-----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, M5dO3AECGeeJHIRu9bFxD0N4PnV8znRCGAVkx7zs7Aqq320Xd1EvBwE/ZTtYDdHG Exlj098D7iCJc3ELNpz/SQ== 0001014100-01-500132.txt : 20020412 0001014100-01-500132.hdr.sgml : 20020412 ACCESSION NUMBER: 0001014100-01-500132 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20011210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIEW SYSTEMS INC CENTRAL INDEX KEY: 0001075857 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS BUSINESS SERVICES [7380] IRS NUMBER: 592928366 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-74828 FILM NUMBER: 1809974 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 SB-2 1 cor0489.txt REGISTRATION STATEMENT - VIEW SYSTEMS As filed with the Securities and Exchange Commission on December 10, 2001 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (Amendment No. ___________) View Systems, Inc. (Exact Name of Small Business Issuer as Specified in its Charter)
Florida 5045 59-2928366 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
President and Chief Executive Officer 925 West Kenyon Avenue, Suite 15 Englewood, Colorado 80110 (303)783-9153 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------------- Gunther Than 1101 Wilso Drive Baltimore, Maryland 21223 (410) 646-3000 (Name, Address and Telephone Number of Agent For Service) -------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following boxes and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following boxes and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
Calculation of Registration Fee Title and Par Value of each class of Amount to be Proposed maximum Proposed Amount of securities to be registered (Maximum) Registered 1 offering maximum aggregate Registration price per share 2 offering price Fee Common Stock, Par Value $.001 6,250,000 $.59 $3,687,500 $881.31
1 If there is a stock split, stock dividend or similar transaction involving our Common Stock, in order to prevent dilution, the number of shares registered hereunder will automatically be increased to cover the additional shares in accordance with Rule 416(a) under the Securities Act. 2 Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and (g). The registrant hereby amends this registration statement as may be necessary to delay its effective date until we shall file another amendment which specifically states that this registration statement shall become effective in accordance with Section 8 (a) of the Securities Act of 1933 or until the registration statement shall become effective. PROSPECTUS VIEW SYSTEMS, INC. a Florida corporation 6,250,000 shares of common stock, par value $.001 -------------------- Trading Symbol This prospectus covers 6,250,000 shares on the of our common stock for sale by certain NASDAQ Over-The-Counter selling stockholders. 2,000,000 shares Bulletin Board is will be acquired from us by certain "VYST.OB" selling stockholders in a private sale after the effective date of the registration statement of which this prospectus is a part at a price of $.50 The last reported sale price for per "Unit" (which consists of one share our common stock as of December 6, of stock and a warrant to purchase one 2001 was $.63. share of stock), and an additional 2,000,000 shares will be acquired from us through the exercise of the warrants at a price of $.70 per share. In addition, 1,750,000 shares will be acquired from us by a selling stockholder pursuant to warrants held by it at exercise prices of $.20 per share for 750,000 shares and $.30 per share for 1,000,000 shares, and 500,000 shares will be acquired from us by a selling stockholder in a share exchange with us after the effective date of the registration statement of which this prospectus is a part. We will receive $1,000,000 in proceeds from the sale of the Units and $1,850,000 in proceeds from the exercise of the 3,750,000 warrants, aggregating $2,850,000. The selling stockholders are identified in this prospectus. Investing in the common stock involves a high degree of risk. See "Risk Factors" beginning on page 2. ----------------- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----------------- Prospectus dated December 10, 2001 We have not authorized any dealer, salesperson or other person to give any information or to make any representations other than those contained or incorporated by reference in this prospectus in connection with the offer contained in this prospectus and, if given or made, you should not rely on such unauthorized information or representations. Neither we nor the selling stockholders are making an offer to sell or a solicitation of any offer to buy securities in any jurisdiction to any person to whom it is unlawful to make such offer or solicitation. You should not assume that the information provided in this prospectus is accurate as of any date other than the date on the front of this prospectus. TABLE OF CONTENTS Page PROSPECTUS SUMMARY............................................................1 RISK FACTORS..................................................................2 CAUTIONARY NOTE CONCERNING FORWARD LOOKING STATEMENTS........................10 USE OF PROCEEDS..............................................................10 SELLING STOCKHOLDERS.........................................................11 PLAN OF DISTRIBUTION.........................................................12 LEGAL PROCEEDINGS............................................................13 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................14 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............15 DESCRIPTION OF SECURITIES....................................................16 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITY.................................................17 DESCRIPTION OF OUR BUSINESS..................................................18 MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................25 DESCRIPTION OF PROPERTY......................................................30 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................30 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................31 EXECUTIVE COMPENSATION.......................................................32 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................................................32 AVAILABLE INFORMATION........................................................33 ADDITIONAL INFORMATION.......................................................33 - i - PROSPECTUS SUMMARY This summary only highlights the more detailed information appearing elsewhere in this prospectus or incorporated in this prospectus by reference. As this is a summary, it may not contain all information that is important to you. Our Company We develop, produce and market digital video systems and products used for security and surveillance. We also offer contract electronic component assembly services. Our systems and products are used by the commercial, residential and law enforcement markets. We distribute and support our products through a network of value-added domestic and international resellers. We have executive offices, engineering and production facilities at 1100 Wilso Drive, Baltimore, Maryland 21223 and our telephone number is (410) 646-3000. Our World Wide Web address is www.viewsystems.com. The Offering The selling stockholders are offering 6,250,000 shares of common stock. The 6,250,000 shares of common stock include 2,000,000 shares to be acquired by certain selling stockholders in a private purchase of 2,000,000 "Units" (each unit consisting of one share of stock and a 90 day warrant to purchase one share of stock), 2,000,000 shares to be acquired by those selling stockholders upon the exercise of their warrants, 1,750,000 shares to be acquired by a selling stockholder upon the exercise of warrants held by it, and 500,000 shares to be acquired by a selling stockholder upon a share exchange with us. After the offering and assuming all warrants are exercised, we will have 25,472,620 shares outstanding, and will have realized $2,850,000 from the sale of 2,000,000 Units and the exercise of 3,750,000 warrants. There are 19,225,620 shares of common stock outstanding as of the date of this prospectus. This excludes (1) the 2,000,000 shares that will be sold to certain Selling Stockholders in the private purchase of Units, (2) the 500,000 shares that will be issued to a Selling Stockholders pursuant to a share exchanges with us, and (3) the 3,750,000 shares underlying outstanding warrants, all of which shares are covered by this prospectus, and also excludes 980,000 shares of common stock that are currently due certain directors, officers, consultants and employees, but that have not yet been issued. As used in this prospectus, the terms "we," "us," "our," and "View Systems" means View Systems, Inc., and the term "common stock" means our common stock, par value $.001 per share. -1- RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors before investing in our common stock. Risks Relating to Our Business We have a limited operating history with our products and we may experience difficulties in development, assembly and production of our products. We may not be able to successfully develop all of our products because of their complex engineering, assemble them because of our lack of experience or profitably make them because of our inability to buy components at discounted prices. It will be difficult for our engineers to develop enhancements and upgrades that we anticipate will be needed for PlateView and SecureView (see "Description of Business - Our Products"). New products and enhancements and upgrades for our existing products require the design of complex electronic circuitry and the development of long and complex software code instruction sets to power our computer hardware. Our engineers may discover that they can not economically design the new products we have conceived in our business plan or make enhancements and upgrades to our products in response to problems discovered from field installations, technological advances in competing products or components, or new functionality required by the marketplace. In that event, we may be forced to abandon products that are currently in our business plan, either because they are no longer feasible or would not be profitable to manufacture and sell. To profitably produce our products, we must obtain components assembled into our products at prices that are discounted by our suppliers because of large quantity orders and there is no assurance we will be able to do that. We have experienced development stage losses. We commenced operations in September 1998. Although our company was incorporated in 1989, we remained a shell company until the fall of 1998. We had operating losses of $3,670,896 for the year ended December 31, 1999 and $2,204,282 for the year ended December 31, 2000. We had operating losses of $882,294 for the nine months ended September 30, 2001. We expect these operating losses to continue to continue through at least the first quarter of 2002. Sales of our products have been limited since we commenced operations. As a result of the expenses we have incurred for research and development, marketing, and hiring and retaining key personnel, our expenses have greatly exceeded our revenues. The tragic events of September 11, 2001 have, however, generated an increased interest in our products and services. While we believe that we will incur operating losses for at least the next two quarters, we anticipate that increased sales resulting from the heightened interest in security products will have a significantly positive effect on our earnings by the middle of 2002. However, there can be no assurance that we will be able to generate sufficient revenues to achieve or sustain profitability in the future. Our profitability is dependent on our ability to increase sales of our security and surveillance products. In order to increase such sales, we will need to significantly increase our spending on items such as: o development of enhancements and upgrades to our existing SecureView line of products; - 2 - o marketing and business development expenses; and o employment related expenses for the hiring and retention of key personnel. If these expenses do not help us generate increased sales of our security and surveillance products, we will not become profitable and we will be forced to reevaluate our business plan. Our capital is limited and we will need additional financing to implement our business plan and continue operations. We require substantial working capital to fund our business. We expect that additional funds will be necessary for our company to implement our business plan. We have developed a business plan to grow our company that assumes that we will have additional capital available to us. Our business model encompasses: o the engagement of additional marketing and sales personnel; o product development; o software development; and o the acquisition of laboratory and testing equipment. Our ability to continue operations will depend on our positive cash flow, if any, from future operations and on our ability to raise additional funds through equity or debt financing. We believe that the additional cash that will be generated from the sales to the Selling Stockholders of the shares that are being registered in this prospectus, as well as the cash that will be generated if the warrant holders that have shares registered in this prospectus exercise their warrants, together with our revenues, will sustain our operations and allow for anticipated growth in operations and strategic acquisitions through September 30, 2002. Going forward, we will continue to seek additional funds through sales of equity and/or debt, or other external financing in order to fund our operations and to achieve our business plan. If we are unable to obtain financing in the amounts desired and on acceptable terms, or at all, we may be required to reduce significantly the scope of our presently anticipated expenditures, which could have a material adverse effect on our growth prospects and the market price of our common stock. If we raise additional funds by issuing equity securities, our stockholders will be further diluted. The successful operation of our business depends upon the supply of hardware and software from third parties. Our operations depend on a number of third parties for hardware and software components. We have limited control over these third parties. We assemble our systems by combining commercially available hardware and software together with our proprietary software. We license software components that are integrated into our proprietary software and installed on our systems. We have license agreements for compression software components, facial recognition and database search software components and optical character recognition software components. Any breaches of these agreements by such third parties, or any errors, failures, interruptions, or delays experienced in connection with these third party technologies could negatively impact our relationship with users and adversely affect our brand and our business, and could expose us to liabilities to third parties. Our services and reputation may be adversely affected by product defects or inadequate performance. We believe that we offer state-of-the art products that are reliable and competitively priced. In the event that our products do not perform to specifications or are defective in any way, our reputation may be materially adversely affected and we may suffer a loss of business and a corresponding loss in revenues. -3- We may face risks associated with potential acquisitions, investments, strategic partnerships or other ventures, including whether such transactions can be located, completed and the other party integrated with our business on favorable terms. As part of our long-term growth strategy, we may seek to acquire or make investments in complementary businesses, technologies, services or products or enter into strategic relationships with parties who can provide access to those assets, if appropriate opportunities arise. From time to time, we may enter into discussions and negotiations with companies regarding our acquiring, investing in, or partnering with their businesses, products, services or technologies. We may not identify suitable acquisition, investment or strategic partnership candidates, or if we do identify suitable candidates, we may not complete those transactions on commercially acceptable terms or at all. Acquisitions often involve a number of special risks, including the following: o we may experience difficulty integrating acquired operations, products, services and personnel; o the acquisition may disrupt our ongoing business; o we may not be able to successfully incorporate acquired technology and rights into our service offerings and maintain uniform standards, controls, procedures, and policies; o we may not be able to retain the key personnel of the acquired company; o the businesses we acquire may fail to achieve the revenues and earnings we anticipated; and o we may ultimately be liable for contingent and other liabilities, not previously disclosed to us, of the companies that we acquire. We may not successfully overcome problems encountered in connection with potential future acquisitions. In addition, an acquisition could materially adversely affect our operating results by: o diluting your ownership interest; o causing us to incur additional debt; and o forcing us to amortize expenses related to goodwill and other intangible assets. Any of these factors could have a material adverse effect on our business. These difficulties could disrupt our ongoing business, distract our management and employees and increase our expenses. Furthermore, we may incur indebtedness or issue equity securities to pay for any future acquisitions. There are certain provisions of our Articles of Incorporation and Bylaws that could have anti-takeover effects. Certain provisions of our Articles of Incorporation, as amended, and our bylaws could make more difficult our acquisition by means of a tender offer, a proxy contest or otherwise and the removal of our incumbent officers and directors. Our Articles of Incorporation and bylaws do not provide for cumulative voting in the election of directors. Our bylaws permit the board of directors to implement staggered terms for board members. Our Articles of Incorporation exempt us from the Florida statutes governing control-share acquisitions. If we were not exempt from the statutes, then a person intending to acquire 20% or more of our shares would have to give us notice of such intent and request approval of the acquisition by our board of directors. If the board of directors failed to approve the acquisition then such persons could request a meeting of the stockholders at which stockholders would be given an opportunity to vote on whether such shares would be accorded full voting rights. Refusal by the stockholders to accord full voting rights would result in the proposed acquirer obtaining shares that could not be voted on any matters to come before the stockholders. Certain acquisitions are exempt from the effects of the statute, such as mergers, business combinations or other acquisitions that have been approved by the board of directors, as well as -4- acquisitions of shares issued by a company in its original offering or in subsequent offerings approved by its board. Our success is dependent upon the protection of our intellectual property. Certain features of our products and documentation are proprietary and we rely on a combination of contract, copyright, trademark and trade secret laws and other measures to protect our proprietary information. Our technology could fall into our competitors' hands. We rely on keeping our technology secret from our competitors. We do not have any patents for our product designs or innovations. Further, we have not applied for copyright protection for our computer schematic designs or software source code. At the same time, we have entered into and expect to enter into business arrangements where we share our proprietary technology with business partners and employees. These arrangements are necessary to develop and sell our products. We require that these parties sign agreements that they will keep our proprietary technology confidential. There can be no assurance that these parties will honor their contractual commitments. As part of our confidentiality procedures, we generally enter into confidentiality and invention assignment agreements with our employees and consultants and mutual non-disclosure agreements with our manufacturing representatives, dealers and systems integrators. We also limit access to and distribution of our software, documentation and other proprietary information. We cannot offer assurances that the steps we have taken will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable. Notwithstanding the precautions we have taken, it might be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization. Our products are marketed under various trade names, such as SecureView, PlateView and CareView. We have not yet applied for federal trademark protection for the trademarks associated with our products. We may not be able to register these trademarks with the US Patent and Trademark Office or we may be forced to abandon these trademarks because other persons have established proprietary rights in them. We may have to chose other trade names for our products, resulting in a loss of investment in these trade names We also rely on a variety of technologies that we license from third parties. We cannot make any assurances that these third-party technology licenses will continue to be available to the company on commercially reasonable terms. Our inability to maintain or obtain upgrades to any of these technology licenses could result in delays in completing our proprietary technology enhancements and new developments until equivalent technology could be identified, licensed or developed and integrated. Any such delays would materially adversely affect our business, results of operations and financial condition. Intellectual property infringement claims would harm our business. Although we do not believe that we are infringing the intellectual property rights of others, claims of infringement are becoming increasingly common as the software industry develops and legal protections, including patents, are applied to software products. Litigation may be necessary to protect our proprietary technology, and third parties may assert infringement claims against us with respect to their proprietary rights. Any future claims or litigation can be time-consuming and expensive regardless of their merit. Infringement claims against us can cause product release delays, require us to redesign our products or require us to enter into royalty or license agreements, which agreements may not be available on terms acceptable to us or at all. In the future, we may also need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Such litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, results of operations and financial condition. -5- Gunther Than's services are critical to the success of our company and if he were to leave View Systems, it would have a detrimental effect on our company. We believe that the management and other experience of Gunther Than, our President and Chief Executive Officer, is critical to our success and the loss of his services would have a detrimental impact on our business. Although Mr. Than has signed an employment agreement with us, this agreement may be terminated by Mr. Than on not less than 60 days notice, subject to a one year covenant not to materially compete with us. Our success will also depend on our ability to hire and retain other qualified management, including trained and competent research, technical, marketing and sales personnel. We may not be able to keep up with market demands for product design and development. The market for our products is characterized by ongoing technological development and evolving industry standards. Our success will depend upon our ability to enhance our current products and to introduce new products that address technological and market developments and satisfy the increasingly sophisticated needs of customers. There also can be no assurance that our new products will gain satisfactory market acceptance. We may be subject to product liability claims and, at this time, we have no product liability insurance. If an intrusion or other event that our products are designed to detect occurs in a setting where our products have been installed, we may be subject to a claim that an error or omission on our part contributed to the damages resulting from such event, which damages could be substantial. Such a claim could be made whether or not our product performed properly under the circumstances. We do not carry product liability insurance. A product liability judgment or settlement could have a material adverse effect on our financial condition and results of operations and any adverse claim or settlement could have an adverse effect on the availability and cost to us of product liability insurance in the event that we decide to purchase product liability insurance. Our efforts to expand into international markets may be unsuccessful. In order to compete in our industry, we intend to continue to expand our operations outside of the United States and enter additional international markets, primarily through the establishment of additional reseller arrangements. We expect to commit additional time and development resources to customizing our products and services for selected international markets and to developing international sales and support channels. We cannot assure that such efforts will be successful. We face certain difficulties and risks inherent in doing business internationally, including, but not limited to: o costs of customizing products and services for international markets; o dependence on independent resellers; o multiple and conflicting regulations; o exchange controls; o longer payment cycles or inability to collect our receivables; o unexpected changes in regulatory requirements; o import and export restrictions and tariffs; o difficulties in staffing and managing international operations; o greater difficulty or delay in accounts receivable collection; o foreign exchange gains and losses o potentially adverse tax consequences; o the burden of complying with a variety of laws outside the United States; -6- o the impact of possible recessionary environments in economies outside the United States; and o political and economic instability. Our successful expansion into certain countries will require additional modification of our products, particularly national language support. Our current export sales are denominated in either United States dollars or the currency of the export country. To the extent that international sales are denominated in U.S. dollars, an increase in the value of the United States dollar relative to other currencies could make our products and services more expensive and, therefore, potentially less competitive in international markets. To the extent that international sales are denominated in a foreign currency, our operating results are subject to risks associated with foreign currency fluctuation. We may consider entering into forward exchange contracts or otherwise engaging in hedging activities in order to reduce this risk, although to date we have not entered into any such contracts or hedging activities. As we increase our international sales, seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world may also affect our total revenues. Risks Relating to Our Industry Because we are subject to intense competition, primarily from larger, more established companies, we may not have the financial resources to increase our market share. The market for video surveillance and identification products is very competitive and subject to rapid technological advances and the frequent introduction of new and enhanced products. The industry in which we operate has become even more competitive over the last several years as security issues and concerns have become a primary consideration worldwide. With respect to close circuit television (CCTV) system components and access control systems, there are numerous companies that market directly or through distributors such equipment to both retail and non-retail customers. We compete in marketing our systems and products principally on the basis of product performance, multiple technologies, service and price. To compete successfully, we must continue to design, develop, manufacture and sell new and enhanced products that will respond to customer requirements and allow us to capture market share from our competitors. We expect the intensity of competition to continue to put pressure on our engineering research and development departments as existing competitors enhance and expand their products. Any failure of our engineering department to keep pace with technological advances could adversely affect our ability to capture market share. Increased competition also may result in price reductions or reduced gross margins as more companies compete with one another by lowering prices. We must be able to keep our production costs low relative to our competition. Many of our competitors have advantages including established positions, brand name recognition, greater assets, personnel, sales and financial resources and established distribution networks. These larger more established competitors include Polaroid Corporation, Loronix Information Systems, Ademco, Sensormatic Corporation and NICE Systems, Ltd. The distribution networks of these larger more established competitors gives them an advantage in achieving higher sales volumes. If they can achieve higher sales volumes, they can spread their costs over larger numbers of units, thereby reducing their per unit production costs and increasing their profitability. Competitors with greater financial resources may be able to offer lower prices or other incentives that we cannot match or offer. Some of our competitors produce a more comprehensive product line that may give them an advantage in selling products competitive to ours. We cannot be certain that we will be able to compete successfully against existing or other competition in the future. -7- Our inability to keep up with technological changes in our industry and identify emerging markets may render our products obsolete. The industry in which we operate is characterized by unpredictable and rapid technological changes and evolving industry standards. We will be substantially dependent on our ability to identify emerging markets and develop products that satisfy such markets. We cannot assure that we will be able to accurately identify emerging markets or that any products we have or will develop will not be rendered obsolete as a result of technological developments. We believe that competition in our business will intensify as technological advances in the field are made and become more widely known. Many companies with substantially greater resources than ours are engaged in the development of products similar to those we sell. Commercial availability of such products could render our products obsolete, which would have a material adverse effect on our company. We may be subject to increased government regulation. We are not subject to government regulation in the manufacture and sale of our products or in the components in our products. However, our resellers and end users will be subject to numerous federal, state, local and foreign regulations that stem from proposed activities in surveillance. Security and surveillance systems, including cameras, raise privacy issues. Our products involve both video and audio. 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. All of these regulations may be amended in response to new scientific evidence or political or economic considerations. Any significant change in regulations could adversely affect demand for our products in regulated markets. Risks Relating to our Common Stock and the Offering Our stock price has been and may continue to be very volatile. The market price of the shares of our common stock has been, and is likely to be, highly volatile and could be subject to wide fluctuations in response to factors such as: o actual or anticipated variations in our results of operations; o announcements of new products or technological innovations by us or our competitors; and o general conditions in the digital imaging and computer industries. Further, the stock markets have experienced extreme price and volume fluctuations that have particularly affected the market prices of equity securities of many technology companies and that often have been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may significantly and negatively affect the market price of our common stock. The warrants we have issued as well as our obligations under the employment agreement of Gunther Than, and our obligation to issue shares earned by certain employees, consultants and directors could have a dilutive effect on our stockholders. We have issued numerous warrants to acquire our common stock that, upon exercise, could have a dilutive effect on our stockholders. As of the date of this prospectus, there are warrants outstanding to purchase 3,750,000 shares of -8- our common stock, exercisable at prices ranging from $.20 to $.70 per share with a weighted average exercise price of $.49 per share. All of the shares underlying these warrants are covered under this prospectus. In addition to the warrants outstanding, there are currently 980,000 shares that are due to certain of our directors, officers, employees and consultants that have not yet been issued, including 440,000 shares due to our CEO, Gunther Than, 180,000 shares due to certain other employees, 240,000 shares due to our two independent directors, and 120,000 shares due to a consultant. These shares were earned as compensation for services rendered. If all of the shares due to directors, officers, employees and consultants were issued, and if all of the outstanding warrants were exercised, the amount of shares outstanding would be 26,455,620, an increase of 37% over the current shares outstanding, and a corresponding decrease in the percentage ownership of our common stock by the purchasers of our common stock. Since we are subject to the penny stock rules, we are subject to extensive government regulation, which makes it more difficult and expensive to raise necessary capital and could impact the market for the shares. Our common stock is subject to the "penny stock" rules. As long as the price of our shares remains below $5.00 and we are unable to obtain a listing of our stock on the NASDAQ System or other national stock exchange, we will be subject to the "penny stock" rules. In general, the penny stock rules impose requirements on securities brokers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 or $300,000 together with their spouse), which tend to reduce the level of trading activity in a stock. Among other things, these rules require that securities brokers: o make a special suitability determination before recommending a penny stock; o deliver a risk disclosure document prior to purchase; o disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market; and o provide customers with monthly statements containing recent price information. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common stock and may affect the ability to sell our common stock in the secondary market. In addition, we may decide to register additional shares of common stock under the Securities Act after the closing of this offering for use by us as consideration for future acquisitions or for additional working capital. If we so decide, upon registration and issuance these shares generally will be freely tradable unless the resale thereof is contractually restricted or unless the holders thereof are subject to the restrictions on resale provided under the Securities Act. Future sales of our common stock in the public market may depress our stock and could limit our ability to raise capital. The introduction of the shares offered under this prospectus into the public market could depress the market price for our shares. In addition, as of November 30, 2001 we have 4,039,316 shares that are not registered, but could be sold in limited amounts and with certain restrictions in the public market pursuant to Rule 144 under the Securities Act. If the stockholders holding these shares sell them in the public market, it could depress the price of our stock. Such sales, or even the potential for such sales, could also effect our ability to raise capital through the sale of equity securities. -9- The market for our company's securities is limited and may not provide adequate liquidity. Our common stock is currently traded on the NASDAQ Over-The-Counter Bulletin Board (the "OTCBB"). As of November 30, 2001, there were 16 active market makers of our common stock. In order to trade shares of our common stock, you must use one of these 16 market makers, unless you trade your shares in a private transaction. The average daily trading volume, as reported by the OTCBB over the past 12 months ending on November 30, 2001 was 260,332 shares. This trading volume means there is limited liquidity in our shares of common stock which result in a limited trading market for our common stock. However, while the trading volume of our stock remains volatile, it has increased substantially over the past three months. During the three month period ending November 30, 2001, the trading volume ranged from a low of 13,600 shares to a high of 4,825,700 shares, with an average daily trading volume of 784,720 shares. The price of our common stock as traded on the OTCBB is also extremely volatile. During the three month period ended November 30, 2001, the closing price per share of our common stock as traded on the OTCBB ranged from a low of $.16 per share to a high of $1.02 per share. The variance in our share price occurring on a daily basis makes it extremely difficult to forecast with any certainty the stock price at which you might be able to buy or sell your shares of our common stock. CAUTIONARY NOTE CONCERNING FORWARD LOOKING STATEMENTS This prospectus contains "forward-looking statements" under the federal securities laws. We caution you to be aware of the speculative nature of forward-looking statements. We intend to identify forward-looking statements in this prospectus using words such as "believes," "intends," "expects," "may," "will," "should," "plan," "projected," "contemplates," "anticipates," or similar statements. These statements are based on our good faith beliefs as well as assumptions we made using information currently available to us. Because these statements reflect our current views concerning future events, these statements involve known and unknown risks, uncertainties and assumptions that could cause actual future results to differ significantly from the results discussed in the forward-looking statements. Some, but not all, of the factors that may cause these differences include those discussed in the Risk Factors section of this prospectus. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. In making these cautionary statements, we are not committed to addressing or updating each factor in future filings or communications regarding our business or results, or addressing how any of these factors may have caused results to differ from discussions or information contained in previous filings or communications. USE OF PROCEEDS We are registering the shares for the benefit of the selling stockholders and they will sell the shares from time to time under this prospectus. We will receive $1,000,000 in proceeds from the sale of 2,000,000 "units" (consisting of one share and one warrant to purchase one share) to Liberty Partners, LLC and Empire Fund Managers, LLC after the Registration Statement, of which this prospectus is a part, is declared effective. We may receive up to $1,400,00 in proceeds from the sale of 2,000,000 shares at $.70 per share upon the exercise of the warrants held by each of Liberty Partners, LLC and Empire Fund Managers, LLC, and $450,000 in proceeds from the sale of 750,000 shares at $.20 per share and 1,000,000 shares at $.30 per share upon the exercise of the warrants held by Columbia Financial Group. See "Selling Stockholders" below. None of the Selling Stockholders are obligated to exercise their warrants, and there can be no assurance that they will exercise all or any of them. We intend to use the proceeds to be received by us for working capital, which may include payment of salaries, rent, research and development, purchase of inventory and marketing expenses, and as consideration for future acquisitions. We will pay all the costs of this offering, with the exception of -10- the costs incurred by the Selling Stockholders for their legal counsel and the costs they may incur for brokerage commissions on the sale of their shares. SELLING STOCKHOLDERS In September, 2001, we entered into a consulting agreement with Columbia Financial Group ("Columbia") in which we agreed to issue to Columbia warrants for 1,000,000 shares of common stock at an exercise price of $.30 per share and 750,000 shares of common stock at an exercise price of $.20 per share in consideration for certain investor and public relations consulting services. We agreed to register for resale at our expense the shares of common stock underlying the warrants. The consulting agreement is for a term of 12 months, with either party able to cancel the agreement upon 60 days notice. If the agreement is cancelled within the first six months, we are entitled to the return of two-thirds of the warrants, and, if the agreement is cancelled between the seventh and tenth month of the agreement, we are entitled to the return of one half of the warrants. This prospectus covers all of the shares underlying the warrants issued to Columbia pursuant to the agreement. Before September, 2001, Columbia had previously provided investor and public relations consulting services to us under consulting agreements dated September, 2000 and July, 1999, pursuant to which we issued shares and warrants to Columbia, as consideration for its consulting services. All warrants previously issued to Columbia have been exercised by it, and all shares of our common stock previously owed by Columbia have been disposed of by it. In October, 2001, we agreed to sell to each of Liberty Partners, LLC ("Liberty") and Empire Fund Managers, LLC ("Empire"), in a private placement, 1,000,000 Units at a price of $.50 per Unit or $500,000 from each. Each Unit consists of one share of common stock and a three month warrant to purchase an additional share of common stock at an exercise price of $.70 per share. As part of the agreement, we agreed to register all of the shares sold to each of Liberty and Empire, as well as all of the shares underlying the warrants sold to each of them. This prospectus covers all such shares. Closing of this sale will take place after the registration statement filed by us with the SEC on Form SB-2 which includes all such shares, becomes effective. In December, 2001 we entered into a Joint Development Agreement with Milestone Technology Inc. ("Milestone"), in which we agreed to issue 500,000 shares of our common stock in exchange for six percent of the outstanding common stock of Milestone. Milestone is a privately held company that has obtained and developed a proprietary "Concealed Weapons and Metal Detector" product. Under the Joint Development Agreement, Milestone and we will combine our technologies to develop and market a more comprehensive product. Under the agreement, Milestone will sell the shares of our stock it is issued in order to raise working capital for the joint development project. As part of the agreement, we agreed to register all of the shares issued to Milestone. This prospectus covers all such shares. -11- Except as noted above, none of the Selling Stockholders currently has or has in the past three years had a material relationship with us. The table below lists all of the above described Selling Stockholders.
