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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ x ] QUARTERLY REPORT UNDER SECTION 13 OR 15
(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ________to __________________________
Commission file number 0-30178
View Systems, Inc. (Exact name of small business issuer
as specified in its charter)
Florida
(State or other jurisdiction
of incorporation or
organization)
59-29228366
(IRS Employer Identification No.)
925 West Kenyon Avenue, Suite 15, Englewood,
Colorado 80110 (Address of principal executive offices)
(303) 783-9153 (Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and
reports required to be filed by Section l2, 13 or 15
(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ x ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date: 6,821,021
Transitional Small Business Disclosure Format
(Check one): Yes [ ] No [ x]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets For Nine
Months Ended September 30, 1999 and December 31, 1998
ASSETS
September 30, December 31,
1999 1998
(unaudited)
CURRENT ASSETS:
Cash $ 75,197 $ 169,899
Accounts receivable 37,770 13,599
Inventory - at lower
of cost or market 98,780 4,574
Due from affiliated
entities 66,478 3,663
Total current assets 278,225 191,735
PROPERTY AND EQUIPMENT:
Machinery and other
equipment 567,392 22,429
Software tools 7,825 10,263
575,217 32,692
Less accumulated
depreciation 131,975 21,580
Net value of property
and equipment 443,242 11,112
OTHER ASSETS:
Investment in MediaComm
Broadcasting, Inc. -
at cost which approximates
fair value 28,000 -
Software development
costs 58,133 72,223
INTANGIBLE ASSETS -
Goodwill - net of
accumulated
amortization 478,832 -
TOTAL ASSETS $ 1,286,432 $ 275,070
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable 44,412 $ 30,071
Accrued interest
payable 8,250 -
Notes payable -
stockholders 287,000 163,000
Note payable - bank 70,709 75,000
Payroll taxes payable 26,467 2,915
Total current
liabilities 436,838 270,986
STOCKHOLDERS' EQUITY:
Common stock - par
value $.001, 50,000,000
shares authorized, issued
and outstanding -
6,821,021 ( September
30, 1999) and 4,316,667
( December 31, 1998) 6,821 4,317
Additional paid
in capital 3,242,839 406,253
Deficit accumulated
during development
stage (2,400,066) (406,486)
Total stockholders'
equity 849,594 4,084
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 1,286,432 $ 275,070
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
(unaudited) (unaudited)
REVENUE:
Sales and other income $ 153,230 $ 9,384
Cost of goods sold 141,199 6,161
GROSS PROFIT ON SALES 12,031 3,223
OPERATING EXPENSES:
Amortization 12,384 -
Automobile expenses 214 -
Commissions 200 -
Depreciation 15,415 -
Development salaries 250,000
Dues and subscriptions 1,175 -
Insurance 4,961 338
Interest 5,595 2,876
Investor relations 7,094 -
Marketing 148,047 204
Miscellaneous expenses 4,122 730
Office expenses 4,942 1,942
Postage and delivery 3,694 168
Printing and Reproduction 5,260 -
Professional fees 291,637 2,519
Rent 7,495 10,716
Repairs and maintenance 10,754 -
Research - 6,731
Salaries and benefits 474,084 28,336
Taxes 2,393 2,397
Telephone 11,791 1,954
Travel expenses 28,884 359
Utilities 3,363 -
Total expenses 1,293,504 59,270
NET LOSS $(1,281,473) $ (56,047)
LOSS PER SHARE:
Basic $ (0.19) $ (0.01)
Diluted $ (0.19) $ (0.01)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
(unaudited) (unaudited)
REVENUE:
Sales and other income $ 194,491 $ 26,337
Cost of goods sold 154,068 10,048
GROSS PROFIT ON SALES 40,423 16,289
OPERATING EXPENSES:
Amortization 16,512 -
Automobile expenses 1,435 -
Commissions 1,200 -
Depreciation 22,039 -
Development salaries 250,000
Dues and subscriptions 1,494 -
Insurance 11,156 826
Interest 17,585 4,493
Investor relations 9,905 -
Marketing 156,487 3,023
Miscellaneous expenses 5,782 927
Office expenses 27,232 4,580
Postage and delivery 6,572 394
Printing and reproduction 26,897 -
Professional fees 427,797 12,420
Rent 30,395 25,462
Repairs and maintenance 14,277 -
Research 2,698 9,269
Salaries and benefits 905,541 60,230
Taxes 3,201 5,462
Telephone 18,591 2,536
Travel expenses 66,847 1,340
Utilities 10,360 -
Total expenses 2,034,003 130,962
NET LOSS $(1,993,580) $(114,673)
LOSS PER SHARE:
Basic $ (0.36) $ (0.03)
Diluted $ (0.36) $ (0.03)
See accompanying notes.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998, TO SEPTEMBER 30, 1999
(unaudited)
Common Additional Retained
Stock Paid-In Capital Earnings
Balance at January 1, 1998
(unaudited) 4,150 $ 156,570 $ (162,928)
Net Loss - - (114,673)
Balance at September 30,
1998 (unaudited) 4,150 156,570 (277,601)
Sale of common stock 167 249,683 -
Net Loss - - (128,884)
Balance at December 31,
1998 4,317 406,253 (406,486)
Sale of common stock 814 1,049,535 -
Redemption of common stock (199) (435,101) -
Issuance of common stock
(employee and other
compensation) 1,469 1,240,864 -
Issuance of common stock
(Eastern Tech acquisition) 250 787,250 -
