UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-28946
Electro-Optical Systems Corporation
(Exact name of registrant as specified in its charter)
Delaware 75-2254748
(State of incorporation) (I.R.S. Employer Identification No.)
36 Nason St, Maynard, Massachusetts 01754
(Address of principal executive offices) (Zip Code)
(978) 461-1773
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]
The aggregate market value of the Registrant's Common Stock, $.0001 par value,
held by non-affiliates of the registrant as of March 13, 1998 was $20.6 million
based on the price of $3.4375 on that date on the NASDAQ National Market. As of
March 13, 1998, 5,989,696 shares of the Registrant's Common Stock, $.0001 par
value, were issued and outstanding to such affiliates. A total of
approximately 21 million shares are issued and outstanding.
After March 13, 1998 the aggregate market value of shares of Common Stock held
by nonaffiliates of the Registrant cannot be determined since there has been no
market for such common stock. For purposes of this computation, all executive
officers, directors and 10% beneficial owners of the Registrant are deemed to be
affiliates. Such determination should not be deemed to be an admission that such
directors, officers or 10% beneficial owners are in fact, affiliates of the
Registrant.
<PAGE>
Part I
Item 1. Business
Information contained in this Report contains forward-looking statements such as
statements of the Company's plans, objectives, expectations and intentions, that
can often be identified by the use of forward-looking terminology, such as
"may," "will," "expect," "anticipate," "believe," "plan," "intend," "could,"
"estimates," "is being" or "goal" or other variations of these terms or
comparable terminology. Such statements, which include statements relating to
the anticipated growth of the market for biometric verification equipment, the
Company's ability to develop and market new products and the Company's ability
to enter new markets, and other matters are subject to risks and uncertainties
that could cause actual results to differ materially from those anticipated. The
cautionary statements made in this Report should be read as being applicable to
all forward-looking statements wherever they appear in this Report. The
forward-looking statements contained herein speak only as of the date of this
Report. EOSC expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any such statement or reflect any change in
EOSC's expectations or any change in events, conditions or circumstances on
which any such statement is based. Factors that could cause or contribute to
such differences include those discussed in the risk factors set forth in Item 7
below (the "Risk Factors") as well as those discussed elsewhere herein.
Recent Developments
On March 13,1998, Electro-Optical Systems Corp. (EOSC or the Company) suspended
operations because of a temporary restraining order obtained by the Securities
and Exchange Commission ("SEC") as part of its investigation of the Company. See
Item 3, Legal Proceedings. Although the temporary restraining order was
eventually lifted as part of the settlement with the SEC, the Company has not
been able to recommence operations because of a lack of capital to operate the
business. The Company had been negotiating additional financing with U.S.
Milestone prior to the commencement of the "SEC Litigation" ( as defined in Item
3, Legal Proceedings). In light of the circumstances, however, such funding is
expected to be unavailable. While exploring alternative financing sources, the
Company has had difficulty obtaining financing due to the uncertainty created by
the SEC investigation. If the Company is unable to secure adequate financing,
the Company's ability to complete the development of its proposed product and to
manufacture the product for distribution in the commercial market is extremely
doubtful.
Due to the Company's lack of capital, the Company is not able to engage an
independent public accountant to complete an audit of the Company's financial
statements for the fiscal year ending December 31, 1997. The Company had engaged
an independent public accountant to complete an audit for its financial
statements for the fiscal year ending December 31, 1996 and December 31, 1995,
which was included as an exhibit to the Company's periodic report on Form 8-K
filed February 13, 1998. Nonetheless, the Company's independent public
accountant has resigned as of September 18, 1998, which was reported on the
periodic report on Form 8-K, filed September 25, 1998. As such, no review or
update of those financial statements has occurred and such statements are
current only up to the date stated on the report. The Company is presently
searching for a new independent public accountant, but does not expect to be
able to complete an audit of its financial statements until and unless it
receives adequate financing, which is extremely doubtful.
A class action lawsuit, case number 98CIV.6403, Alan Fellman, et al., on behalf
of himself and all others situated vs. Electro Optical Systems Corp., Charles
Weaver, et al in September 10, 1998 by shareholders who purchased the Company's
stock from December 18, 1997 to March 27, 1998 inclusive, and who are claiming
damage in the United States District Court, Southern District of New York. The
Company presently has no capital, no operations and no source of additional
financing. Nonetheless, the Company intends to defend its position, however,
given its present financial situation, the Company's ability to defend against
this action this action will be extremely limited.
Overview
The Company is a development stage company, that designs, develops, tests, and
produces fingerprint biometric systems that can be used to secure access to
computer based information systems as well as provide access control in a number
of other applications.
The Company's biometric system verifies the user by scanning her fingerprint
into a digital image, processing the image to extract fingerprint minutiae
information and then converts the minutia data into templates for comparison
with the users stored template. Once a positive comparison is made, the
information on the user is then passed to the host system. This system
automatically (without the use of an operator) verifies the user, reducing or
eliminating the need for passwords in multi-user environments. The device
verifies the user in less than a second, enabling controlled access to data and
a secure audit trail of the end user for each document seen and/or modified.
The medical and financial markets are beginning to require verification of users
who access specific records because of the public's privacy and security
concerns. EOSC is developing fingerprint based biometric systems for these
markets. The Company's sales will be primarily to VARs and OEMs. EOSC will
supply biometric devices and software to VARs that can be used in conjunction
with their own products. The OEM applications will use modules in which EOSC's
core verification technology will be used with little or no modification.
EOSC is building on its core technology base, which includes proprietary optics,
digital video systems, image processors, and fingerprint verification algorithms
to produce a quality biometric fingerprint system. The Company has applied for a
patent on EOSC's unique optical system, which is a key element in the product.
Other key elements of this proprietary technology will be patented.
The core biometric technology can be used, unaltered, for a series of biometric
fingerprint products that the Company plans to introduce in the future.
The Company was incorporated as a Delaware company in October 1996 under the
name of Curbstone Acquisition Corp. The Company was renamed Electro-Optical
Systems Corp. in December 1997 in conjunction with the merger of WTS
Transnational Corporation, a Massachusetts corporation.
Industry Background
There is a convergence towards using biometrics by many technology markets.
Biometrics is an enabling technology which can be used to authenticate or verify
the user, define level of privilege, maintain privacy, strengthen system
integrity and provide non-repudiation of transactions or receipt of data. The
electronic information security market, computer aided manufacturing market
(including time and attendance), financial transaction market (point of sale,
ATM, commodities) and the original physical security markets are establishing
nearly identical biometric system requirements.
The security and identification industry consists of several different
technologies, each at various stages in their respective life cycles. Those
technologies include:
Card Technologies
Bar code
PHOTO Id
Magnetic Stripe
Smart Card (Integrated Circuit - IC)
PIN (Personal Identification Number) and Token Technologies
ATM Card
Numeric Key Pad
Time Sensitive Code Card
Biometric Information Technologies
Fingerprint
Typing Rhythm
Retina Scan
Voice Recognition
Hand Topology
Signature Dynamics
These technologies can either stand-alone or be combined to create hybrids, such
as Magnetic Stripe and PIN, used today for ATM bank transactions. Smart Cards
can be used with fingerprint verification systems for point of sale user
verification. Most future applications will use hybrids and will likely include
application or private label specific encryption.
Markets
Information systems (IS) security has become increasingly important to business
organizations because a growing amount of their control systems have moved from
manual procedures to IS-based procedures. This migration of financial records,
engineering documentation, acquisition plans, customer records, time and
attendance, shop flow records, employee information, and other functions into
IS-based systems has accelerated with organizational downsizing, the spread of
personal computers, and the introduction of mid-range or client-server
technology. The migration to open desktop computing and client-server technology
has temporarily outpaced the creation and deployment of business-quality
security and auditing products. The development of security solutions for these
new environments is expected to be faster than in previous paradigm shifts. This
faster response will occur because the level of security awareness and knowledge
among managers, IS specialists, auditors, and end users is now much higher than
it was in the early 1980s, when IS security was widely introduced into the
mainframe environment for the first time.
The medical, financial, telecommunications and insurance industries are
searching for a cost-effective solution over privacy and security of digital
based information. At conferences such as card Tech/Secure Tech and privacy and
American Business these industries engage in discussions seeking new and
improved techniques for improving the security over access to computerized data
records. Since 1993 there has been significant activity in United States
Congress related to the privacy of medical and financial records. Many bills
require the ability to audit the actual user, thereby motivating medical and
financial companies to seek new and improved administrative control over access
to records.
The information security and access control markets have identified security
needs, which can be met by biometric technology. In the past, biometric
solutions have been cost prohibitive. Current investment in technology is
reducing the cost and increasing the utility of biometric systems. The company
believes that lower cost is opening these markets to biometric solutions.
The Company's market research concluded that many businesses or institutions
have a specific need to verify and secure the identity of individuals conducting
on-line data transactions or gaining access to databases, especially where
financial transactions are conducted or sensitive information is stored.
Typically within the enterprise, businesses and institutions to prevent
unauthorized transactions and access to databases use password security.