Common Stock Common Stock Beneficially Owned Prior Number of Beneficially Owned After to Offering(1) Shares Being Offering(1)(2) Name of Selling Stockholder Shares Percent Registered Shares Percent Columbia Financial Group 1,750,000 8.3% 1,750,000 0 0% Liberty Partners, LLC 2,000,000 9.4% 2,000,000 0 0% Empire Fund Managers, LLC 2,000,000 9.4% 2,000,000 0 0% Milestone Technology Inc. 500,000 2.5% 500,000 0 0% - ------------------------------ (1) Shares beneficially owned include any shares that would be issued by contract or upon exercise of warrants or options currently exercisable or exercisable within 60 days of the date of this prospectus. (2) Assumes the sale of all shares currently held by the Selling Stockholders, as well as the exercise of all warrants held by the Selling Stockholders, and the subsequent sale of the underlying shares.
PLAN OF DISTRIBUTION This prospectus relates to the offer and sale by the Selling Stockholders of up to 6,250,000 shares of common stock par value $.001 per share, assuming the exercise of their warrants. The shares covered by this prospectus may be offered and sold from time to time by the Selling Stockholders. The Selling Stockholders will act independently of us in making decisions with respect to the timing, manner and size of each sale. The Selling Stockholders may sell the shares being offered hereby on the Over-The-Counter Bulletin Board, or otherwise, at prices and under terms then prevailing, at prices related to the then current market price, or at negotiated prices. Registration of the shares does not necessarily mean that any of the shares will be offered by the Selling Stockholders. Shares may be sold by one or more of the following means of distribution: o block trades in which the broker-dealer so engaged will attempt to sell such shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction; o purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this prospectus; o over-the-counter distributions in accordance with the rules of the NASD; o ordinary brokerage transactions and transactions in which the broker solicits purchasers; and o privately negotiated transactions. -12- The Selling Stockholders and any persons who participate in the sale of the securities offered in this registration statement may be deemed to be "underwriters" within the meaning of the Securities Act and any commissions paid or discounts or concessions allowed to any person and any profits received on resale of the securities offered may be deemed to be underwriting compensation under the Securities Act. We will not receive any of the proceeds from the sale of shares by the Selling Stockholder. We will bear all expenses of the offering, except that the Selling Stockholders will pay all underwriting commissions, brokerage fees and transfer taxes as well as fees of their counsel. In effecting sales, brokers, dealers or agents engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Brokers, dealers or agents may receive commissions, discounts or concessions from the Selling Stockholders in amounts to be negotiated prior to the sale. Such brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales, and any such commissions, discounts or concessions may be deemed to be underwriting discounts or commissions under the Securities Act. In order to comply with the securities laws of certain states, the shares must be sold in such states only through registered or licensed brokers or dealers. In addition, in certain states shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirements is available and has been complied with. The rules and regulations in Regulation M under the Exchange Act provide that during the period that any person is engaged in the distribution (as defined therein) of our common stock, such person generally may not purchase shares of our common stock. The Selling Stockholders are subject to such regulation which may limit the timing of its purchases and sales of shares of our common stock. At the time a particular offer of shares is made, if required, a prospectus supplement will be distributed that will set forth the number of shares being offered and the terms of the offering, including the name of any underwriter, dealer or agent, the purchase price paid by any underwriter, any discount, commission and other item constituting compensation, any discount, commission or concession allowed or reallowed or paid to any dealer, and the proposed selling price to the public. LEGAL PROCEEDINGS We are not a party to any pending legal proceedings that would have a material effect on our operations. -13- DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS Our directors, executive officers and key employees, their respective ages and positions, and biographical information on them is set forth below. Name Age Position Held Gunther Than 54 President, CEO and Director since September 1998 Dr. Martin Maassen 59 Director since May, 1999; Chairman of the Board since April 2000 Dr. Michael L. Bagnoli 45 Director since May 1999, Secretary since July 2000 All directors hold office until the next annual stockholders 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. Our executive officers are chosen by our Board of Directors and serve at its discretion. There are no existing family relationships between or among any of our directors or executive officers. Gunther Than, President, Director and CEO Gunther Than has served as our President and Chief Executive Officer since September 1998. He also served as Chairman 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 of RealView Systems, Inc. and View Technology, Inc., software developers. Mr. Than continues as President, CEO and director of View Technology, Inc. Prior to founding RealView Systems, Inc., Mr. Than held a variety of executive business management positions. Mr. Than is a graduate of the University of Wisconsin, with a dual degree in engineering physics and applied mathematics. Martin Maassen, M.D., Chairman of the Board Dr. Maassen became a Director in May 1999. He became our Chairman of the Board in April, 2000. He is board-certified in internal medicine and emergency medicine and has served as a staff physician in the emergency departments of Jackson County, Deaconess, Union and St. Elizabeth hospitals in Indiana since 1977. In addition to practicing medicine, he maintains an expertise in computer technologies and their medical applications. Dr. Maassen also currently sits on the board of directors of NetUniversity.com and Ultimate Sports, Inc. Michael L. Bagnoli, D.D.S., M.D., Director and Secretary Dr. Bagnoli became a Director in May 1999. He holds degrees as a medical doctor and a dental specialist. Since 1988 he has practiced dentistry in the specialty area of oral and masiofacial surgery for a physician group in Lafayette, Indiana. He introduced in his practice arthroscopy surgery along with the full scope of arthroplastic and total joint reconstruction. Dr. Bagnoli was founder, CEO and president of a successful medical products company, Biotek, Inc., which was sold in 1994. -14- Compensation of Directors We compensate our independent directors, Messrs. Maassen and Bagnoli, with 5,000 shares of our common stock for each month of service. Although the independent directors accrue 5,000 shares per month, these shares are not issued on a monthly basis. As of the date of this prospectus, 120,000 shares are due to each of Messrs. Maassen and Bagnoli but which have not yet been issued. We do not have any arrangement for compensating our directors in cash for the services they provide in their capacity as directors, including services for committee participation or for special assignments. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables and the accompanying text list as of November 30, 2001, the beneficial ownership of our outstanding common stock by: (1) beneficial owners of five percent or more of our outstanding common stock, and (2) our executive officer, each of our directors, and our executive officer and directors as a group. To our knowledge, except as specified in the tables and the text below, there is no person who presently owns beneficially five percent or more of our outstanding common stock. Beneficial ownership of the Selling Stockholders after this offering will depend on the number of shares actually sold by each of them, the number of shares purchased pursuant to warrants owned by them and whether these shares are subsequently sold by them. Beneficial ownership is determined in accordance with the rules of the SEC and generally depends on voting or investment power with respect to the shares. For purposes of calculating the percentages shown in the chart, each person listed is also deemed to beneficially own any shares that would be issued by contract or upon exercise of warrants or options currently exercisable or exercisable within 60 days of the date of this prospectus. The persons named below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. The inclusion of any shares as beneficially owned does not constitute an admission of beneficial ownership of those shares. Beneficial Owners of Five Percent or More of Our Outstanding Common Stock Name and Address of Beneficial Owner Shares Percent Columbia Financial Group 1,750,000 (1) 8.3% 1301 York Road, Ste 400 Lutherville, Maryland 21093 - --------------------------------------- (1)Includes 1,750,000 shares issuable upon exercise of warrants that Columbia Financial Group is currently entitled to. As of November 30, 2001, Liberty Partners, LLC (8665 Flamingo Road, Suite 2000, Las Vegas, Nevada 89147) ("Liberty") and Empire Fund Managers, LLC (525 South 300 East, Salt Lake City, Utah, 84111) ("Empire") were each entitled to 1,000,000 shares of our common stock and warrants to purchase an additional 1,000,000 shares, pursuant to a Unit Purchase Agreement between Liberty, Empire, and us. If these shares are considered beneficially owned by Liberty and Empire, their corresponding ownership percentage of our outstanding common stock would be 9.4% for each of Liberty and Empire. However, under the Unit Purchase Agreement, both Liberty and Empire are prohibited from acquiring shares of our stock if the amount of shares acquired, together with all other shares of our stock owned at the time of the acquisition, would result in Liberty or Empire (as the case may be) owning more than 4.99% of our then outstanding shares of common stock. -15- Executive Officer and Directors Name of Beneficial Owner(1) Shares Percent - --------------------------- ------ ------- Gunther Than 2,675,940 (2) 12.2% Martin J. Maassen 404,500 (3) 2.1% Michael Bagnoli 150,000 (4) * All Executive Officers and Directors 3,230,440 14.4% as a Group (3 persons) - --------------------------------------- * Indicates beneficial ownership of less than 1% of the outstanding shares of our common stock. (1)The address of each person named below is the address of our principal executive office. (2)Includes 440,000 shares of common stock due to Mr. Than, but not issued. (3)Includes 120,000 shares of common stock due to Mr. Maassen, but not issued. (4)Includes 120,000 shares of common stock due to Mr. Bagnoli, but not issued. DESCRIPTION OF SECURITIES The summary of the terms of our capital stock set forth below does not purport to be complete. For a detailed, complete description, please see our Articles of Incorporation and our Bylaws, copies of which were filed with the SEC as exhibits to our registration statement on Form SB-2 filed on January 11, 2000. General Our authorized capital consists of 50,000,000 shares of common stock, $0.001 par value. As of the date of this prospectus, there are 19,225,620 shares of common stock issued and outstanding. An additional 2,000,000 shares wil be issued to Selling Stockholders in a private sale, and 500,000 shares will be issued to a Selling Stockholder in a share exchange after the effective date of the registration statement of which this prospectus is a part. In addition, 3,750,000 shares of common stock, all of which are covered under this prospectus, are subject to issuance upon the exercise of outstanding warrants, and there are 980,000 shares of common stock due to certain of our directors, officers, employees and consultants that have not been issued as of the date of this prospectus. The transfer agent for the common stock is Interwest Transfer Co., Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117. Common Stock Each share of our common stock has the same relative rights and is identical in all respects with every other share of common stock. Voting The holders of the common stock are entitled to one vote for each share they hold of record on all matters submitted to a vote of our stockholders. Preemptive Rights Holder of our common stock do not have preemptive rights with respect to the issuance of shares. The common stock is not entitled to cumulative voting rights with respect to the election of directors. -16- Dividends The holders of common stock are entitled to pro rata dividends and other distributions, if and when declared, by the board of directors out of assets legally available for the payment of dividends. The payment of dividends, if any, in the future rests within the discretion of the board of directors. Liquidation and Redemption Upon our liquidation, dissolution or winding up, the holder of each share of common stock is entitled to share equally in the distribution of our assets after the payment of liabilities. The holders of common stock are not entitled to the benefit of any sinking fund provision. The shares of common stock are not subject to any redemption provisions, nor are they convertible into any other security or property. All shares of common stock outstanding are fully paid and non-assessable. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITY Florida corporations are authorized to indemnify against liability any person who is a party to any legal proceeding because such person is a director or officer of the corporation. The officer or director must act in good faith and in a manner reasonably believed to be in the best interests of the corporation and, with respect to any criminal action or proceeding, have no reasonable cause to believe the conduct was unlawful. Florida law does not allow indemnification for an act or omission that involves intentional misconduct or a knowing violation of a law. In the case of an action by or on behalf of a corporation, indemnification may not be made if the person seeking indemnification is found liable, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification. Indemnification is required if a director or officer has been successful on the merits. The indemnification authorized under Florida law is not exclusive and is in addition to any other rights granted to officers and directors. A corporation may purchase and maintain insurance or furnish similar protection on behalf of any officer or director. Our articles of incorporation provide for the indemnification of directors and executive officers to the maximum extent permitted by Florida law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or controlling persons pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. There is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that would result in a claim for such indemnification. -17- DESCRIPTION OF OUR BUSINESS History We incorporated in Florida in January, 1989 but did not become active until September, 1998 when Gunther Than joined us as our president and we began development of our product line. In October 1998, we acquired Real View Systems, Inc. a company controlled by Gunther Than and his family by which we acquired compression technology and computer equipment. In February 1999, we acquired Xyros Systems, Inc. by which we acquired remote monitoring and storage engineering, a qualified employee staff and computer hardware and software. In May, 1999, we acquired ETMC, a contract manufacturer of electronic hardware and assemblies with 15 years of manufacturing experience which we have absorbed and whose equipment we use to manufacture our products. In March, 1999, we made our first sales of our security and surveillance products. The potential market for security and surveillance products and services throughout the world is huge and has been enhanced by digital technology, greater storage capacity at a lower cost and advanced software techniques including facial and character recognition abilities. Overview Surveillance devices are common today and are used as a proven method for protection and risk management. We develop, produce and market digital security and surveillance systems and products utilizing video based cameras and microphones. Our security systems, which are marketed under the trade name SecureView, record video images digitally and permit their viewing remotely over the customer's existing CCTV systems together with audio output over ordinary telephone lines. Digital recording connects data to a computer readable format rather than on a conventional video tape. We store the video output on computer hard disks rather than VCR tapes which significantly improves access to stored data. In addition, our systems are programmable and are capable of being customized to satisfy each customer's special requirements, be it coverage which is continuous or when events are detected. Our digital systems also employ digital video data compression which saves space and time for transmissions. In addition to SecureView, our products include the following: o ViewStorage which is a competitively priced programmable VCR replacement device that records video output digitally for use with existing CCTV systems and which will not degrade as tapes do; o PlateView which is a license plate recognition system that uses optical character recognition technology to provide an additional means of identifying individuals in a surveillance area for commercial or law enforcement use; o CareView which is a system for monitoring loved ones such as children at a day care center or at home with a baby sitter or adult relatives at a nursing home or hospice; o FaceView which is a system for analyzing facial characteristics to identify individuals and persons for access control and tracking; and o WebView which is a low-priced retail product that allows a user to capture and view remotely camera output from a limited number of cameras via a connection to a server which in turn is connected to the world-wide web for use by a customer desiring a low cost way to monitor remote assets -18- such as a home or boat. We are marketing this product through a separate web site, www.secureviewsystems.com. We currently market our products principally to commercial users for monitoring facilities for the protection of employees, customers and assets which leads to both the curtailment of crime and loss prevention. We also market our products to residential users and law enforcement agencies. We currently distribute and support our products through a network of value-added domestic and international resellers which we intend to expand. Industry Background The increased functionality that digital technology brings to CCTV systems has made this a dynamic and rapidly growing market. Video transmission is just beginning to transform from what was "closed-circuit" to a mix of methods that will widen into hard-wired, phone line, TV cable and wireless link systems. It is expected that this will expand user demand, create new product opportunities and channels of distribution and expand the way in which other communication services are used. The tragic events of September 11 have generated an increased interest in surveillance and security products. This heightened interest is expected to continue for the foreseeable future. Business Strategy We distribute our SecureView line of products, with add-on features, to the market through a network of value-added resellers. We are also in discussions with security companies and law enforcement agencies with respect to distribution agreements. We have ongoing reseller arrangements with small and medium sized domestic and international resellers. Our reseller agreements grant a non-exclusive right to sell our products. The reseller purchases from us at a discount from list price and on other terms and conditions in effect at the time of order. The agreements are generally for a term of one year and automatically renew for successive one year terms unless terminated by notice or in the event of breach. We intend to market WebView through different channels. We plan to offer WebView for direct retail sale on the world wide web and wholesale through retail distributors. We do not have any agreements with any distributors and will not seek any until we complete development of the product. This product will be priced at a level to be attractive to retail consumers. In addition to these products, through our acquisition of ETMC, we acquired an ongoing business operation of providing contract electronic component assembly and test services. ETMC had been in operation for over 15 years and had an established base of clients. ETMC had 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, Martin Marietta, Maryland Government Procurement Office, Lockheed Martin, and John Hopkins's Applied Physics Labs under contract to NASA. We have absorbed ETMC's business line into our business line while converting a portion of its manufacturing capability to the production of our security and surveillance products. Our core strategy is to continue to build products and deliver services that are marketable while at the same time developing new products and applications to anticipate and meet the expanding needs of our customers. We are also attempting to create alliances with various specialty markets which require the use of security systems such as: -19- o installers of pools in certain states that require that all residential pools have an alarm system; o credit card companies that control their own ATM machines which have surveillance systems; and o gas stations and car washes which rely heavily on surveillance systems. We will also continue to offer upgrades and enhancements to existing customers as a method of retaining customers. Every customer who does not participate in the upgrade program is targeted by one of our sales persons one year after the date of original purchase, at which time our warranty expires, to offer our newest upgrades to existing systems. Our Products We manufacture several of the hardware components in our systems. We assemble our systems by combining additional commercially available hardware and software together with our proprietary software. We license software components that are integrated into our proprietary software and installed in our systems. We believe that we can continue to obtain components for our systems at reasonable prices from a variety of sources. Although we have developed certain proprietary hardware components for use in our products and purchased some components from single source suppliers, we believe similar components can be obtained from alternative suppliers without significant delay. We have software licensing agreements for (i) compression software components, (ii) for facial recognition to possibly integrate into our proprietary software, and (iii) license to integrate commercially available operating systems software into our proprietary software for installation into our products. SecureView SecureView is a line of digital CCTV recording and remote monitoring systems. Our digital CCTV SecureView system: o takes video images captured by cameras; o digitizes the video; o stores the video according to times or criteria specified by the customer; o retrieves the visual data selectively in a manner that the customer considers valuable or desirable; o transmits the video across computer networks or ordinary phone lines; o has two way audio ability that can use real-time to communicate to the location being monitored; and o triggers programmed responses to events detected in the surveillance area such as break-ins or other unauthorized breaches of the secured area. Our system stores video output on computer hard discs, rather than VCR tapes. Storage on computer hard discs allows selective access to stored data. With a VCR, a user must search an entire tape to review a critical event, often fast forwarding and rewinding. With computer hard disc, a user can gain immediate access to stored data by doing a controlled search for the desired data. Our systems come standard with up to 28 days storage. Our systems are programmable -- they can be pre-set to take actions when events are detected in the surveillance area. For example, they can be programmed to begin recording when motion is detected in a surveillance area or to notify the user if the system is not functioning properly. Because of the programmable recording features, our systems can eliminate the unnecessary -20- storage of non-critical image and audio data. This capacity allows the user to utilize the hard disk storage more efficiently. Our digital systems employ video data compression. This saves space for storage and time for transmission especially on low bandwidth channels such as plain telephone wiring. Our SecureView line of products include the following features: o users can remotely monitor multiple locations from a remote PC; o connects to existing CCTV systems allowing retrofit enhancements using our systems; o uses any and all forms of telecommunications, such as standard telephone lines; o video can be monitored 24 hours a day by a security monitoring center; o allows uninterrupted "2-way" audio transmission while switching, controlling and monitoring up to 16 cameras per unit; o local and remote recording, storage and playback for up to 28 days, with optional additional storage capability; o cameras can be concealed in ordinary home devices such as in smoke detectors; o monitors itself to insure system functionality with alert messages in the event of covert or natural interruption; o modular expansion system configuration allows user to purchase add on components at a later date; and o allows the user to set the system to automatically review an area in desired camera sequence. ViewStorage ViewStorage is currently in development and is expected to reach market later in 2001. ViewStorage is a competitively priced video storage system that will archive the video from our systems. This storage device records video output digitally, and can be configured to house almost any amount of storage of video output from cameras. 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 is modular in nature and can be expanded to add additional storage, up to an amount that meets the requirements of each particular customer. 