Issuance of common stock
(debt conversion) 170 194,038 -
Net loss - - (1,993,580)
Balance at September 30,
1999 (unaudited) $ 6,821 $ 3,242,839 $ (2,400,066)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,993,581) $ (114,673)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Dereciation and
amortization 38,552 -
Employee and other compensation
paid through the issuance of
common stock 1,242,333 -
Changes in operating assets
and liabilities:
Accounts receivable 56,819 -
Inventory (63,996) -
Accounts payable (1,455) 749
Accrued interest payable 8,250 -
Taxes payable 20,202 -
Software development costs 20,490 -
(672,387) (113,924)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment (26,958) -
Amounts advanced to/from
affiliated entities (447,792) 3,090
Investment in MediaComm
Broadcasting, Inc. (28,000) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans provided by
stockholders 431,315 113,327
Repayment of loans
to stockholders - -
Repayment of note
payable - bank (4,291) -
Proceeds from sale of
common stock 1,050,192 -
Redemption of stock (396,781) -
1,080,435 113,327
NET DECREASE IN CASH (94,702) 2,493
CASH AT BEGINNING
OF PERIOD 169,899 7
CASH AT END OF PERIOD $ 75,197 $ 2,500
Schedule of noncash investing and
financing transactions:
Common stock issued to effect
purchase of Eastern Tech
Manufacturing, Inc. $ 787,500 $ -
Debt issued to effect
purchase of Eastern Tech
Manufacturing, Inc. $ 148,184 $ -
Common stock issued for
conversion of debt $ 194,208 $ -
Common stock issued for
purchase of automobile $ 25,125 $ -
Common stock redeemed in
exchange for receivable $ 384,977 $ -
Cash paid during the period for:
Interest $ 9,335 $ -
Income taxes $ - $ -
See accompanying notes.
NOTES TO INTERIM FINANCIAL STATEMENTS
NOTE 1 - General
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information
and the instructions to Form 10-QSB and Item
310 of Regulation S-B. Accordingly, they do
not include all the information and footnotes
required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals)
considered necessary for a fair presentation
have been included. Operating results for the
nine months ended September 30, 1999, are not
necessarily indicative of the results that may
be expected for the fiscal year ended December
31, 1999. For further information, refer to the
consolidated financial statements and footnotes
thereto included in the Companys report on
Form 10-SB/A for the fiscal year ended December
31, 1998.
Reclassification
Certain amounts for 1998 have been reclassified
to conform to the 1999 presentation.
Use of Estimates
The preparation of the financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported
amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date
of the financial statements and the reported amounts
of revenues and expenses during the
reporting period. Estimates are used when accounting
for uncollectible accounts receivable,
inventory valuation, depreciation and amortization,
intangible assets and contingencies, among
others. Actual results could vary from those estimates.
NOTE 2 - Loss Per Share
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings per Share the
Company is required to present basic and diluted
earnings per share (EPS). Basic and fully diluted
loss per share have been calculated by the dividing
the loss by the weighted average shares outstanding
during each of the periods presented.
NOTE 3 - Due From Affiliated Entities
Due from affiliated entities includes amounts due
from a member of the Board of Directors and
senior management and a company under his control.
The amounts due will be repaid during
the quarter ending December 31, 1999.
NOTE 4 - Intangible Assets
Intangible assets consists of goodwill created by
the purchase acquisition of Eastern Tech
Manufacturing, Inc. This goodwill is being amortized
on a straight-line basis over a ten-year period.
NOTE 5 - Notes Payable - Stockholders
Notes payable - stockholders consists of amounts
due to stockholders which management intends
to repay within the next six months.
NOTE 6 - Income Taxes
The Company is in a net operating loss (NOL) carry
forward position for book and tax purposes.
No tax benefit will be recognized until taxable
income is recognized.
NOTE 7 - Business Combination
During the nine months ended September 30, 1999, the
Company acquired all of the outstanding
stock of Eastern Tech Manufacturing, Inc. a closely
held company located in Columbia, Maryland.
This business combination was accounted for as a
purchase and resulted in the creation of
goodwill in the amount of $495,344.
Item 2. Management's Discussion and Analysis or Plan of
Operation.
Overview
We were in a developmental stage and achieved only
nominal operations until October 1998. Thereafter,
we began the development of the SecureView line of
products, which permit cameras to be remotely monitored,
and the video captured by those cameras to be stored on
hard disk, and received first sales revenue in March, 1999.
