ELECTRO OPTICAL SYSTEMS CORP
10-Q, 1999-02-01
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===============================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED March 31, 1998

                         COMMISSION FILE NUMBER 0-28946

                          Electro-Optical Systems Corp.
             (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 AND ZIP CODE)

                                        (978) 461-1773
                     (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

      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 [ ]

      THERE WERE 21,084,821 SHARES OF OUTSTANDING COMMON STOCK OF THE REGISTRANT
AS OF March 31, 1998.

TOTAL NUMBER OF PAGES: 16       EXHIBIT INDEX BEGINS ON PAGE 15
               



<PAGE>



                          Electro-Optical Systems Corp
                                      Index

Part I.  Financial Information

         Item 1.  Condensed Financial Statements

                  Condensed Balance Sheet as of March 31, 1998 and 
                  December 31, 1997

                  Condensed  Statement of  Operations  for the
                  three months ended March 31, 1998 and March 31, 1997

                  Condensed Statement of Cash Flows for the three months 
                  ended March 31, 1998

                  Notes to Condensed Financial Statements

         Item 2.  Management's Discussion and Analysis of Financial Conditions 
                  and Results of Operations

Part II.          OTHER INFORMATION

                  Item 1.           Legal Proceedings

                  Item 6.           Exhibits and Reports on Form 8-K




<PAGE>



===============================================================
                         PART 1 - FINANCIAL INFORMATION
===============================================================


                          Electro-Optical Systems Corp.
                             Condensed Balance Sheet
                             (Dollars in Thousands)
<TABLE>
<CAPTION>


                                                       March 31,                  December 31,
Assets                                                   1998                      1997
Current Assets                                        (unaudited)               (unaudited)
                                                    ---------------          -----------------
<S>                                                 <C>                      <C> >

   Cash                                                  $      151                $       455
Total Current Assets                                            151                        455
                                                    ---------------          -----------------
Property & Equipment
   Computer  & Office Eqpt                                       72                          8
   Accumulated Depreciation                                     (5)                          0
Total Property & Equipment                                       67                          8
                                                    ---------------          -----------------

   Deposit                                                       62                         20

Total Assets                                                    280                        483
                                                    ===============          =================
Liabilities & Stockholders' Equity
Liabilities
Current Liabilities
   Trade Payables                                               366                        268
   Accrued Liabilities                                          245                        328
   Notes Payable                                                300                          8
Total Current Liabilities                                       911                        604
                                                    ---------------          -----------------

Stockholders' Equity
Common Stock, $.001 par value
  Authorized - 250,000,000 and 250,000,000 shares
    as of March 31, 1998 and December 31, 1997,
    respectively
  Issued and Outstanding -
      21,084,821 shares as of September 30,
      1998 and December 31, 1997                                  2                          2
   Capital in excess of par value                               975                        975
   Accumulated Deficit                                      (1,098)                      (745)
   Net Loss                                                   (510)                      (353)
Total Stockholders' Equity                                    (631)                      (121)
                                                    ---------------          -----------------
Total Liabilities & Stockholders' Equity                 $      280                $       483
                                                    ===============          =================

</TABLE>


                             See accompanying notes.











<PAGE>



                          Electro-Optical Systems Corp.
                       Condensed Statements of Operations
                                   (Unaudited)
                      (In thousands, except per share data)





                                                     Three Months Ended
                                                         March 31,

INCOME                                            1998               1997
                                            ----------------   ----------------
   Revenues                                  $             -    $             -
   Cost of Revenues                                        -                  -
   Gross Profit                                            -                  -
                                            ----------------   ----------------

OPERATING EXPENSES
   Research and Development                               97                  0
   Sales and Marketing                                    80                  0
   General and Administrative                            333                 25
   Total Operating Expenses                              510                 25

   Other Income (Expense)                                  0                  0
NET LOSS                                               (510)                (25)
                                             ================   ================

Basic and diluted loss per share               $       (0.02)     $       (0.00)

Weighted average number of
common shares outstanding                              21,085             15,488

                             See accompanying Notes





<PAGE>



                          Electro-Optical Systems Corp.
                       Condensed Statements of Cash Flows
                                   (Unaudited)
                                 (In thousands)



<TABLE>
<CAPTION>


                                                                      Three Months Ended
                                                                           March 31,

                                                                    1998              1997
                                                                -------------     -------------
<S>                                                             <C>               <C>   


