-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MX9ozEmjA5RBU/8bA4q9FiK1ipVK6D2ITbUHRql93KOW1UBLUwyNOxunYzhVojkH eIZgJstD8O1iJLeE20j9eA== /in/edgar/work/20000628/0000912057-00-030126/0000912057-00-030126.txt : 20000920 0000912057-00-030126.hdr.sgml : 20000920 ACCESSION NUMBER: 0000912057-00-030126 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIEW SYSTEMS INC CENTRAL INDEX KEY: 0001075857 STANDARD INDUSTRIAL CLASSIFICATION: [7380 ] IRS NUMBER: 592928366 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-30178 FILM NUMBER: 662685 BUSINESS ADDRESS: STREET 1: 825 W KENYON AV STREET 2: SUITE 15 CITY: ENGLEWOOD STATE: CO ZIP: 80110 BUSINESS PHONE: 3032957200 MAIL ADDRESS: STREET 1: 925 W KENYON AVREET STREET 2: SUITE 15 CITY: ENGLEWOOD STATE: CA ZIP: 80110 10KSB/A 1 a10ksba.txt 10-KSB/A 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 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 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 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 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 - 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 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 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 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 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 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 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 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 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
HIGH LOW 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
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.
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.
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 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 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 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 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 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 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 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
Page No. -------- Summary Pro Forma Consolidated Financial Information E-1 Independent Auditors' Report F-1
22 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
INDEX TO FINANCIAL STATEMENTS EASTERN TECH MANUFACTURING CORP.
Page No. -------- 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
INDEX TO FINANCIAL STATEMENTS XYROS SYSTEMS, INC -----------------------------
Page No. -------- Independent Auditors' Report H-1
23 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
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:
Name Age Position Held 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
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 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 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 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 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 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 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 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 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. 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
32 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:
1999 1998 ---- ---- 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) =========== ===========
-E-1- 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 - VIEW SYSTEMS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 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 ===========
See accompanying notes. - F-2 - VIEW SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 ----------- ----------- 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) =========== ===========
See accompanying notes. - F-3 - VIEW SYSTEMS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
ADDITIONAL TOTAL COMMON PAID-IN ACCUMULATED STOCKHOLDERS' STOCK CAPITAL DEFICIT EQUITY ------ ------- ----------- ------------- 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 =========== =========== =========== ===========
See accompanying notes. - F-4 - VIEW SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1998 ----------- ----------- 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 =========== ===========
- F-5 - VIEW SYSTEMS, INC. Statements of Cash Flows (Continued) For the Years Ended December 31, 1999 And 1998
1999 1998 ---------- ------- 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 $ - $ - ========== =======
See accompanying notes. - F-6 - 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 - PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated over their estimated useful lives, using the straight-line and accelerated depreciation methods. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is included in the results of operations. The useful lives of property and equipment for purposes of computing depreciation are as follows: Equipment 5 - 7 years Software tools 3 years
Repairs and maintenance charges which do not increase the useful lives of assets are charged to operations as incurred. Depreciation expense for the years ended December 31, 1999 and 1998 amounted to $29,856 and $4,706, respectively. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets and identifiable intangibles (including goodwill) to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed. Impairment is measured by comparing the carrying value to the estimated undiscounted future cash flows expected to result from use of the assets and their eventual disposition. 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 - 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 - 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:
TWO MONTHS ENDED YEAR ENDED FEBRUARY 28, 1999 DECEMBER 31, 1998 ----------------- ----------------- (UNAUDITED) 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) ========= =========
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:
ELEVEN MONTHS ENDED YEAR ENDED MAY 31, 1999 JUNE 30, 1998 -------------- ------------- (UNAUDITED) 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) ========= =========
- F-10 - 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:
1999 1998 ----------- ----------- (UNAUDITED) (UNAUDITED) 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) =========== ===========
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: Finished goods $ 42,000 Work in process 32,563 Raw materials 66,650 --------- $ 141,213 =========
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 - 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: Total assets $ 28,129 -------- Total equity $ 26,630 -------- Net loss $(82,780) --------
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 - 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: Effect of net operating loss carryforward $ 563,000 Less valuation allowance (563,000) --------- Net deferred tax asset (liability) $ - =========
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:
NUMBER EXPENSE OF SHARES RECOGNIZED --------- ----------- Officers and employees 1,100,000 $1,755,000 Independent contractors and consultants 369,000 392,333 ---------- ----------- 1,469,000 $2,147,333 ========= ==========
- F-13 - 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:
COMMON WEIGHTED STOCK AVERAGE RANGE OF OPTIONS EXERCISE PRICE EXERCISE PRICES ------- -------------- --------------- 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 ======= ======= =============
Additionally, the Company has issued warrants to purchase the Company's stock as follows:
COMMON WEIGHTED STOCK AVERAGE RANGE OF WARRANTS EXERCISE PRICE EXERCISE PRICES -------- -------------- --------------- 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 ======== ====== ======
- F-14 - 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:
AS REPORTED PRO FORMA ----------------------- ------------------------ YEAR NET PER NET PER ENDED LOSS SHARE LOSS SHARE ----- ----------- ------ ----------- ------ 1999 $(3,943,335) $(0.68) $(4,209,848) $(0.72) =========== ====== =========== ======
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 - 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:
1999 1998 --------------------------- ------------------------ AS AS REPORTED RESTATED REPORTED RESTATED -------- -------- -------- -------- 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) - -
- F-16 - 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 - EASTERN TECH MANUFACTURING CORPORATION BALANCE SHEET JUNE 30, 1998 AND 1997 ASSETS
1998 1997 ---- ---- 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 ========== ==========
See Notes To Financial Statements -G- 2 - EASTERN TECH MANUFACTURING CORPORATION STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997 ---- ---- 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 =========== ==========
See Notes To Financial Statements -G- 3 - EASTERN TECH MANUFACTURING CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997 ---- ---- 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 ========= =========
-G- 4 - 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 - 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 - EASTERN TECH MANUFACTURING CORPORATION BALANCE SHEET MARCH 31, 1999 (UNAUDITED) 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 ========
-G- 7 - EASTERN TECH MANUFACTURING CORPORATION STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1999 1998 ---- ---- (unaudited) (unaudited) 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 ========= =========
-G- 8 - EASTERN TECH MANUFACTURING CORPORATION STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
1999 1998 ---------- ---------- (UNAUDITED) (UNAUDITED) 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 ========= =========
-G-9- 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- XYROS SYSTEMS, INC. BALANCE SHEET DECEMBER 31, 1998 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 ---------- ----------
See accompanying notes. -H-2- XYROS SYSTEMS, INC. STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ----- ---- 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) --------- --------- --------- ---------
See accompanying notes. -H-3- XYROS SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997 ----- ---- 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 --------- --------- --------- ---------
See accompanying notes. -H-4- 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- 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: Effect of net operating loss carryforward $ 70,010 Less valuation allowance (70,010) ---------- Net deferred tax asset (liability) $ -- ---------- ----------
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- EX-23.1 2 ex-23_1.txt EXHIBIT 23.1 Exhibit 23.1 Consent of Stegman & Company Stegman & Company To: Board of Directors of View Systems Inc. We hereby consent to the inclusion in amended Form 10K-SB/A of our report dated May 22, 2000, related to the consolidated financial statements of View Systems, Inc. and Subsidiaries for the years ended December 31, 1999, and 1998. /s/ Stegman and Company Baltimore, Maryland June 26, 2000 EX-23.2 3 ex-23_2.txt EXHIBIT 23.2 Exhibit 23.2 Consent of Davis, Sita & Company Davis, Sita & Company To: Board of Directors of View Systems, Inc. We hereby consent to the inclusion in amended Form 10K-SB/A of our report dated June 2, 2000 related to the financial statements of Eastern Tech Manufacturing Corp., Inc. for the years ended June 30, 1999 and 1997. /s/ Davis, Sita & Company Baltimore, Maryland June 26, 2000 EX-23.3 4 ex-23_3.txt EXHIBIT 23.3 Exhibit 23.3 Consent of Stegman & Company Stegman & Company To: Board of Directors of View Systems, Inc. We hereby consent to the inclusion in amended Form 10K-SB/A of our report dated May 31, 2000 related to the financial statements of Xyros Systems, Inc. for the years ended December 31, 1998 and 1997. /s/ Stegman & Company Baltimore, Maryland June 26, 2000 EX-27 5 ex-27.txt EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED FINANCIAL STATEMENTS OF VIEW SYSTEMS INC. 0001075857 VIEW SYSTEMS INC. 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 89,150 0 0 0 93,278 0 0 0 141,213 0 373,641 0 348,638 0 48,296 0 1,559,421 0 383,999 0 0 0 0 0 0 0 7,167,000 4,167,000 0 0 1,559,421 0 303,711 0 303,711 0 258,378 0 258,378 0 3,988,668 89,824 0 0 51,262 217 (3,943,335) (89,824) 0 0 (3,943,335) (89,824) 0 0 0 0 0 0 (3,943,335) (89,824) (0.68) (.02) (0.68) (.02)
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