In July, 1999, we began marketing and producing the
SecureView-4, which is a system that takes a 4-camera
input, and provides 4 alarm inputs, 4 outputs, and 4
relays. In many ways, the SecureView-4 embodies all
of our engineering development work (including the companies
acquired) to date. We continue to advance the engineering
for our SecureView product lines, including software
upgrades and enhancements and hardware efficiency and cost
improvements. We are nearing completion of a web based
surveillance product and a VCR replacement digital video
storage device. We intend to market our products in the
commercial business, consumer, law enforcement, government,
and military markets. We estimate that the markets for
our video surveillance products aggregate $2 billion and
are growing at a rate of 12 - 15%. We have devoted most
of our resources since expanding our business operations
in October, 1998, to the research and development of digital
video surveillance and security products and of brand awareness
of "SecureView." In the third quarter ended September 30, 1999,
we began earning material revenues; however, we continue to
operate at a loss due to high development costs and the
substantial costs associated with launching our products to market.
As of September 30, 1999, we had an accumulated earnings
deficit of approximately $1,281,473, and a per share loss of $.19.
We expect our operating losses to continue until we develop a
sufficient customer and advertising base to cover our operating
expenses. In sum, our expenses have exceeded our revenues for
each fiscal period since our inception. The revenues we have
generated to date have become more than nominal for the first
time in this third quarter ended September 30, 1999. Excluding
sales of manufacturing and testing services in our Eastern Tech
subsidiary, our sales have almost exclusively related to product
sales and licensing fees for products that are still undergoing
development. We believe that product sales revenues will increase
as we refine the development of our products and as we bring new
products to market. Accordingly, we believe a comparison of the
results of our operations on a period-by-period basis is of little
benefit. We expect that, as we implement our business plan, our
revenues will grow, along with the burdens generally associated
with larger revenues, including increased burdens on our managerial,
accounting and technical personnel.
Acquisition Treatment.
We were formed on January 26, 1989, under the name of
Beneficial Investment Group, Inc., changing our name to
BIGI, Inc., on July 21, 1998, and to View Systems, Inc.,
on September 22, 1998. In October, 1998, we acquired
RealView Systems, Inc. and issued 2,000,000 shares to
the existing shareholders of RealView Systems in exchange
for all of the outstanding shares of RealView Systems.
We have accounted for the acquisition of RealView under
the pooling of interest accounting method. On February 25,
1999, we acquired Xyros Systems, Inc., a Maryland
corporation, issuing 150,000 shares to the shareholders
of Xyros and guarantying certain debts of Xyros. Our
acquisition of Xyros added staff and intellectual property
to our Company. Xyros had developed a line of products,
called the RM1600, and these products have been incorporated
into the SecureView product line. We have accounted for the
acquisition of Xyros under the pooling of interest accounting
method. The May 25, 1999, acquisition of Eastern Tech
Manufacturing Corp., allowed us to acquire strategic assets
and human resources. Eastern Tech provides the Company with
a captive manufacturer that enables the Company to better
manage quality control of its products. Eastern Tech is
implementing a quality control plan that is in compliance
with the requirements of ISO9002 and has consistently
maintained high quality control standards in its contract
production work for large commercial and governmental
entities, having maintained certifications that it produces
in accordance with MIL-I-45208 and MIL-STO-2000. We
accounted for the Eastern Tech business combination
under the purchase accounting method. Consistent
with the foregoing accounting treatment, our financial
statements consolidate the financial statements of Xyros,
Eastern Tech and RealView.
Results of Operations
Three Months Ended September 30, 1999, Compared with
September 30, 1999
Net sales for the quarter ended September 30, 1999,
increased $143,846 to $153,230 compared with $9,384
in the year ago period. The sales growth was experienced
primarily through the consolidation of operations with
Eastern Tech Manufacturing Corp., which has an established
clientele with steady orders of manufacturing services.
We also experienced limited sales of our SecureView
product line in the third quarter ended September 30,
1999, with both domestic and international sales.
Gross profit margin for the third quarter ended September
30, 1999, decreased from 34.3% in 1998, to 7.9% this year.
At these low sales amounts, we consider the gross profit
margin fluctuation to be non-material. The gross profit
margin should stabilize with increased sales.
Operating expenses for the third quarter ended September
30, 1999, were $1,293,504 compared with $59,290 in the
year ago period. The increase was principally the result
of increased sales and marketing activity and costs of sale,
increased research and development costs and costs associated
with our corporate acquisitions and consolidations of operations.
Interest expense was increased 94.5% to $5,595 for the
third quarter of 1999, as a result of Xyros taking loans
from management and Columbia Bank to fund operations.
We assumed these debt obligations when we acquired Xyros.
There was no income tax expense for the entire period.