Cash used in operating activities:
   Net Loss                                                       $     (510)       $      (25)
   Adjustments to reconcile net loss to net
  cash used in operating activities:
   Depreciation                                                              5                -
  Changes in operating assets and liabilities:
 (Increase) decrease in assets:
  Deposits                                                                (42)                -
 Increase (decrease) in liabilities:
  Trade Payables & Accrued liabilities                                     15                25
                                                                -------------     -------------
Total Adjustments                                                         (22)               25

Net cash used in operating activities                                   (532)                 -

Cash used in investing activities:
  Purchase of equipment                                                   (64)                -
                                                                -------------     -------------
Net cash used in investing activities                                     (64)                -

Cash provided by financing activities:
  Payments on debt                                                          (8)               -
  Borrowings                                                              300                 -
  Proceeds from issuance of common stock                                    -                 -
                                                                -------------     -------------
Net cash provided by financing activities                                 292                 -

Net increase (decrease) in cash                                         (304)                 -
                                                                -------------     -------------

Cash and equivalents at beginning of period                               455                 -

Cash and equivalents at end of period                              $      151        $        -
                                                                =============     =============
</TABLE>

                             See accompanying notes






<PAGE>



===============================================================
                                ELECTRO-OPTICAL SYSTEMS CORP.
===============================================================
                     NOTES TO CONDENSED FINANCIAL STATEMENTS -- UNAUDITED

1.       BASIS OF PRESENTATION

         The accompanying  financial statements are unaudited and condensed and,
therefore,  do not contain certain information  included in the annual financial
statements of  Electro-Optical  Systems CORP. (the "Company" or "EOSC").  In the
opinion of management,  all adjustments  (consisting only of normally  recurring
items) it considers  necessary for a fair presentation have been included in the
accompanying financial statements.

         The  Company's   condensed   interim   financial   statements  are  not
necessarily  indicative  of results to be  expected  for a full  fiscal year and
should  be read in  conjunction  with its  financial  statements  and the  notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, as filed with the  Securities  and Exchange  Commission
(the "SEC") on October 2, 1998.

          Certain other amounts in the 1997  financial  statements and the notes
thereto have been  reclassified  to conform with the 1998  presentation  of such
items.

2.       NET INCOME (LOSS) PER COMMON SHARE

         For the three  month  periods  ended  March 31, 1998 and 1997 basic and
diluted  loss per share was computed by dividing  the net loss  attributable  to
common  stockholders by the weighted average number of common shares outstanding
during these periods. There were no common stock equivalents.

3.       IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS

         As of January 1, 1998,  the  Company  adopted  Statement  of  Financial
Accounting  Standards  No. 130 ("SFAS  130"),  REPORTING  COMPREHENSIVE  INCOME,
issued by the Financial  Accounting  Standards  Board.  SFAS 130 establishes new
rules for the reporting and display of comprehensive  income and its components.
Adoption of this  Statement has not had, and is not expected to have, a material
impact on the Company's net income or stockholders' equity.




<PAGE>



                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
RESULTS OF OPERATIONS

FACTORS THAT MAY AFFECT FUTURE RESULTS

         Except for the historical  information contained herein, certain of the
matters discussed in this quarterly report are  "forward-looking  statements" as
defined in Section 21E of the Securities Exchange Act of 1934, as amended, which
involve  certain  risks and  uncertainties  which could cause actual  results to
differ materially from those discussed herein. For a discussion of certain risks
associated with the Company and its operations see  MANAGEMENT'S  DISCUSSION AND
ANALYSIS OF  FINANCIAL  CONDITION  AND RESULTS OF  OPERATIONS - FACTORS THAT MAY
AFFECT FUTURE RESULTS  included in this  quarterly  report and in other reports,
proxy and  informational  statements and other  information of the Company filed
with the SEC.

A.       RESULTS OF OPERATING ACTIVITIES

         For the three month period ended March 31, 1998, the Company incurred  
a net loss of approximately $510,000. This compares to a net loss of 
approximately $25,000 for the comparable period in 1997. The $485,000 increase 
in net loss for the three months ended March 31, 1998 was primarily due to an 
increase in research and development expenses of $97,000, an increase in sales 
and marketing expenses of $80,000, and increase in G&A expenses of $308,000.


REVENUE AND GROSS PROFIT

         For the three month  periods  ended March 31, 1998 and March 31,  1997,
the Company reported no revenues.