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. PlateView PlateView is a license plate recognition system that uses optical character recognition technology to provide an additional means of identifying individuals in a surveillance area. The 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. Law enforcement personnel can use this system in traffic enforcement. In addition to plate identification, officers can receive early warnings as to a number of items, including whether the owner of a car being stopped has outstanding arrest warrants or whether the license plate matches the vehicle's registration. PlateView was brought to market in the first quarter of 2000. -21- CareView Parent's rising concerns about the safety of their children at home with a baby sitter or nanny or in a day care center - as well as the treatment of a loved one in a nursing home - have created the need for a way of monitoring activities in these facilities. We are developing the CareView system as an option for the care facility. Users of the CareView system access the Internet to scan 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 system allows family and friends to view loved ones when they are not able to be at the care facility -- just by accessing the facilities' web sites. The core of CareView is a proprietary personal computer board or component that we have designed. CareView requires our proprietary software capable for use on the Internet. We have developed a prototype of CareView and have successfully tested it at our Maryland facility. WebView We are developing WebView, a low-priced retail product that allows 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. It consists of a proprietary personal computer card or component and proprietary software that is compatible with use on the world wide web. This product is ideal for the consumer who would like a low cost way to monitor his/her assets remotely. We have developed a prototype of WebView and have successfully tested it. Markets Our family of products offers government and law enforcement agencies, commercial security professionals, private businesses and residential consumers a dramatically enhanced surveillance capacity. It also offers a more efficient and economical method to store, search and retrieve historically stored data. Residential The residential home security user will purchase our products from either commercial companies installing either self-contained or centrally monitored systems, or directly from retail distribution centers. Utilizing our technology, individuals can run their own perimeter and interior surveillance systems from their own home computer. Real time action can be monitored remotely at homes through a modem and the Internet. There is also the capability to make real-time monitors wireless. In turn, this reduces the expense and time of the home installation and makes installation affordable for a majority of homeowners. An additional advantage of our technology is that it allows for the storage of information on the home computer and does not require a VCR. Commercial Commercial business users represent the greatest potential users of our surveillance products. Commercial businesses have already realized the need for using surveillance devices for protection. Our products provide observation of facilities for protection of employees, customers, and assets. This can result in the curtailment of crime and loss prevention by employees and others. The market for this technology is the same as the current market for analog CCTV -22- systems, including hospitals, schools, museums, and retail, manufacturing and warehousing facilities. Our system reduces the requirements for a guard force. In addition, lesser number of security personnel are needed to monitor, verify and respond to tripped alarms. Our products and technology can be used where there is a temporary requirement for real-time surveillance in areas where an analog CCTV system is impractical or impossible. Examples of this are special events, concerts, and conventions. Our systems reduce the need for a large guard force and provide unobtrusive monitoring of these events. Law Enforcement The gathering of video and data images is commonplace in law enforcement. The data is used to protect both the law enforcement officer and the suspect. It is also used as a historical record for prosecution and event verification. Because our technology can be used for stakeouts and remote monitoring of areas, we believe there is a market potential with law enforcement agencies. We have been asked to submit proposals for license plate recognition systems that help law enforcement identify people entering a surveillance area. Law enforcement agencies are also frequently using robotic systems to investigate and disarm explosive devices. The robotic systems are severely limited in flexibility by the need to utilize CCTV systems with a VCR, which can be overcome by the use of our digital technology. Competition The markets for our products are extremely competitive. Competitors include a broad range of companies that develop and market products for the identification and video surveillance markets. Competitors in the market for our identification product, PlateView, include Polaroid Corporation, Loronix Information Systems, Data Card Corporation, Dactek International, Inc. Competitors in the video surveillance market include numerous VCR suppliers and digital recording suppliers including, Loronix Information Systems, Inc., Sensormatic Corporation and NICE Systems, Ltd. We believe the introduction of digital technology to video surveillance and security systems is our market opportunity. We believe that many of the established CCTV companies have approached the design of their digital CCTV products from the standpoint of integrating their digital products to existing security and surveillance product offerings. These systems are closed, not easily integratable with other equipment and not capable of upgrades as technology improves. We have designed our systems so that they are open, compatible with other digital and analog systems, and easily adaptable to technological advances that will inevitably occur with digital technology. Intellectual Property Certain features of our products and documentation are proprietary and we rely on a combination of patent, contract, copyright, trademark and trade secret laws and other measures to protect our proprietary information. As part of our confidentiality procedures, we generally enter into confidentiality and invention assignment agreements with our employees and mutual non-disclosure agreements with our manufacturing representatives, dealers and systems integrators. Notwithstanding such actions, a court considering these provisions -23- may determine not to enforce such provisions or only partially enforce such provisions. We also limit access to and distribution of our software, documentation and other proprietary information. Because the software and firmware (software imbedded in hardware) are in a state of continuous development, we have not filed applications to register the copyrights in these items. However, under law, copyright vests upon creation of our software and firmware, and registration is not a prerequisite for the acquisition of copyright rights. We take steps to insure that notices are placed on these items to indicate that they are copyright protected. The copyright protection for our software extends for the statutory period from the date of first "publication" (distribution of copies to the general public) or from the date of creation, whichever expires first. We are in the process of applying to the U.S. Patent and Trademark Office for patent protection of important components of our products. We plan to prepare and file applications to register the trademarks SecureView, CareView and WebView. We provide software to end-users under non-exclusive "shrink-wrap" licenses (or automatic license executed once the package is opened) which generally are nontransferable and have a perpetual term. Although we do not generally make source code available to end-users, we may, from time to time, enter into source code escrow agreements with certain customers. We have also licensed certain software from third parties for incorporation into our products. 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 added 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. Employees We employ 18 persons including three persons in part-time positions. We also employ four independent contractors who devote a majority of their work to a variety of our projects. Our employees are not presently covered by any collective bargaining agreement. Our relations with our employees are good, and we have not experienced any work stoppages. -24- MANAGEMENT'S DISCUSSION AND ANALYSIS The following discussion and analysis should be read in conjunction with our financial statements and the accompanying notes. In addition to historical information, this Form 10-KSB contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans and expectations. The Company's actual results could differ materially from management's expectations. In the first several years of operation since September 1998, we have devoted most of our resources to the research and development of digital video surveillance and security products. We have generated limited revenues from our security products to date, but are rapidly expanding our sales and distribution network. During the last year we have been working on delivering new products to market and enhancing and upgrading our product line. Until we more fully develop our sales and distribution network, we expect our operating losses to continue. Although our revenue from contract manufacturing services has decreased significantly, we still provide contract manufacturing services, and remain ready to take advantage of potential increases in this market. ETMC had provided such services for more than 15 years and had an established customer base. While we have continued the contract manufacturing business line, we have increased ETMC's manufacturing capacity to permit production of our products. The tragic events of September 11, 2001 generated a larger than normal interest in our products and services. This trend has continued and inquiries regarding our products have increased substantially. On-line and web site inquires more than quadrupled and phone inquires have more than tripled since September 11, 2001. We have added two more inbound telephone lines and are staffing to meet the increased demand. As of September 30, 2001, we had $2,800,000 of purchase orders, some which are backed by letters of credit. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 2000 Results of Operations Revenue For the nine months ended September 30, 2001, revenues from sales of our products increased $597,863 or 407% to $744,842 from $146,979 in the same period last year, and revenues from sales of our services decreased $251,568 or 96% to $9,512 from $261,080 in the same period last year. Of the $754,354 in total revenue during the nine month period ended September 30, 2001, $744,842 or 99% was derived from sales of systems and $9,512 or 1% from sales of contract manufacturing services. While the percentage of revenues generated from sales of our contract manufacturing services has decreased to only 1% of our revenues, we will continue to offer contract manufacturing services, and remain ready to take advantage of potential increases in this market. Gross Profit Gross profit on sales for the nine months ended September 30, 2001, increased $196,888 or approximately 100%, to $393,779 compared with $196,891 in the same period last year. Gross profit margin for the nine months ended September 30, 2001, was 52% compared with 48% in the same period last year. Because of low net sales we achieved in the period last year ended September 30, 2000, we do not believe gross profit margin comparisons are meaningful at this stage of our operations. -25- Costs and Expenses Operating expenses for the nine months ended September 30, 2001, decreased to $1,276,073 from $1,376,264 for the comparable period in 2000. The decrease is principally due to decreased expenditures in sales promotions. Costs of Products and Services Sold. The cost of products and services sold was $360,575 for the nine months ended September 30, 2001 and represents 48% of revenue for the period, compared to $211,168 for the nine months ended September 30, 2000 which represents 52% of revenues for that period. Because of our low sales volume in the same period last year, we do not consider the costs of goods sold in the same period last year to be a good measure of our true cost of goods sold. We anticipate that our profit margins on sales of security systems will exceed our profit margins on sales of services. We are continually working on engineering changes in our security products that we expect will lower component costs for these products. We do not determine our inventory on a quarterly basis, instead we do it on an annual basis. Therefore, our cost of goods sold is based on estimates of inventory used in products sold. Research and Development Expense. No expenditures were made on research and development for the nine months ended September 30, 2001, as compared with $143,840 in the same period last year. Salaries and Benefits. We spent $422,178 on salaries and benefits for the nine months ended September 30, 2001, as compared with $420,032 for the same period last year. Going forward, we plan to significantly increase our expenditures in salaries and benefits to address the additional staffing needed in the aftermath of the events of September 11. Net Operating Loss. Net loss was $(882,294) for the nine months ended September 30, 2001, compared to a net loss of $(1,179,373) for the nine months ended September 30, 2000. The basic and fully diluted loss per share is $.02 for the third quarter 2001, compared to $.05 for the same period last year. The basic and fully diluted loss per share for the nine months ended September 30, 2001 is $.07 compared to $.15 for the same period last year. Changes in Financial Condition As of September 30, 2001, we had total assets of $2,451,389 an increase of $563,965 over the December 31, 2000 balance of $1,887,424. Total liabilities were $541,630, at September 30, 2001, resulting in stockholders' equity of $1,909,759, an increase of $631,706 from the December 31, 2000 balance of $1,278,053. During the nine months ended September 30, 2001, our cash increased from $265,245 at December 31, 2000, to $366,207 at September 30, 2001. Net cash used in operating activities was $1,257,231 for the nine months ended September 30, 2001, including increases in accounts receivable of $407,471, increases in inventory of $78,103, and decreases in accounts payable of $8,077. Net cash generated from financing activities during the nine months ended September 30, 2001 was $1,392,448, consisting of proceeds received from sales of stock of $1,489,000, less $61,189 advanced to stockholders, less payments of $35,363 made on a promissory note to Columbia Bank with an outstanding principal balance of $6,720 at September 30, 2001. -26- As a result of the foregoing, at September 30, 2001 we had working capital of $560,507, $562,488 of net trade accounts receivable, and $173,442 in inventory. We have provided and may continue to provide payment term extensions to certain of our customers from time to time. As of September 30, 2001 there were not material payment term extensions in effect. Our inventory balance at September 30, 2001, was estimated to be $173,442. We do not take inventory on a quarterly basis, and we made inventory estimates based on annual inventory determinations. With expected increased product sales, we will need to make increased inventory expenditures. However, the terms of our product sales frequently require 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, and the resulting materials purchases and inventory increases, will adversely affect liquidity in any material respect. YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999 Results of Operations Revenue In 1999, our revenues totaled $303,711 of which $65,954 was derived from sales of security systems and $237,757 from sales of contract manufacturing and test services. In 2000, our revenues totaled $661,789, or an increase of 118% over the prior year. In 2000, we derived $319,376, or 48% of revenues from sales of security systems and $342,413, or 52%, from sales of contract manufacturing and test services. This represents a major change from the prior year in which 78% of revenue derived from contract manufacturing and only 22% of revenue was derived from sales of security systems. In the last quarter of 2000, only 32% of the revenues were derived from contract manufacturing in the face of increasing revenues. Gross Profit And Operating Expenses Gross profit on sales for the year ended December 31, 1999, was $45,333 compared to $225,479 for the year ended December 31, 2000, a fivefold increase. Gross profit margin was 15% in 1999 and 34% in 2000. Operating expenses for the year ended December 31, 1999, were $3,716,229, compared with $2,429,761 in 2000. 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. As a result cash operating expenses in 1999 were only $1,569,229. Approximately $345,000 of our operating expenses in 2000 were attributable to the issuance of shares of our common stock as compensation resulting in cash expenses of $2,084,761 for that 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 $436,310 in 2000 as compared to $258,378 in 1999, and represented 85% of revenue in 1999 and 66% of revenue in 2000, a decrease of approximately 20%. As product sales in the future account for a larger percentage of overall sales, we expect that our costs of goods and services sold will decline as a percentage of total revenue and stabilize in the mid 70% range. Our profit margins on sales of security systems exceeds our profit margins on sales of services. We are currently working on engineering changes in our security products that we expect will further lower component costs for these products. -27- Salaries And Benefits. We spent $2,045,531 in salaries and benefits in 1999. We organized and staffed up in 1999, converting many independent contractors to employees. In 2000, we spent $794,166 for salaries and professional fees. We incurred expenses associated with issuing shares of our common stock to employees of $2,045,531 in 1999 and $344,802 in 2000. We believe 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 our early years of operation. Research And Development Expense. We spent $210,143 in 1999 on research and development and $132,300 in 2000. We expect to continue to fund new product development in 2001 at or above the dollar levels expended in 2000. Investor Relations Expenses. Investor relations expenses increased from $212,086 in 1999 to $392,136 in 2000. Included in this expense category is the issuance of shares of our common stock to Columbia Financial Group, LLC and Magnum Financial in California in partial payment of their services in providing investor relations support. Professional Fees. Professional fees increased from to $317,100 in 1999 to $359,131 in 2000. These fees include attorneys, accountants, and programming contractors. Write-Off Of Goodwill And Other Intangible Assets. Following the consummation of the purchase of ETMC it experienced a significant decrease in sales volume. For the seven months following the purchase through December 31, 1999, ETMC sales to unrelated entities totaled $231,970 which, if annualized, amount to approximately $400,000, less than half of the previous years sales of $820,000. Additionally, ETMC's sales volume for the year 2000 was $342,413. In accordance with applicable accounting requirements, we determined that the following changes in circumstances had occurred which required a review for possible impairment: a significant change in the manner in which the asset was used, current period operating and cash flow losses, and a forecast of continuing losses. Our impairment review consisted of an analysis of the future sales prospects of ETMC's manufacturing business and an evaluation of the cash flows to be realized hereafter. Our review indicated that sales volume would not increase significantly from the current levels for the foreseeable future. At these significantly decreased sales levels, cash flows to be realized from this business line would be negative due to fixed operating expenses exceeding gross profit on sales. We also considered the fact that ETMC continues to provide a skilled employee force and a captive manufacturing resource that was used in the original valuation of the combination. As a result of this analysis, we determined the remaining value of the goodwill to be associated with the captive manufacturing capabilities and skill set of ETMC to be more than half of the book value, and our related write-off of 40% of the goodwill is consistent with that valuation. Net Operating Loss Net loss was $3,670,896 for 1999, or $.63 per share, compared to a net loss of $2,204,282 or $.18 per share for the year 2000. We have accumulated an aggregate of approximately $1.7 million of net operating loss carry-forwards as of December 31, 2000, which may be offset against taxable income in future years. The use of these losses to reduce income taxes will depend on the generation of sufficient taxable income prior to their expiration in the year 2018. In the event of certain changes in control, there will be an annual limitation on the amount of net operating loss carry-forwards which can be used. No tax benefit for these carry-forwards has been reported in the financial statements for the years ended December 31, 1999 or 2000. -28- Changes in Financial Condition As of December 31, 2000, we had total assets of $ 1,887,424, an increase of approximately $55,000 over last year's $1,831,860. Total liabilities were $609,371, resulting in stockholders' equity of $1,278,053, a decrease from last year's $1,447,861 of $169,808. During the year ended December 31, 2000, our cash increased from $89,150 at December 31, 1999, to $265,245 at December 31, 2000. Net cash used in operating activities was $1,222,519 for the year ended December 31, 2000, including increases in accounts receivable of $61,739, decreases in inventory of $45,874, increases in accounts payable of $227,141 and increases in accrued interest of $11,000. Net cash generated from financing activities during the year ended December 31, 2000, was $1,480,727, consisting of proceeds received from the sale of stock, plus $56,452 advanced from stockholders, less payments made on a promissory note with an outstanding principal balance of $42,083, plus accrued and unpaid interest, which note accrues interest at a rate of 2% plus prime, to Columbia Bank. View Systems pays $5,000 per month to Columbia Bank. As a result of the foregoing, as of December 31, 2000, we had negative net working capital of $93,770, $155,017 of trade accounts receivable and $95,339 in inventory. We have provided and may continue to provide payment term extensions to certain of our customers from time to time. As of December 31, 2000, we have not granted material payment term extensions. Our inventory balance at December 31, 2000, was estimated to be $95,339. We do not take inventory on a quarterly basis, and we made inventory estimates based on annual inventory determinations. 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. LIQUIDITY AND CAPITAL RESOURCES Since the start-up of our operations in 1998, we have funded our cash requirements primarily through equity transactions. We received $8,276,259 since inception through the issuance of our common stock. We used the proceeds from these sales of equity to fund operating activities, including, product development, sales and marketing, and to invest in the acquisition of technology, assets and business. We are not currently generating cash from our operations in sufficient amounts to finance our business and will continue to need to raise capital from other sources. We believe that cash from operations, funds available, and the proceeds received from the sales to the Selling Stockholders of the shares that are covered by this prospectus, as well as the cash that will be generated if the warrant holders that have shares covered under this prospectus exercise their warrants, will sustain our operations and allow for anticipated growth in operations and strategic acquisitions through September 30, 2002. PLAN OF OPERATION The amount of capital that we need to raise will depend upon many factors primarily including: o the rate of sales growth and market acceptance of our product lines; o the amount and timing of necessary research and development expenditures; o the amount and timing of expenditures to sufficiently market and promote our products; and o the amount and timing of any accessory product introductions. -29- We intend to use the cash raised from the exercise of warrants held by the Selling Stockholders to the following: o bring our FaceView, PlateView and Access Control products to market; o continue our product development efforts; o expand our sales, marketing and promotional activities for the SecureView line of products; and o increase our sales and marketing and customer support staff. We operate in a very competitive industry that requires continued large amounts of capital to develop and promote our products. We believe that it will be essential to continue to raise additional capital, both internally and externally, to compete in this industry. In addition to accessing the public and private equity markets, we will pursue bank credit lines and equipment lease lines for certain capital expenditures. We currently estimate we will need between $2 million and $3 million to launch our expanded business operations in accordance with our current business plan. DESCRIPTION OF PROPERTY We lease 6,000 square feet of space used for executive offices and engineering design and manufacturing facilities in Baltimore, Maryland. The lease term commenced on May 1, 2001 and ends on April 30, 2003. During the term of the lease, the rent is $2,200 per month. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following information summarizes certain transactions we engaged in during the past two years, or we propose to engage in, involving our executive officers, directors, 5% stockholders or immediate family members of those persons: View Technology, Inc. is a privately held Colorado corporation founded in 1994 by Gunther Than, our President and CEO. Mr. Than is also President and CEO of View Technology. We advanced monies from time to time during 1999 to View Technology to provide it with working capital in order to complete development of certain products which we manufacture and market. As of this date, View Technology is indebted to us in the amount of $90,990. We also had a license agreement with View Technology for use of compression software. We no longer use View Technology to assist us in the development of our products or its compression software. It is not likely that we will collect in the future any of View Technology's indebtedness to us. From time to time during 1999, we advanced non-interest bearing loans to Gunther Than and his wife, who was our employee. All of such loans have been repaid. In addition during 1999, we also redeemed 59,860 shares of our common stock owned by Mr. Than at a price of $2.00 per share or $119,720 in the aggregate, consisting of $52,000 cash and the cancellation of $67,719 of his indebtedness due to us. Mr. Than was granted the option for a period of two years after the redemption to repurchase the shares at a price per share of $2.00 plus interest on the cancelled debt at the rate of 10% per year. Mr. Than has not taken a salary from us during 2001. Consequently, as of November 30, 2001, we owe Mr. Than compensation in the amount of $110,000. See "Executive Compensation" for a description of warrants and stock issued to our directors and officers. -30- MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our shares are traded on the Over-The-Counter Bulletin Board under the symbol "VYST.OB." The high and low bids for the periods indicated, according to information from the National Quotation Bureau, were: 2001 High Low Quarter ended March 31, 2001 1.09 .47 Quarter ended June 30, 2001 .71 .41 Quarter ended September 30, 2001 .71 .16 2000 High Low Quarter ended March 31, 2000 4.19 2.06 Quarter ended June 30, 2000 3.19 1.13 Quarter ended September 30, 2000 1.60 .44 Quarter ended December 31, 2000 .88 .38 1999 High Low Quarter ended September 30, 1999 5.00 2.25 Quarter ended December 31, 1999 6.35 2.00 As of November 30, 2001, we had 252 stockholders of record. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Dividend Policy We have not declared or paid cash dividends or made distributions in the past, and we do not anticipate that we will pay cash dividends or make distributions in the foreseeable future. We intend to retain and invest future earnings to finance our operations. -31- EXECUTIVE COMPENSATION No compensation was payable to any executive officer for any fiscal year until the fiscal year ending December 31, 1999. No officer or director received compensation in any fiscal year in excess of $100,000 with the exemption of Gunther Than, currently our only executive officer. The following table sets forth certain information concerning his compensation for the years ending December 31, 1999 and December 31, 2000.
Annual Compensation Long-Term Compensation ------------------- ---------------------- Awards Payouts ------ ------- Securities Under- Other Restricted lying Annual Stock Options/ LTIP All Other Name and Year Salary Bonus Compensation Award(s) SARs Payouts Compensation Principal Position ($) ($) ($) ($) (#) ($) ------------------ --- --- --- --- --- --- Gunther Than, 1999 $72,000 $337,500(1) --- 60,000(2) --- 0 President and CEO 2000 $96,000 $110,400(3) --- 0 (1) The bonus amount represents 300,000 shares awarded to Gunther Than in 1999 for bringing about the acquisition of ETMC, 150,000 of which vested in 1999 and 150,000 of which vested in 2000. The 300,000 shares were valued at a price of $1.35 per share which was market value less a discount based on the trading restrictions on the shares. (2) These options were granted to Mr. Than as non-qualified options under our stock options plan to acquire 60,000 shares at an option price of $.01 per share which vest at the rate of 5,000 shares per month commencing July 1999. (3) This amount represents 480,000 shares of our common stock valued at $.23 per share which was market value less a discount based on the trading restrictions on the date of issuance. The shares were granted to Mr. Than pursuant to his employment agreement.