The current period reflects the income tax expense
associated with the operations of Eastern Tech
Manufacturing Corp.; however, the expense is eliminated
on the Companys consolidated return by consolidating
net operating losses incurred in the Companys other
operations. The consolidated operations of the Company
for the near-term future are expected to continue generating
net operating tax losses that can be carried forward and
offset against income earned.
As a result of the foregoing, net loss was $1,281,473 for
the third quarter ended September 30, 1999, up from $56,047
from the year ago period.
Results of Operations
Nine Months Ended September 30, 1999, Compared with
September 30, 1999
Net sales for the nine months ended September 30,
1999, increased $168,154 to $194,491 compared with
$26,237 in the year ago period. The sales growth
was experienced primarily through the consolidation
of operations with Eastern Tech Manufacturing Corp.,
which has an established clientele and order to
manufacturing services. We also experienced limited
sales of our SecureView product line in the third
quarter ended September 30, 1999, with both domestic
and international sales.
Gross profit margin for the first nine months ended
September 30, 1999, decreased 61.8% in 1998, to
20.8% in 1999. At these low sales amounts, we consider
the gross profit margin fluctuation to be non-material.
The gross profit margin should stabilize with increased
sales.
Operating expenses for the first nine months ended September
30, 1999, were $2.034,003 compared with $130,962 in the
year ago period. The increase was principally the result
of increased sales and marketing activity and costs of sale,
increased research and development costs and costs associated
with our corporate acquisitions and consolidations of operations.
Interest expense was increased $13,092 to $17,585 for the
first nine months of 1999 as a result of Xyros taking loans
from management and Columbia Bank to fund operations.
There was no income tax expense for the entire period.
The current period reflects the income tax expense associated
with the operations of Eastern Tech Manufacturing Corp.;
however, the expense is eliminated on the Companys
consolidated return by consolidating net operating losses
incurred in the Companys other operations. The consolidated
operations of the Company for the near-term future are
expected to continue generating net operating tax losses
that can be carried forward and offset against income earned.
As a result of the foregoing, net income was $1,993,580 for
the nine months ended September 30, 1999, compared to a
net loss of $114,673 for the previous year.
Risk Factors and Cautionary Statements
This Statement contains certain forward-looking statements.
We wish to advise readers that actual results may differ
substantially from such forward-looking statements.
Forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially from
those expressed in or implied by the statements, including,
but not limited to, the following: the our ability to meet
our cash and working capital needs, our ability to
successfully market our products, and other risks
detailed in our periodic report filings with the
Securities and Exchange Commission.
Quarterly Trends.
We do not anticipate significant "seasonal"
changes in our operations. We expect continue to
experience significant revenue growth throughout the
remainder of calendar year 1999, and into the year
2000, after which the Company expects revenues to
assume a steadier, slower growth. The security
industry has traditionally been served with CCTV
analog systems, which are inferior in terms of
performance and cost to a digital system like
SecureView. As a result, many large security system
integrators, commercial and government parties are
currently looking for digital systems that provide
remote video access, programmable, unattended smart
security features and enhanced video storage.
Accordingly, the Company believes that there is an
immediate market opportunity for the SecureView
product line and the Company is well positioned
to take advantage of that market opportunity.
The Company believes that much of its sales growth
will be driven by significant revenue growth in
the SecureView line of products. In addition,
the Company expects to see sales revenue growth in
the electronic component assembly, test and
engineering service offerings in Eastern Tech, as
Eastern Tech hires additional personnel to manage
production and quality control thereby freeing up
resources to focus more on sales. We believe that
there is a significant market need for design-engineering
services, especially when such services can be combined
with manufacturing services. Many of Eastern Techs
manufacturing competitors offer engineering services.
Eastern Tech will be moving into design engineering
work, and the Company expects the addition of this
additional service offering in Eastern Tech will boost
sales revenue.
Liquidity and Capital Resources.
Since our inception, we have funded our cash requirements
primarily through equity transactions. We used the funds
from those transactions to fund investments in, and
acquisition of, technology, assets and companies, to
provide working capital and for general corporate purposes,
including paying expenses we incurred in connection with
the development of the SecureView line of products.
As of December 31, 1998, we had total assets of $275,070.00,
and total liabilities of approximately $270,986.00,
resulting in equity of $4,084.00. On February 25, 1999,
we acquired Xyros and losses in Xyros had been funded in
part by small loans from two shareholders aggregating
$125,000.00 and a $75,000.00 revolving bank line of
credit. Following the acquisition of RealView,
beginning in November 1998, we conducted an offering
of securities under Regulation D, Rule 504 promulgated
by the U.S. Securities and Exchange Commission.
This offering was fully subscribed and closed on
February 8, 1999, and the Company sold 666,667 shares
for a consideration of $1,000,000.00, which provided
a significant source of operating capital and capital
used to acquire and consolidate RealView, Xyros and
Eastern Tech. During January and February 1999, the
Company received most of the proceeds of the Rule 504
offering. On May 25, 1999, the Company acquired Eastern
Tech, for an exchange of shares and a guaranty of debt
to Eastern Techs sole shareholder, Lawrence Seiler.