OPERATING EXPENSES

         Total  operating  expenses  for the three month  period ended March 31,
1998 of $510,000 increased  approximately  $485,000 (1940%) from the same period
in 1997. These increases were primarily due to increases in headcount associated
with Sales and Marketing and G&A as well as outsourcing  expenditures associated
with research and  development.  The following table provides a breakdown of the
dollar and percentage  changes in operating  expenses for the three month period
ended March 31, 1998 as compared to the same period in 1997:






<PAGE>




                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)



(Dollars in Thousands)                             Three Months Ended
                                                     March 31, 1998
                                                   Increase (Decrease)
                                         $                     %
                                         -----------------     -----------------
Research and Development                                97            N/A
Sales and Marketing                                     80            N/A
General and Administrative                             333           1332%
                                         -----------------     -----------------
                                                       510           2040%

SALES AND  MARKETING  - The  increases  in sales  and  marketing  expenses  were
primarily  due to the  hiring of a Vice  President  of Sales  and the  Company's
initial  marketing  and  sales  activities  for  its  biometric   identification
technology.

         The Company expects that sales and marketing  expenses will increase if
sales of the Company's products increase.

PRODUCT  DEVELOPMENT  - The  increases  in  product  development  expenses  were
primarily  due to  outsourcing  of  development  activity  for  its  proprietary
biometric identification reader.

         The Company's product development efforts are focused on developing new
products for the computer data security and access control system  markets.  The
Company is developing biometric  verification systems,  based upon the Company's
current technology, to meet computer data security requirements.  The Company is
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."

        There  is no  assurance  that  the  Company  will be  able  to  generate
significant  sales, or, if the Company is able to consummate  significant sales,
that such sales will be profitable.

         The Company expects to continue to incur product  development  costs as
it develops additional products and enhances existing products.

GENERAL  AND  ADMINISTRATIVE  - The  increases  in  general  and  administrative
expenses  were  primarily  due to  litigation  costs,  and to a  lesser  degree,
increases in support  personnel,  legal and  accounting  fees,  rental of office
space in advance of product roll out and various other expenses.




<PAGE>




                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


         The Company expects certain general and administrative costs to 
increase once development of the Company's micro-reader is developed.  
As discussed in "Risk Factors- Uncertainty of Product Development", there can 
be no assurances 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.


B.       LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

          Cash  and  working  capital   (deficit)  as  of  March  31,  1998  was
approximately $151,000 and ($760,000),  respectively,  compared to approximately
$455,000 and ($149,000),  respectively, as of December 31, 1997. The decrease in
the  Company's  cash as of March 31,  1998  compared  to  December  31,  1997 is
primarily due to the payment of salaries and normal  operating  expenses as well
as  legal  fees  resulting  from  the  SEC's  enforcement   action  (see  "Legal
Proceedings").


DIVIDENDS

         Since its incorporation, the Company has not paid or declared dividends
on the Common Stock,  nor does it intend to pay or declare cash dividends on its
Common Stock in the foreseeable future.


YEAR 2000 EXPOSURE

         The Company is currently working to resolve the potential impact of the
year 2000 ("Y2K")  problem on the  processing of  date-sensitive  information by
computerized  information  systems.  The Y2K  problem is the result of  computer
programs  being  written  using two  digits  (rather  than  four) to define  the
applicable  year.  Computer  programs  that  have  time-sensitive  software  may
recognize  a date using "00" as the year 1900  rather  than  2000,  which  could
result  in  miscalculations  or  system  failures.  The  Company  has not  fully
completed  its efforts to insure  that the Y2K problem  will not have a material
adverse impact on the Company's  business,  condition  (financial or otherwise),
results of operations, prospects and cash flows in future periods.

          The Company has, to date, determined that all of the software that it 
has developed for sale to others is Y2K compliant.  The Company does not 
utilize third party software in its product. However, the Company has not yet 
determined the




<PAGE>



                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


impact that a Y2K failure suffered by customers or other
suppliers  would have on the Company,  and as such cannot  state  whether such a
failure  would  have  a  material  adverse  impact  on the  Company's  business,
condition  (financial or otherwise),  results of operations,  prospects and cash
flows.  The Company has not  developed a  contingency  plan for dealing with any
such failures,  and is currently  evaluating the necessity of developing  such a
plan.  Based on the  information  the Company has  developed  to date,  costs of
addressing  potential  problems  are not  currently  expected to have a material
adverse impact on the Company's  business,  condition  (financial or otherwise),
results of operations,  prospects and cash flows in future periods.  The Company
has limited  resources and may not be able to devote the necessary  resources to
resolve remaining significant Y2K issues in a timely manner.