However, this method does not guarantee that the identity of the individual
entering the password and conducting the transactions is the same as the
identity of the individual authorized to use that password. For those
applications and databases where it is required, fingerprint identification can
offer a higher level of verification and security.
Almost as important as the added security, biometrics has the capability to be
an empowering tool. It can reduce the time and effort to log-on to a system. By
identification of the user, the application software has the ability to quickly
present menus and windows configured for the user.
The development of application software that enables biometrics as a security
option, or a password substitute, is necessary to stimulate recurring demand for
secure IS in particular secure electronic commerce.
Security is an important factor in IS decisions, and it affects the
marketability of other IS products and services. Security was the number one
requirement in a recent Standish Group survey of more than 900 businesses. The
Standish Demand Assessment and Tracking Service survey of 11 key IS system
features indicates that security is firmly established as a key feature
requirement.
The Company believes that if the price of biometric solutions comes down and the
multiplicity of passwords, PINs and code cards go up, there will be an
increasing rate of migration to biometric systems.
Products
Workstation Fingerprint Reader
If the Company can recommence operations, adequate financing is obtained and
development proceeds according to plan, EOSC's initial product is expected to be
an integrated verification fingerprint reader for computer based data security
applications. The prototype reader has the ability, through fingerprint
biometrics, to verify the user, eliminating the need for passwords in multi-user
user environments. The system verifies the user in less than a second, enabling
controlled access to data and a secure audit trail of the end user for each
document seen and/or modified.
Other Products and Applications
The Company believes that the installation of advanced biometric verification
systems will accelerate the adoption of this technology for other applications.
The core biometric technology developed for the workstation verification reader
can be used, unaltered, for a series of biometric fingerprint products that the
Company plans to introduce in the future. See "Risk Factors - Development
Market; Uncertainty of Market Acceptance" and "Uncertainty of Product
Development."
Product Development
Prior to suspending operations, the Company's product development efforts were
focused on developing new products for the computer data security and access
control system markets. The Company was developing biometric verification
systems, based upon the Company's current technology, to meet computer data
security requirements. The Company was also developing improvements to its core
technology and the company plans to produce product improvements based on them.
This development effort is being funded by private investment. There can be no
assurance that the Company will be able to develop systems on a timely basis, if
at all, or that if developed, the system will be commercially successful. See
"Risk Factors - Uncertainty of Product Development."
The Company had a core team of engineers that were responsible for the
development of key technologies (optics, cameras, processors, algorithms and
software) and the concept development and design of the Company's products.
The Company had relied on a number of consulting firms and consultants to
provide industrial design and other engineering capabilities needed. This allows
the Company to staff tasks quickly and cost effectively if adequate financing
could be obtained. The Company's goal would be to bring these capabilities in
house as the Company grows to the point where it can support them on a
continuous base.
Marketing and Sales
If the Company can recommence operations, adequate financing is obtained and
development proceeds according to plan the Company plans to sell and market its
products through the use of a number of indirect sales and marketing techniques
in an attempt to stimulate demand for its products and services. The Company
plans to market its products into vertical markets through value-added resellers
(VARs) and Original Equipment Manufactures (OEMs). The Company plans to utilize
small internal sales and marketing staff. It plans to use manufactures
representatives in areas where appropriate. See Risk Factors "Dependence on New
and Uncertain Markets" and "Dependence on collaborative partners for product
distribution."
Customer Service and Support
If operations can be recommenced the Company plans to provide a high level of
VAR support to assist in the installation and integration of the Company's
products into the VARs application software and their customers' Intranets. The
Company plans to offer a number of customer support services, including
applications support, training, and software upgrades.
Regulatory Issues and Industry Standards
Regulatory or legislative activities, in the U.S. and elsewhere, that are
potentially bringing biometrics to the forefront and should improve market
conditions for the biometric industry in general include:
Privacy legislation
Voter registration
Health care legislation
Passport control/border security
Welfare fraud legislation
Drivers license/ID
The United States over the past five years has been in a period of intense
congressional and state legislative and executive branch privacy activity. The
1998 European Union Data Directive deadline and the likelihood of continuing
technological and organizational threats to privacy suggest privacy will not
soon fade as a consumer issue. For the business community, this means continued
close attention to privacy developments, continued work on industry-wide and
company privacy policies and principles, and perhaps most importantly, continued
and strengthened commitment to handling personal information in a way that
convinces decision makers that the business community is a responsible and
trustworthy information steward.
An examination of both the current state of privacy legislation and the
Administrations privacy proposals leaves little doubt that there will be a
sector-by-sector approach to privacy. Proposed legislation addresses information
privacy issues either by type of record (such as financial record or medical
record), or by type of record subject (such as SSA account holders or children),
or by type of user (such as Internet consumer).
In March 1998, a committee of the National Research Council released its report,
for the Record: Protecting Electronic Health Information proposing practices n
which could serve as guidelines for Health and Human Services (HHS) for
improving the privacy and security of electronic patient records. The Committee
recommended that hospitals, doctors offices, and insurance firms adopt technical
and organizational security safeguards:
Provide employees with unique identifiers and discipline employees who
share identifiers or leave records unattended;
Use additional access controls to restrict employees from obtaining
information that is unnecessary for their jobs and utilize electronic
audits;
Use special software encrypted passwords, dedicated modem lines,
and/or firewalls; and
Encrypt information.
The committee also encouraged consideration of updating industry standards for
protecting electronic health records.
The U.S. 103rd Congress produced approximately 100 bills and executive branch
initiatives that involved business-privacy issues. These included access to
public records information, comprehensive telecommunication reform (including a
privacy mandate for the FCC) and health record reform legislation.
The need to provide appropriate Information System (IS) and OLTP system
protection in heterogeneous computing environments has increased the sense of
urgency for adopting security standards of all types: de facto, national, and
international. There are major economic incentives for IS system manufacturers,
software companies, and multinational IS users to promote consistent
international security standards that foster interoperability on a worldwide
scale.
Commercial companies seem to be less worried about secrecy and more concerned
about authorizing access and changes to information. This emphasis on access and
change authorization is a natural extension of the management and financial
control objectives that are fundamental to good business practices.
Proprietary APIs have slowed the growth of biometrics for a wide range of
applications where a vendor would like to use an out of the box system from
anyone. An application vendor cannot be expected to write to every device on the
market there are simply too many of them and they're not widely deployed. As
APIs become available, the biometric verification system vendors will write
system software to interface with (standard) APIs. A good example of the success
of this approach for other technologies is the computer mouse.
Intellectual Property
Proprietary protection of the Company's products, technology, and processes is
essential to its business. The Company's policy is to protect its technology by,
among other things, filing or causing to be filed patent applications for
technology that it considers important to the development of its business. The
Company has filed one patent application for its unique optical design and
intends to file additional patents, where appropriate, relating to technology,
new products and product improvements. The use of patents to protect proprietary
positions for electronic and optical systems is well founded within this
industry. There can be no assurance, however, that patents will provide
meaningful proprietary protection to the Company, given the uncertain and
complex legal and factual questions relating to their breadth and
enforceability.
The Company also relies upon trade secrets, know-how, and continuing
technological internal and external advances to develop and maintain its
competitive position. To maintain the confidentiality of trade secrets and
proprietary information, the Company maintains a policy of requiring employees,
consultants, and collaborators to execute confidentiality and invention
assignment agreements upon commencement of a relationship with the Company.
These Agreements are designed both to enable the Company to protect its
proprietary information by controlling the disclosure and use of technology to
which it has rights and to provide ownership in the Company of proprietary
technology developed by the Company. There can be no assurance; however, that
these agreements will provide meaningful proprietary protection for the
Company's trade secrets in the event of unauthorized use or disclosure of such
information.
EOSC's technical strengths are in optics, digital cameras, image processing and
algorithms. Competitive advantage will be created by the development of unique
optical, application specific integrated circuits (ASIC), application software,
and algorithms. See Risk Factors - "Limited Protection of Intellectual property
rights."
Competition
There are a number of competitors who are developing and producing fingerprint
biometric products. Competitive information on companies with existing products
and those companies currently in the development stage is available from two
primary sources: PIN (a US publication) and The Biometric Reports (a UK
publication). While both of these sources list companies developing or marketing
fingerprint identification devices, a few of the competitors are large
companies, most of the competitors are small and privately owned. It is
difficult to obtain data on either their financial condition or marketing
strategies. Several companies provide similar equipment and software. They
include Sony Corporation, Digital Biometrics Inc., Identix Inc., Identicator
Technologies, Inc., Digital Persona., Mytec, Inc., American Biometric Company,
Printrak International Inc. Mytec, Inc., and the National Registry, Inc. Identix
Inc. and Digital Biometrics Inc. are US public companies. Most of the
competitors are small privately held companies.
The industry is an emergent industry and the financial performance of the
companies reflect it.
EOSC also faces competition from non-biometric technologies such as PINs, Time
Sensitive Code Cards and Smart Cards.
Manufacturing
If operations can be recommenced , the Company plans to establish manufacturing
operations that consist primarily of assembly, test, burn-in and quality
control. The Company plans to rely on outside manufacturers to produce
sub-assembly components including its optic lens, printed circuit boards, and
other components for the ultimate finished product. The Company believes that
for the expected demand of its products, these components should be readily
available and that it should not be reliant on any single manufacturer or
supplier for its components.