The acquisition of Eastern Tech added substantial assets
to the consolidated balance sheet of the Company. As
a result, as of June 30,1999, the Company had total
assets of $1,528,233.00 The Companys total liabilities
as of that date were $475,559.00, and the stockholders
equity was $1,052,674. In July, the Company issued
shares to Lawrence Seiler in satisfaction of the debts
owed to, or for the benefit of him, at an exchange
rate of $2.00 per share, which was the price set for
offering securities under the Companys Rule 506
private placement of securities. As a result of
this isolated transaction, the liabilities of the
Company have been reduced to $436,838 and shareholders
equity is $849,594, as of September 30, 1999. Our
cash or cash equivalents September 30, 1999, totaled $75,197.
Net cash used in operating activities was $672,307
for the first nine months of 1999.
We have three short-term debt obligations. We owe
$120,000 to two former managers of Xyros, which it
acquired on February 25, 1999, and $71,000 to Columbia
Bank. The loans to the former managers come due on
December 31, 1999, and the loan to Columbia Bank has
been extended to February 1, 2000.
We believe that cash from operations and funds
available will not be sufficient to meet anticipating
operation, capital expenditures and debt service
requirements for the next twelve months and that we
will be materially dependent on raising additional
capital through equity sales and/or debt financing.
Year 2000 Compliance
We have completed a review of our computer systems
and operations to determine the extent to which our
business will be vulnerable to potential errors and
failures as a result of the "year 2000" problem.
The year 2000 problem results from the use of computer
programs which were written using only two digits
(rather than four digits) to define applicable years.
On January 1, 2000, any clock or date recording
mechanism, including date-sensitive software that
uses only two digits to represent the year, could
recognize a date using "00" as the year "1900," rather
than the year "2000." This could result in system
failures or miscalculations, causing disruptions of
operations, including, among other things, a temporary
inability to process transactions, send invoices,
provide services or engage in similar activities. These
failures, miscalculations and disruptions could have a
material adverse effect on our business, operations and
financial condition. We have concluded, based on our
review of our operations and computer systems, that our
significant computer programs and operations will not be
materially affected by the Year 2000 problem, and that we
can modify or replace the programs that will be affected
by the end of 1999 at a cost which will not be significant.
Under a reasonably likely worst-case scenario, however,
our computer systems and/or operations could be materially
affected by the Year 2000 problem.
In addition to our own properties and computer systems,
we rely on operations and computer systems of
third-party customers, financial institutions,
vendors and other parties with or through which
we conduct business (such as Internet service
providers and the owners of communications backbones
utilized by us). We have prioritized our year 2000
efforts in an effort to protect, to the extent possible,
our business and operations. Our first priority will be
to protect our critical operations such as those systems
and applications that we use to provide digital video
security and surveillance capabilities from incurring
material service interruptions that could occur as a
result of the year 2000 transition. To this end, we have
attempted to identify any element within our business
operation (including elements relating to third party
relationships) that could be materially impacted by the
year 2000 date change, and have attempted to determine
the risks to our continuing business operations as a
result of an adverse effect resulting from that date change.
We generally require our key vendors and suppliers to warrant
they are year 2000 ready. We have purchased most of our
mission-critical systems from such third-party vendors.
We have attempted to identify the vendors and third-parties
with which we have contractual relationships which may not
be year 2000 compliant by the end of 1999, and we have
adopted contingency plans which we believe will mitigate
any adverse impact to our business operations resulting
from those vendors or third parties inability to perform
their contractual obligations. Our contingency plans
include preparing and using backup copies of our financial
records, determining the availability and reliability of
alternate network and backbone communication systems,
and scheduling additional phone center, repair and
administrative personnel to be on hand on the transition date.
Plan of Operation
We have devoted most of our resources since
inception of operations to the research and development
of the SecureView line of products, the development
of marketing and sales infrastructure, the development
of production capability and the development of brand
awareness of SecureView. During the third quarter,
the Company has been devoting a significant amount of
time developing a web based digital video surveillance
product and VCR replacement digital video storage product,
which it hopes to bring to market during the fourth quarter
of calendar year 1999 or first quarter of calendar year
2,000. Although the Company has been selling products
since March of 1999, the Company is still developing these
products and has generated limited revenues. As of
September 30, 1999, the Company had an accumulated earnings
deficit of approximately $1,281,473. The Company expects
the operating losses to continue until the Company develops
a sufficient network of value added resellers, OEMs and
strategic partners generating sales revenues to cover our
operating expenses.
We are currently making some isolated private placements
of securities to qualified investors and we are planning
a public offering of securities in the first quarter of
calendar year 2,000. We will use the cash raised from
these sales of securities in this offering to continue to
expand our product line, to bring our new products to market,
to expand the Companys sales, marketing and promotional
activities for our products, and to increase the Companys
engineering, production management, quality control, and
customer support staff. The Company operates in a very competitive
industry that requires continued large amounts of capital
to develop and promote its products. Many of the Companys
competitors have significantly greater capital resources.
