821 --
Employee compensation and benefits 90,008 --
Insurance 826 --
Interest 9,837 --
Office expenses 16,426 2,147
Professional fees 1,529 9,717
Rent 35,879 --
Research and development expenses 22,077 16,387
Utilities 3,921 --
Travel 2,424 1,640
--------- ---------
Total operating expenses 186,567 29,891
--------- ---------
NET LOSS (176,020) (29,891)
ACCUMULATED DEFICIT AT BEGINNING OF YEAR (29,891) --
--------- ---------
ACCUMULATED DEFICIT AT END OF YEAR $(205,911) $ (29,891)
--------- ---------
--------- ---------
BASIC NET LOSS PER SHARE $(1,760.20) $ (298.91)
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
-H-3-
<PAGE>
XYROS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(176,020) $ (29,891)
Adjustments to reconcile net loss to net cash used by operating
activities - Depreciation 821 --
Changes in operating assets and liabilities:
Accounts receivable (13,599) --
Inventory (4,574) --
Accounts payable 6,289 --
Other accrued liabilities 3,024 --
--------- ---------
Net cash used by operating activities (184,059) (29,891)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES - Purchase of property and equipment (4,104) --
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank note payable 65,000 --
Proceeds from stockholder notes payable 125,000 30,000
--------- ---------
Net cash provided by financing activities 190,000 30,000
--------- ---------
NET DECREASE IN CASH 1,837 109
CASH AT BEGINNING OF YEAR 109 --
--------- ---------
CASH AT END OF YEAR $ 1,946 $ 109
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
-H-4-
<PAGE>
XYROS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Xyros Systems, Inc. (the "Company") was incorporated in the State of
Maryland on July 27, 1997.
The Company designs and develops products which permit remote monitoring
and storage of video.
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 recognizes revenue and the related cost of goods sold upon
shipment of the product.
INVENTORIES
Inventories consist of parts and other materials and are stated at the
lower of cost or market. Cost is determined by the firstin firstout method.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated over their
useful lives, using the straight line method. 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 is 5 years.
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. Valuation
allowances are recorded for deferred tax assets when it is more likely than not
that such deferred tax assets will not be realized.
2. NOTE PAYABLE BANK
The Company has a demand note payable with a commercial bank having an
outstanding balance of $65,000 at December 31, 1998. The note bears interest
equivalent to the prime rate plus 2% per annum payable monthly and is personally
guaranteed by the Company's stockholders.
-H-5-
<PAGE>
3. NOTES PAYABLE - STOCKHOLDERS
The Company has notes payable with its stockholders in the aggregate
amount of $155,000 as of December 31, 1998. The notes carry an annual
interest rate of 10% with interest payable monthly and are due December 31,
1999.
4. INCOME TAXES
The components of the deferred income taxes as of December 31, 1998
consist of the following:
<TABLE>
<S> <C>
Effect of net operating loss carryforward $ 70,010
Less valuation allowance (70,010)
----------
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 carryforward.
-H-6-