The Company plans to purchase a major portion of the parts and peripheral
components for its products. Most parts and materials are readily available from
several supply sources.
The Company intends to produce its products at its U.S. facility.
Employees
On March 13, 1998, the date of the SEC action, the Company had 7 full time
employees, of whom 4 were engaged in product development and manufacturing and
the remaining 3 in sales and marketing, general and administrative. As of July
31, 1998, the Company had 3 full time employees.
Item 1 (a). Executive Officers of the Company
The Executive Officers of the Company are as follows:
Name Age Position
Charles B. Weaver 57 President, Chairman of the Board,
and Chief Executive Officer
James F Callahan 47 Vice President Manufacturing
George G. Clarke 46 Vice President Marketing
Charles B. Weaver, President, Chairman of the Board and Chief Executive
Officer. Charles B. Weaver was a founder of WTS Transnational, Inc. the
Predecessor Company to the registrant, in 1990. Prior to founding WTS,
Mr. Weaver held positions of Business Area Manager and Program Manager for the
Honeywell Electro-Optics Division of Honeywell, Inc. during his 15 years
tenure. Prior to joining Honeywell Electro-Optics, he was a Senior Systems
Engineer for Texas Instruments. He holds a Bachelor of Arts degree in Physics
from Oklahoma City University and participated in Graduate Studies in Physics
at Texas A&M.
James F. Callahan, Vice President Manufacturing. Prior to becoming Vice
President Manufacturing in 1994 of WTS Transnational, Inc., Mr. Callahan was
responsible for Production Control at American Surgical Technologies Inc.
(1992-1994) and Materials Manager of Autograhix, Inc. (1990-1992).
Prior thereto, he spent 18 years at Honeywell's Electro-Optics Division in a
number of manufacturing related positions.
George G. Clarke, Vice President of Marketing & Sales. Prior to joining the
company in February 1998, Mr. Clarke was Regional Manager - Marketing & Sales
since 1991 and National Account Manager (1988-1991) of Goddard Technology a
developer of imaging systems and software products. Mr. Clarke has a BS degree
from the University of Toronto, Canada.
Item 2. Properties
As of December 31, 1997, the Company had facilities in Acton, Massachusetts
where it leased and occupied a total of approximately 6,000 square feet of space
The description of the lease terms is incorporated by reference from Note 5 to
the Consolidated Financial Statements. On the June 25, 1998, the company ceased
operations at this facility and negotiated a termination of the lease with no
further financial obligations or penalties.
The Company is currently using facilities in Maynard, Massachusetts where it
leases as a tenant at will and occupies 800 square feet of space.
Item 3. Legal Proceedings
A class action lawsuit, case number 98CIV.6403, Alan Fellman, et al., on behalf
of himself and all others situated vs. Electro Optical Systems Corp., Charles
Weaver, et al in September 10, 1998 by shareholders who purchased the Company's
stock from December 18, 1997 to March 27, 1998 inclusive, and who are claiming
damage in the United States District Court, Southern District of New York. The
Company presently has no capital, no operations and no source of additional
financing. Nonetheless, the Company intends to defend its position, however,
given its present financial situation, the Company's ability to defend against
this action this action will be extremely limited.
The Company is a defendant in an action commenced by the Securities and Exchange
Commission (SEC) in the United States District Court for the Southern District
of New York on March 13, 1998 captioned SEC v. Cavanaugh, et al. (the SEC
Litigation). In the SEC Litigation, the SEC alleges that various defendants,
including the Company, engaged in a pattern of conduct having the purpose and
effect of manipulating the price of the common stock of the Company since
December 1997 when Curbstone Acquisition Corporation (Curbstone), a public
company having no operations, acquired WTS Transnational Corp. (WTS) and changed
its name to Electro-Optical Systems Corporation. Those other defendants accused
of manipulation include, inter alia, the former controlling shareholders of
Curbstone; the former financial adviser of the Company, U.S. Milestone Corp.,
and affiliates who had arranged the acquisition of WTS by Curbstone; and William
Levy, a lawyer for U.S. Milestone Corp. who formerly acted as lawyer for the
Company. No officer, director or employee of the Company is named as a
defendant. The complaint alleges violations of Sections 5 and 17 (a) of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder against all of the defendants, including
the Company. The Court entered an ex parte temporary restraining order on March
13, 1998 that froze the assets of all of the defendants, including the Company,
and enjoined the defendants from raising additional funds. In addition, trading
of the Company's stock over the OTC bulletin board was frozen for ten days. The
Company plans to request reinstatement.
After the commencement of a hearing on the SEC's motion for a preliminary
injunction, and prior to the Court issuing its opinion on April 23,1998, the SEC
and the Company agreed to a stipulation entered as an order of the Court on
April 15, 1998, pursuant to which: (i) the SEC withdrew its motion for a
preliminary injunction against the Company;
(ii) the temporary restraining order against the Company was dissolved; (iii)
the Company is free to expend existing funds on reasonably necessary business
expenses, excepting payments of any deferred salary to management and any
payment to any other defendant; and (iv) the Company will provide the SEC with a
summary of its expenditures on a periodic basis.
The Company has no continuing association with any of the other defendants in
the SEC Litigation who are alleged to have carried out the alleged manipulative
scheme and expressly disassociates itself from the alleged conduct of such
defendants. The former controlling shareholders of Curbstone no longer have a
controlling position in the Company and have no influence over the Company's
ongoing affairs. U.S. Milestone and its principals are no longer acting as
financial advisers to the Company and have no influence over the Company's
ongoing affairs, except to the extent that it claims to have an ownership
interest in approximately 2.1 million shares of the Company's common stock. An
additional 2,108,482 were purchased in a private transaction arranged by U S
Milestones and 857,081 shares are held by business acquaintances of U S
Milestones received in connection with the reverse acquisition and related
financing. Mr. Levy is no longer engaged as a counsel to the Company and has no
influence over the Company's ongoing affairs, except to the extent that he owns
500,000 shares of the Company's common stock. None of the other defendants is an
officer, director, employee or advisor to the Company.
The Company understands that the SEC's investigation of the matters alleged in
the complaint in the SEC Litigation is ongoing. The Company intends to
co-operate with this investigation. The President ,Charles Weaver, has asserted
his right against self-incrimination in response to questions raised by the SEC
pertaining to its investigation.
The Company seeks to continue the development of its principal product, a
fingerprint identification device having a variety of potential security-related
applications. The Company is exploring alternatives for additional financing in
order to achieve its business objectives. Before the commencement of the SEC
Litigation, the Company had anticipated that U.S. Milestone would provide or
arrange for up to $3 million in additional financing. In light of the current
circumstances, such financing is expected to be unavailable. If the Company is
unable to obtain adequate additional financing, its ability to continue as a
going concern or to survive in its present state is extremely doubtful.
Item 4. Submission of Matters to a vote of Security Holders
No matters were submitted to a vote of security holders after the reverse
acquisition of the Company of December 18, 1997.
Part II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Market Information - The Company's Common Stock, $.0001 par value (Common Stock)
was quoted on the NASDAQ OTCBB under the symbol (EOSC.) The following table sets
forth the high and low sales prices for the Company's Common Stock for the
periods indicated. No trading has occurred since the trading on the NASDAQ OTCBB
of the Common Stock was frozen on March 13, 1998.
High Low
December 18 - December 31, 1997 7.00 .47
January 1 - March 31, 1998 6.593 3.19
April 1 - July 31, 1997 N/A N/A
Number of holders- As of December 31, 1997, there were approximately 204 holders
of record of the Company's common stock, including multiple beneficial holders
at depositories, banks and brokers listed as a single holder in the street name
or each respective depository, bank or broker.
Dividend Policy - The Company has never declared or paid cash dividends on its
capital stock and does not plan to pay any cash dividends in the foreseeable
future. The Company's current policy is to retain all of its earnings to finance
future growth.
Recent Sales of Unregistered Securities - The following information is furnished
with regard to all securities issued by the Registrant within fiscal 1997 which
were not registered under the Securities Act.
Prior to the consummation of the Company's acquisition of WTS (the "WTS
Acquisition") in exchange for 15,488,120 shares of the Company's common stock,
the Company (then named Curbstone Acquisition Corp.) had outstanding 3,488,217
shares of common stock. On December 19, 1997, Curbstone issued 1,054,240 shares
of its common stock to foreign investors in a private placement under Regulation
S (the "Private Placement") at a per share price of $.47 which generated
$500,000 in gross proceeds to the Company. In addition, the Company issued
1,054,241 shares of its common stock on December 19, 1997 in full repayment of a
$500,000 loan advance made to WTS in November of 1997 (the "Loan Payment"). As
of February 17, 1998, the Company has 21,084,818 outstanding shares of common
stock. The Company had arranged a $300,000 bridge loan (convertible note)
through US Milestone in anticipation of a $3,000,000 investment. There are
currently no other options, warrants, or other convertible securities
outstanding.
The securities issued in such transactions were not registered under the
Securities Act, as amended, in reliance upon the exemptions from registration
set forth in Section 3(b) and 4(2) of the Securities Act, relating to sales by
an issuer not involving any public offering. None of the foregoing transactions,
either individually or in the aggregate, involved a public offering.