The Company believes that it will be essential to continue
to raise additional capital, both internally and externally,
to compete in this industry.
The Company will need to be successful in its public offering
and to raise further external capital in the future.
The amount of capital that we need to be raised will
depend upon many factors, including, but not limited to,
the rate of sales growth and market acceptance of the
Companys product lines, the amount and timing of our
necessary research and development expenditures, the
amount and timing of our expenditures to sufficiently
market and promote the Companys products and the amount
and timing of any accessory product introductions. In
addition to accessing the public equity markets, the
Company will pursue bank credit lines and equipment lease
lines for certain capital expenditures. However, there
can be no assurance that the Company will be able to access
the capital it needs. The Company currently estimates
it will need between $7,000,000 - $12,000,000 million to
fully develop all of its products and launch its expanded
business operations and in accordance with its current
business plan. The actual amount of capital the Company
will need to raise will depend on a number of factors,
including (i) the Companys ability to negotiate favorable
prices for purchases of necessary parts and assemblies, (ii)
the number and composition of its resellers, OEMs and
strategic partners, (iii) the prices the Company can
obtain for its products and services and costs of servicing
its products and delivering its services, (iv) changes in
technology. In addition, the Companys cost and revenues
could vary from the amounts the Company expects or budgets,
possibly by a material amount, and those variations are
likely to affect how much additional financing the Company
will need for its operations. Accordingly, there can be
no assurance the Companys actual financial needs will not
exceed the amounts available to them. To the extent that
the Company acquires the amounts necessary to fund the
business plan through the issuance of equity securities,
current shareholders may experience dilution in the value
per share of their equity securities. The acquisition of
funding through the issuance of debt could result in a
substantial portion of the Companys cash flows from
operations being dedicated to the payment of principal
and interest on that indebtedness, and could render the
Company more vulnerable to competitive and economic downturns.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
As of September 30, 1999, other than its subsidiary,
Eastern Tech, as described below, the Company is not
a part of any material pending legal proceedings and
no such action by, or to the best of its knowledge,
against the Company has been threatened.
Certain assets of the Companys wholly subsidiary,
Eastern Tech, have been seized by the Federal Bureau
of Investigation, Washington Field Office (the FBI).
On March 12, 1999 the FBI seized one corporate bank
account holding $63,572.21 titled in the name of
Eastern Tech and a 1996 Chevrolet Tahoe and bank
account holding $43,321.49 titled in the name of
Larry Seiler. Both Mr. Seiler and Eastern Tech are
contesting the seizure action and the matter has been
referred to the U.S. Attorneys Office for the District
of Columbia.
The U.S. Attorneys Office for the District of Columbia
and the FBI have disclosed that they are investigating
Eastern Tech and Mr. Seiler in connection with certain
subcontracts Eastern Tech performed in 1996 and 1997
for Boeing, Inc., which in turn was performing contracts
with the National Space & Aerospace Administration
(NASA). In seizing the assets, the FBI has alleged
that Eastern Tech and Mr. Seiler paid kickbacks in
connection with the Boeing contracts and laundered moneys
paid from these contracts. Mr. Seiler and Eastern
Tech vigorously contest these allegations and are
prepared to take whatever actions are necessary to
recover the seized assets. No civil or criminal
proceedings have been initiated with regard to this
on-going investigation and seizure.
The Companys officers and directors are aware of
no other threatened litigation, which would have
a material, adverse effect on the Company.
Item 2. Changes in Securities.
On May 25, 1999, we acquired all of the
stock of Eastern Tech Manufacturing Corp. in
exchange for the issuance of 250,000 shares of
restricted common stock to Lawrence Seiler and
cash payments to Lawrence Seiler and/or guarantie
of cash payments for the benefit of Larry Seiler.
On July 29, 1999, the Company issued 170,000
shares of restricted common stock in exchange for
the cancellation of indebtedness it owed to or for
the benefit of Lawrence Seiler. In connection with
this issuance, the Company agreed to register at it
expense 100,000 of these shares. Each share issued
on July 29, 1999, cancelled $2.00 worth of
On July 2, 1999, the Company 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 Eastern Tech Manufacturing Corp. Mr. Than
acquired this stock pursuant to Section 4(2) of
the Securities Act of 1933.
On July 2, 1999, we issued 13,333 shares
to Leokadia Than because she exchanged a RealView
stock certificate in the amount of 10,000 shares
that she had obtained from Keith Bosworth, a former
shareholder of RealView Systems, Inc. The Company
had agreed to exchange 1.33 of its shares of common
stock in exchange for every share of stock of RealView
Systems, Inc. Ms. Than acquired this stock pursuant
to Regulation D promulgated under the Securities Act
of 1933.