Employment Agreements Mr. Than has an Executive Employment Agreement with us to serve as our President and Chief Executive Officer, effective June 1, 1999, without a term but terminable by either party on 60 days written notice. He is entitled to compensation in the amount of $10,000 per month for the calendar year 2001, and an accrual payment of 480,000 shares of our common stock per year in exchange for his covenants not to compete with us for a period of one year after any termination of the Agreement. If we terminate the employment of Mr. Than without cause or because of merger, acquisition or change in control, we will be obligated to pay him approximately $350,000 in severance payments over a three year period. Certain employees are eligible to receive up to 2,000 shares per month as part of their compensation from us. As of November 30, 2001, the number of shares due to such employees was 180,000. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Prior to becoming a reporting company under the Exchange Act on October 6, 1998, we acquired RealView Systems, Inc. ("Real View"). RealView was acquired by us through a share exchange, as a result of which, RealView became our wholly owned subsidiary. Due to the immateriality of this transaction, we accounted for it as a pooling of interest. As a result, all of our financial statements and financial information were restated to include the amounts and results of operations of RealView. Following the acquisition, we decided to become a fully reporting company under the Exchange Act. To become a reporting company, we filed a -32- registration statement on Form 10SB to register our common stock under Section 12(g) of the Exchange Act on August 13, 1999. We were required to include in this registration statement audited statements of income, cash flows and changes in stockholders' equity for 1997 and 1998. This required us to include the financial information for RealView for 1997 and 1998. RealView had engaged the accounting firm of Katz, Abosch, Windesheim, Gershman & Freedman, P.A. (Katz, Abosch) to provide audit accounting services and to render an independent audit report, dated June 1, 1998, of the financial statements of RealView as of December 31, 1997, and the related statements of operations, stockholders' equity and cash flows for the year then ended and for the period from September 15, 1993 (inception) to December 31, 1997. We requested and received Katz, Abosch's authorization to include the results of their audit in our financial reports in our Form 10SB and in our registration statement on Form SB-2, which we filed on January 11, 2000. However, as a matter of its own internal policy, Katz, Abosch does not provide audit accounting services to public companies. Therefore, it did not offer to provide audit accounting services to us and we engaged another company, Stegman & Company to provide such services. Katz, Abosch did not render an adverse opinion or disclaimer of opinion with regard to its audit of the financial statements of RealView, nor was its audit work for RealView modified as to uncertainty, audit scope, or accounting principles. The decision to engage Stegman & Company as our auditors was approved by both our board of directors and stockholders. We did not have any disagreements with Katz, Abosch on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. AVAILABLE INFORMATION We are subject to the information reporting requirements of the Securities Exchange Act and, accordingly, file reports and other information with the Commission. Such reports and other information are available for inspection and copying at the public reference facilities maintained by the Commission at Room 1026, 450 Fifth Street N.W., Washington, D.C. 20549, and the public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. The information is also available at the Commission's regional offices located at 7 World Trade Center in New York, NY 10007, at the Klucynski Building, 230 Fourth Dearborn Street, in Chicago, IL 60604 and at 5757 Wilshire Boulevard, Los Angeles, CA 90024. Copies of such material also may be obtained from the Public Reference Section of the Commission, 450 Fifth Street N.W., Judiciary Plaza, Washington, D.C. 20549 at prescribed rates and are also available on the Commission's web site at www.sec.gov ADDITIONAL INFORMATION We filed a registration statement with the Commission under the Securities Act with regard to the securities offered hereby. This prospectus does not contain all of the information set forth in the registration statement and in the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information reference is made to such registration statement and the exhibits and schedules thereto. The registration statement and any amendments, including exhibits are available for inspection and copying as set forth above. We intend to distribute annual reports containing audited financial statements to our stockholders. -33- Index To Financial Statements View Systems, Inc Page No. -------- Independent Auditors' Report F-1 Consolidated Balance Sheet at December 31, 2000 F-2 Consolidated Statements of Operations for the F-3 Years Ended December 31, 2000 and 1999 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000 and 1999 F-4 Statements of Cash Flows for the years ended December 31, 2000 and 1999 F-5 Notes to Consolidated Financial Statements F-7 Consolidated Balance Sheet at September 30, 2001 F-16 Consolidated Statements of Operations for the Nine Months and F-17 Quarter ended September 30, 2001 and 2000 Consolidated Statements of Changes in Stockholders' Equity for the Period from January 1, 2000 to September 30, 2001 F-18 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000 F-19 Notes to Consolidated Financial Statements F-20 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 (the Company) as of December 3l, 2000 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 3l, 2000 and 1999. 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 auditing standards generally accepted in the United States. 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 that our audits provide a reasonable basis for our opinion. In our opinion, the accompanying consolidated balance sheet as of December 31, 2000 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years ended December 3l, 2000 and 1999 present fairly, in all material respects, the financial position of the Company as of December 31, 2000 and the results of its operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Stegman & Company Baltimore, Maryland March 15, 2001 F-1
VIEW SYSTEMS, INC. CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 ASSETS CURRENT ASSETS: Cash $ 265,245 Accounts receivable (net of allowance for doubtful accounts of $10,000) 155,017 Inventory 95,339 --------- Total current assets 515,601 --------- PROPERTY AND EQUIPMENT: Equipment 323,766 Leasehold improvements 20,261 Software tools 15,071 Vehicles 43,772 --------- 402,870 Less accumulated depreciation 79,814 --------- Net value of property and equipment 323,056 --------- OTHER ASSETS: Goodwill 894,383 Investments 28,000 Due from affiliated entities 105,552 Due from affiliate 20,000 Deposits 832 --------- Total other assets 1,048,767 --------- TOTAL ASSETS $1,887,424 ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 401,247 Note payable - bank 42,083 Accrued interest 22,000 Notes payable - other 110,000 Due to stockholder 2,090 Payroll tax liabilities 31,951 ---------- Total current liabilities 609,371 ---------- STOCKHOLDERS' EQUITY: Common stock - par value $.01, 50,000,000 shares authorized, Issued and outstanding - 11,481,031 shares 11,481 Additional paid-in capital 7,364,502 Accumulated deficit (6,097,930) ---------- Total stockholders' equity 1,278,053 ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,887,424 ========== See accompanying notes
F-2
VIEW SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ---- ---- REVENUE: Sales of contract assembly services $ 319,376 $ 65,954 Sales of assembled electronic components 342,413 237,757 ----------- ----------- Total sales 661,789 303,711 Cost of goods sold 436,310 258,378 ----------- ----------- GROSS PROFIT ON SALES 225,479 45,333 ----------- ----------- OPERATING EXPENSES: Advertising and promotion 20,931 23,256 Amortization 113,135 95,299 Bad debts 14,010 - Business development expense 133,393 140,000 Contributions 10,347 2,500 Depreciation 44,765 29,856 Dues and subscriptions 2,573 3,379 Employee compensation and benefits 794,166 2,045,531 Impairment loss of goodwill and other intangible assets - 244,155 Insurance 21,088 17,038 Interest 23,338 51,262 Investor relations 392,136 212,086 Miscellaneous expenses 13,692 19,445 Office expenses 94,846 69,989 Professional fees 359,131 317,100 Rent 121,951 74,228 Repairs and maintenance 9,148 10,167 Research and development 132,300 210,143 Taxes (other than income) 5,249 3,201 Telephone 35,807 28,398 Travel 72,851 105,813 Utilities 14,904 13,383 ----------- ----------- Total operating expenses 2,429,761 3,716,229 ----------- ----------- NET LOSS FOR THE YEAR $(2,204,282) $(3,670,896) =========== =========== LOSS PER SHARE: Basic $( 0.19) $( 0.63) =========== =========== Diluted $( 0.19) $( 0.63) =========== ===========
See accompanying notes F-3
VIEW SYSTEMS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 Additional Total Common Paid-In Accumulated Stockholders' Stock Capital Deficit Equity ------ ---------- ----------- ------------ Balances at January 1, 1999 $ 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 acquisitions) 150 562,350 - 562,500 Issuance of common stock (ETMC acquisitions) 250 787,250 - 787,500 Issuance of common stock (debt conversion) 370 403,838 - 404,208 Net loss for the year ended December 31, 1999 - - (3,670,896) (3,670,896) ------- --------- --------- --------- Balances at December 31, 1999 7,167 5,334,342 (3,893,648) 1,447,861 Sales of common stock 2,843 1,448,097 - 1,450,940 Stock options exercised 88 894 - 982 Issuance of common stock (employee and other compensation) 1,383 581,169 - 582,552 Net loss for the year ended December 31, 2000 - - (2,204,282) (2,204,282) ------- --------- --------- --------- Balances at December 31, 2000 $11,481 $7,364,502 $(6,097,930) $1,278,053 ======= ========= ========== =========
See accompanying notes. F-4
VIEW SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,204,282) $( 3,670,896) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 157 ,900 125,155 Impairment loss of goodwill and other intangible assets - 244,155 Employee and other compensation paid through the issuance of common stock 582,552 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 ( 61,739) ( 93,278) Inventory 45,874 ( 141,213) Other assets 6,175 ( 6,571) Accounts payable 227,141 150,333 Accrued interest 11,000 11,000 Payroll taxes payable 12,788 19,163 ----------- ---------- Net cash used by operating activities (1,222,591) ( 1,094,399) ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 67,479) ( 50,354) Funds advanced to affiliated entities ( 14,562) ( 459,180) Investment in MediaComm Broadcasting Systems, Inc. ( - ) ( 28,000) ----------- ---------- Net cash used in investing activities ( 82,041) ( 537,534) ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from loans provided by stockholders 56,452 132,071 Repayment of note payable-bank ( 27,647) ( 5,270) Proceeds from sales of stock 1,451,922 1,426,329 ----------- ---------- Net cash provided by financing activities 1,480,727 1,553,130 ----------- ---------- NET INCREASE( DECREASE) IN CASH 176,095 ( 78,803) CASH AT BEGINNING OF YEAR 89,150 167,953 ----------- ---------- CASH AT END OF YEAR $ 265,245 $ 89,150 =========== ==========
See accompanying notes F-5 VIEW SYSTEMS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued)
2000 1999 ---- ---- Schedule of noncash investing and financing transactions: Common stock issued to effect purchase of Eastern Tech Manufacturing, Inc. $ - $ 787,500 ====== ======= Debt issued to effect purchase of Eastern Tech Manufacturing, Inc. $ - $ 148,184 ====== ======= Common stock issued for to effect purchase of Xyros Systems, Inc. $ - $ 562,500 ====== ======= 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 $ 12,338 $ 45,379 ====== ====== Income taxes $ - $ - ======= ======
See accompanying notes F-6 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations View Systems, Inc. (the "Company") designs and develops computer software and hardware used in conjunction with surveillance capabilities. The technology utilizes the compression and decompression of digital inputs. Operations, from formation to June 30, 1999, were devoted primarily to raising capital, developing the technology, promotion, and administrative functions. 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 accounting principles generally accepted in the United States. 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. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes certain of the SEC's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of 2000. The adoption of SAB 101 had no impact on the Company's financial condition or results of operations. Inventories Inventories are stated at the lower of cost or market. Cost is determined by the last-in-first-out method (LIFO). F-7 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 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 or 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, 2000 and 1999 amounted to $44,765 and $29,856 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, 2000 and 1999 were $20,931 and $23,256, respectively. F-8 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 Nonmonetary Transactions Nonmonetary transactions are accounted for in accordance with Accounting Principles Board Opinion No. 29 Accounting for Nonmonetary Transactions which requires the transfer or distribution of a nonmonetary asset or liability to be based, generally, on the fair value of the asset or liability that is received or surrendered, whichever is more clearly evident. Financial Instruments For most financial instruments, including cash, accounts receivable, accounts payable and accruals, management believes that the carrying amount approximates fair value, as the majority of these instruments are short-term in nature. Net Loss Per Common Share Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. The calculation of the net loss per share available to common stockholders for the years ended December 31, 2000 and 1999 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 for the years ended December 31, 2000 and 1999. 2. FINANCIAL CONDITION AND MANAGEMENT'S PLAN The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going-concern. However, the Company has sustained significant operating losses in the past two years. In addition, the Company has used substantial amounts of working capital in its operations. As of December 31, 2000 and for the year then ended, the Company had an accumulated deficit of $6.1 million and a net loss of $2.2 million. Further, as of December 31, 2000 current liabilities exceed current assets by $93,770. There can be no assurance that the Company will be able to generate sufficient revenues to achieve or sustain profitability in the future. In view of these matters, realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the ability to meet it financing requirements, and the success of its future operations. Management has undertaken a F-9 vigorous effort to reduce both cost of sales and other operating expenses. Additionally, the Company will be dependent upon the ability to raise capital through equity offerings and the exercise of common stock options and warrants. The Company anticipates that upon registration of shares in the second quarter of 2001 that 2,000,000 common stock warrants will be exercised at a price of $.40 per share thereby raising $800,000. Management also anticipates additional equity offerings and the exercise of additional common stock options and warrants later in 2001. There can be no assurance that these equity offerings will be successful. Management believes the actions presently being taken to revise the Company's operating and financial requirements provide the opportunity for the Company to continue as a going concern. 3. BUSINESS COMBINATIONS On February 25, 1999, the Company acquired Xyros Systems Inc. of Columbia, Maryland, a developer of computer based systems and equipment that captures video and audio data and 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 was exchanged for 1,500 shares of the Company's common stock. This acquisition was accounted for as a purchase. 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 shares of the Company. 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. 4. INVENTORY Inventories at December 31, 2000 consisted of the following: Work in process 43,835 Raw materials 51,504 ------ $ 95,339 ====== 5. DUE FROM AFFILIATED ENTITY The Company has advanced non-interest bearing funds of $105,552 as of December 31, 2000 to a related corporation, View Technologies, Inc. which is controlled by the Chief Executive Officer of the Company. There are no formal repayment terms associated with this advance. The two companies enter into various transactions throughout the year to provide working capital to one another when necessary. 6. DUE FROM AFFILIATE The Company has advanced non-interest bearing funds to its Chief Executive Officer in the amount of $20,000 as of December 31, 2000. There are no repayment terms associated with this advance. F-10 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 7. INVESTMENTS The Company owns approximately 14% of the common stock of a privately held entity known as MediaComm Broadcasting Systems, Inc., which is a development stage company formed to generate revenue through internet retail sales. 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. 8. 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, the Company recognized an impairment loss in the amount of $199,009. The remaining goodwill is being amortized over a 10 year period, beginning at the acquisition date. In relation to the business combination with Xyros accounted for under the purchase method of accounting, the Company recorded goodwill in the amount $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. Software development costs of $47,146 relating to internal costs associated with a software product that the Company will not market were also written-off to expense during 1999. 9. NOTE PAYABLE - BANK One of the Company's subsidiaries has a note payable with a bank having an outstanding balance of $42,083 as of December 31, 2000. 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. The Company is obligated to make monthly principal payments of $5,000. 10. NOTE PAYABLE - OTHERS 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 originally due December 31, 1999, but the Company has renegotiated the terms of the loan to allow for repayment as cash flow permits. F-11 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 11. INCOME TAXES The components of the net deferred tax asset and liability as of December 31, 2000 are as follows: Effect of net operating loss carryforward $ 2,090,000 Less valuation allowance $(2,090,000) --------- Net deferred tax asset (liability) $ - ========= 12. STOCK-BASED COMPENSATION During the years ended December 31, 2000 and 1999 the Company granted restricted stock, incentive stock options, non-qualified stock options, and warrants to employees, officers, independent consultants and investors. 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 2000 and 1999 the Company issued the following shares under this Plan and additional shares at the direction of the Board of Directors: 2000 1999 ------------------------ ------------------------ Number Expense Number Expense of Shares Recognized of Shares Recognized --------- ---------- --------- ---------- Officers and employees 580,000 $ 266,927 1,100,000 $1,755,000 Consultants 803,000 156,125 369,000 392,333 ------- --------- --------- ---------- 1,383,000 $ 423,052 1,469,000 $2,147,333 ========= ========= ========= ========== The recognition of expense was based on the fair market value of the common stock issued on the date of the grant. Stock Options and Warrants -------------------------- The Company adopted the 1999 Stock Option Plan during 1999. The Plan reserves 4,500,000 shares of the Company's unissued common stock for options. Options, which may be tax qualified and non-qualified, are exercisable for a period of up to ten years at prices at or above market price as established on the date of grant. F-12 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 A summary of the Company's stock option activity and related information for the years ended December 31, 2000 and 1999 is as follows: 2000 ----------------------------------------- Common Weighted Stock Average Range of Options Exercise Price Exercise Prices ------- -------------- --------------- Outstanding at beginning of year 504,860 $ 1.56 $0.01-$2.07 Granted - - - Exercised (87,250) .01 .01 Expired/cancelled (309,920) 2.00 2.00 ------- Outstanding at end of year 107,690 $1.63 $0.01-$2.07 ======= 1999 ----------------------------------------- Common Weighted Stock Average Range of Options Exercise Price Exercise Prices ------- -------------- --------------- Outstanding at beginning of year - $ - $ - Granted 504,860 l.56 0.01-2.07 Exercised - - - Expired/cancelled ------- Outstanding at end of year 504,860 $1.56 $0.01-$2.07 ======= All options issued are immediately exercisable. The Company has issued warrants to purchase the Company's common stock as follows: 2000 ----------------------------------------- Common Weighted Stock Average Range of Warrants Exercise Price Exercise Prices -------- -------------- --------------- Outstanding at beginning of year 454,000 $2.00 $2.00 Granted 3,200,000 1.85 .50-2.25 Exercised (665,000) .50 .50 Expired/cancelled - - - --------- Outstanding at end of year 2,989,000 $1.97 1.25-2.25 ========= F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 2000 ----------------------------------------- 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 ======== During January, 2001 the company cancelled 2,235,000 warrants with an exercise price of $2.00 per share due to non-performance of the warrant holder. 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. 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 expected 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 share would have been changed to the pro forma amounts for the year ended December 31, 1999 as follows: Net income - as reported $ (3,670,896) Net income - pro forma (3,937,524) Net income per share - as reported $ (0.63) Net income per share - pro forma (0.68) There were no stock options granted during the year ended December 31, 2000. 13. RELATED PARTY TRANSACTIONS During the year ended December 31, 1999 the Company redeemed 59,860 shares owed 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 for $117,719 F-14 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 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 share of the Company's common stock. 14. CONCENTRATION OF CREDIT RISK The Company maintains a checking account in a commercial bank. Cash in this checking account at times exceeded $100,000. The checking account is insured by the Federal Deposit Insurance Corporation up to $100,000. F-15
VIEW SYSTEMS, INC. CONSOLIDATED BALANCE SHEET ASSETS September 30, December 31, 2001 2000 ------------- ------------ (Unaudited) CURRENT ASSETS: Cash $ 366,207 $ 265,245 Accounts receivable (net) 562,488 155,017 Inventory 173,442 95,339 ----------- ----------- Total current assets 1,102,137 515,601 ----------- ----------- PROPERTY AND EQUIPMENT: Equipment 416,864 382,609 Leasehold improvements 20,261 20,261 ----------- ----------- 437,125 402,870 Less accumulated depreciation 113,387 79,814 ----------- ----------- Net value of property and equipment 323,738 323,056 ----------- ----------- OTHER ASSETS: Goodwill 809,531 894,383 Investments 28,000 28,000 Due from affiliated entity 105,552 105,552 Due from stockholders 79,099 20,000 Deposits 3,332 832 ----------- ----------- Total other assets 1,025,514 1,048,767 ----------- ----------- TOTAL ASSETS $ 2,451,389 $ 1,887,424 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 393,170 $ 401,247 Note payable bank 6,720 42,083 Notes payable 110,000 110,000 Accrued interest payable 30,250 22,000 Other accrued liabilities 1,490 31,951 Due to stockholder - 2,090 ----------- ----------- Total current liabilities 541,630 609,371 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock par value $0.001 50,000,000 shares authorized, 14,305,000 shares issued and outstanding 14,305 - 11,481,031 shares issued and outstanding - 11,481 Additional paid-in capital 8,875,678 7,364,502 Accumulated deficit (6,980,224) (6,097,930) ----------- ----------- Total stockholders' equity 1,909,759 1,278,053 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,451,389 $ 1,887,424 =========== ===========
See accompanying notes F-16
VIEW SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine months Ended ------------------ ----------------- September 30, September 30, 2001 2000 2001 2000 -------------- ------------ ------------- ----------- REVENUE: Sales of security systems $ 312,353 $ 31,719 $ 744,842 $ 146,979 Sales of assembled electronic components - 34,848 9,512 261,080 ----------- ---------- ------------ ----------- Total sales 312,353 66,567 754,354 408,059 Cost of goods sold 161,675 20,412 360,575 211,168 ----------- ---------- ------------ ----------- GROSS PROFIT ON SALES 150,678 46,155 393,779 196,891 ----------- ---------- ------------ ----------- OPERATING EXPENSES: Advertising and promotion 31,168 1,283 32,294 12,663 Amortization 28,284 27,281 84,852 81,843 Depreciation 11,191 11,293 33,573 33,404 Dues and subscriptions 885 495 2,795 2,741 Insurance 11,443 5,694 28,138 13,174 Interest 3,202 4,022 11,800 15,570 Investor relations 22,525 15,488 73,575 49,353 Miscellaneous expense 249 11,338 9,741 13,777 Office expenses 18,751 26,102 82,208 92,311 Professional fees 75,362 110,757 302,936 282,013 Rent 7,779 26,746 88,752 81,590 Repairs and maintenance 820 1,158 8,560 8,165 Research and development - 34,538 - 143,840 Salaries and benefits 116,961 137,103 422,178 420,032 Sales promotions 11,618 25,796 35,723 74,050 Taxes - other - 362 9,151 4,667 Travel 11,618 4,882 35,723 34,412 Utilities 2,348 4,875 14,074 12,659 ----------- --------- ------------ ----------- Total operating expenses 354,204 449,213 1,276, 073 1,376,264 ----------- --------- ------------ ----------- NET LOSS FOR THE PERIODS $( 203,526) $(403,058) $( 882,294) $(1,179,373) =========== ========= =========== =========== LOSS PER SHARE: Basic $ (0.02) $ (0.05) $ (0.07) $ (0.15) =========== ========= =========== =========== Diluted $ (0.02) $ (0.05) $ (0.07) $ (0.15) =========== ========= =========== ===========
See accompanying notes F-17
VIEW SYSTEMS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD JANUARY 1, 2000 TO SEPTEMBER 30, 2001 Additional Total Common Paid-In Accumulated Stockholders' Stock Capital Deficit Equity --------- ------------ ------------ -------------- Balances at January 1, 2000 $ 7,167 $ 5,334,342 $( 3,893,648) $ 1,447,861 Sale of common stock 1,285 863,991 - 865,276 Stock options exercised 100 978 - 1,078 Net loss for the nine months ended September 30, 2000 - - ( 1,179,373) (1,179,373) --------- ------------ ------------ ----------- Balances at September 30, 2000 (Unaudited) 8,552 6,199,311 ( 5,073,021) 1,134,842 Sale of common stock 1,446 583,044 - 584,490 Stock options exercised 100 978 - 1,078 Issuance of common stock (employee and other compensation) 1,383 581,169 - 582,552 Net loss for the period of October 1, 2000 to December 31, 2000 - - ( 1,024,909) (1,024,909) --------- ------------ ------------ ----------- Balances at December 31, 2000 11,481 7,364,502 ( 6,097,930) 1,278,053 Sale of common stock 2,764 1,486,236 - 1,489,000 Issuance of common stock for services 60 24,940 - 25,000 Net loss for the nine months ended September 30, 2001 - - ( 882,294) ( 882,294) --------- ------------ ------------ ----------- Balances at September 30, 2001 (Unaudited) $ 14,305 $ 8,875,678 $( 6,980,224) $ 1,909,759 ========= ============ ============ ===========
See accompanying notes F-18
VIEW SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED September 30, September 30, 2001 2000 ------------- --------------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $( 882,294) $( 1,179,373) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 118,425 115,247 Stock issued for services 25,000 - Changes in operating assets and liabilities: Accounts receivable ( 407,471) 51,051 Inventory ( 78,103) ( 76,839) Deposit ( 2,500) ( 1,653) Accounts payable ( 8,077) 162,489 Accrued interest 8,250 8,250 Other accrued liabilities ( 30,461) 19,910 ---------- ------------ Net cash used in operating activities (1,257,231) ( 900,918) ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 34,255) ( 34,972) Funds advanced to affiliated entities - ( 12,443) ---------- ------------- Net cash used in investing activities ( 34,255) ( 47,415) ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Funds advanced (to) from shareholders ( 61,189) 60,038 Repayment of note payable - bank ( 35,363) ( 23,166) Proceeds from sales of stock 1,489,000 866,354 ---------- ------------- Net cash provided by financing activities 1,392,448 903,226 ---------- ------------- NET INCREASE/(DECREASE) IN CASH 100,962 ( 45,107) CASH AT BEGINNING OF PERIOD 265,245 89,150 ---------- ------------ CASH AT END OF PERIOD $ 366,207 $ 44,043 ========== ============
See accompanying notes F-19 VIEW SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 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 September 30, 1999, have been devoted primarily to raising capital, developing the technology, promotion, and administrative function. 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 accounting principles generally accepted in the United States. 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. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements" . SAB 101 summarizes certain of the SEC's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of 2000. The adoption of SAB 101 had no impact on the Company's financial position or results of operations. Inventories ----------- Inventories are stated at the lower of cost or market. Cost is determined by the last-in-first-out method (LIFO). Property and Equipment ---------------------- Property and equipment is recorded at cost and depreciated over their estimated useful lives, using the straight-line and accelerated depreciation methods. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts, and the resulting gain or loss is VIEW SYSTEMS, INC. F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 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 nine months ended September 30, 2001 and 2000 amounted to $33,573 and $33,404 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 nine months ended September 30, 2001 and 2000 were $32,294 and $12,668, 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 F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 nonmonetary asset or liability to be based, generally, on the fair value of the asset or liability that is received or surrendered, whichever is more clearly evident. Financial Instruments --------------------- For most financial instruments, including cash, accounts receivable, accounts payable and accruals, management believes that the carrying amount approximates fair value, as the majority of these instruments are short-term in nature. Net Loss Per Common Share ------------------------- Basic net loss per common share ("Basic EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss available to common stockholders by the weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares consist of shares issuable upon the exercise of stock options and warrants. The calculation of the net loss per share available to common stockholders for the nine months ended September 30, 2001 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 September 30, 2001. 2. FINANCIAL CONDITION Since its inception, the Company has incurred significant losses and as of September 30, 2001 had an accumulated deficit of $7.0 million. The tragic events of September 11, 2001 have, however, generated an increased interest in the Company's products and services. While the Company believes that it will incur operating losses in the near term, it is anticipated that increased sales resulting from the heightened interest in security products will have a significantly positive effect on the Company's earnings. However, there can be no assurance that the Company will be able to generate sufficient revenues to achieve or sustain profitability in the future. 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 September 30, 2002. 3. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria for intangible F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 will require goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of the statement. SFAS No. 142 will also require intangible assets with definite useful lives to be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The Company is required to adopt the provision of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Further more, any goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001, will continue to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values for all intangible assets acquired in purchase business combinations, and make any necessary changes to the amortization period by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. The Company is assessing the effects of the adoption of these standards and these potential effects cannot be determined at this time. F-23 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 24 Indemnification of Directors and Officers. The Florida Business Combinations Act (FBCA) authorizes Florida corporations to indemnify any person who was or is a party to any proceeding (other than an action by, or in the right of, the corporation) by reason of the fact that he or she is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, or agent of another corporation or other entity, against liability incurred in connection with such proceeding, including any appeal thereof, if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. Florida law does not provide for indemnification for (i) an act or omission that involves intentional misconduct or a knowing violation of a law, or (ii) payment of improper distributions. In the case of an action by or on behalf of a corporation, indemnification may not be made if the person seeking indemnification is adjudged liable, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification. The indemnification provisions of the FBCA require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding to which he or she was a party by reason of the fact that he or she is or was a director or officer of the corporation. The indemnification authorized under Florida law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or bylaws of the corporation or any agreement between officers and directors and the corporation. A corporation may purchase and maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against the director or officer and incurred by the director or officer in such capacity, or arising out of the status, as an officer or director, whether or not the corporation would have the power to indemnify him or her against such liability under the FBCA. Our Articles of Incorporation provide for the indemnification of directors and executive officers to the maximum extent permitted by Florida law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. There is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification would be required or permitted. We are not aware of any threatened litigation or proceeding that would result in a claim for such indemnification. Item 25. Other Expenses of Issuance and Distribution. The following table sets forth the various estimated expenses to be incurred by us in connection with the registration of the securities being registered hereby, all of which will be borne by us except any underwriting II-1 discounts and commissions and expenses incurred by the selling stockholder for brokerage, accounting or tax services or any other expenses incurred by the selling stockholder in disposing of the shares (other than the reasonable fees and expenses of the selling stockholder's counsel).