Item 6. Selected Financial Data
The following table contains certain selected consolidated financial data of WTS
prior to the transaction and to the Company post transaction on a consolidated
basis and is qualified in its entirety by the more detailed Unaudited
Consolidated Financial Statements included herein. This information provided
herein has not been audited by independent public accountants. Although the
Company does not expect any material changes, there can be no assurance that
such changes will not occur if the Company is able to appoint new independent
public accountants to complete the audit. This data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Unaudited Consolidated Financial
Statements appearing elsewhere herein.
Unaudited Consolidated Balance Sheet and Statements of Operations
Consolidated Statement of Operations Data:
December 31
<TABLE>
1994 1995 1996 1997
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Revenues $1,360 $672 $ - $ -
Cost of revenues 884 373 - -
Gross margin 476 299 - -
Operating expenses:
Research and development - - 205 88
Selling and marketing 41 162 131 7
General and administrative 468 389 123 259
Total operating expenses 509 551 459 354
Income (loss) from operations (33) (252) (459) (354)
Interest and other income
(expense), net (1) (-) - -
Income (loss) before
income taxes (32) (252) (459) (354)
Provision for income taxes - - - -
Net income (loss) $ (32) $ (252) $ (459) $ (354)
Net income (loss) per
common and common
equivalent share $ (.01) $ (.08) $ (.04) $ (0.02)
Weighted average number
of common and common
equivalent shares
outstanding 2,201 3,057 10,901 21,083
Consolidated Balance Sheet Data:
(Dollars in thousands)
1994 1995 1996 1997
Working capital $72 $(297) $(643) $(149)
Total assets 203 21 - 584
Stockholders' equity
(deficit) 91 (284) (643) (121)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with "Item
1. Business," "Item 6. Selected Financial Data," the Company's Unaudited
Consolidated Financial Statements and Notes thereto and the information
described under the caption "Risk Factors" below.
Overview
Curbstone Acquisition Corp. created Electro-Optical Systems Corp.
(EOSC) through the acquisition of WTS
Transnational, Inc. (WTS) on December 18, 1997 by acquiring all the issued
and outstanding shares of WTS. At the completion of the acquisition,
Curbstone changed its name to "Electro-Optical Systems Corp." and the OTC
Bulletin Board symbol changed to (EOSC) from ("CBSO"). The management of
Curbstone resigned in favor of the management of WTS.
On December 18, 1997, Curbstone Acquisition Corporation (Curbstone) acquired
Electro Optical Systems Corp. (EOSC), formerly WTS Transnational Inc., in which
Curbstone acquired the outstanding stock of EOSC in exchange for 15,488,120
shares of Curbstone's common stock or 73% of Curbstone. In connection with the
acquisition, the Company changed its name to Electro-Optical Systems
Corporation. Prior to the acquisition, Curbstone had no operating business. EOSC
is a development stage company, which is developing for commercial use
state-of-the-art systems for the information and security and access control
market segments. As a result of the acquisition, the Company's primary business
is the business of WTS. For accounting purposes, the acquisition is treated as a
recapitalization of Curbstone with WTS as the acquirer (reverse acquisition).
The number of shares of common stock that each holder of the WTS capital stock
received in the acquisition was determined by multiplying the number of shares
of WTS capital stock held by each holder by the exchange ratio 336.83. In
connection with the acquisition, EOSC issued 2,108,481 shares of common shares
to certain investors resulting in net proceeds of approximately $835,000.
The Unaudited Consolidated Balance Sheet as of December 31, 1997 and the
Unaudited Combined Statement of Operations for the year ended December 31, 1997
give effect to the acquisition accounted for under the reverse acquisition
purchase method of accounting. The financial information for the year ended
December 31, 1996 for Curbstone have been derived from the financial statements
of Curbstone which have been audited by McBride and Reeves, CPA's. The financial
information for the year ended December 31, 1995 and 1996 for EOSC have been
derived from the financial statements of EOSC which have been audited by Arthur
Andersen LLP. The unaudited financial statements as of December 31, 1997 have
been derived from the unaudited financial statements of EOSC and Curbstone,
respectively. In the opinion of management, the unaudited financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the financial position and results of
operations for such period.
The Unaudited Combined Financial Information is based on the historical
financial statements of EOSC and Curbstone under the assumptions and adjustments
set forth in the accompanying Notes to the Unaudited Combined Financial
Information.
The adjustments are based on the reverse acquisition method of accounting, which
provides that the net assets of the acquired company (Curbstone) be recorded at
their historical cost, which approximates fair value.
WTS started business as an engineering consulting company in 1990 and began
developing biometric fingerprint technology and systems. In 1994, on a contract
basis. WTS produced and shipped 20 fingerprint biometric reader systems in 1995
fulfilling a contract from a biometric company. In 1995 WTS started to develop
its own fingerprint biometric core technology based on its strengths in optics,
cameras, and image processing. It recognized the potential for these
technologies and has been exploring ways to exploit this technology and to
attract investors to continue development and commercialization of products
based on these core technologies.
As a development stage company the company will not have Revenue until the
launch of its initial product.
Prior to the commencement of the SEC Litigation, the Company anticipated that
U.S. Milestone would provide or arrange for up to $3 million in additional
financing. In light of the current circumstances, such financing is expected to
be unavailable. The Company seeks to continue the development of its principal
product, a fingerprint identification device having a variety of potential
security-related applications. The Company is exploring alternatives for
additional financing in order to achieve its business objectives. If the Company
is unable to obtain adequate additional financing, its ability to complete the
development of its proposed product and to manufacture the product for
availability in the commercial market is doubtful.
Reverse Acquisition
Prior to the consummation of the Company's acquisition of WTS (the "WTS
Acquisition") in exchange for 15,488,120 shares of Electro-Optical Systems Corp.
(EOSC) common stock, EOSC (then named Curbstone Acquisition Corp.) had
outstanding 3,488,217 shares of common stock. On December 18, 1997, Curbstone
issued 1,054,240 shares of its common stock to foreign investors in a private
placement under Regulation S (the "Private Placement") at a per share price of
$0.47 which generated $500,000 in gross proceeds to the Company. In addition,
the Company issued 1,054,241 shares of its common stock on December 18, 1997 in
full repayment of a $500,000 loan advance made to WTS in November of 1997 (the
"Loan Payment"). As of February 17, 1998, Electro has outstanding 21,084,818
shares of common stock; there are currently no options, warrants securities
outstanding.
Results of Operations
For the periods indicated, the following table sets forth the percentage of
revenues represented by the respective line items in the Company's consolidated
statement of operations:
Year Ended
December 31,
1995 1996 1997
Revenues 100.00% - -
Cost of revenues 55.53 N/A N/A
Gross margin 44.47 N/A N/A
Operating expenses:
Research and development 0.00 N/A N/A
Selling and marketing 24.09 N/A N/A
General and administrative 57.78 N/A N/A
Total operating expenses 81.87 N/A N/A
Income from operations (37.40) N/A N/A
Interest and other income, net (.01) N/A N/A
Income before income taxes (37.41) N/A N/A
Provision for income taxes 0.00 N/A N/A
Net income (34.41%) N/A N/A
Fiscal Year Ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1996
Revenues. The Company generated no revenues in fiscal 1997.
Gross Margin. The Company produced no goods for sale in either fiscal 1996
or fiscal 1997, therefore had no cost of sales.
Research and Development Expenses. Research and development expenses were
$88,000 in fiscal 1997 the decrease in research and development expenses in
fiscal 1997 was primarily due to the reduction of engineering personnel and
outside consultants working on the development of new products.
Selling and Marketing Expenses. Selling and marketing expenses were
approximately $7,000 in fiscal 1997.
General and Administrative Expenses. General and administrative expenses were
$260,000 in fiscal 1997. The increase in general and administrative expenses in
fiscal 1997 was primarily attributable to an increase in personnel and related
costs as well as additional overhead costs as the headcount for the Company
increased. The Company anticipates that general and administrative costs will
continue to increase in anticipation of continued growth in fiscal 1998.
Litigation Expenses. The Company incurred no litigation expenses in fiscal 1997.
Interest Income. None.
Provision for Income Taxes. None.
Liquidity and Capital Resources
Since inception, WTS, and now the Company, has funded its operations and capital
expenditures through internally generated cash flow, and proceeds from a private
offering. In December 1997 and January 1998, the Company received total gross
proceeds of $1.0 million from a private offering of its Common Stock. The
Company also received $300,000 in the form of a note payable bearing interest at
7% per annum. See "Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters."
Prior to the commencement of the SEC Litigation, the Company had anticipated
that U.S. Milestone would provide or arrange for approximately $3 million in
additional financing. Currently, the additional financing is unavailable. The
Company seeks to continue the development of its principal product, a
fingerprint identification device having a variety of potential security-related
applications. The Company is exploring alternatives for additional financing in
order to achieve its business objectives. If the Company is unable to obtain
adequate additional financing, its ability to complete the development,
manufacturing and marketing of its proposed product. is uncertain.