On July 19, 1999, we issued 300,000 shares
of restrictive common stock to Gunther Than as
consideration under an executive employment agreement
he entered into with the Company, in which he agreed
to a restrictive, non-compete, non-solicit covenant
running to the benefit of the Company. These shares
of restrictive common stock were issued under Section
4(2) of the Securities Act of 1933. These shares were
issued as compensation and were valued at $.50 per
share on the Companys financial statements.
On August 2, 1999, the Company 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,
we sold the following amounts of shares to the following
individuals: Gus and Anita Mastracci, Maryland residents,
1,000 shares; Michael L. Bagnoli, Indiana resident, 20,000
shares; Martin J. Maassen, Indiana resident, 111,000 shares.
Two of the investors in this offering, Michael L. Bagnoli
and Martin J. Maassen are members of our board of directors.
On August 8, 1999, we issued 200,000 shares of
restrictive common stock and warrants to purchase 400,000
shares of restricted common stock at an exercise price of
$2.00 per share to Columbia Financial Group pursuant to a
written contract in exchange for its provision of investment
relations services, including direct investor relations and
broker/dealer relations, public relations services, publishing,
advertising services, fulfillment services, as well as
internet related services. We valued the shares of restricted
stock at $.50 per share on the Companys financial statements.
These shares of restrictive common stock were issued
under Section 4(2) of the Securities Act of 1933.
On September 1, 1999, we granted options to
Richard W. Gray to purchase 30,000 shares at an exercise
price of $.01 per share pursuant to the View Systems, Inc.
Stock Option Plan and Stock Option Agreement. The options
vest at the rate of 5,000 shares per month beginning
September 1, 1999, and continuing to January 1, 2,000.
Thereafter, the options vest at the rate of 1,000 shares
per month beginning February 1, 2,000, and continuing
to June 1, 2000.
On September 16, 1999, we granted options to Andrew
L. Jiranek to purchase 18,000 shares at an exercise price
of $2.07 per share (or 110% of the then trading price of
the Companys shares) pursuant to the View Systems, Inc.
Stock Option Plan and Stock Option Agreement. The options
vest at the rate of 1,500 shares per month beginning
September 16, 1999, and continuing to August 16, 2,000.
Also, on September 16, 1999, we granted options to Andrew
L. Jiranek to purchase 18,000 shares at an exercise price
of $.01 per share pursuant to the View Systems, Inc. Stock
Option Plan and Stock Option Agreement. The options vest
at the rate of 1,500 shares per month beginning July 1,
1999, and continuing to June 1, 2,000.
On September 16, 1999, we granted options to Gunther
Than to purchase 60,000 shares at an exercise price of $2.07
per share (or 110% of the then trading price of the Companys
shares) pursuant to the View Systems, Inc. Stock Option Plan
and Stock Option Agreement. The options vest at the rate of
5,000 shares per month beginning September 16, 1999, and
continuing to August 16, 2,000. Also, on September 16, 1999,
we granted options to Gunther Than to purchase 60,000 shares
at an exercise price of $.01 per share pursuant to the View
Systems, Inc. Stock Option Plan and Stock Option Agreement. The
options vest at the rate of 5,000 shares per month beginning July
1, 1999, and continuing to June 1, 2,000.
On September 16, 1999, we granted options to Vincent DeCampo to
purchase 6,000 shares at an exercise price of $1.88 per share
(or 100% of the then trading price of the Companys shares)
pursuant to the View Systems, Inc. Stock Option Plan and
Stock Option Agreement. The options vest at the rate of 500
shares per month beginning September 16, 1999, and continuing
to August 16, 2,000. Also, on September 16, 1999, we granted
options to Vincent DeCampo to purchase 3,000 shares at an
exercise price of $.01 per share pursuant to the View Systems,
Inc. Stock Option Plan and Stock Option Agreement. The options
vest at the rate of 250 shares per month beginning September
1, 1999, and continuing to August 1, 2,000.
Item 3. Defaults Upon Senior Securities
The former shareholders and management of Xyros Systems, Inc.
loaned monies to Xyros, and took back promissory notes, which
mature on December 31, 1999, and accrue interest at the rate
of 10% per annum. As part of our acquisition of Xyros, we
agreed to guaranty the repayment of this indebtedness. As of
September 30, 1999, the outstanding principal balance of these
loans had been paid down to $110,000. Some of the management
of Xyros, became involved in the management of the Company
following the acquisition. The Company is not current on the
monthly interest or other payments on one or more of these
loans. The Company has an outstanding open line of credit
facility with Columbia Bank that has an outstanding amount
due of $71,250. This facility matures on February 1, 2000.
We believe we are current on all payments on this account.
Item 4. Submission of Matters to a Vote of Security Holders.
