SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
May 12, 1998
Date of Report (Date of earliest event reported)
Electro-Optical Systems Corp.
(Exact name of Registrant as specified in its charter)
Delaware 33-26344 75-2254748
(State or other jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
20 Main Street, Acton, MA 01720
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 263-9115
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Item 3. Litigation
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 WTS Transnational Corp. ("WTS") and changed its name to Electro-Optical
Systems Corp. 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 N. 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, 1999 that froze the
assets of all of the defendants, including the Company, and enjoined the
defendants from raising additional funds. In addition, trading in the Company's
stock over the OTC bulletin was frozen for ten days.
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, 1990 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.
On April 23, 1998, the Court issued its opinion regarding the SEC's
motion for a preliminary injunction which, inter alia, that the SEC had
established a substantial likelihood of success in proving that the former
controlling shareholders of Curbstone (George Chachas and Thomas Brooksbank);
the former financial adviser of the Company, (U.S. Milestone Corp. and Thomas
Cavanaugh), and certain affiliates had violated Section 5 of the Securities Act
and Sections 17(a) and 10(b) and that Mr. Levy had violated Section 5 of the
Securities Act. The Court further froze the EOSC shares held by these defendants
and the proceeds of the sale of any EOSC shares.
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
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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 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, the certificate for which is held
by the Company.
As part of the original financing transaction, 2,108,482 shares of
restricted common stock were issued in the name of U. S. Milestone and the stock
certificate has been held by the Company pending completion of what was to have
been an additional $3 million private financing arranged by U. S. Milestone. As
of the date of the TRO, the Company had received a bridge loan of $300,000
($270,000 after placement fee) towards the completion of that financing. In
connection with the reverse acquisition and related financing, 857,081 shares of
restricted common stock were issued to an entity alleged to be associated or
affiliated with U.S. Milestone, Invesora Dactilar, S.L., and 500,000 shares of
restricted common stock were issued to William Levy. Mr. Levy is no longer 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.
In a stipulation agreement with the SEC and ordered by the court on April 2,
1998, Mr. Levy deposited into Court these shares. As previously reported, on
December 19, 1997, Electro (then named Curbstone Acquisition Corp.) issued
1,054,240 shares of its common stock to Agira Trading Ltd. Morgan & Morgan Trust
Corporation Ltd. 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, Electro issued 1,054,241 shares of
restricted common stock on December 19, 1997 to Optimum Fund in a private
placement under Regulation S in full repayment of a $500,000 loan advance made
to WTS in November of 1997 (the "Loan Payment"). This combined transaction
netted the Company $850,000 after placement and legal fees.
In connection with the reverse acquisition transaction, 2,563,000
Curbstone Management Shares (shares of the predecessor company) purchased
directly from Curbstone management were sold and/or distributed to foreign
investors alleged to be or associated or affiliated with U.S. Milestone. Of the
2.5 million shares transferred to foreign investors, based upon the Court
proceedings and findings, the Company believes more than 1,000,000 shares have
been sold to public investors, which transactions the Court found to violate the
federal securities laws.
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Capitalization Summary Effective with Reverse Acquisition in
December 1997
Restricted common shares issued to
former WTS Transnational, Inc.
shareholders. 12,022,560 57.0%
Restricted common shares sold to
Agira Trading, Ltd. et al and
Optimum Fund pursuant to a 2,108,482 10.0%
Regulation S Transaction.
2,108,481 restricted common shares
issued to U S Milestone Corp., with
the certificate held by the Company,
857,081 restricted shares to Invesora 3,465,562 16.4%
Dactilar S. L. and 500,000 restricted
shares to William N. Levy.
Common shares purchased from
Curbstone Management by U.S.
Milestone and sold and/or distributed
to foreign investors associated and/or 2,564,000 12.2%
affiliated with U.S. Milestone.
Shares of common stock held by
Curbstone shareholders, based on
findings of Court. 925,217 4.4%
Total Capitalization 21,084,821 100.0%
None of the other defendants in this litigation is an officer,
director, employee, or advisor to the Company.
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 not likely to be available. The availability of
alternative financing is highly uncertain. If the Company is unable to obtain
additional financing, its ability to continue as a going concern or to survive
in its present state is extremely doubtful.
Item 5: Other
Although the Company previously announced on January 30, 1998 that it
had received a purchase order for 1,000 units of its fingerprint identification
device from ADL Systems, Inc. ("ADL") in fact, the Company entered into a letter
agreement in which ADL expressed its
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interest in purchasing units at a price to be determined, subject to a number of
conditions. The letter referred to a purchase order but no separate purchase
order was attached.
After receiving the Temporary Restraining Order on March 13, 1998, the
Company suspended operations effective March 22, 1998. Since that date, the
individuals listed in the 8KA, George Clarke and Philip Holberton are no longer
serving in those positions. Mr. Clarke is no longer an employee, but continues
to perform specific consulting assignments without any agreement concern
compensation. The Company anticipates, if it is successful in obtaining
additional financing, that he will rejoin the company. Mr. Holberton has
continued to provide consulting service to the Company but payment for these
services, billed through April 30, remains unpaid.
Although in the amended 8KA filing by the Company on February 18, 1998,
the Company disclosed it was in the process of commencing production of
fingerprint biometric systems; more precisely, it was in the process of
completing development of its optic lens mold and establishing manufacturing
capacity in order to commence production of fingerprint biometric system. Given
the circumstances regarding the TRO and the suspension of operations, the
development of the optic lens mold is presently suspended.
Three of the individuals named as directors of the Company in the
Company's Form 8K (filed December 23, 1998) and Form 8KA (filed February 18,
1998), Avi Fogel, Martin Goldman and George Parrent, Jr., take the position
that, while they previously had served as directors of WTS, they have not served
as directors of the Company but have agreed to become directors of the Company
under certain express conditions which the Company acknowledges have not been
fully met. These conditions include, inter alia, obtaining directors and
officers liability insurance, updating the Company's business plan, and
providing various items of information. These individuals maintain that they
continue to be willing to serve as directors of the Company if the conditions
are met.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
May 12, 1998 ELECTRO-OPTICAL SYSTEMS CORP.
/s/Charles B. Weaver
Charles B. Weaver
President and Chief Executive Officer
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