On December 31, 1997, the Company had working capital of $(149,000) including
approximately $455,000 in cash and cash equivalents. As of the date of this
filing the Company has a net deficit in working capital.
During the fiscal year ended December 31, 1997, the Company's net cash used in
operating activities was approximately $415,000. During that period, net income
and depreciation and amortization expenses were essentially zero. There were no
inventories or accounts receivable.
During the fiscal year ended December 31, 1997, net cash provided by financing
activities was approximately $877,000, primarily attributable to the receipt of
net proceeds of approximately $835,000 from the private offering of the
Company's common stock and approximately $42,000 of proceeds from convertible
notes.
The Company does not currently have any significant capital commitments.
Recent Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which established new standards for calculating and
presenting earnings per share. The Company will adopt this new standard in its
fiscal 1998 financial statements, which will require the reporting of diluted
earnings per share and basic earnings per share, as defined. Diluted net loss
per common share is the same as basic net loss per share as the Company has no
potentially dilutive common shares. The pro forma weighted average shares of
EOSC are calculated based upon the exchange ratio of 336.83 shares of Curbstone
for one share of EOSC.
Risk Factors
This Report contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Report
should be read as being applicable to all forward-looking statements wherever
they appear in this Report. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
in this Report.
Uncertainty of SEC investigation, no operations, lack of financing. The Company
has not had operations since March 13, 1998, due to a temporary restraining
order obtained against the Company by the SEC as part of its investigation of
the Company and its former directors and officers. Although the order was
eventually lifted as part of a settlement with the SEC, the Company has not been
able to recommence operations because of a lack of financing. The Company had
been negotiating additional financing with U.S. Milestone prior to the
commencement of the SEC Litigation. In light of the circumstances, however, such
funding is expected to be unavailable. While exploring alternative financing
sources, the Company has had difficulty obtaining financing due to uncertainty
created by the ongoing SEC litigation. If the Company is unable to secure
adequate financing, the Company's ability to complete the development of its
proposed product and to manufacture the product for distribution in the
commercial market is extremely doubtful.
Developing Market; Uncertainty of Market Acceptance. Rapid technological change
and evolving industry requirements characterize the market for the Company's
products. The Company believes that its future success will depend in large part
upon its ability to enhance its existing core technology and to successfully
develop new products that meet regulatory and customer requirements and gain
market acceptance. There can be no assurance that the Company's products will
not be rendered obsolete by new industry standards or changing technology.
Limited Operating History, Accumulated Net Losses. From its commencement of
business in 1990, the Company has been principally engaged in organizational,
development and marketing activities. Through December 31, 1997, the Company has
reported an accumulated net loss of approximately $1,063,933 and has had only
limited revenues. The Company has incurred additional losses from December 31,
1997 to date. There is no assurance that the Company will be able to achieve
significant revenues or any net income in the future.
NASDAQ SmallCap Market Eligibility and Maintenance Requirements; Delisting of
Securities from the NASDAQ SmallCap Market. EOSC was listed as a defendant in a
stock manipulation lawsuit on March 13th, 1998. The Company was delisted from
the NASDAQ SmallCap Market at that time. The Company plans to apply to have its
stock relisted. If the Common Stock were excluded from the SmallCap Market, it
would adversely affect the prices of such securities and the ability of holders
to sell them. The Board of Governors of the National Association of Securities
Dealers, Inc. ("NASD") has established certain standards for the continued
listing of a security on the SmallCap Market. Additional investment funding may
be required to meet these Maintenance Requirements.
Significant Fluctuations and Unpredictability of Operating Results. The
Company's success will depend upon its ability to enhance its existing products,
and to develop new products to meet regulatory and customer requirements and to
achieve market acceptance. The enhancement and development of these products
will be subject to all of the risks associated with new product development,
including unanticipated delays, expenses, technical problems or other
difficulties that could result in the abandonment or substantial change in the
commercialization of these enhancements or new products. Given the uncertainties
inherent with product development and introduction, there can be no assurance
that the Company will be successful in introducing products or product
enhancements, including products that meet FAA certification standards, on a
timely basis, if at all, or that the Company will be able to market successfully
these products and product enhancements once developed.
Lengthy Sales Cycle. The Company expects sales effort with potential customers
to be extended over several years. Customers may initially purchase one or a few
units for extensive testing and evaluation before making a decision regarding
volume purchases and, in certain circumstances, the Company may provide a
potential customer with a demonstration unit for beta testing and evaluation
free of charge. Delays in anticipated purchase orders could have a material
adverse effect on the Company's business and financial condition. See "Risk
Factors-Significant Fluctuations and Unpredictability of Operating Results" and
Item 1." Business-Marketing and Sales."
Uncertainty of Product Development. The Company's success will depend upon its
ability to enhance its core technology, and to develop new products to meet
customer requirements and to achieve market acceptance. The enhancement and
development of these products will be subject to all of the risks associated
with new product development, including unanticipated delays, expenses,
technical problems or other difficulties that could result in the abandonment or
substantial change in the commercialization of these enhancements or new
products. Given the uncertainties inherent with product development and
introduction, there can be no assurance that the Company will be successful in
introducing products or product enhancements, on a timely basis, if at all, or
that the Company will be able to market successfully these products and product
enhancements once developed.
Rapid Technological Change. Rapid technological change and evolving industry
requirements characterize the market for the Company's products. The Company
believes that its future success will depend in large part upon its ability to
enhance its existing core technology and to successfully develop new products
that meet regulatory and customer requirements and gain market acceptance. There
can be no assurance that the Company's products will not be rendered obsolete by
new industry standards or changing technology.
Competition. The markets for the Company's products are highly competitive. The
Company's systems compete against Optical and Silicon based sensors as well as
other competing technologies, including Card Technologies, Personal
Identification Numbers (PIN) or passwords, and Token Technologies. Certain of
the Company's competitors have substantially greater manufacturing, marketing
and financial resources than the Company. In addition, other major corporations
have recently announced their intention to enter the verification market and
currently have systems in development. None of the Company's products have been
certified by any testing agency such as the International Computer Security
Association. Competitors may develop superior products or products of similar
quality for sale at the same or lower prices. Other technical innovations may
impair the Company's ability to market its products. There can be no assurance
that the Company will be able to compete successfully with existing or new
competitors. See "Item 1. Business-Competition."
Limited Protection of Intellectual Property Rights. The Company's success
depends significantly upon proprietary technology. The Company relies on a
combination of patent, copyright, trademark and trade secret laws,
non-disclosure agreements and other contractual provisions to establish,
maintain and protect its proprietary rights, all of which afford only limited
protection. The Company has pending one patent application in the United States.
In addition, for certain foreign countries the Company has pending patent
applications that correspond to the subject matter of the United States patent
application. There can be no assurance that any of the Company's patent
applications will be granted, that any patent or patent application will provide
significant protection for the Company's products and technology, or that the
Company's current or future products, processes or technology will not be
challenged under patents held by competitors or potential competitors. Moreover,
there can be no assurance that foreign intellectual property laws will protect
the Company's intellectual property rights. In the absence of significant patent
protection, the Company may be vulnerable to competitors who attempt to copy the
Company's products, processes or technology.
Risks Associated with Possible Acquisitions. The Company intends to pursue
potential acquisitions of businesses, products and technologies that could
complement or expand the Company's business. There can be no assurance that the
Company will be able to identify any appropriate acquisition candidate. If the
Company identifies an acquisition candidate, there can be no assurance that the
Company would be able to successfully negotiate the terms of any such
acquisition, finance such acquisition or integrate such acquired business,
products or technologies into the Company's existing business and products.
Furthermore, the negotiation of potential acquisitions as well as the
integration of an acquired business could cause diversion of management's time
and resources, and require the Company to use working capital to consummate a
potential acquisition. There can be no assurance that a given acquisition,
whether or not consummated, would not have a material adverse effect on the
Company's business or financial condition. If the Company consummates one or
more significant acquisitions in which consideration consists of Common Stock,
stockholders of the Company could suffer significant dilution of their interests
in the Company. See "Risk Factors-Management of Growth."
Concentration of Ownership; Control by Management. As of December 31, 1997, the
Company's executive officers, directors and their affiliates and members of
their immediate families beneficially owned approximately 57% of the outstanding
shares of Common Stock, excluding shares issuable upon exercise of options and
warrants. As a result, these stockholders, if acting together, will be able to
exert substantial influence over actions requiring stockholder approval,
including the election of directors, amendments to the Company's Restated
Certificate of Incorporation, mergers, sales of assets or other business
acquisitions or dispositions.
Item 8. Financial Statements and Supplementary Data
The consolidated Financial Statements and Supplementary Data of the Company are
listed under Part IV, Item 14, in this Report. This information provided therein
has not been audited by independent public accountants. Although the Company
does not expect any material changes, there can be no assurance that such
changes will not occur if the Company is able to appoint new independent public
accountants to complete the audit.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company's independent public accountant, Arthur Andersen LLP
("AA") resigned as of September 28, 1998, which was reported on the periodic
report filed September 25, 1998. AA's reports on the financial statements for
the Registrant's fiscal years ended December 31, 1996 and the year ended
December 1995 included an explanatory paragraph regarding the Registrant's
ability to continue as a going concern. AA did not complete its audit of the
Registrant's financial statements for the fiscal year ended December 31, 1997.