On August 27, 1999, the Company held a special meeting of
shareholders in lieu of annual meeting. On August 12, 1999,
notice of the meeting was mailed to all shareholders of record
as of August 12, 1999, in accordance with the Corporations
By-laws. No proxies were solicited as to matters submitted for
a vote at the meeting of shareholders; however, several shareholders
appointed Gunther Than as their proxy to vote their shares
at the meeting. A quorum was present in person and by proxy,
and the shareholders unanimously approved the following actions:
Martin Maassen, Michael L. Bagnoli, David Barbara and Gunther
Than were elected to the Board of Directors for the Corporation.
2. Stegman & Company was approved to be engaged as the
auditors of the Companys books and records for the coming year;
3. Interwest Transfer Co., Inc. was approved to be engaged
by the Company as its stock transfer agent for the coming year;
4. The View Systems, Inc. 1999 Restricted Share Plan was
approved and all agreements thereunder ratified and approved;
5. The View Systems, Inc.1999 Stock Option Plan, attached
hereto and made a part hereof, was approved.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is filed.
Index of Exhibits
Plan of Purchase, Sale, Reorganization, Arrangement,
Liquidation or Succession.
Acquisition Agreements
2.1.1 View Systems, Inc. acquisition of RealView Systems, Inc.
2.1.2 View Systems, Inc. acquisition of Xyros Systems, Inc.
View Systems, Inc. acquisition of Eastern Tech Mfg. Corp.
2.2 Letter of Intent to Form Joint Venture Corporation b/t
Netserv
Caribbean, Ltd. and View Systems, Inc.
3. Articles of Incorporation/By-laws of Registrant
3.1 Articles of Incorporation and all Articles of Amendment.
3.2 By-Laws.
4. Instruments Defining The Rights of Holders, Including Indentures.
4.1 Agreement with Columbia Financial Awarding Warrants and Stock
and Granting Piggyback Registration Rights.
4.2 Subscription Agreements From Rule 506 Offering and Private
Placement Memorandum, Dated August 8, 1999.
4.3 Subscription Agreement With Lawrence Seiler, Granting
Registration Rights to 100,000 Shares.
Agreement With Cardinal Capital Granting Warrants and Piggyback
Registration Rights As To Those Warrants.
Lock-Up Agreement with Lawrence Seiler.
Form of Stock Certificate.
Material contracts
View Systems, Inc. Employment Agreement with Gunther Than
View Systems, Inc. Employment Agreement with Andrew L. Jiranek
View Systems, Inc. Engagement Agreement with Bruce Lesniak
View Systems, Inc. Employment Agreement with David Bruggeman
View Systems, Inc. Employment Agreement with Lawrence Seiler
Eastern Tech Mfg. Corp. Employment Agreement with Lawrence Seiler
Eastern Tech Mfg. Corp. Employment Agreement with John Curran
Lease Agreement b/t View Systems, Inc. and Lawrence Seiler
Stock Redemption Agreement, dated May 27, 1999, b/t View Systems,
Inc. and Gunther Than
Stock Redemption Agreement, dated September 30, 1999, b/t View
Systems, Inc. and Gunther Than
View Systems, Inc. 1999 Restricted Share Plan
View Systems, Inc. Restricted Share Agreements
Restricted Share Agreement with Bruce Lesniak (Lesniak & Associates)
Restricted Share Agreement with John Curran
Restricted Share Agreement with Vincent DeCampo
Restricted Share Agreement with David Bruggeman
Restricted Share Agreement with Tom Weiss
Restricted Share Agreement with Gunther Than
Restricted Share Agreement with Andrew Jiranek
Restricted Share Agreement with Linda Than
View Systems, Inc. 1999 Employee Stock Option Plan
Non-qualified Stock Option Agreement with Dick Gray
Non-qualified Stock Option Agreement with Gunther Than
Non-qualified Stock Option Agreement with Vincent DeCampo
Non-qualified Stock Option Agreement with Andrew Jiranek
Qualified Stock Option Agreement with Gunther Than
Qualified Stock Option Agreement with Vincent DeCampo
Qualified Stock Option Agreement with Andrew Jiranek
Promissory Note from Xyros Systems, Inc. to Ken Weiss
Promissory Note from Xyros Systems, Inc. to Hal Peterson Trust
Loan Agreement b/t Xyros Systems, Inc. and Columbia Bank
Promissory Note from Xyros Systems, Inc. to Columbia Bank
Security Agreement b/t Xyros Systems, Inc. and Columbia Bank
Statement regarding computation of per share earnings.
Letter on Unaudited Interim Financial Information from Stegman & Company
Consents of experts and counsel.
Consent of Stegman & Company
24. Power of Attorney.
27 Financial Data Schedule.
SIGNATURES
In accordance with the requirements of the Exchange Act,
the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
View Systems, Inc.
By:______________________________
Gunther Than, President, CEO and Bd. Chairman
________________________________
Martin Maassen, Director
________________________________
Michael Bagnoli, Director
_______________________________
David Barbara, Director
___________________________________________
Andrew L. Jiranek, Vice President & General Counsel
_________________________________
Linda Than, Comptroller