SEC Registration Fee $ 881.31 Accounting fees and expenses $ 2,500.00 Legal fees and expenses $ 10,000.00 Printing fees $ 0.00 Transfer agent fees $ 0.00 Miscellaneous $ 1,000.00 -------------- TOTAL $ 14,381.31
Item 26. Recent Sales of Unregistered Securities 1998 (1) On September 30, 1998, we forward split our common stock 2-to-1, thereby increasing the outstanding common stock from 1,000,000 shares to 2,000,000 shares. On September 30, 1998, we entered into a plan of merger to acquire RealView Systems, a Colorado corporation owned by Gunther Than, our President and CEO. On October 28, 1998, we acquired by merger all of the stock of RealView Systems by issuing to the stockholders of RealView systems 2,000,000 shares of our common stock in exchange for their shares of RealView Systems common stock. The shares were issued under Section 4(2) of the Securities Act and Rule 506. The purchasers were accredited investors and all the other conditions of Rule 506 were satisfied. (2) On November 16, 1998, we commenced an offering of common stock at a price of $1.50 per share under Rule 504 of Regulation D promulgated under the Securities Act of 1933. Investors in this offering were provided with a private placement memorandum and each investor executed a subscription agreement, representing, among other things, that the shares were being acquired for investment for their own accounts, and not with a view toward distribution or resale. The offering was made to accredited investors, within the meaning of Rule 501 of Regulation D, with the exception of one non-accredited investor, Marilyn King, a Florida resident who had a preexisting business relationship with us and by reason of her business and financial experience, understood the risks of her investment. The offering was open from November 16, 1998, to February 8, 1999. In total, we offered and sold 666,667 shares as part of this offering, for a total consideration of $1,000,000. Three of the investors in this offering, Martin Maassen, Michael Bagnoli and David Barbara, subsequently became part of our board of directors. 1999 - ---- (1) On February 25, 1999, we acquired all of the issued and outstanding shares of Xyros Systems, Inc., a Maryland corporation, through a share exchange whereby we issued 150,000 of our non-registered, restricted stock to the former stockholders of Xyros in exchange for all of their shares. The former stockholders of Xyros were all Maryland residents. The shares were sold only to accredited investors or sophisticated investors and the other conditions of Rule 506 were satisfied. The shares were exempt from registration pursuant to Rule 506 and Section 4(2) of the Securities Act of 1933. Subsequent to the acquisition, we employed Vincent DeCampo, Thomas G. Weiss and David C. Bruggeman. II-2 (2) On April 7, 1999, our Board of Directors adopted the View Systems, Inc. 1999 Restricted Share Plan, which Plan, and the agreements under the Plan, were subsequently ratified at a special meeting of stockholders held on August 27, 1999. The Plan provides for the issuance of incentive and compensation shares of common stock to our key employees. From April 7, 1999, to July 20, 1999, we issued 706,000 shares under the plan. In addition to being non-registered, restricted shares pursuant to Rule 144 of the Securities Act of 1933, the shares issued under the plan also contained contractual restrictions, which provided that the shares vested over time according to a schedule set forth in the agreement entered into pursuant to the plan. As of October 1, 1999, 526,000 shares had fully vested under the plan and were freely transferable, to the extent transferable under the Securities laws. These shares were issued under Rule 701 promulgated under the Securities Act of 1933. The shares were issued as compensation and were valued at $.50 per share on our financial statements. Gunther Than and Andrew Jiranek were the only executive officers receiving shares under the plan. (3) On May 25, 1999, we acquired all of the stock of ETMC in exchange for the issuance of 250,000 shares of restricted common stock to Lawrence Seiler and cash payments to Lawrence Seiler and/or guaranties of cash payments for the benefit of Larry Seiler. On July 29, 1999, we issued 170,000 shares of restricted common stock in exchange for the cancellation of indebtedness we owed to or for the benefit of Lawrence Seiler. In connection with this issuance, we agreed to register at our expense 100,000 of these shares. Each share issued on July 29, 1999, canceled $2.00 worth of indebtedness. These shares were exempt from registration under Rule 506. Lawrence Seiler is a Maryland resident and a Sales Manager of ETMC. Mr. Seiler is an accredited investor and all the other conditions of Rule 506 were satisfied. (4) On June 17, 1999, in connection with a consulting engagement agreement, we granted to Columbia Financial Group, LLC 200,000 shares of our common stock and five year warrants to purchase a total of 400,000 shares of our common stock at $2.00 per share. The shares of common stock that can be obtained upon exercise of the warrants carry registration rights. Columbia Financial Group, LLC, provides investment relations services, including direct investor relations and broker-dealer relations services, public relations services, publishing services, advertising services and fulfillment services. Its securities were exempt from registration under Section 4(2) of the Securities Act of 1933 and Rule 506. The purchaser is an accredited investor and all the other conditions of Rule 506 were satisfied. (5) On July 2, 1999, we issued 250,000 shares of restricted common stock and options to purchase 250,000 shares at an exercise price of $2.00 per share to Gunther Than, President, CEO and a Director in connection with the acquisition of ETMC. Mr. Than acquired this stock pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506. The purchaser is an accredited investor and all the other conditions of Rule 506 were satisfied. (6) On July 2, 1999, we issued 13,333 shares to Leokadia Than because she exchanged a RealView Systems stock certificate in the amount of 10,000 shares that she had obtained from Keith Bosworth, a former stockholder of RealView Systems. We had agreed to exchange 1.33 of its shares of common stock in exchange for every share of stock of RealView Systems. Ms. Than acquired this stock pursuant to Rule 506 promulgated under the Securities Act of 1933. The purchaser is an accredited investor and all the other conditions of Rule 506 were satisfied. II-3 (7) On July 19, 1999, we issued 300,000 shares of common stock to Gunther Than as consideration under an executive employment agreement he entered into with us, in which he agreed to a restrictive, non-compete, non-solicit covenant running to our benefit. These shares of restrictive common stock were issued under Section 4(2) of the Securities Act of 1933 and Rule 506. These shares were issued as compensation and were valued at $.50 per share. (8) On August 2, 1999, we commenced an offering under Rule 506 of Regulation D promulgated under the Securities Act of 1933. Investors in this offering were provided with a private placement memorandum and each investor executed a subscription agreement, representing, among other things, that the shares were being acquired as an investment for their own accounts, and not with an eye toward distribution or resale. The offering was made to Accredited Investors, within the meaning of Rule 501 of Regulation D. From August 2, 1999, to August 18, 1999, when we closed the offering. (9) On October 29, 1999, we issued 100,000 shares to two accredited Maryland resident investors who are working for Columbia Financial Group, LLC, our investor relations firm. These investors, Jim Price and Tim Rieu, purchased 50,000 shares each for $1.00 per share and executed subscription agreements. As condition of their subscription for shares, we agreed to register their shares in our next registered offering under the Securities Act of 1933. These securities were issued under Section 4(2) of the Securities Act of 1933 and Rule 506. The purchaser is an accredited investor and all the other conditions of Rule 506 were satisfied. (10) Also, on October 29, 1999, we agreed to issue 200,000 shares to Leokadia Than in exchange for satisfaction of loan indebtedness of $210,000 ($177,000 in principal loans, plus $33,000 in accrued interest). As part of Leokadia Than's subscription agreement, we agreed to register 50,000 shares in our next registered offering under the Securities Act of 1933. These securities were issued under Section 4(2) of the Securities Act of 1933 and Rule 506. The purchaser is an accredited investor and all the other conditions of Rule 506 were satisfied. (11) On November 11, 1999, we commenced an offering of securities under Rule 506 of Regulation D of the Securities Act of 1933. Each investor was given a private placement memorandum prior to acceptance of any subscription in the offering and each executed a subscription agreement, representing, among other things, that the shares are being acquired for investment purposes only. We sold 285,727 shares at a price of $1.75 per share, for total sales proceeds of $500,026. As a condition of investment in this offering, we agreed to register the shares purchased by investors in our next registered offering under the Securities Act of 1933. We believed that each investor was capable of evaluating the merits and risks of investment immediately prior to making such sale. All of the other conditions of Rule 506 were met. We closed this offering on January 8, 2000. (12) On December 9, 1999, in connection with 2 consulting agreements, we granted 5 year warrants to purchase shares of our common stock at $2.00 per share. The warrants were granted to Tom Cloutier, a California resident (44,000 shares), and Guy Parr, a Maryland resident (10,000 shares) and carried registration rights. The shares were issued under Section 4(2) of the Securities Act of 1933 and Rule 506. Tom Clothier is a sophisticated investor who has been working substantially for us since November, 1998, and Guy Parr is an accredited investor. II-4 2000 - ---- (1) On February 18, 2000, we sold to Rubin Investment Group, an accredited investor a total of 800,000 shares and warrants to acquire an aggregate of up to 2,500,000 shares, of which 1,500,000 expire on the later of August 31, 2000 or the 30th day following the effective date of a registration statement covering the sale of the underlying shares and 1,000,000 expire in three years from the date of the purchase. We agreed to register the shares and the shares received upon warrant exercises. Rubin Investment Group purchased its shares in an offering conducted under Section 4(2) and Rule 506 of the Securities Act of 1933. During April and May, 2000, Rubin Investment Group partially exercised the warrants to the extent of providing us with cash and property with a value of $230,000 and receiving 265,000 shares of our common stock. We modified these agreements of May 22, 2000, to permit Rubin Investment Group to acquire 200,000 shares for $100,000. All of Rubin's outstanding warrants were subsequently cancelled by us due to Rubin's failure to perform under the contract. (2) In July, 2000, we entered into a consulting agreement with Magnum Financial Group, LLC, an accredited investor, in which we agreed to pay $5,000.00 per month for six months, 25,000 shares of common stock and five year warrants exercisable immediately to purchase 200,000 shares at exercise prices of $1.25 for 100,000 shares, $1.75 for 50,000 shares and $2.25 for 50,000 shares in exchange for investor and public relations services. We also agreed to register for resale at our expense the shares underlying the warrants. The 100,000 shares underlying the warrants exercisable at $1.25 per share were subsequently registered in our Registration Statement on Form SB-2 filed on April 16, 2001. These securities were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. (3) In September, 2000, we entered into a consulting agreement with Columbia Financial Group, LLC, an accredited investor, pursuant to which we agreed to issue to them 500,000 shares and three year warrants to purchase 500,000 shares at an exercise price of $1.00 per share in exchange for investor and public relation services. The shares and warrants were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. 100,000 of the shares and the 500,000 shares underlying the warrants were subsequently registered in our Registration Statement on Form SB-2 filed on April 16, 2001. (4) In October, 2000 we entered into a consulting agreement with John Clayton, an accredited investor, pursuant to which we agreed to issue 500,000 shares of our common stock in consideration for certain business consulting and corporate development services. The shares were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. The 500,000 shares were subsequently registered in our Registration Statement on Form SB-2 dated April 16, 2001. (5) In October 2000, we commenced an offering of securities pursuant to which we issued 443,000 shares of our common stock at prices ranging from $.25 to $.50 from October to December, 2000 to eight persons, all of whom were accredited investors, in which we raised $90,000. The shares were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. (6) In December, 2000, we agreed to sell to each of Mid-West First National, Inc. and Pacific First National, Inc., accredited investors, in a private placement 1,000,000 Units at a price of $.40 per Unit. Each Unit consists of one share of common stock and a five year warrant to purchase an additional share of common at an exercise price of $.50 per share. In connection with the sale of the shares, the purchaser agreed to provide certain financial consulting services and we agreed to grant them certain rights of first refusal with respect to future public offerings. The 1,000,000 shares acquired by each of the above purchasers were subsequently registered on our Registration Statement on Form SB-2 dated August 1, 2001. These securities were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. II-5 2001 - ---- (1) In July, 2001, we agreed to sell to Oxford Group, Inc., accredited investors, in a private placement 500,000 shares of our common stock at a price of $.30 per share or $150,000. The 500,000 shares acquired by Oxford Group, Inc. were subsequently registered under our Registration Statement on Form SB-2 filed on August 7, 2001. These securities were exempt from registration under Section 4(2) of the Securities Act. (2) In September, 2001, we entered into a consulting agreement with Columbia Financial Group, an accredited investor, ("Columbia") in which we agreed to issue to Columbia warrants for 1,000,000 shares of common stock at an exercise price of $.30 per share and 750,000 shares of common stock at an exercise price of $.20 per share in consideration for certain investor and public relations consulting services. These securities were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act.As part of the agreement, we agreed to register for resale at our expense all of the shares underlying the warrants. This registration statement includes the 1,750,000 shares underlying the warrants issued to Columbia. (3) In October, 2001, we agreed to sell to each of Liberty Partners, LLC ("Liberty") and Empire Fund Managers, LLC ("Empire"), each an accredited investor, in a private placement, 1,000,000 Units at a price of $.50 per Unit or $500,000 from each. Each Unit consists of one share of common stock and a three month warrant to purchase an additional share of common stock at an exercise price of $.70 per share. These securities were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. As part of the agreement we agreed to register for resale at our expense all of the shares sold to each of Liberty and Empire, and all of the shares underlying the warrant sold toeach of them. This registration statement includes all such shares. (4) In December, 2001 we entered into a Joint Development Agreement with Milestone Technology Inc. ("Milestone"), an accredited investor, in which we agreed to issue 500,000 shares of our common stock in exchange for six percent of the outstanding stock of Milestone. These securities were exempt from registration under Section 4(2) and Rule 506 under Regulation D of the Securities Act. As part of the agreement we agreed to register for resale, at our expense, the shares issued to Milestone. This registration statement includes the 500,000 shares to be issued to Milestone in the share exchange. II-6 EXHIBITS 1.1 INDEX OF EXHIBITS 2.1 View Systems, Inc. Board of Directors Resolutions approving Acquisition Agreement and Plan of Reorganization With RealView Systems, Inc; Resolution of stockholders and Board of Directors of Real View Systems, Inc. approving Acquisition Agreement and Plan of Reorganization With Real View Systems, Inc. (1) 2.2 View Systems, Inc. Board of Directors Resolutions approving Acquisition Agreement and Plan of Reorganization With RealView Systems, Inc; Resolution of stockholders and Board of Directors of Real View Systems, Inc. approving Acquisition Agreement and Plan of Reorganization With Real View Systems, Inc. (1) View Systems, Inc. Acquisition Agreement and Plan of Reorganization with Xyros Systems, Inc. (1) 2.3 View Systems, Inc. Acquisition Agreement and Plan of Reorganization with ETMC(1) 2.4 Letter of Intent to Form Joint Venture Corporation Between NetServ Caribbean, Ltd. and View Systems, Inc. (1) 2.5 Joint Development Agreement between View Systems, Inc. and Milestone Technology Inc.* 3.1 Articles of Incorporation and all Articles of Amendment of View Systems, Inc. (1) 3.2 By-Laws of View Systems, Inc. (1) 5.1 Consent of Counsel Regarding Legality.* 10.1 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. (1) 10.2 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. (1) 10.3 Subscription Agreement Between View Systems, Inc. and Lawrence Seiler for 170,000 Shares, Granting Registration Rights to 100,000 Shares. (1) 10.4 Lock-Up Agreement With Lawrence Seiler.(1) 10.5 Subscription Agreement Between View Systems, Inc. and Leokadia Than. (1) 10.6 Form of Subscription Agreement Between View Systems, Inc. and Jim Price and Tim Rieu. (1) 10.7 Subscription and Investment Representation Agreement between View Systems, Inc. and Rubin Investment Group, dated February 18, 2000. (2) 10.8 First Common Stock Purchase Warrant between View Systems, Inc. and Rubin Investment Group, dated February 18, 2000. (2) 10.9 Second Common Stock Purchase Warrant between View Systems, Inc. and Rubin Investment Group, dated February 18, 2000. (2) 10.10 Registration Rights Agreement between View Systems, Inc. and Rubin Investment Group, dated February 18, 2000. (2) 10.11 Non-qualified Stock Option Agreement with Richard W. Gray. (6) 10.12 Amendment to First Purchase Common Stock Warrant, Dated February 18,2000, Second Purchase Common Stock Warrant, Dated February 18, 2000, and Subscription and Investment Agreement, Dated February 18, 2000, Between View Systems and Rubin Investment Group. (7) 10.13 View Systems, Inc. 2000 Restricted Share Plan (8) 10.14 Second Amendment to First Purchase Common Stock Warrant, Dated February 18, 2000, Second Purchase Common Stock Warrant, Dated February 18, 2000, and Subscription and Investment Agreement, Dated February 18, 2000, Between View Systems and Rubin Investment Group. (9) II-7 10.15 View Systems, Inc. Employment Agreement with Gunther Than. (1) 10.16 View Systems, Inc. Employment Agreement with Andrew L. Jiranek. (1) 10.17 View Systems, Inc. Engagement Agreement with Bruce Lesniak. (1) 10.18 View Systems, Inc. Employment Agreement with David Bruggeman. (1) 10.19 Eastern Tech Mfg. Corp. Employment Agreement with John Curran. (1) 10.20 Lease Agreement Between View Systems, Inc. and Lawrence Seiler. (1) 10.21 Stock Redemption Agreement, dated May 27, 1999, Between View Systems, Inc. and Gunther Than. (1) 10.22 Stock Redemption Agreement, dated September 30, 1999, Between View Systems, Inc. and Gunther Than. (1) 10.23 View Systems, Inc. 1999 Restricted Share Plan. (1) 10.24 Restricted Share Agreement with Bruce Lesniak (Lesniak & Associates). (1) 10.25 Restricted Share Agreement with John Curran. (1) 10.26 Restricted Share Agreement with David Bruggeman. (1) 10.27 Restricted Share Agreement with Gunther Than. (1) 10.28 Restricted Share Agreement with Andrew Jiranek. (1) 10.29 Restricted Share Agreement with Linda Than. (1) 10.30 View Systems, Inc. 1999 Employee Stock Option Plan. (1) 10.31 Non-qualified Stock Option Agreement with Gunther Than. (1) 10.32 Non-qualified Stock Option Agreement with Andrew Jiranek. (1) 10.33 Qualified Stock Option Agreement with Gunther Than. (1) 10.34 Qualified Stock Option Agreement with Andrew Jiranek. (1) 10.35 Promissory Notes from Xyros Systems, Inc. to Ken Weiss. (1) 10.36 Promissory Notes from Xyros Systems, Inc. to Hal Peterson. (1) 10.37 Loan Agreement Between Xyros Systems, Inc. and Columbia Bank. (1) 10.38 Letter From Columbia Bank Extending Term of Loan. (1) 10.39 License and Distribution Agreement with Visionics Corporation. (5) 10.40 License and Distribution Agreement with Lead Technologies, Inc. for Video OCR Software. (3) 10.41 License and Distribution Agreement with Anasoft Systems for Microsoft Operating System Software. (3) 10.42 License and Distribution Agreement with Aware, Inc. for Compression Software. (3) 10.43 Typical Non-Exclusive Reseller Agreement. (5) 10.44 Schedule of Contracted Resellers. (5) 10.45 Agreement between View Systems, Inc. and Magnum Financial Services, Inc., dated February 27, 2000. (5) 10.46 View Systems, Inc. Employment Agreement with Keith Company. (5) 10.47 Unit Purchase Agreement between View Systems, Inc., Liberty Partners, LLC and Empire Fund Managers, LLC, dated October 1, 2001.* 16.1 Letter From Katz, Abosch, Windesheim, Gershman & Freedman, P.A. to View Systems, Inc., dated April 11, 2000. (4) 21.1 Subsidiaries of Registrant. (1) 23.1 Consent of Davis, Sita & Company.(11) 23.2 Consent of Stegman & Company.(11) 23.3 Consent of Stegman & Company.(12) 23.4 Consent of Stegman & Company* II-8 99.1 Consulting Agreement with Columbia Financial Group, LLC Granting Warrants and Stock and Granting Piggyback Registration Rights. (1) 99.2 Consulting Agreement with Tom Cloutier Granting Warrants and Registration Rights. (1) 99.3 Consulting Agreement with Guy Parr Granting Warrants and Registration Rights. (1) 99.4 Form of Stock Certificate. (1) 99.5 Consulting Agreement with Magnum Worldwide Investments, Ltd. (1) 99.6 Consulting Agreement with Mid-West First National, Inc. (10) 99.7 Consulting Agreement with Pacific First National, Corp.(10) 99.8 Consulting Agreement with Columbia Financial Group, LLC (10) 99.9 Consulting Agreement with John Clayton* (11) 99.10 Consulting Agreement with Magnum Financial Group, LLC (10) 99.11 Letter to Rubin Investment Group dated March canceling its warrants (11) 99.12 Consulting Agreement with Columbia Financial Group, LLC, dated September 10, 2001* - ----------------------------------------- (1) Incorporated By Reference from Registrant's Registration Statement on Form SB-2 Filed With the Commission On January 11, 2000 (2) Incorporated By Reference From Registrant's Report on Form 8K, dated February 19, 2000. (3) Incorporated By Reference From Registrant's Report on Form 10KSB, Dated March 30, 2000. (4) Incorporated By Reference From Registrant's Report on Form 8K, Dated April 13, 2000. (5) Incorporated By Reference From Registrant's Statement on Form SB-2/A, Dated April 27, 2000. (6) Incorporated By Reference From Registrant's Form 10 QSB, Dated May 15,2000. (7) Incorporated By Reference to Registrant's Registration Statement on Form SB-2/A, dated June 7, 2000. (8) Incorporated By Reference to Registrant's Definitive Proxy Statement On Schedule 14A, dated May 3, 2000. (9) Incorporated By Reference to Registrant's Registration Statement on Form SB-2/A, dated July 20, 2000. (10) Incorporated By Reference to Registrant's Registration Statement on Form SB-2, dated February 2, 2001. (11) Incorporated by Reference to Registrant's Registration Statement on Form SB-2, dated April 16, 2001. (12) Incorporated By Reference to Registrant's Registration Statement on Form SB-2, dated August 1, 2001. ---------------------------------- * attached to registration statement. II-9 Item 28. Undertakings. The undersigned Registrant hereby undertakes: (1) To file with the SEC, during any period in which offers or sales are being made in reliance on Rule 415 of the Securities Act, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in such prospectus any facts or events that exist which, individually or together, represent a fundamental change in the information contained in the registration statement; provided, however, that notwithstanding the foregoing, any increase or decrease in volume of the securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (iii)To include any material information with respect to the plan of distribution. (2) For purposes of determining any liability under the Securities Act, to treat each post-effective amendment as a new registration statement relating to the securities offered and the offering of such securities at that time to be the initial bona fide offering. (3) To file a post-effective amendment to remove from registration any of the securities being registered which remain unsold at the termination of the offering. For determining any liability under the Securities Act, the Registrant hereby undertakes: (1) to treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the SEC declared it effective; and (2) to treat each post-effective amendment that contains a form of prospectus as a new registration statement relating to the securities offered therein, and the offering of such securities at that time as the initial bona fide offering of the securities. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding, is asserted by the director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been II-10 settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether the indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of that issue. II-11 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of a filing on Form SB-2 and authorized this registration statement to be signed on behalf of the undersigned in the City of Baltimore Maryland, on December 6, 2001. VIEW SYSTEMS, INC. By: /s/ Gunther Than ---------------- Gunther Than, President, Chief Executive Officer and Director In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated. /s/ Gunther Than President, December 6, 2001 - ---------------- Gunther Than Chief Executive Officer and Director /s/ Martin Maassen Chairman of the Board December 6, 2001 - ------------------ Martin Maassen /s/ Michael Bagnoli Director December 6, 2001 - ------------------- Michael Bagnoli II-12 EX-2.5 4 agt0496.txt EXHIBIT 2.5 JOINT DEVELOPMENT AGREEMENT EXHIBIT 2.5 JOINT DEVELOPMENT AGREEMENT Milestone Technology Inc. of 1820 East 17th Street, Idaho Falls, Idaho, 83404, owners of certain Security Technologies, hereinafter referred to as Milestone. And View Systems, Inc. of 1100 Wilso Drive, Baltimore, MD owners of certain video security technologies, hereinafter referred to as View. WHEREAS, Milestone has obtained and developed a proprietary "Concealed Weapons and Metal Detector" (CWD) product, and is desirous of entering into a joint development agreement (JDA) for the purpose of combining Milestone technology with View technology, to develop a more comprehensive product. WHEREAS, View is established in digital video, character and facial recognition in the security industry, they desire to collaborate with Milestone to enhance the "Concealed Weapons and Detection System" product and other products produced by View. SCOPE OF AGREEMENT - Prior to the development efforts the parties agree that funding will be needed. For Milestone, approximately $1M will be required to expense earlier technology development and proceed with development of enhanced and integrated technology. Milestone will contribute 6% of their stock as in-kind value for this development effort and View will provide a minimum of 500,000 shares of its common stock as an exchange of like kind. View will register the above shares in a public filing for funding purposes. Phase I: A scope of work will then be developed to define enhanced products or integrated products to be marketed by either or both Milestone and View. Phase II: This phase of development will include the actual physical and electrical integration of both View and Milestone technologies. SCHEDULE: A definitive project plan will be developed immediately following availability of funds, via sale of View Systems, Inc. stock by Milestone. Milestone reserves the right to review any documents which will be filed with SEC regarding this transaction. And also determine when the View Systems, Inc. stock will be sold and at what price. Funds will be directed as needed for prototype product engineering, software development and packaging efforts as well as ancillary procurement of parts, inventory and related operating expenses. If, within a one-year period from the date of this agreement, the View System stock is not sold by Milestone, View Systems, Inc., agrees to return 3% (or half of the amount described above,) of the Milestone stock to Milestone. Similarly, Milestone will retain the View Systems, Inc. stock for an undetermined period. Phase II Start Date: TBD, by View and Milestone. APPROVALS: DATE: December 4, 2001 /s/ - ---------------------------------- ------------------------------------------ Milestone Technology, Inc. View Systems, Inc. EX-5.1 5 exh5-1edg0497.txt OPINION OF GFRHH EX-5.1 Opinion of GFRH&H LAW OFFICES GORDON, FEINBLATT, ROTHMAN, HOFFBERGER & HOLLANDER, LLC THE GARRETT BUILDING 233 EAST REDWOOD STREET BALTIMORE, MARYLAND 21202-3332 410-576-4000 ----------- Telex 908041 Fax 410-576-4246 December 7, 2001 View Systems, Inc. 9693 Gerwig Lane, Suite O Columbia, Maryland 21046 Re: View Systems, Inc. Registration Statement on Form SB-2 Ladies and Gentlemen: We have acted as counsel to View Systems, Inc. (the "Company"), a Florida corporation, in connection with the possible resale by certain selling stockholders of up to 6,250,000 shares of the Company's Common Stock, par value $.001 per share (the "Common Stock") pursuant to a Registration Statement on Form SB-2 (the "Registration Statement") filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"). The shares being registered are currently owned by the selling stockholders or will be acquired upon exercise of outstanding warrants. We have examined copies of (i) the Articles of Incorporation of the Company, (ii) the Bylaws of the Company, (iii) the Registration Statement, and (iv) resolutions adopted by the Board of Directors of the Company relating to the matters referred to herein. Based upon the foregoing, it is our opinion that the Common Stock is duly and validly authorized and fully paid and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement. In giving this opinion, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Act. Very truly yours, /s/ Gordon, Feinblatt, Rothman, Hoffberger, & Hollander, LLC ------------------------------------------- GORDON, FEINBLATT, ROTHMAN, HOFFBERGER & HOLLANDER, LLC EX-10.47 6 agt0479.txt EXHIBIBIT 10.47 UNIT PURCHASE AGREEMENT EXHIBIT 10.47 UNIT PURCHASE AGREEMENT THIS UNIT PURCHASE AGREEMENT, dated as of October 1, 2001 (the "Agreement") between View Systems, Inc., a Florida corporation with offices at 925 West Kenyon Avenue, Suite 15, Englewood, Colorado 81106 (the "Company") and the persons and/or entities listed on the Schedule of Investors attached hereto as Exhibit E (collectively referred to as the "Investors"). RECITALS WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investors, and the Investors shall purchase up to 2,000,000 Units (as defined below) (the "Units"). WHEREAS, the investment will be made in reliance upon the provisions of Section 4(2) and Regulation D of the United States Securities Act of 1933, as amended, and the regulations promulgated thereunder, and/or upon such other exemptions from the registration requirements of the Securities Act as may be available with respect to any and all of the investments to be made hereunder. NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I Certain Definitions Section 1.1 "Capital Shares" shall mean the Common Stock and any shares of any other class of Common Stock whether now or hereafter authorized, having the right to participate in the distribution of earnings and assets of the Company. Section 1.2 "Capital Shares Equivalents" shall mean any securities, rights, or obligations that are convertible into or exchangeable for, or giving any right to, subscribe for any Capital Shares of the Company or any warrants, options or other rights to subscribe for or purchase Capital Shares or any such convertible or exchangeable securities. Section 1.3 "Closing" shall mean one of the closings of the purchase and sale of the Units pursuant to Article 11 below. Section 1.4 "Closing Date" shall mean the date of the closing of the purchase and sale of the Units pursuant to Article II below. Section 1.5 "Common Stock" shall mean the Company's common stock, $0.001 par value per share. Section 1.6 "Damages" shall mean any loss, claim, damage, liability, costs and expenses which shall include, but not be limited to, reasonable attorney's fees, disbursements, costs and expenses of expert witnesses and investigation. Section 1.7 "Effective Date" shall mean the date on which the SEC first declares effective the Registration Statement. Section 1.8 "Escrow Aunt" shall mean the law firm of Daniel W. Jackson, pursuant to the terms of the Escrow Agreement attached as Exhibit B. Section 1.