The foregoing notwithstanding, the reports of AA did not contain an adverse
opinion or a disclaimer of opinion, and were not modified as to audit scope or
accounting principles. There were no disagreements between the Registrant and
AA during Fiscal 1995, Fiscal 1996 and the subsequent periods on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of AA, would have caused AA to make reference to the subject
matter of the disagreements in connection with its reports. This change was
reported on a Form 8-K, filed September 25, 1998.
PART III
Item 10. Directors and Executive Officers of the Registrant
Current Capital Structure
Prior to the consummation of the Company's acquisition of WTS (the "WTS
Acquisition") in exchange for 15,488,120 shares of the Company's (previously
named Curbstone Acquisition Corp) common stock, the Company had outstanding
3,488,217 shares of common stock. On December 19, 1997, Curbstone issued
1,054,240 shares of its common stock to foreign investors in a private placement
under Regulation S (the "Private Placement") at a per share price of $.47 which
generated $500,000 in gross proceeds to the Company. In addition, the Company
issued 1,054,241 shares of its common stock on December 19, 1997 in full
repayment of a $500,000 loan advance made to WTS in November of 1997 (the "Loan
Payment"). As of February 17, 1998, the Company has outstanding 21,084,818
shares of common stock; there are currently no options, warrants, or other
convertible securities outstanding.
The following table sets forth the names and ages of the Company's current
Officers and Directors. Officers are generally elected to serve until the
meeting of the Board of Directors following the next Annual Meeting of
Shareholders or until their successors have been elected and have qualified. The
former officers and directors of Curbstone resigned at the time of the WTS
Acquisition, and certain of the officers of WTS became officers of the Company
at the time.
The following table lists the executives and directors of the Company:
<TABLE>
Amount and
Position Nature of Percent
with Beneficial of
Name Age Since Registrant Ownership Class
<S> <C> <C> <C> <C> <C>
Charles B. Weaver 57 1997 President, 7,430,155 35.24%
CEO
James Callahan 47 1997 VP 547,082 2.60%
Manufacturing
</TABLE>
Charles Weaver, President, CEO and Chairman of the Board. Charles B. Weaver
is the President of the Company and was the founder of WTS Transnational, Inc.
in 1990. Prior to founding WTS, Mr. Weaver held positions of Business Area
Manager and Program Manager for the Honeywell Electro-Optics Division of
Honeywell, Inc. during his 15 years tenure. Prior to joining Honeywell
Electro-Optics, he was a Senior Systems Engineer for Texas Instruments.
He holds a Bachelor of Arts degree in Physics from Oklahoma City University and
participated in Graduate Studies in Physics at Texas A&M.
James Callahan, Vice President Manufacturing. Prior to becoming Vice
President Manufacturing in 1994 of WTS Transnational, Inc., Mr. Callahan was
Production Control Supervisor of Corning OCA, Inc. (1992-1994) and Materials
Manager of Autograhix, Inc. (1990-1992). Prior thereto, he spent 18 years at
Honeywell's Electro-Optics Division in a number of manufacturing related
positions.
Item 11. Executive Compensation
Post-merger
The following table sets forth certain information concerning annual, long term
and other compensation received during the fiscal year ended December 31 1997,
by officers of the Company.
<TABLE>
Long
Name and Principal Fiscal Term All
Position year Salary Bonus Compensation Other
<S> <C> <C> <C> <C> <C>
Charles B. Weaver
President, CEO 1997 $9,000 N/A N/A N/A
James Callahan
VP Manufacturing 1997 $5,962 N/A N/A N/A
</TABLE>
Post-merger Compensation of Directors - There was no regular meetings of the
Board of Directors and no director of the Registrant received any compensation
during the fiscal year ended December 31, 1997.
Post-merger Employment Contracts/Stock Incentive Plans - No employment contracts
or stock incentive plans were adopted or granted by the Registrant during the
fiscal year ended December 31, 1997.
Pre-merger
Pre-merger Compensation of Officers - No executive officer of Curbstone received
any compensation during the fiscal year ended December 31, 1997.
Pre-merger Employment Contracts/Stock Incentive Plans - No employment contracts
or stock incentive plans were adopted or granted by the Registrant during the
fiscal year ended December 31, 1997.
Pre-merger Compensation of Directors - There was no regular meetings of the
Board of Directors and no director of the Registrant received any compensation
during the fiscal year ended December 31, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following tables set forth information, to the extent known by the
Registrant, as to the persons and companies who owned beneficially more than
five percent (5%) of the outstanding shares of the Common Stock of the
Registrant at the close of business on December 31, 1997, and the beneficial
ownership of the Registrant, as a group, as of such date. The number of shares
held by each Director is set forth in Item 10 herein above.
<TABLE>
Amount and Nature of
Name and Address Beneficial Ownership Percent of Class
<S> <C> <C>
Charles B. Weaver 7,430,155 35.24%
36 Nason Street
Maynard, MA 01754
US Milestone 2,108,481 10.00%
417 Surf Avenue
Stanton Island, NY 10307
AGIRA Trading, Ltd. 1,054,241 5.00%
Morgan & Morgan Trust Corp. LTD
Pasea Estate
PO Box Road Town Tortola
British Virgin Islands
Optimum Fund 1,054,241 5.00%
George Town
Grand Cayman
Cayman Island BWI
All Directors and 10,878,162 51.59%
Officers as a Group
</TABLE>
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this report:
(1) Financial Statements Page
Consolidated Balance Sheets as of December 31,
1996 and 1997 F-1
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995, 1996 and 1997 F-2
Consolidated Statements of Stockholders' Equity (Deficit) for
the years ended December 31, 1990 through 1997 F-3
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 F-4
Notes to Consolidated Financial Statements F-5
(2) Financial Statement Schedules
Supplemental schedules are not provided because of the absence of
conditions under which they are required or because the required
information is given in the financial statements or notes thereto.
This information provided therein has not been audited by independent
public accountants. Although the Company does not expect any material
changes, there can be no assurance that such changes will not occur if
the Company is able to appoint new independent public accountants to
complete the audit.
(3) Listing of Exhibits
Exhibit Reference
No
*3.1 Restated Certificate of Incorporation.
3.2 By-laws of the Company (incorporated herein by reference to
exhibit 4.2 of the Form S-8 filed November 6, 1996).
*4.1 Specimen Certificate for shares of
the Company's Common Stock
*10.3 Convertible note between the Company
and Agira trading.
*27 Financial Data Schedule
* Filed herewith
(4)Reports on Form 8-K . The following report was filed on Form 8-K by the
Company during the last quarter of the period reported by this report.
(i) A report on Form 8-K filed December 22, 1997, reporting the
acquisition of WTS Transactional Corporation, as amended on February 13,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ELECTRO-OPTICAL SYSTEMS CORP.
Dated: October 2, 1998 By /s/Charles B. Weaver
Charles B. Weaver
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
Signature Title Date
/s/Charles B. Weaver Principal Executive & October 2, 1998
Charles B. Weaver Financial Officer
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
A Development Stage Company
Unaudited Consolidated Balance Sheets
<TABLE>
Year Ended December 31,
1996 1997
Audited Unaudited
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ - $454,537
Due From Officer - 100,969
Total Current Assets - 555,506
Property:
Office Equipment 14,654 8,356
Accumulated Depreciation (14,654) (232)
Net Property - 8,124
Other Assets:
Deposits - 19,940
Total Other Assets - 19,940
TOTAL ASSETS - 583,570
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Notes Payable 7,000 8,236
Accounts Payable 333,972 267,533
Accrued Payroll and Taxes 212,326 325,751
Accrued Expenses 90,000 103,003
Total Current Liabilities 643,298 704,523
Stockholders' Equity:
Common Stock 100,309 2,109
Capital in Excess of Par - 975,100
Accumulated Deficit (743,607) (1,098,162),
Total Stockholders' Deficit (643,298) (120,953)
TOTAL LIABILITIES AND STOCKHOLDER'S
DEFICIT $ - $ 583,570
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-1
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
Unaudited Consolidated Statements of Operations
<TABLE>
Year Ended December 31,
1994 1995 1996 1997
<S> <C> <C> <C> <C>
INCOME
Revenues $ 1,359,605 $ 672,472 $ - $ -
Cost of Revenues 883,558 373,392 - -
Gross Profit 476,047 299,080 - -
OPERATING EXPENSES
Research and Development - - 205,239 87,709
Sales and Marketing 41,392 161,981 131,237 7,045
General and Administrative 467,842 388,586 122,586 259,801
Total Operating Expenses 509,234 550,567 459,062 354,555
Other Income (Expense) 1,446 (79) - -
NET LOSS $ (31,741) $ (251,566) $ (459,062) $(354,555)
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-2
ELECTRO-OPTICAL SYSTEMS CORP.
Unaudited Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
Deficit
Accumulated in the
Common stock Development stage
Number of
shares par value Total
<S> <C> <C> <C> <C> <C> <C>
INCEPTION, OCTOBER 9, 1990 $ - $ - $ - $ - $
Issuance of common stock 5,400 54 - 54
Net loss - - (77) (77)
BALANCE, DECEMBER 31, 1990 5,400 54 (77) (23)
Net income - - 13 13
BALANCE, DECEMBER 31, 1991 5,400 54 (64) (10)
Net income - - 204 204
BALANCE, DECEMBER 31, 1992 5,400 54 140 194
Net loss - - (1,378) (1,378)
BALANCE, DECEMBER 31, 1993 5,400 54 (1,238) (1,184)
Issuance of common stock 3,400 34 - 34
Net loss - - (31,741) (31,741)
BALANCE, DECEMBER 31, 1994 8,800 88 (32,979) (32,891)
Issuance of common stock 600 66
Net loss - - (251,566) (251,566)
BALANCE, DECEMBER 31, 1995 9,400 94 (284,545) (284,451)
Issuance of common stock
for services 21,475 215,215
Issuance of common stock 1,625 100,000 - 100,000
Net loss
(459,062) (459,062)
BALANCE, DECEMBER 31, 1996 100,309 32,500 (743,607) (643,298)
Reversal of no par value common
stock (32,500) (100,309) (100,309)
Recording of par value
($.0001) of shares
issued to EOSC 15,488,122 1,549 98,760 100,309
Conversion of WTS note
Payable 41,900 41,900
Conversion of Notes Payable 1,054,241 105 499,895 500,000
Sale of common stock 1,054.241 105 334,895 335,000
Issuance of common to
US Milestone
pending sale to
third parties 3,488.215 350 (350)
Net Loss (354,555) (354,555)
Balance at December 31,1997 21,084,818 2,109 975,100
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-3
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
Unaudited Consolidated Statements of Cash Flows
<TABLE>
Year Ended December 31,
1995 1996 1997
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (251,566) $ (459,062) $ (354,555)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Compensation expense - 215 -
Depreciation 7,300 4,254 232
Changes in assets and liabilities:
Accounts receivable 51,432 - -
Accounts receivable n Officer - - (100,969)
Accounts payable 132,843 141,789 (66,439)
Accrued payroll and taxes 75,230 137,096 113,425
Other accrued expenses (35,852) 51,593 13,003
Increase (Decrease) in other Assets 299 8,179 (19,940)
--------- --------- ------
Net cash provided by (used in)
operating activities (20,314) (115,936) (415,243)
------ ------- -------
Cash Flows from Investing Activities:
Purchase of office equipment - - (8,356)
Net cash provided by (used in)
investing activities - - (8,356)
-----
Cash Flows from Financing Activities:
Proceeds from notes payable - 7,000 43,136
Conversion of notes payable to common stock - - -
Sale of common stock, net 6 100,000 -
Issuance of common stock, net - - 835,000
-------- -------- --------
Net cash provided by (used in)
financing activities 6 107,000 878,136
- -------- --------
Net Increase (Decrease) in Cash (20,308) (8,936) 454,537
Cash and Cash Equivalents,
Beginning of Period 29,244 8,936 -
------ -------- --------
Cash & Cash Equivalents,
End of Period $ 8,936 $ - $454,537
</TABLE>
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
F-4
ELECTRO-OPTICAL SYSTEMS CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Electro-Optical Systems Corp. (the Company), formerly WTS
Transnational Corporation Inc. (WTS), is a development stage
company which is developing for commercial use state-of-the-art
fingerprint biometric systems for the information security and
access control market. Revenues generated by the Company in 1994
and 1995 were for consulting services provided to other companies.
On December 18, 1997, Curbstone Acquisition Corporation (Curbstone)
acquired the outstanding stock of WTS in exchange for 15,488,120
shares of Curbstone's common stock or 73% of Curbstone. For accounting
purposes, the acquisition is treated as a recapitalization of
Curbstone with WTS as the acquirer (reverse acquisition). In
connection with the acquisition, the Company changed its name to
Electro-Optical Systems Corporation (EOSC). Prior to the acquisition,
Curbstone had no operating business. As a result of the acquisition,
the Company's primary business is the business of WTS. In connection
with the acquisition, EOSC issued 2,108,481 shares of common stock to
certain investors resulting in net proceeds of approximately $835,000
to the Company.
The Company is subject to risks common to rapidly growing,
technology-based companies, including a limited operating history,
dependence on key personnel, rapid technological change, competition
from substitute products and larger companies, uncertainty in
development and marketing of commercial products and services, and
raising capital.
The Company has not completed the development of its products and has
suffered recurring losses of approximately $1,098,000 since inception.
The Company has a working capital deficit as of June 30, 1998, and is
dependent on raising additional capital to satisfy its ongoing capital
needs and to continue the development of its products. Management
continues to pursue additional funding arrangements; however, no
assurance can be given that such financing will in fact be available
to the Company. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
The accompanying financial statements reflect the application of the
accounting policies as described below.
(a) Revenue Recognition
The Company recognized consulting revenue as services were
rendered.
(b) Cash and Cash Equivalents
The Company considers all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
(c) Concentrations of Credit Risk and Significant Customers
Statement of Financial Accounting Standards (SFAS) No. 105,
Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, requires disclosure of any
significant off-balance-sheet and credit risk
concentrations. The Company has no significant
off-balance-sheet concentration of credit risk such as
foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company maintains its cash
and cash equivalents with several financial institutions and
its accounts receivable balances are all domestic. The
Company received revenues of greater than 10% of total
revenues for the years ended December 31, 1994 and 1995 and
has amounts due to the Company of greater than 10% of
accounts receivable as of December 31, 1995 as follows:
F-5
<PAGE>
<TABLE>
Significant Percentage of Percentage of
Customers Customer Revenues Accounts Receivable
A B A B
Years Ended December 31,
<S> <C> <C> <C>
1997 * * - * -
1996 * * - * -
1995 2 73% 27% - -
1994 1 100% -
</TABLE>
* The Company had no revenues in the year ended December
31, 1996 and 1997 and had no accounts receivable at
December 31, 1996 and 1997.
(d) Disclosure of Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash
and cash equivalents, accounts receivable, account payable
and notes payable. The carrying amounts of the Company's
cash and cash equivalents, accounts receivable, accounts
payable and notes payable approximate fair value due to the
short-term nature of these instruments.
(e) Depreciation
The Company provides for depreciation through charges to
operations using the straight-line method of depreciation
over an estimated useful life of three years.
(f) Net Loss per Common Share
In March 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, Earnings per Share, which
established new standards for calculating and presenting
earnings per share. Basic net loss per share is computed by
dividing net loss by the weighted average common shares
outstanding during the year. Diluted net loss per common
share is the same as basic net loss per share as the Company
has no potentially dilutive common shares. The weighted
average shares of EOSC are calculated based upon the
exchange ratio of 336.83 shares of Curbstone for one share
of EOSC as of December 18, 1997.
(g) Management Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
(h) Research and Development Costs
Research and development costs have been charged to
operations as incurred.
(2) NOTES PAYABLE
During 1996, the Company issued $7,000 of notes payable to
individuals, of which $5,000 was to a member of the Board of
Directors. These notes were paid in full in the first quarter of 1998.
During 1997 the Company issued $41,900 convertible notes payable.
These notes were converted into common stock on December 18, 1997 upon
the consummation of the "Acquisition" In February 1998 the Company
issued $300,000 note payable to a common stockholder. The note is
payable on demand and bears interest at 7%.
(3) INCOME TAXES
For the period from inception (October 9, 1990) through December 18,
1997 (the date of the merger), the Company elected for federal and
state income tax purposes to be treated as an S corporation. Under
this election, the taxable income of the Company is reported by the
stockholders of the Company on their personal tax returns.
Accordingly, the accompanying statements of operations do not include
a provision for federal or state income taxes.
F-6
(4) STOCKHOLDERS' DEFICIT
In 1990 and 1994, the Company issued a total of 8,800 shares of common
stock to its founders. In July 1995, the Company issued 600 shares of
stock to employees. In January 1996, the Company issued 1,625 shares
of common stock resulting in net proceeds of $100,000. Additionally,
the Company issued 21,475 shares of common stock to employees for
services previously performed for the Company.
(5) COMMITMENTS AND CONTINGENCIES
The Company leased certain operating facilities, which expired in
October 1996. In December 1997, the Company entered into a new
operating facility lease, which expires in December 2000. The future
minimum lease payments are as follows:
For the year ended December 31,
1998 $ 63,000
1999 64,600
2000 67,800
$ 195,400
Rent expense charged to operations for the year ended December 31,
1994, 1995 and 1996 was approximately $53,000, $82,000 and $66,000,
respectively. There was no rent expense during 1997. In June 1998 the
Company terminated the facilities lease agreement.