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Section 1.10 "Legend" shall have the meaning set forth in Article VIII below. Section 1.11 "Material Adverse Effect" shall mean any effect on the business, operations, properties, earnings, prospects, Bid Price, trading volume of the Common Stock, or financial condition of the Company that is material and adverse to the Company and its subsidiaries and affiliates, taken as a whole, and/or any condition, circumstance, or situation that would prohibit or otherwise in any material respect interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement, the Registration Rights Agreement and the Escrow Agreement. Section 1.12 "NASD" shall mean the National Association of Securities Dealers, Inc. Section 1.13 "Outstanding" when used with reference to shares of Common Stock, or Capital Shares (collectively the "Shares"), shall mean, at any date as of which the number of such Shares is to be determined, all issued and outstanding Shares, and shall include all such Shares issuable in respect of outstanding scrip or any certificates representing fractional interests in such Shares; provided, however, that Outstanding shall not mean any such Shares then directly or indirectly owned or held by or for the account of the Company. Section 1.14 "Person" shall mean an individual, a corporation, a partnership, an association, a limited liability company, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.15 "Principal Market" shall mean the OTC Bulletin Board, Nasdaq National Market, the Nasdaq Small Cap Stock Market, the American Stock Exchange, or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.16 "Registrable Securities" shall have the definition set forth in the Registration Rights Agreement. -2- Section 1.17 "Registration Rights Agreement" shall mean the agreement regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company, and the Investors. Section 1.18 "Registration Statement" shall mean a registration statement on Form SB-2, for the registration of the resale by the Investors of the Registrable Securities under the Securities Act. Section 1.19 "Regulation D" shall have the meaning set forth in the recitals of this Agreement. Section 1.20 "SEC" shall mean the Securities and Exchange Commission. Section 1.21 "Section 4(2)" shall have the meaning set forth in the recitals of this Agreement. Section 1.22 "Securities Act" shall have the meaning set forth in the recitals of this Agreement. Section 1.23 "Warrants" shall mean Common Stock Purchase Warrant, annexed hereto as Exhibit C. Section 1.24 "Warrant Shares" shall mean all shares of Common Stock or other securities issued or issuable pursuant to the exercise of the Warrants. ARTICLE II Purchase and Sale of the Preferred Stock and Warrants Section 2.1 Closings. The Company will sell, and the Investors will buy, on the Closing Date 2,000,000 Units at a per unit price of $0.50. Section 2.2 Form of Payment. The Investors shall pay the Purchase Price by delivering good funds in United States Dollars by check or wire transfer to the Escrow Agent, against delivery of the original shares of Warrants. The parties have entered into an Escrow Agreement annexed hereto as Exhibit B. Section 2.3 Wire Instructions. Wire instructions for the Escrow Agent can be arranged by contacting the law office of Daniel W. Jackson (801) 596-8338. Section 2.4 Units. Each Unit is comprised of a share of the Company's common stock, and one Common Stock Purchase Warrant which shall be exercisable beginning on the Closing Date and extending for a three month period thereafter and shall grant to the investor or holder thereof the right to purchase one additional share of the Company's common stock at a price of $0.70 per share. The common share and warrants shall be delivered by the Company to the Escrow Agent and delivered to the Investor pursuant to the terms of this -3- Agreement and the Escrow Agreement. The common share and the warrant share shall be registered for resale pursuant to the Registration Rights Agreement. Section 2.5 Closings. The closings are as follows: (i) Acceptance by the Investor of this Purchase Agreement and due execution by all parties of this Agreement and the Exhibits annexed hereto; (ii) Delivery into escrow by the Company of the original Initial Shares, original Warrant as more fully set forth in the Escrow Agreement attached hereto; (iii) Delivery into escrow by the Investors of the Purchase Price as set forth in the Escrow Agreement annexed hereto; (iv) All representations, covenants, and warranties of the Company contained herein shall remain true and correct in all material respects as of Closing Date; ARTICLE III Representations and Warranties of the Investors The Investor represents and warrants to the Company that: Section 3.1 Intent. The Investor is entering into this Agreement for its own account and has no present arrangement (whether or not legally binding) at any time to sell the Common Stock to, or through any person or entity; provided, however, that by making the representations herein, the Investor does not agree to hold the Common Stock for any minimum or other specific term and reserves the right to dispose of the Common Stock at any time in accordance with federal and state securities laws applicable to such disposition. Section 3.2 Sophisticated Investors. The Investors are described in Rule 506(b)(2)(11) of Regulation D) and a accredited investor (as defined in Rule 501 of Regulation D), and have such experience in business and financial matters that they are capable of evaluating the merits and risks of an investment in the Units. The Investors acknowledge that an investment in the Common Stock is speculative and involves a high degree of risk. Section 3.3 Authority. This Agreement has been duly authorized and validly executed and delivered by the Investors and is a valid and binding agreement of the Investor enforceable against each of it in accordance with its terms, subject to applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Section 3.4 Not an Affiliate. The Investors are not an officer, director or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of the Company. -4- Section 3.5 Organization and Standing. The Investors are duly organized, validly existing, and in good standing under the laws of the countries and/or states of their incorporation or organization. Section 3.6 Absence of Conflicts. The execution and delivery of this Agreement and any other document or instrument executed in connection herewith, and the consummation of the transactions contemplated thereby, and compliance with the requirements thereof, will not violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on Investors, or, to the Investors knowledge, (a) violate any provision of any indenture, instrument or agreement to which the Investor is a party or is subject, or by which the Investors or any of their assets is bound; (b) conflict with or constitute a material default thereunder; (c) result in the creation or imposition of any lien pursuant to the terms of any such indenture, instrument or agreement, or constitute a breach of any fiduciary duty owed by Investors to any third party; or (d) require the approval of any third-party (which has not been obtained) pursuant to any material contract, agreement, instrument, relationship or legal obligation to which the Investors are subject or to which any of their assets, operations or management maybe subject. Section 3.7 Disclosure; Access to Information. The Investors have received all documents, records, books and other information pertaining to Investors' investment in the Company that have been requested by Investors, including the opportunity to ask questions and receive answers. The Investors have reviewed or received copies of any such reports that have been requested by it. The Investors represent that they have reviewed the Company Reports. Section 3.8 Manner of Sale. At no time was the Investors presented with or solicited by or through any leaflet, public promotional meeting, television advertisement or any other form of general solicitation or advertising. Section 3.9 Registration or Exemption Requirements. The Investors further acknowledges and understands that the Securities may not be transferred, resold or otherwise disposed of except in a transaction registered under the Securities Act and any applicable state securities laws, or unless an exemption from such registration is available. The Investors understand that the certificate(s) evidencing the Common Shares, and Warrants will be imprinted with a legend that prohibits the transfer of these securities unless (1) they are registered or such registration is not required, or (ii) if the transfer is pursuant to an exemption from registration (with no limitations). Section 3.10 No Legal, Tax or Investment Advice. The Investors understand that nothing in this Agreement or any other materials presented to the Investors in connection with the purchase and sale of the Units constitutes legal, tax or investment advice. The Investors have relied on, and have consulted with, such legal, tax and investment advisors as they, in their sole discretion, have deemed necessary or appropriate in connection with their purchase of the Units. -5- ARTICLE IV Representations and Warranties of the Company The Company represents and warrants to the Investors that: Section 4.1 Organization of the Company. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of Florida and has all requisite corporate authority to own its properties and to carry on its business as now being conducted except as described in the Company Documents. The Company is duly qualified to do business as a foreign corporation and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, other than those in which the failure so to qualify would not reasonably be expected to have a Material Adverse Effect Section 4.2 Authority. (1) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, and all Exhibits annexed hereto, and to issue the Common Shares, Warrants, and Warrant Shares, (11) the execution, issuance and delivery of this Agreement, and all Exhibits annexed hereto, by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no further consent or authorization of the Company or its Board of Directors, and (iii) this Agreement, and all Exhibits annexed hereto, have been duly executed and delivered by the Company and constitute valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application. Upon their issuance and delivery pursuant to this Agreement, the Common Shares, Warrants and Warrant Shares, will be validly issued, fully paid and nonassessable and will be free of any liens or encumbrances other than those created hereunder or by the actions of the Investor; provided, however, that the Common Shares, Warrants and Warrant Shares, are subject to restrictions on transfer under state and/or federal securities laws. The issuance and sale of the Common Shares, Warrants and Warrant Shares, under will not give rise to any preemptive right or right of first refusal or right of participation on behalf of any person. Section 4.3 Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.001 par value per share, as of June 30, 2001, the Company reported in it's Form 10-QSB filing that the Company's issued and outstanding was 15,225,620 shares. All of the outstanding shares of Common Stock of the Company has been duly and validly authorized and issued and are fully paid and nonassessable. No shares of Common Stock are entitled to preemptive or similar rights. To the knowledge of the Company, no Person or group of Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated under the Exchange Act) or has the night to acquire by agreement with or by obligation binding upon the Company beneficial ownership of in excess of five percent of the Common Stock. -6- Section 4.4 Common Stock. The Common Stock has been registered pursuant to Section 12(g) of the Exchange Act. The Common Stock is currently listed or quoted on the OTC Bulletin Board under the symbol VYST. Section 4.5 Company Documents. The Company has delivered or made available to the Investor true and complete copies of the Company Documents. The Company has not provided to the Investor any information that, according to applicable law, rule or regulation, should have been disclosed publicly prior to the date hereof by the Company, but which has not been so disclosed. None of the Company Documents contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the Company Documents comply as to form in all material respects with applicable accounting requirements. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended. Section 4.6 Valid Issuances. When issued and payment has been made therefor, Common Shares, Warrants and Warrant Shares, sold to the Investors will be duly and validly issued, fully paid, and nonassessable. Neither the issuance of the Common Shares, Warrants and Warrant Shares to the Investors, pursuant to, nor the Company's performance of its obligations under this Agreement, and all Exhibits annexed hereto will (i) result in the creation or imposition by the Company of any liens, charges, claims or other encumbrances upon the securities issued to the Investors, or any of the assets of the Company, or (11) entitle the holders of Outstanding Capital Shares to preemptive or other rights to subscribe to or acquire the Capital Shares or other securities of the Company. Section 4.7 No General Solicitation or Advertising in Regard to this Transaction. Neither the Company nor any of its affiliates nor any distributor or any person acting on its or their behalf (i) has conducted or will conduct any general solicitation (as that term is used in Rule 502(c) of Regulation D) or general advertising with respect to the Units, or (ii) made any offers or sales of any security or solicited any offers to buy any security under any circumstances that would require registration of the Units under the Securities Act. Section 4.8 Corporate Documents. The Company has furnished or made available to each of the Investors true and correct copies of. (i) the Company's Articles of Incorporation, as amended and in effect on the date hereof-, (ii) the Company's by-laws, as amended and in effect on the date hereof (the "By-Laws"); (iii) Form 10 Registration Statement; and (iv) Form 10-K and 10Q report. Section 4.9 No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, including without limitation the issuance of -7- the Common Shares, Warrants and Warrant Shares, do not and will not (i) result in a violation of the Company's Articles of Incorporation or By-Laws, or (ii) conflict with, or constitute a material default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture, instrument or any "lock-up" or similar provision of any underwriting or similar agreement to which the Company is a party, or (111) result in a violation of any federal, state or local law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations) applicable to the Company or by which any property or asset of the Company is bound or affected, nor is the Company otherwise in violation of, conflict with or in default under any of the foregoing as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental entity, except for possible violations that either singly or in the aggregate would not reasonably be expected to have a Material Adverse Effect. The Company is not required under federal, state or local law, rule or regulation to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement (including all Exhibits annexed hereto) or to issue and sell the Common Shares, Warrants and Warrant Shares in accordance with the terms hereof, provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Investors herein. Section 4.10 No Material Adverse Change. Since September 28, 2001, no Material Adverse Effect has occurred or exists with respect to the Company, except as publicly announced. Section 4.11 No Undisclosed Liabilities. The Company has no liabilities or obligations which are material, individually or in the aggregate, that are not disclosed in the Company Documents or otherwise publicly announced, other than those set forth in the Company's financial statements or as incurred in the ordinary course of the Company's businesses since May 1993, and which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Section 4.12 No Undisclosed Events or Circumstances. Since September 28, 2001, no event or circumstance has occurred or exists with respect to the Company or its businesses, properties, prospects, operations or financial condition, that, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed in the Company Documents. Section 4.13 No Integrated Offering. To the Company's knowledge, neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, other than pursuant to this Agreement or pursuant to the Company's existing employee benefit plan, under circumstances that would cause the offering of the Units pursuant to this Agreement to be integrated with prior or future offerings by the Company for purposes of the Securities Act or any applicable stockholder approval provisions. -8- Section 4.14 Litigation and Other Proceedings. There are no lawsuits or proceedings pending or to the knowledge of the Company threatened, against the Company, nor has the Company received any written or oral notice of any such action, suit, proceeding or investigation, which would reasonably be expected to have a Material Adverse Effect. Except as set forth in the Company Documents, no judgment, order, whit, injunction or decree or award has been issued by or, so far as is known by the Company, requested of any court, arbitrator or governmental agency which would be reasonably expected to result in a Material Adverse Effect. Section 4.15 Acknowledgment of Dilution. The Company is aware and acknowledges that issuance of Common Shares, and/or Warrant Shares, may result in dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligation to issue the Common Shares, and Warrant Shares is unconditional and absolute regardless of the effect of any such dilution. Section 4.16 Employee Relations. The Company is not involved in any labor dispute, nor, to the knowledge of the Company, is any such dispute threatened which could reasonably be expected to have a Material Adverse Effect. None of the Company's employees is a member of a union and the Company believes that its relations with its employees are good. Section 4.17 Environmental Laws. The Company is (1) in compliance with any and all foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants and which the Company know is applicable to them ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required under applicable Environmental Laws to conduct its business, and (iii) is in compliance with all terms and conditions of any such permit, license or approval. Section 4.18 Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged. The Company has no notice to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires, or obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operation, of the Company. Section 4.19 Board Approval. The board of directors of the Company has concluded, in its good faith business judgment, that the issuances of the securities of the Company in connection with this Agreement are in the best interests of the Company. Section 4.20 Integration. The Company shall not and shall use its best efforts to ensure that no affiliate shall sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security of the Company that would be integrated with the offer or sale of the Units, in a manner that would require the registration under the Securities Act of the issue, offer or sale of the Units to the Investors. The Units are being offered and sold -9- pursuant to the terms hereunder, are not being offered and sold as part of a previously commenced private placement of securities. Section 4.21 Use of Proceeds. The Company represents that the net proceeds from this offering will be used for working capital purposes, and not for the repayment of any outstanding judgments against the Company (including any affiliate or subsidiary) or any officer, director or employee of the Company. ARTICLE V Covenants of the Investors Section 5.1 4.99% Limitation. The number of shares of Common Stock which may be acquired by any of the Investors pursuant to the terms of this Agreement shall not exceed the number of such shares which, when aggregated with all other shares of Common Stock then owned by any of the Investors, would result in any of the Investors owning more than 4.99% of the then issued and outstanding Common Stock. ARTICLE VI Covenants of the Company Section 6.1 Registration Rights. The Company shall cause the Registration Rights Agreement to remain in full force and effect so long as any Registrable Securities remain outstanding and the Company shall comply in all material respects with the terms thereof Section 6.2 Reservation of Common Stock. As of the date hereof, the Company has authorized and reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, shares of Common Stock for the purpose of enabling the Company to satisfy any obligation to issue the Common Shares, Warrants and Warrant Shares. The number of shares so reserved shall be increased or decreased to reflect potential increases or decreases in the Common Stock that the Company may thereafter be so obligated to issue by reason of adjustments to the Warrants. Section 6.3 Legends. The Common Shares, Warrants and Warrant Shares, to be issued by the Company pursuant to this Agreement shall be free of legends, except as set forth in Article VIII. Section 6.4 Corporate Existence. The Company will take all steps necessary to preserve and continue the corporate existence of the Company. Section 6.5 Notice of Certain Events Affecting Registration. The Company will immediately notify each of the Investors within three Business Days after the occurrence of any of the following events in respect of a registration statement or related prospectus in respect of an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related prospectus; (ii) the issuance by the SEC or -10- any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (the Company shall not be required to notify the Investors in this case in the event such notification would be deemed the release of nonpublic information); and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate. The Company will, within five Business Days of when filed with the SEC make available to the Investors any such supplement or amendment to the related prospectus. Section 6.6 Consolidation; Merger. The Company shall not, at any time after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all of the assets of the Company to, another entity (a "Consolidation Event") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investors such shares of stock and/or securities as the Investors are entitled to receive pursuant to this Agreement. Section 6.7 Issuance of Common Shares and Warrant Shares. The issuance of the Common Shares and Warrant Shares shall be made in accordance with the provisions and requirements of Section 4(2) of the Securities Act, or Regulation D and any applicable state securities law. Section 6.8 Exercise of Warrants. The Company will pen-nit the Investors to exercise their night to exercise the Warrants, by telecopying an executed and completed Notice of Exercise (along with payment of the applicable Exercise Price) to the Company as is set forth in the Warrant. Section 6.9 Increase in Authorized Shares. At such time as the Company would be, if a notice of exercise were to be delivered on such date, precluded from honoring (i) the exercise in full of the Warrants, due to the unavailability of a sufficient number of shares of authorized but unissued or re-acquired Common Stock, the Board of Directors of the Company shall promptly (and in any case within forty five (45) calendar days from such date) hold a shareholders meeting in which the shareholders would vote for authorization to amend the Company's certificate of incorporation to increase the number of shares of Common Stock which the Company is authorized to issue to at least a number of shares equal to the sum of (i) all shares of Common Stock then outstanding, (ii) the number of shares of Common Stock issuable on account of -11- all outstanding warrants, options and convertible securities (other than the Warrants) and on account of all shares reserved under any stock option, stock purchase, warrant or similar plan, and (iv) such number of Warrant Shares as would then be issuable upon the exercise in full of the Warrants, as would be issuable on such date. In connection therewith, the Board of Directors shall promptly (x) adopt proper resolutions authorizing such increase, (y) recommend to and otherwise use its best efforts to promptly and duly obtain shareholder approval to carry out such resolutions and (z) within three Business Days of obtaining such shareholder authorization, file an appropriate amendment to the Company's certificate of incorporation to evidence such increase. In no way shall the aforementioned be deemed a waiver of the Company's obligations contained in Section 6.2 above. Section 6.10 Notice of Breaches. Each of the Company on the one hand, and the Investors on the other, shall give prompt written notice to the other of any breach by it of any representation, covenant, warranty or other agreement contained in this Agreement or any Exhibit annexed hereto, as well as any events or occurrences arising after the date hereof, which would reasonably be likely to cause any representation, covenant, or warranty or other agreement of such party, as the case may be, contained in this Agreement or any Exhibit annexed hereto, to be incorrect or breached as of such date. However, no disclosure by either party pursuant to this Section shall be deemed to cure any breach of any representation, warranty or other agreement contained in this Agreement or any Exhibit annexed hereto. Notwithstanding the generality of the foregoing, the Company shall promptly notify each Investor of any notice or claim (written or oral) that it receives from any lender of the Company to the effect that the consummation of the transactions contemplated by this Agreement or any Exhibit annexed hereto, violates or would violate any written agreement or understanding between such lender and the Company, and the Company shall promptly furnish by facsimile to each Investor a copy of any written statement in support of or relating to such claim or notice. ARTICLE VII Due Diligence Review, Non-Disclosure of Non-Public Information Section 7.1 Due Diligence Review. The Company shall make available for inspection and review by the Investors, advisors to and representatives of the Investors (who may or may not be affiliated with the Investors), any underwriter participating in any disposition of the Registrable Securities on behalf of the Investors pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all Company Documents, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by any of the Investors or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investors and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. -12- Section 7.2 Non-Disclosure of Non-Public Information (a) The Company has not disclosed, and hereafter shall not disclose nonpublic information to the Investors, advisors to, or representatives of, the Investors unless prior to disclosure of such information the Company identifies such information as being non-public information and provides each Investor, and its advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require each of the Investors advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investors. (b) Nothing herein shall require the Company to disclose non-public information to any of the Investors or their advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investors and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section shall be construed to mean that such persons or entities other than the Investors (without the written consent of the Investors prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of a material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE VIII Legends Section 8.1 Legends. The Investors agree to the imprinting, so long as is required by this Section, of the following legend (or such substantially similar legend as is acceptable to the Investors and their counsel, the parties agreeing that any unacceptable legended securities shall be replaced promptly by and at the Company's cost) on the securities: [FOR WARRANTS AND COMMON SHARES] NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF -13- ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. [ONLY FOR WARRANT SHARES TO THE EXTENT THE RESALE THEREOF IS NOT COVERED BY AN EFFECTIVE REGISTRATION STATEMENT AT THE TIME OF ISSUANCE OR EXERCISE] THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. The Warrant Shares shall not contain the legend set forth above or any other restrictive legend if the issuance of such occurs at any time while a Registration Statement is effective under the Securities Act in connection with the resale of the shares of Common Stock or, in the event there is not an effective Registration Statement at such time, if in the opinion of counsel to the Company such legend is not required under applicable requirements of the Securities Act (including Judicial interpretations and pronouncements issued by the staff of the Commission). The Company agrees that it will provide the Investors, upon request, with a certificate or certificates representing the Warrant Shares, free from such legend at such time as such legend is no longer required hereunder. The Company may not make any notation on its records or give instructions to any transfer agent of the Company which enlarge the restrictions of transfer set forth in this Section. Upon the execution and delivery hereof, the Company is issuing to the transfer agent for its Common Stock (and to any substitute or replacement transfer agent for its Common Stock upon the Company's appointment of any such substitute or replacement transfer agent) instructions in substantially the form of Exhibit H hereto. Such shall be irrevocable by the Company from and after the date hereof or from and after the issuance thereof to any such substitute or replacement transfer agent, as the case may be, except as otherwise expressly provided in the Registration Rights Agreement. It is the intent and purpose of such instructions, as provided therein, to require the transfer agent for the Common Stock from time to time upon transfer of Registrable Securities by the Investors to issue certificates evidencing such Registrable Securities free of the Legend during the following periods and under the following circumstances and except as provided below, without consultation by the transfer agent with -14- the Company or its counsel and without the need for any further advice or instruction or documentation to the transfer agent by or from the Company or its counsel or the Investors: (a) at any time after the Effective Date, upon surrender of one or more certificates evidencing the Warrants or Warrant Shares that bear the aforementioned Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the aforementioned legend to replace those surrendered; provided that (i) the Registration Statement shall then be effective; (ii) the Investor(s) confirm to the transfer agent that it has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Common Stock in a bona fide transaction to a third party that is not an affiliate of the Company; and (iii) the Investor(s) confirm to the transfer agent that the Investor(s) have complied with the prospectus delivery requirement. (b) at any time upon any surrender of one or more certificates evidencing Registrable Securities, that bear the aforementioned legend, to the extent accompanied by a notice requesting the issuance of new certificates free of such legend to replace those surrendered and containing representations that (i) the Investor(s) is permitted to dispose of such Registrable Securities, without limitation as to amount or manner of sale pursuant to Rule 144(k) under the Securities Act or (ii) the Investor(s) has sold, pledged or otherwise transferred or agreed to sell, pledge or otherwise transfer such Registrable Securities, in a manner other than pursuant to an effective registration statement, to a transferee who will upon such transfer be entitled to freely tradeable securities. The Company shall have counsel provide any and all opinions necessary for the sale under Rule 144, as permitted under applicable law. Any of the notices referred to above in this Section may be sent by facsimile to the Company's transfer agent. Section 8.2 No Other Legend or Stock Transfer Restrictions. No legend other than the one specified in this Article has been or shall be placed on the share certificates representing the Common Stock, and no instructions or "stop transfer orders," so called, "stock transfer restrictions," or other restrictions have been or shall be given to the Company's transfer agent with respect thereto other than as expressly set forth in this Article. Section 8.3 Investor's Compliance. Nothing in this Article shall affect in any way any of the Investors obligations under any agreement to comply with all applicable securities laws upon resale of the Common Stock. ARTICLE IX Choice of Law Section 9.1 Choice of Law, Venue, Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of Colorado, except for matters arising under the Securities Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the United States District Court for the District of Colorado in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any -15- objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the night of any party to serve process in any other manner permitted by law. Each party waives its night to a trial by jury. ARTICLE X Assignment; Entire Agreement, Amendment, Termination Section 10.1 Assignment. The Investor's interest in this Agreement and its ownership of Common Stock and Warrants may be assigned or transferred at any time, in whole or in part, to any other person or entity (including any affiliate of the Investors) who agrees to, and truthfully can, make the representations and warranties contained in Article III, and who agrees to be bound by the covenants of Article V. The provisions of this Agreement shall inure to the benefit of, and be enforceable by, any transferee of any of the shares of Common Stock and/or Warrants purchased or acquired by the Investors hereunder with respect to the Common Stock held by such person. Section 10.2 Termination. This Agreement shall terminate upon the earliest of (i) the date that all the Registrable Securities have been sold by the Investors pursuant to the Registration Statement; (ii) the date the Investors receive an opinion from counsel to the Company that all of the Registrable Securities may be sold under the provisions of Rule 144, without volume limitation; or (iii) five years after the Closing Date; provided, however, that the provisions of Articles III, IV, V, VI, VII, VII, IX, X, XI, and II herein, and the registration rights provisions for the Registrable Securities held by the Investors set forth in this Agreement, and the Registration Rights Agreement, shall survive the termination of this Agreement. ARTICLE XI Notices Section 11.1 Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified, return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand delivery or delivery by facsimile, with accurate confirmation generated by the -16- transmitting facsimile machine, at the address or number designated below (if delivered on a Business Day during normal business hours where such notice is to be received), or the first Business Day following such delivery (if delivered other than on a Business Day during normal business hours where such notice is to be received), or (b) on the second Business Day following the date of mailing by reputable courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: View Systems, Inc. 925 West Kenyon Avenue Suite 15 Englewood, Colorado 81106 If to the Investors: See attached Exhibit E Either party hereto may from time to time change its address or facsimile number for notices under this Section 11. 1 by giving at least ten calendar days' prior written notice of such changed address or facsimile number to the other party hereto. Section 11.2 Indemnification. The Company agrees to indemnify and hold harmless each of the Investors and each officer, director of the Investors or person, if any, who controls the Investors within the meaning of the Securities Act against any losses, claims, damages or liabilities, Joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Investors may become subject, under the Securities Act or otherwise, insofar as such losses, claims. damages or liabilities (or actions in respect thereof) anise out of or are based upon the breach of any ten-n of this Agreement by the Company. This indemnity agreement will be in addition to any liability which the Company may otherwise have. Each Investor agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Securities Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof) anise out of or are based upon the breach of any term of this Agreement by the Investor. This indemnity agreement will be in addition to any liability which the Investors or any subsequent assignee may otherwise have. Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve the indemnifying -17- party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is one of the Investors, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (11) the named parties to any such action (including any impleaded parties) include both the Investors and the indemnifying party and the Investors shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party in conflict with any legal defenses which may be available to the Investors (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Investors, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Investor(s), which firm shall be designated in writing by the Investor(s)). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 11.3 Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (1) the indemnified party makes a claim for indemnification pursuant to Section 11.2 hereof but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 11.2 hereof provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any indemnified party, then the Company and the applicable Investor shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in Section 11.2 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the -18- meaning of Section 11 (F) of the Securities Act) shall be entitled to contributions from any person who was not guilty of such fraudulent misrepresentation. ARTICLE XII Miscellaneous Section 12.1 Counterparts; Facsimile; Amendments. This Agreement may be executed in multiple counterparts, each of which may be executed by less than all of the parties and shall be deemed to be an original instrument which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one and the same instrument. Except as otherwise stated herein, in lieu of the original documents, a facsimile transmission or copy of the original documents shall be as effective and enforceable as the original. This Agreement may be amended only by a writing executed by the Company on the one hand, and the Investors, on the other hand. Section 12.2 Entire Agreement. This Agreement, the Exhibits or attachments hereto, which include, but are not limited to the Warrant, the Certificate of Designation, the Escrow Agreement, and the Registration Rights Agreement, set forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. The terms and conditions of all Exhibits to this Agreement are incorporated herein by this reference and shall constitute part of this Agreement as if fully set forth herein. Section 12.3 Survival; Severability. The representations, warranties, covenants and agreements of the parties hereto shall survive each Closing hereunder. In the event that any provisions of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that such severability shall be ineffective if it materially changes the economic benefit of this Agreement to any party. Section 12.4 Title and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. Section 12.5 Reporting Entity for the Common Stock. The reporting entity relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement and all Exhibits shall be Yahoo Finance or Bloomberg, or any successor thereto. The written mutual consent of the Investors and the Company shall be required to employ any other reporting entity. Section 12.6 Replacement of Certificates. Upon (i) receipts of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a certificate representing the Initial Shares, Secondary Shares, Reset Shares, Warrants, Warrant Shares, or Additional Shares, and (ii) -19- in the case of any such loss, theft or destruction of such certificate, upon delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or (iii) in the case of any such mutilation, on surrender and cancellation of such certificate, the Company at is expense will execute and deliver, in lieu thereof, a new certificate of like tenor. Section 12.7 Fees and Expenses. Each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company shall pay (i) on the Closing Date the Escrow Agent will distribute the following: $50,000 to be paid in commissions and up to $30,000 to be paid for legal, administrative, and escrow fees. Section 12.8 Publicity. The Company and the Investors shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and no party shall issue any such press release or otherwise make any such public statement without the prior written consent of the other parties, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other parties with prior notice of such public statement. Notwithstanding the foregoing, the Company shall not publicly disclose the names of the Investors without the prior written consent of the Investors, except to the extent required by law or in response to a written SEC request, in which case the Company shall provide the Investors with prior written notice of such public disclosure. Exhibits: - -------- Escrow Agreement Registration Statement Warrant Instructions to Transfer Agent List of Investors -20- IN WITNESS WHEREOF, the parties hereto have caused this Unit Purchase Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. VIEW SYSTEMS, INC. By /s/ Gunther Than ----------------------------- Name: Gunther Than -------------------------- Title: CEO ------------------------- LIBERTY PARTNERS, LLC By /s/ --------------------------------- Its Managing Member -------------------------------- EMPIRE FUND MANAGER By /s/ --------------------------------- Its Member -------------------------------- -21- EXHIBIT A ESCROW AGREEMENT THIS AGREEMENT is made as of the 1st day of October, 2001 by and between VIEW SYSTEMS, INC., a Florida corporation with its principal office at 925 West Kenyon Avenue, Suite 15, Englewood, Colorado, 81106 (hereinafter the "Company"), LIBERTY PARTNERS LLC, and EMPIRE FUND MANAGERS, collectively referred to as the "Investors", and Daniel W. Jackson, Esq. 525 South 300 East, Salt Lake City, Utah 84111 (hereinafter the "Escrow Agent"). W I T N E S S E T H: WHEREAS, pursuant to the Unit Purchase Agreement dated as of October 1, 2001 (the "Purchase Agreement"), the Investors will be purchasing Common Stock and Warrants of the Company (the "Securities") at the purchase price sets forth in the Purchase Agreement; and WHEREAS, the Company has requested that the Escrow Agent hold the funds of the Investors in escrow until the Escrow Agent has received the original Securities. The Escrow Agent will then immediately wire transfer or otherwise deliver at the Company's direction immediately available funds to the Company or the Company's account and arrange for delivery of the Securities to each Investor per each Investor's written instructions, and delivery of the Warrants. NOW, THEREFORE, in consideration of the covenants and mutual promises contained herein and other good and valuable consideration, the receipt and legal sufficiency of which are hereby acknowledged and intending to be legally bound hereby, the parties agree as follows: ARTICLE I TERMS OF THE ESCROW FOR THE PURCHASE OF THE INITIAL SHARES AND WARRANTS Section 1.1 Upon Escrow Agent's receipt of the Purchase Price from the Investors, into his attorney account, it shall notify the Company, or the Company's designated attorney or agent, of the amount of funds it has received into its account. Section 1.2 The Company, upon receipt of said notice and acceptance of the Purchase Agreement (including all Exhibits annexed thereto) by all parties, as evidenced by the Company, and all of the Investor's execution thereof, shall deliver to the Escrow Agent the original Securities being purchased by the Investors. Escrow Agent shall then communicate with the Company to confirm such receipt. Section 1.3 Once Escrow Agent confirms receipt of the Securities and receives all other documentations precedent to the applicable Closing, he shall immediately wire that amount of funds necessary to purchase the Securities per the written instructions of the Company net of all the fees. The Company will furnish Escrow Agent with a "Net Letter" directing payment of the legal, administrative, and escrow costs as per the terms of the Purchase Agreement to the Escrow Agent. Such fees are to be remitted in accordance with wire instructions that will be sent to Escrow Agent from the Company, with the net balance payable to the Company. Once the funds (as set forth above) have been received per the Company's instructions, the Escrow Agent shall then arrange to have (i) the Securities delivered as per instructions from the Investors. ARTICLE II MISCELLANEOUS Section 2.1 This Agreement maybe altered or amended only with the consent of all of the parties hereto. Should any party attempt to change this Agreement in a manner which, in the Escrow Agent's discretion, shall be undesirable, the Escrow Agent may resign as Escrow Agent by notifying the Company and the Investors in writing. The parties may remove the Escrow Agent as escrow agent in writing signed by each of the parties, which writing must be delivered to the Escrow Agent via reputable overnight courier and shall be effective upon receipt by the Escrow Agent. In the case of the Escrow Agent's resignation or removal pursuant to the foregoing, his only duty, until receipt of notice from the Company and the Investors or their agent that a successor escrow agent, the name of a successor escrow account and a direction to transfer the Securities and/or funds, the Escrow Agent shall promptly thereafter transfer all of the Securities and/or funds held in escrow to said successor escrow agent. Immediately after said transfer of securities, the Escrow Agent shall furnish the Company and the Investors with proof of such transfer. The Escrow Agent is authorized to disregard any notices, requests, instructions or demands received by it from the Company or the Investors after notice of resignation or removal shall have been given, unless the same be the aforementioned notice from the Company and the Investors to transfer the Securities and funds to a successor escrow agent or to return same to the respective parties. Section 2.2 The Escrow Agent shall be reimbursed by the Company and the Investors for any reasonable expenses incurred in the event there is a conflict between the parties and the Escrow Agent shall deem it necessary to retain counsel. Section 2.3 The Escrow Agent shall not be liable for any action taken or omitted by him in good faith in accordance with the advice of the Escrow Agent's counsel; and in no event shall the Escrow Agent be liable or responsible except for the Escrow Agent's own gross negligence or willful misconduct. Section 2.4 The Company and each of the Investors warrant to and agree with the Escrow Agent that, unless otherwise expressly set forth in this Agreement: (i) there is no security interest in the Securities or any part thereof; -2- (ii) no financing statement under Uniform Commercial Code is on file in any jurisdiction claiming a security interest or in describing (whether specifically or generally) the Securities or any part thereof; and (iii) the Escrow Agent shall have no responsibility at any time to ascertain whether or not any security interest exist in the Securities or any part thereof or to file any financing statement under the Uniform Commercial Code with respect to Securities or any part thereof. Section 2.5 The Escrow Agent has no liability hereunder to either party other than to hold the Securities and funds and to deliver them under the terms hereof. Each party hereto agrees to indemnify and hold harmless the Escrow Agent from and with respect to any suits, claims, actions or liabilities arising in any way out of this transaction including the obligation to defend any legal action brought which in any way arises out of or is related to this Escrow. Section 2.6 No waiver or any breach of any covenant or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed any extension of the time for performance of any other obligation or act. Section 2.7 All notices or other communications required or permitted hereunder shall be in writing, and shall be sent by fax, overnight courier, registered or certified mail, postage prepaid, return receipt requested, and shall be deemed received upon receipt thereof, as follows, or as set forth on Schedule A. (i) View Systems 925 West Kenyon Avenue Suite 15 Englewood, Colorado 81106 Telephone: (410) 290-5919 Facsimile: (410) 290-5917 (ii) Daniel W. Jackson 525 South 300 East Salt Lake City, Utah 84111 Telephone: (801) 596-8338 Facsimile: (801) 364-5645 (iii) Investors (See attached Exhibit E) Section 2.8 This Agreement shall be binding upon and shall inure to the benefit of the permitted successors and assigns of the parties hereto. -3- Section 2.9 This Agreement is the final expression of, and contains the entire Agreement between, the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived, except by written instrument signed by the parties to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. Section 2.10 Whenever required by the context of this Agreement, the singular shall include the plural and masculine shall include the feminine. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to Articles are to this Agreement. Section 2.11 The parties hereto expressly agree that this Agreement shall be governed by, interpreted under and construed and enforced in accordance with the laws of the State of Utah. Each of the parties consents to the exclusive jurisdictions of the federal courts for the District of the Utah, in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, and objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any state or country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at is address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. [Remainder of Page Intentionally Left Blank] [Signature Page Follows] -4- IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. VIEW SYSTEMS, INC. By______________________________ Name:___________________________ Title:__________________________ LIBERTY PARTNERS, LLC By__________________________________ Its ________________________________ EMPIRE FUND MANAGER By__________________________________ Its ________________________________ -5- EXHIBIT B REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 1st day of October, 2001, between LIBERTY PARTNERS, LLC., and EMPIRE FUND MANAGERS, (referred to as the "Investors"), COLUMBIA FINANCIAL GROUP, INC. (the "Placement Agent") and VIEW SYSTEMS, INC. a corporation incorporated under the laws of the State of Florida, and having its principle place of business at 925 West Kenyon Avenue, Suite 15, Englewood, Colorado, 81106 (the "Company"). WHEREAS, simultaneously with the execution and delivery of this Agreement and from time to time thereafter, the Investors are purchasing from the Company, pursuant to the Unit Purchase Agreement dated the date hereof (the "Purchase Agreement"), shares of Common Stock and Warrants (hereinafter collectively referred to as the "Securities" of the Company); All capitalized terms not hereinafter defined shall have the meaning assigned to them in the Purchase Agreement; and WHEREAS, prior to the execution and delivery of this Agreement, the Company has issued Warrants to Columbia, in return for services rendered, from time to time as provided in a separate Consulting Agreement dated September 10, 2001 (the "Consulting Agreement"); and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Security" means the Common Stock of the Company issued under the Purchase Agreement or as the result of the execution of warrants issued under that Agreement or the Consulting Agreement; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "1933 Act") and disposed of pursuant thereto, (ii) registration under the 1933 Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144 promulgated under the 1933 Act, or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a Registrable Security. In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in definition of Registrable Security as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section. Section 2. Restrictions on Transfer. The Holders acknowledge and understand that prior to the registration of the Registrable Securities as provided herein, the Registrable Securities and the Securities are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holders understand that no disposition or transfer of the Registrable Securities or the Securities may be made by the Holders in the absence of (i) an opinion of counsel to the Holders that such transfer may be made without registration under the 1933 Act, or (ii) such registration. Section 3. Registration Rights. (a) The Company agrees that it will prepare and file with the Securities and Exchange Commission ("SEC"), on or prior to December 15, 2001, a registration statement (on Form SB-2, or other appropriate registration statement) under the 1933 Act (the "Registration Statement"), at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of all holders of Registrable Securities, so as to permit a public offering and sale of the Registrable Securities under the Act. The Company shall use its best efforts to cause the Registration Statement to become effective on or before January 15, 2001. The number of shares of Common Stock designated in the Registration Statement to be registered shall be not less than (i) 100% of the number of Common Shares acquired under the Purchase Agreement, plus (ii) 100% of the number of Warrant Shares issuable assuming all of the Warrants had been issued pursuant to the Purchase Agreement and Consulting Agreement. (b) The Company will maintain the Registration Statement, or post-effective amendment filed under this Section 3 hereof current under the 1933 Act until the earlier of (i) the date that all of the Registrable securities have been sold pursuant to the applicable Registration Statement, (ii) the date the holders thereof receive an opinion of counsel that the Registrable Securities may be sold under the provisions of Rule 144 (without limitation) or (III) five years after the Subscription Date. (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of the Registration Statement under subparagraph 3(a) and in complying with applicable securities and blue sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holders shall bear the cost, pro rata, of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered and the fees and expenses of its counsel. The Company shall qualify any of the securities for sale in such states as such Holder reasonably designates and shall furnish indemnification in the manner provided in Section 6 hereof. The Company at its expense will supply the Holders with copies of the Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holders. (d) The Company shall not be required by this Section 3 to include a Holder's Registrable Securities in any Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company) the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in -2- all purchasers or transferees obtaining securities which are not "restricted securities", as defined in Rule 144 under the 1933 Act. (e) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not filed with the SEC on or before December 31, 2001 and/or the Registration Statement is not declared effective by the SEC on or before January 31, 2002, then the Company will pay the Holders (pro rated on a daily basis), as liquidated damages for such failure and not as a penalty, five percent of the purchase price of the then outstanding Securities for every 30 calendar day period until the Registration Statement has be filed and/or declared effective. Such payment of the liquidated damages shall be made to the Holders in cash, immediately upon demand, provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Registrable Securities. If the Company does not remit the damages to the Holder as set forth above, the Company will pay the Holders reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. The registration of the Securities pursuant to this provision shall not affect or limit Holder' other rights or remedies as set forth in this Agreement. (f) The Company agrees that it shall declare the Registration Statement effective within three Business Days after being informed by the SEC that it may do so. The Company also agrees that it shall respond to any questions and/or comments from the SEC which relate to the Registration Statement within five Business Days of receipt of such question or comment. Section 4. Cooperation with Company. Each of the Holders will cooperate with the Company in all respects in connection with this Agreement, including timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. If and whenever the Company is required by any of the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the Holder shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 promulgated under the Act); (b) furnish to each Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably -3- request in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) register and qualify the securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Holders shall reasonably request, and do any and all other acts and things which may be necessary or advisable to enable each Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by such Holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process; (d) list such securities on the Principal Market on which any securities of the Company are then listed, if the listing of such securities is then permitted under the rules of such Principal Market; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by the Registration Statement any time when a prospectus relating thereto covered by the Registration Statement is required to be delivered under the Act, and of the happening of any event of which it has knowledge as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Information by Holder. Each Holder of Registrable Securities included in any registration statement shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to in this Section. Section 7. Assignment. The rights granted the Holders under this Agreement shall not be assigned without the written consent of the Company, which consent shall not be unreasonably withheld. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. Section 8. Termination of Registration Rights. The rights granted pursuant to this Agreement shall terminate as to each Holder (and permitted transferee under Section 7 above) upon the occurrence of any of the following: (a) all such Holder's securities subject to this Agreement have been registered; -4- (b) all of such Holder's securities subject to this Agreement may be sold without such registration pursuant to Rule 144 promulgated by the SEC pursuant to the Securities Act; (c) all of such Holder's securities subject to this Agreement can be sold pursuant to Rule 144(k) without volume limitation; or five years from the issuance of the Registrable Securities. Section 9. Indemnification. (a) In the event of the filing of any Registration Statement with respect to Registrable Securities pursuant to Section 3 hereof, the Company agrees to indemnify and hold harmless the Holders, and each officer, director of the Holders or person, if any, who controls the Holders within the meaning of the Securities Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for the purposes of this Agreement, include, but not be limited to, all costs of defense, and investigation and all attorneys' fees), to which the Distributing Holders may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. this indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) In the event of the filing of any Registration Statement with respect to Registrable Securities pursuant to Section 3 hereof, each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in a Registration Statement, requested by such Distributing Holder, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the -5- statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof and, provided further, that the indemnity agreement contained in this Section 9(b) shall not inure to the benefit of the Company with respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Company failed to send or give (in violation of the Securities Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in such Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Company was obligated to do so under the Securities Act or the rules and regulations promulgated thereunder. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is made against the indemnifying party under this Section, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification s then being sought solely pursuant to this Section. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable -6- fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. Section 10. Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (i) the Distributing Holder makes a claim for indemnification pursuant to Section 9 hereof but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 9 hereof provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any Distributing Holder, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 11. Notices. Any notice pursuant to this Agreement by the Company or by the Holders shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Company: View Systems, Inc. 925 West Kenyon Avenue Suite 15 Englewood, Colorado 81106 (b) If to the Placement Agent: -7- Columbia Financial Group, Inc. 1301 York Road, #400 Lutherville, Maryland 21093 Attention: Tim Rieu (c) If to the Investors: See attached Exhibit "E" Notices shall be deemed given at the time they are delivered personally or five calendar days after they are mailed in the manner set forth above. If notice is delivered by facsimile to the Company and followed by mail, delivery shall be deemed given two calendar days after such facsimile is sent. Section 12. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 13. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 14. Choice of Law; Venue; Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of Colorado, except for matters arising under the Securities Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the U.S. District Court sitting in the State of Colorado, for the Central District of Colorado in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if another party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trail by jury. Section 15. Severability. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. -8- IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed, on the day and year first above written. VIEW SYSTEMS, INC. Attest: By:____________________________________ By:_________________________________ Name: Name: Title: Title: COLUMBIA FINANCIAL GROUP, INC. By:__________________________________ Name: Title: LIBERTY PARTNERS, LLC By:__________________________________ Name: Title: EMPIRE FUND MANAGERS By:__________________________________ Name: Title: -9- EXHIBIT C THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE RESOLD OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. COMMON STOCK PURCHASE WARRANT No. To Purchase 1,000,000 Shares of Common Stock of VIEW SYSTEMS, INC. THIS CERTIFIES that, for value received, Empire Fund Managers or its assigns, (the "Investor"), is entitled, upon the terms and subject to the conditions hereinafter set forth, at any time on or after the date hereof and on or prior to 5:00 p.m. Eastern Time 90 days after the effective date of the Company's registration statement (the "Termination Date"), but not thereafter, to subscribe for and purchase from VIEW SYSTEMS, INC., a Florida corporation (the "Company"), One Million (1,000,000) shares of Common Stock (the "Warrant Shares"). The purchase price of one share of Common Stock (the "Exercise Price") under this Warrant shall be $0.70. The Exercise Price and the number of shares for which this Warrant is exercisable shall be subject to adjustment as provided herein. This Warrant is being issued in connection with the Unit Purchase Agreement dated October 1, 2001 (the "Agreement") entered into between the Company and the Investor. 1. Title of Warrant. Prior to the expiration hereof and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. 2. Authorization of Shares. The Company covenants that all Warrant Shares which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof. -1- 3. Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made at any time or times, in whole or in part, after the date hereof and before the close of business on the Termination Date, or such earlier date on which this Warrant may terminate as provided in paragraph 11 below, by the surrender on any business day of this `Warrant and the Notice of Exercise annexed hereto duly completed and executed, at the principal office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased (the "Exercise Date"); whereupon the holder of this Warrant shall be entitled to receive a Common Stock certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the holder hereof within five Business Days after the date on which this Warrant shall have been exercised as aforesaid. Payment of the Exercise Price shall be by certified check or cashier's check or by wire transfer (of same day funds) to an account designated by the Company in an amount equal to the Exercise Price multiplied by the number of Warrant Shares being purchased. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue, transfer, or other incidental expense in respect of the issuance of such certificate, all of which expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this arrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and provided further, that upon any transfer involved in the issuance or delivery of any certificates for shares of Common Stock, the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer expenses incidental thereto. 6. Closing of Books. The Company will at no time close its shareholder books or records in any manner which interferes with the timely exercise of this Warrant. 7. No Rights as Shareholder until Exercise. This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise thereof. If, however, at the time of the surrender of this Warrant and purchase the holder hereof shall be entitled to exercise this Warrant, the shares so purchased shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been exercised. 8. Assignment and Transfer of Warrant. This Warrant may be assigned by the surrender of this Warrant and the Assignment Form annexed hereto duly executed at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company); provided, -1- however, that this Warrant may not be resold or otherwise transferred except (i) in a transaction registered under the Securities Act of 1933, as amended, or (ii) in a transaction pursuant to an exemption, if available, from such registration and whereby, if requested by the Company, an opinion of counsel reasonably satisfactory to the Company is obtained by the holder of this Warrant to the effect that the transaction is so exempt. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and warrants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant or stock certificate, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of this Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a legal holiday. 11. Effect of Certain Events. If at any time the Company proposes (i) to sell or otherwise convey all or substantially all of its assets or (ii) to effect a transaction (by merger or otherwise) in which more than 50% of the voting power of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in which the consideration to be received by the Company or its shareholders consists solely of cash, and in case the Company shall at any time effect a Sale or Merger Transaction in which the consideration to be received by the Company or its shareholders consists in part of consideration other than cash, the holder of this Warrant shall have the right thereafter to purchase, by exercise of this Warrant and payment of the aggregate Exercise Price in effect immediately prior to such action, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such transaction had this Warrant been exercised immediately prior thereto. In the event the holder chooses to exercise its purchase rights, at the holder's option, the holder may elect to waive Section 16 below in its entirety. 12. Adjustments of Exercise Price and Number of Warrant Shares. The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following: in case the Company shall (i) declare or pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall -3- be adjusted so that the holder of this Warrant shall be entitled to (in the event the holder so chooses) receive the kind and number of Warrant Shares or other securities of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Any adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. In such event the holder, at its option may elect to waive Section 16 below in its entirety. 13. Voluntary Adjustment by the Company. The Company may at its option, at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or kind of securities or other property purchasable upon the exercise of this Warrant, or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail or registered or certified mail, return receipt requested, to the holder of this Warrant notice of such adjustment or adjustments setting forth the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustments and setting forth computation by which such adjustment was made. Such notice, in absence of manifest error, shall be conclusive evidence of the correctness of such adjustment. 15. Authorized Shares. The Company covenants that during the period the Warrant is outstanding and exercisable, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that is issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the securities exchange and/or market upon which the Common Stock may be listed. 16. 4.99% Limitation. The number of shares of Common Stock which may be acquired by the Investor upon exercise pursuant to the terms herein shall not exceed the number of such shares which, when aggregated with all other shares of Common Stock then owned by the holder, not including all securities convertible or exercisable into Common Stock, would result in the Investor owning more than 4.99% of the Company's then issued and outstanding shares of Common Stock. The preceding sentence shall not interfere with the Investor's right to exercise this Warrant or convert other securities over time which in the aggregate totals more than 4.99% of the then outstanding shares of Common Stock so long as such Investor does not own more than 4.99% of the then outstanding Common Stock at any given time. 17. Call. In the event, at any time one month after the date hereof, the closing bid price of the Common Stock is greater than US$2.00 (the "Strike -4- Price") per share for ten consecutive trading days (the "Call Period"), the Company shall have the right to "Cal" this Warrant, in whole or in part, thereby forcing exercise by the Investor. The Strike Price shall be adjusted proportionately to reflect any adjustments due to the payment of a stock dividend, stock split, combination of shares or any other similar event as provided herein. The Company may exercise its right to Call by telecopying written notice (the "Call Notice") to the Investor within ten (10) trading days after the expiration of the Call Period. Once the Company has exercised its right to Call by giving written notice to the Investor it shall be deemed irrevocable. The Investor will transmit the Exercise Price to the Company for that number of Warrant Shares which are the subject to the Call Notice within three business days after receipt of the Call Notice. The Company will transmit the certificates representing Warrant Shares issuable pursuant to the Call (together with the certificates representing the remainder of the Warrant not Called, if any) to the Investor via express courier, by electronic transfer or otherwise within five business days after the Exercise Price was received by the Company (the "Call Date"). The Call Notice shall set forth (i) the number of Warrant Shares being Called, and (ii) a calculation referencing the aggregate Exercise Price due to the Company. All rights of this Warrant, including the right to exercise, shall be canceled upon the completion of the exercise of this Warrant upon a Call for the Warrant Shares that were subject to such Call. Immediately following the Call Date, the Investor shall surrender their original Warrant being called to the Company, and the Company shall issue to the Investor a new Warrant Certificate for the Warrant Shares that remain outstanding, if any. The number of shares of Warrant Shares issuable upon the Call of this Warrant shall be adjusted in accordance with the provisions set forth herein. Any Call pursuant to this Section shall not be deemed to affect or otherwise reduce the Investor's exercise rights set forth in this Warrant, except for the portion of the Warrant Shares being Called. The Company shall not have the right to Call this Warrant if the Company exercises its redemption rights in connection with shares of Stock held by the Investor. In the event the Company fails to comply with the Call provisions set forth herein in any manner whatsoever, it shall waive its right to perform a call in the future. 18. Miscellaneous. (a) Issue Date; Choice of Law; Venue; Jurisdiction. The provisions of this Warrant shall be construed and shall be given effect in all respects as if it had been issued and delivered by the Company on the date hereof. This Warrant shall be binding upon any successors or assigns of the Company. This Warrant will be construed and enforced in accordance with and governed by the laws of the State of Colorado, except for matters arising under the Act, without reference to principles of conflicts of law. Each of the parties consents to the exclusive jurisdiction of the U.S. District Court for the Central District of Colorado in connection with any dispute arising under this Warrant and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding -5- in such jurisdiction. Each party hereby agrees that if the other party to this Warrant obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Warrant irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. Each party waives its right to a trial by jury. (b) Modification and Waiver. This Warrant and any provisions hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. Any amendment effected in accordance with this paragraph shall be binding upon the Investor, each future holder of the Warrants and the Company. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. (c) Notices. Any notice, request or other document required or permitted to be given or delivered to the Investor or future holders hereof or the Company shall be personally delivered or shall be sent by certified or registered mail, postage prepaid, to the Investor or each such holder at its address as shown on the books of the Company or to the Company at the address set forth in the Agreement. All notices under this Warrant shall be deemed to have been given (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the fifth business day following the date of such mailing. A party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance with the provisions of this Section 18(c). (d) Severability. Whenever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision in any other jurisdiction or affect the validity, legality or enforceability of any provision in any other jurisdiction, but this Warrant shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. -6- IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: October 1, 2001 VIEW SYSTEMS, INC. By ________________________________ Name ________________________ Title _______________________ -7- NOTICE OF EXERCISE To: VIEW SYSTEMS, INC. (1) The undersigned hereby elects to purchase __________ shares of Common Stock of VIEW SYSTEMS, INC., pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price in full, together with all applicable transfer taxes, if any. (2) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: _________________________ (Name) _________________________ (Address) _________________________ (3) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ____________________________________ (Name) _______________________________________ ____________________________________ (Date) (Signature) ____________________________________ (Address) Dated: _______________________________________ -8- ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to __________________________________________________________ whose address is ___________________________________________________________________________. ___________________________________________________________________________ Dated:__________ Holder's Signature:___________________________ Holder's Address:_____________________________ Signature Guaranteed: ____________________________________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant. -9- EXHIBIT D INSTRUCTIONS TO TRANSFER AGENT View Systems, Inc. October 1, 2001 Interwest Transfer Co. 1981 East 4800 South, Suite 100 Salt Lake City, Utah 84117 Dear Sirs: Reference is made to the Unit Purchase Agreement and all Exhibits and Attachments thereto (the "Agreement") dated as of October 1, 2001, between Liberty Partners, LLC, Empire Fund Managers, and Columbia Financial Group, Inc. (the "Investors"), and View Systems, Inc., (the {Company"). Pursuant to the Agreement, and subject to the terms and conditions set forth in the Agreement, the Investors have agreed to purchase from the Company and the Company has agreed to issue to the Investors, Common Stock and Warrants to purchase Common Stock (the "Warrant"). As a condition to the effectiveness of the Agreement, the Company has agreed to issue to you, as the transfer agent for the Common Stock (the "Transfer Agent"), these instructions relating to the Common Stock, and Warrants to be issued to the Investors pursuant to the Agreement, and Common Stock upon exercise of the Warrants. All terms used herein and not otherwise defined shall have the meaning set forth in the Agreement. 1. ISSUANCE OF COMMON STOCK WITHOUT THE LEGEND Pursuant to the Agreement, the Company is required to prepare and file with the Commission, and maintain the effectiveness of, a registration statement or registration statements and (ii) upon exercise of the Warrants. The Company will advise the Transfer Agent in writing of the effectiveness of any such registration statement promptly upon its being declared effective. The Transfer Agent shall be entitled to rely on such advice and shall assume that the effectiveness of such registration statement remains in effect unless the Transfer Agent is otherwise advised in writing by the Company and shall not be required to independently confirm the continued effectiveness of such registration statement. In the circumstances set forth in the following two paragraphs, the Transfer Agent shall deliver to the Investors certificates representing Common Stock not bearing the Legend without requiring further advice or instruction or additional documentation from the Company or its counsel or the Investors or its counsel or any other party (other than as described in such paragraphs). At any time after the effective date of the applicable registration statement (provided that the Company has not informed the Transfer Agent in writing that such registration statement is not effective) upon any surrender of one or more certificates which bear the Legend, to the extent accompanied by a notice requesting the issuance of new certificates free of the Legend to replace those surrendered, the Transfer Agent shall deliver to the Investors certificates representing the Common Stock not bearing the Legend, in such names and denominations as the Investors shall request. In the event a registration statement is not filed by the Company, or for any reason the registration statement which is filed by the Company is not declared effective by the Commission the Investors or its permitted assignee, or their legal counsel confirms to the Transfer Agent that (i) the Investors have held the shares of Common Stock (or the Warrants) for at least one year, (ii) counting the shares surrendered as being sold upon the date the unlegended Certificates would be delivered to the Investors (or the Trading Day immediately following if such date is not a Trading Day), the Investors will not have sold more than the greater of (a) one percent of the total number of outstanding shares of Common Stock or (b) the average weekly trading volume of the Common Stock for the preceding four weeks during the three months ending upon such delivery date (or the Trading Day immediately following if such date is not a Trading Day), and (iii) the Investors has complied with the manner of sale and notice requirements of Rule 144 under the Securities Act, and the Company shall give an opinion to the extent available, authorizing the removal of the Legend. Any advise, notice, or instructions to the Transfer Agent required or permitted to be given hereunder may be transmitted via facsimile to the Transfer Agent's facsimile number of: (801) 272-9294. 2. MECHANICS OF DELIVERY OF CERTIFICATES REPRESENTING COMMON STOCK In connection with any Closing pursuant to which the Investors acquires Common Stock under the Agreement, the Transfer Agent shall deliver to the Investors as defined in the Agreement certificates representing Common Stock (with the Legend) immediately. 3. FEES OF TRANSFER AGENT; INDEMNIFICATION The Company agrees to pay the Transfer Agent for all fees incurred in connection with these Irrevocable Instructions. The Company agrees to indemnify the Transfer Agent and its offices, employees and agents, against any losses, claims, damages or liabilities, joint or several, to which it or they become subject based upon the performance by the Transfer Agent of its duties in accordance with the Irrevocable Instructions. 4. THIRD PARTY BENEFICIARY The Company and the Transfer Agent acknowledge and agree that the Investors is an express third party beneficiary of these Irrevocable Instructions and shall be entitled to rely upon, and enforce, the provisions thereof. -2- VIEW SYSTEMS, INC. By: /s/ Gunther Than ------------------------------------- Name: ------------------------------------ Title: CEO ---------------------------------- -3- EXHIBIT E SCHEDULE OF INVESTORS Investor Number of Units Purchase Price - -------- --------------- -------------- Liberty Partners, LLC 1,000,000 $500,000 8665 Flamingo Road, Suite 2000 Las Vegas, Nevada 89174 Attn: John W. Peters Empire Fund Managers, LLC 1,000,000 $500,000 525 South 300 East Salt Lake City, Utah 84111 EX-23 7 exh23edg0497.txt EX-23.4 CONSENT OF INDEPENDENT AUDITORS Board of Directors View Systems, Inc. We hereby consent to the inclusion in this Form SB-2 of our report dated March 15, 2001 related to the consolidated financial statement of View Systems, Inc. and subsidiaries for the years ended December 31, 2000 and 1999. /s/ Stegman & Company ------------------------------- Stegman & Company Baltimore, Maryland December 4, 2001 EX-99.12 8 agt0493.txt EXHIBIT 99.12 CONSULTANT AGREEMENT EXHIBIT 99.12 CONSULTANT AGREEMENT Columbia Financial Group is an investor relations, direct marketing, publishing, public relations and advertising firm with expertise in the dissemination of information about publicly traded companies. Also in the business of providing investor relations services, public relations services, publishing, advertising service, fulfillment services, as well as Internet related services. Agreement made this 10th day of September, 2001, between View Systems, Inc. (hereinafter referred to as "Corporation"), and Columbia Financial Group, Inc. (hereinafter referred to as "Consultant"), (collectively referred to as the "Parties"): Recitals: The Corporation desires to engage the services of the Consultant to perform for the Corporation consulting services regarding all phases of the Corporation's "Investor Relations" to include direct investor relations and broker/dealer relations as such may pertain to the operation of the Corporation's business. The Consultant desires to consult with the Board of Directors, the Officers of the Corporation, and certain administrative staff members of the Corporation, and to undertake for the Corporation consultation as to the company's investor relations activities involving corporate relations and relationship with various broker/dealers involved in the regulated securities industry. AGREEMENT 1. The respective duties and obligations of the contracting parties shall be for a period of twelve (12) months commencing on the date first appearing above. This Agreement may be terminated by either parties only in accordance with the terms and conditions set forth in Paragraph 7. Services Provided by Consultant 2. Consultant will provide consulting services in connection with the Corporation's "investor relations" dealings with NASD broker/dealers and the investing public. (At no time shall the Consultant provide services which would require Consultant to be registered and licensed with any federal or state regulatory body or self-regulating agency). During the term of this Agreement, Consultant will provide those services customarily provided by an investor relations firm to a Corporation, including but not limited to the following: Columbia Financial Group (a) Aiding a Corporation in developing a marketing plan directed at informing the investing public as to the business of the Corporation; and (b) Providing assistance and expertise in devising an advertising campaign in conjunction with the marketing campaign as set forth in (1) above; and (c) Advise the Corporation and provide assistance in dealing with institutional investors as it pertains to the Company's offerings of its securities; and (d) Aid and assist the Corporation in the Corporation's efforts to secure "market makers" which will trade the Corporation's stock to the public by providing such information as may be required; and (e) Aid and advise the Corporation in establishing a means of securing nationwide interest in the Corporation's securities; and (f) Aid and assist the Corporation in creating an "institutional site program" to provide ongoing and continuous information to fund managers; and (g) Aid and consult with the Corporation in the preparation and dissemination of press releases and news announcements; and (h) Aid and consult with the Corporation in the preparation an dissemination of all "due diligence" packages requested by and furnished to NASD registered broker/dealers, the investing public, and/or other institutional and/or fund managers requesting such information from the Corporation. Compensation 3. In consideration forth services provided by Consultant to the Corporation the Corporation shall pay or cause to be delivered to the Consultant on the execution of this agreement or as otherwise provided by the following: (a) 750,000 warrants at $.20 per share (b) 1 million warrants $.30 per share All warrants listed are to be piggybacked on next registration Columbia Financial Group Compliance 4. At the time of Consultants execution of the referred to in #3, Compensation above, common shares underlying the warrants, delivered by Corporation to Consultant will, at that particular time, be free trading, or, if not, if a registration is contemplated, the shares will have "piggy back" registration rights and will, at the expense of the Corporation, be included in said registration. -2- Representation of Corporation 5. (a). The Corporation, upon entering this Agreement, hereby warrants and guarantees to the Consultant that to the best knowledge of the Officers and Directors of the Company, all statement, either written or oral, made by the Corporation to the Consultant are true and accurate, and contain no misstatements of a material fact. Consultant acknowledges that estimates of performance made by Corporation are based upon the best information available to Corporation officers at the time of said estimates of performance. The Corporation acknowledges that the information it delivers to the Consultant will be used by the Consultant in preparing material regarding the Company's business, including but not necessarily limited to, its financial condition, for dissemination to the public. Therefore, in accordance with Paragraph 6, below, the Corporation shall hold harmless the Consultant from any and all errors, omissions, misstatements, except those made in a negligent or intentionally misleading manner in connection with all information furnished by Corporation to Consultant. 6. View Systems, Inc. a. Authorized: ___________ shares b. Issued: ___ shares c. Outstanding: ________ shares d. Free trading (float): ___ shares (approx.) e. Shares subject to Rule 144 restrictions: ________ shares (approx.) Limited Liability 7. With regard to the services to be performed by the Consultant pursuant to the terms of this Agreement, the Consultant shall not be liable to the Corporation, or to anyone who may claim any right due to any relationship with the Corporation, for any acts or omissions in the performance of services on the part of the Consultant, except with said acts or omissions of the Consultant are due to its willful misconduct or culpable negligence. Columbia Financial Group Termination 8. This Agreement may be terminated by either party upon the giving of not less than sixty (60) days written notice, delivered to the parties at such address or addresses as set forth in paragraph 9, below. In the event this Agreement is terminated by the Corporation, all compensation paid by Corporation to the Consultant shall be "back-charged" to Consultant, and payable to the Corporation as follows: -3- (a) In the event the Agreement is terminated by the Consultant in months 1 through 6, Consultant shall repay to Corporation two-thirds (2/3) of the fees paid pursuant to Paragraph 3 above. (b) In the event the Consultant terminates this Agreement during months 7 through 10, the Corporation shall be entitled to a return of fifty percent (50%) of the fees paid in accordance with Paragraph 3 above; thereafter, all fees paid shall be deemed earned. (c) In the event of a termination by either party, any repayment of funds or stock due from Consultant to Corporation may be paid either in cash or the equivalent number of shares of the Corporation received by Consultant from the Corporation in accordance with Paragraph 3 above, payable at the option of the consultant. The valuation of said shares for purposes of repayment of shares, shall be the bid price of said shares as of the date shares are tendered back to the Corporation. If there is no bid price, then the price shall be agreed to, by separate writing to be determined by the parties upon the execution of this Agreement. Notices 9. Notices to be sent pursuant to the terms and conditions of this Agreement shall be sent as follows: Timothy J. Rieu Gunther Than Columbia Financial Group, Inc. View Systems, Inc. 1301 York Road, Ste. 400 28 Dekker Drive Lutherville, Maryland 21093 Golden, CO 80401 Columbia Financial Group Attorney's Fees In the event any litigation or controversy, including arbitration, arises out of or in connection with this Agreement between the parties hereto, the prevailing party in such litigation, arbitration or controversy, shall be entitled to recover from the other party or parties, all reasonable attorney's fees expenses and suit costs, including those associated within the appellate or post judgment collections proceedings. Arbitration 10. In connection with any controversy or claim arising out of or relating to this Agreement, the parties hereto agree that such controversy shall be submitted to arbitration, in conformity with the Federal Arbitration Act (Section 9 U.S. Code Section 901 et seq), and shall be conducted in accordance with the Rules of the American Arbitration Association. Any judgment rendered as a result of the arbitration of any dispute herein, shall upon being rendered by the arbitrators be submitted to a Court of competent jurisdiction with the State of Maryland, if initiated by Consultant, or in the state of Pennsylvania, if initiated by the Corporation. -4- Governing Law 11. This agreement shall be construed under and in accordance with the laws of the State of Maryland and the State of Colorado, and all obligations of the parties created under it are performed in Baltimore County, MD and Golden, CO venue for said arbitration shall be in Baltimore City, MD and Golden, CO and all parties hereby consent to that venue as the proper jurisdiction for said proceeding provided herein. Parties Bound 12. This Agreement shall be binding on and inure to the benefit of the contracting parties and their respective heirs, executors, administrators, legal representatives, successors, and assigns when permitted by this Agreement. Legal Construction 13. In case any one or more of the provisions contained in this Agreement shall for any reason by held to be invalid, illegal, or unenforceable in any respect, the invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if the invalid, illegal, or unenforceable provision had never been contained in it. Columbia Financial Group Prior Agreements Superseded 14. This Agreement constitutes the sole and only Agreement of the contracting parties and supersedes any prior understanding or written or oral agreements between the respective parties. Further, this Agreement may only be modified or changed by written agreement signed by all the parties hereto. Multiple Copies or Counterparts of Agreement 15. The original and one or more copies of this Agreement may be executed by one or more of the parties hereto. In such event, all of such executed copies shall have the same force and effect as the executed original, and all of such counterparts taken together shall have the effect of a fully executed original. Further, this Agreement may be signed by the parties and copies hereof delivered to each party by way of facsimile transmission, and such facsimile copies shall be deemed original copies for all purposes if original copies of the parties' signatures are not delivered. -5- Liability of Miscellaneous Expenses 16. The Corporation shall be responsible to any miscellaneous fees and costs approved in writing prior by the Company or its agents to commitment that are unrelated to the agreement made between the Parties. Headings 17. Headings used throughout this Agreement are for reference and convenience, and in on way define, limit or describe the scope or intent of this Agreement or effect is provisions. IN WITNESS WHEREOF, the parties have set their hands and seal as of the date written above. By:/s/ Timothy J. Rieu --------------------------------- Timothy J. Rieu, President Columbia Financial Group, Inc. By:/s/ Gunther Than --------------------------------- Gunther Than View Systems, Inc. -6- -----END PRIVACY-ENHANCED MESSAGE-----