(6) ACCRUED EXPENSES
Accrued expenses in the accompanying balance sheets consist of the
following at December 31, 1995, 1996 and 1997
1995 1996 1997
Payroll and payroll-related $ 58,637 222,326 $ 325,751
Accrued consulting 5,000 5,000 100,000
Other 50,000 75,000 3,000
$ 113,637 $ 302,326 $ 428,751
(7) SUBSEQUENT EVENTS
The Company is a defendant in an action commenced by the Securities and Exchange
Commission (SEC) in the United States District Court for the Southern District
of New York on March 13, 1998 captioned SEC v. Cavanaugh, et al. (the SEC
Litigation). In the SEC Litigation, the SEC alleges that various defendants,
including the Company, engaged in a pattern of conduct having the purpose and
effect of manipulating the price of the common stock of the Company since
December 1997 when Curbstone Acquisition Corporation (Curbstone), a public
company having no operations, acquired WTS Transnational Corp. (WTS) and changed
its name to Electro-Optical Systems Corporation. Those other defendants accused
of manipulation include, inter alia, the former controlling shareholders of
Curbstone; the former financial adviser of the Company, U.S. Milestone Corp.,
and affiliates who had arranged the acquisition of WTS by Curbstone; and William
Levy, a lawyer for U.S. Milestone Corp. who formerly acted as lawyer for the
Company. No officer, director or employee of the Company is named as a
defendant. The complaint alleges violations of Sections 5 and 17 (a) of the
Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder against all of the defendants, including
the Company. The Court entered an ex parte temporary restraining order on March
13, 1998 that froze the assets of all of the defendants, including the Company,
and enjoined the defendants from raising additional funds. In addition, trading
of the Company's stock over the OTC bulletin board was frozen for ten days. The
company plans to request reinstatement
F-7
<PAGE>
After the commencement of a hearing on the SEC's motion for a preliminary
injunction, on April 14, 1998, the SEC and the Company agreed to a stipulation
entered as an order of the Court on April 15, 1998, pursuant to which: the SEC
withdrew its motion for a preliminary injunction against the Company; (ii) the
temporary restraining order against the Company was dissolved; (iii) the Company
is free to expend existing funds on reasonably necessary business expenses,
excepting payments of any deferred salary to management and any payment to any
other defendant; and (iv) the Company will provide the SEC with a summary of its
expenditures on a periodic basis.
The Company has no continuing association with any of the other defendants in
the SEC Litigation who are alleged to have carried out the alleged manipulative
scheme and expressly disassociates itself from the alleged conduct of such
defendants. The former controlling shareholders of Curbstone no longer have a
controlling position in the Company and have no influence over the Company's
ongoing affairs. U.S. Milestone and its principals are no longer acting as
financial advisers to the Company and have no influence over the Company's
ongoing affairs, except to the extent that it claims to have an ownership
interest in approximately 2.1 million shares of the Company's common stock. An
additional 2,108,482 were purchased in a private transaction arranged by U S
Milestones and 857,081 shares are held by business acquaintances of U S
Milestones received in connection with the reverse acquisition and related
financing. Mr. Levy is no longer engaged as a counsel to the Company and has no
influence over the Company's ongoing affairs, except to the extent that he owns
500,000 shares of the Company's common stock. None of the other defendants is an
officer, director, employee or advisor to the Company.
The Company understands that the SEC's investigation of the matters alleged in
the complaint in the SEC Litigation is ongoing. The Company intends to cooperate
fully with this investigation
F-8
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
CURBSTONE ACQUISITION CORP.
NOTES TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
(XX) BALANCE SHEET ADJUSTMENTS
The adjustments to the balance sheet comprise the following:
Cash-
Proceeds from issuance of 2,108,481 shares of common stock resulting
in net proceeds of approximately $850,000 $ 850,000
Common Stock-
Reversal of EOSC no par value common stock $ (100,309)
Recording of par value ($.0001) of 15,488,120 shares issued to EOSC 1,549
Recording of par value ($.0001) from the issuance of 2,108,481 shares 211
$ (98,549)
Additional paid-in capital-
Elimination of Curbstone accumulated deficit $ (100,508)
Recording of Curbstone additional paid in capital of newly issued
shares 98,760
Recording of additional paid in capital from the issuance of 2,108,481
849,789
$ 848,041
Accumulated deficit-
Elimination of Curbstone accumulated deficit $ 100,508
(C) ADJUSTMENTS TO STATEMENTS OF OPERATIONS
For purposes of computing pro forma net loss per share, the pro forma
weighted average common shares of EOSC reflects (i) the
conversion of shares of EOSC common stock into Curbstone Stock at a
conversion ratio of 336.83 and (ii) the issuance of 2,108,481 shares
of common stock.
F-9
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CURBSTONE ACQUISITION CORP.
Curbstone Acquisition Corp., incorporated on November 29, 1988.
Thomas R. Brooksbank and George G. Chachas hereby certify that:
First: They are the president and secretary, respectively, of
Curbstone Acquisition Corp., a Delaware corporation (the "Corporation").
Second: That at a meeting of the Board of Directors of Curbstone Acquisition
Corp., a Delaware corporation, held on December 1, 1997, a resolution was duly
adopted setting for a proposed amendment of the Certificate of Incorporation.
The resolution setting forth the proposed amendment is as follows:
RESOLVED, That the Article 1., of the Certificate of Incorporation of this
Corporation is amended to read as follows:
ARTICLE 1
The name of this Corporation (hereinafter called the or this
"Corporation") is ELECTROOPTICAL SYSTEMS CORP.
Third: That thereafter, pursuant to resolution of its Board of Directors, the
shareholders holding the necessary number of shares as required by statute,
voted for, approved and adopted the amendment to the Certificate of
Incorporation in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
Fourth: That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware. We
further declare under penalty of perjury under the laws of the State of Delaware
that the matters set forth in this certificate are true and correct of our own
knowledge.
Date: December 1, 1997 /s/Thomas R. Brooksbank
By: Thomas R. Brooksbank
Its: President
/s/George G. Chachas
By: George G. Chachas
Its: Secretary
Ex-4.1
Form of Common Stock Certificate
NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
0574 SPECIMEN
EOSC
ELECTRO-OPTICAL SYSTEMS CORP
AUTHORIZED COMMON STOCK: 250,000,000 SHARES
PAR VALUE: $.0001
THIS CERTIFIES THAT SPECIMEN
IS THE RECORD HOLDER OF SPECIMEN
Shares of ELECTRO-OPTICAL SYSTEMS CORP. Common Stock
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated: SPECIMEN
- -------------------------------- -----------------------------------
ASSISTANT SECRETARY PRESIDENT
<PAGE>
Ex. 10.3
Convertible Promissory Note
PROMISSORY NOTE
$300,000.00 Acton, Massachusetts February 11, 1998
For value received, ELECTRO-OPTICAL SYSTEMS CORP., a Delaware Corporation, with
offices located at P.O. Box 590, Stow, Massachusetts 01775, promise to pay to
the order of AGIRA TRADING LTD., at c/o Morgan & Morgan Trust Corporation Ltd.
Pasea Estate, P.O. Box Road Town, Tortola, British Virgin Islands, the sum of
Three Hundred Thousand and 00/100 Dollars ($300,000.00), together with interest
from the date hereof at the rate of Seven percent (7%) per annum payable upon
demand.
Upon default in the payment of any installment of interest or principal when
due, which default continues for a period of more than ten (10) days, the whole
of the principal then remaining unpaid and all interest accrued hereunder,
shall, at the option of the holder of this Note, become immediately due and
payable, without further demand or notice. In the event this note is placed into
the hands of an attorney for collection after maturity or default, the
undersigned agrees to pay for costs of such collection, the amount of such costs
shall be liquidated at fifteen percent (15%) of the principal and interest then
remaining, plus all court costs and costs of service of process incurred
therewith.
In addition to the aforesaid, upon the occurrence of any of the following, with
respect to any maker or any endorser or guarantor hereof, this Promissory Note
shall immediately become due and payable for the full remaining blanace and
interest, without notice or demand. The commencement, by or against any of them
of any proceeding, suit or action (at law or in equity) for reorganization,
dissolution or liquidation, suspension or liquidation by any o fthem of their
usual business, proceedings instituted by or against any of them under any of
the provisions of the Bankruptcy Act or amendments thereto; dissolution (if any
of the parties be a partnership or a corporation); application for, or
appointment of, a receiver of any of them or their property; death; issuance of
a writ of attachment; entry of judgment; admission in writing by any of them of
inability to pay his or her debts generally as they become due; calling of a
meeting of creditors; appointment of a committee of creditors or liquidating
agent; or offering a composition or extension to creditors. The undersigned, if
more than one, shall be jointly and severally bound and liable hereunder, and if
any of the undersigned is a partnership, also the members thereof individually.
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF A COPY OF THIS NOTE ON THE DATE ABOVE.
ELECTRO-OPTICAL SYSTEMS CORP.
By:______________________________
CHARLES WEAVER, President
By:______________________________
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ELECTRO-OPTICAL SYSTEMS CORP.
FINANCIAL DATA SCHEDULE
</LEGEND>
<CIK> 0000846005
<NAME> Electro-Optical Systems Corporation
<MULTIPLIER> 1
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 454,537
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 555,506
<PP&E> 8,356
<DEPRECIATION> (232)
<TOTAL-ASSETS> 583,570
<CURRENT-LIABILITIES> 704,523
<BONDS> 0
0
0
<COMMON> 2,109
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 583,570
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 354,555
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (354,555)
<EPS-PRIMARY> (.017)
<EPS-DILUTED> (.017)
</TABLE>