SUBSEQUENT TO MARCH 31, 1998

          The Company believes that its existing working capital will be
insufficient to meet its expected working capital for 1998. The Company will 
require significant additional funds during 1999 to continue its operations.  
Accordingly, the Company is reviewing the options available to it to obtain 
additional financing.

         The options the Company is reviewing  include,  but are not limited to,
the sale and issuance of stock,  the sale and issuance of debt and entering into
an  additional  strategic  relationship  or  relationships  to either obtain the
needed  funding  or to  create  what  the  Company  believes  would  be a better
opportunity  to obtain  such  funds.  It is  possible  that any such  additional
infusion  of capital or other  transaction  would be in the form of the sale and
issuance of additional shares of Common Stock or securities that are convertible
into Common Stock,  which would  substantially  increase the number of shares of
Common Stock outstanding on a fully-diluted basis.

         There is a significant  likelihood that additional  funding will not be
available on terms  acceptable to the Company,  if at all. The failure to obtain
such  additional  funds would cause the Company to curtail or cease  operations.
Even if such  additional  funding is obtained,  there is no  assurance  that the
Company will be able to generate  significant sales of its products or services,
or, if the Company is able to consummate  significant sales, that any such sales
would be profitable.





<PAGE>




C.       FACTORS THAT MAY AFFECT FUTURE RESULTS

                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


         In addition to other  information  contained in this quarterly  report,
the following factors, among others,  sometimes have affected, and in the future
could affect the  Company's  actual  results and could cause  future  results to
differ  materially  from those in any forward  looking  statements made by or on
behalf of the Company.  Factors  that could cause future  results to differ from
expectations are discussed below.

Need for  Additional  Funds.  The Company  believes  that its  existing  working
capital will be insufficient to meet its expected  working capital needs through
the  remainder  of 1998.  Accordingly,  the  Company is  reviewing  the  options
available  to  it  to  obtain  additional  financing.  There  is  a  significant
likelihood  that  such  additional  financing  will  not be  available  on terms
acceptable to the Company.  It is possible that any such additional  infusion of
capital  would be in the form of the sale and issuance of  additional  shares of
Common Stock or securities that are convertible  into Common Stock,  which would
substantially  increase  the number of shares of Common Stock  outstanding  on a
fully-diluted basis.

Developing  Market;  Uncertainty  of  Market  Acceptance.  The  market  for  the
Company's products is characterized by rapid  technological  change and evolving
industry requirements.  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.  The Company has an accumulated net loss 
of approximately $1,608,000 since inception through March 31, 1998, including 
a net loss of approximately $510,000 for the three months ended March 31, 1998.
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. Subsequently a settlement was 
reached with the SEC on July 10, 1998. The Company plans to apply to have its 
stock relisted. If the Common Stock continues to be excluded from the SmallCap 
Market, it will adversely




<PAGE>




                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


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 
will 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, 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's  sales  efforts with certain  existing and
potential  customers have 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.




<PAGE>




                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


Rapid   Technological   Change.   The  market  for  the  Company's  products  is
characterized by rapid technological change and evolving industry  requirements.
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  unallowed
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.




<PAGE>




                          ELECTRO-OPTICAL SYSTEMS CORP.
               MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)


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.






<PAGE>



                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

          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 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
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, 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:  (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




<PAGE>




                           PART II - OTHER INFORMATION


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 President of the Company, Mr.
Charles Weaver, has asserted his right against self-incrimination in response to
questions raised by the SEC pertaining to the investion.

          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.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (A)  EXHIBITS

                EXHIBIT
                NUMBER
                ------
                  11      Computation of Earnings Per Share
                  27      Financial Data Schedule (Electronic filing only)

        (B)  REPORTS ON FORM 8-K.

                           On February 18, 1998,  the Company filed an amendment
to the Form 8-K filed on December 17, 1997.




<PAGE>



                                   SIGNATURES

      Pursuant to the  requirements of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                ELECTRO-OPTICAL SYSTEMS CORP.



DATE:   January 29, 1999          BY: /S/ Charles Weaver
                                  -----------------------------
                                  Charles Weaver
                                  PRESIDENT and CHIEF FINANCIAL OFFICER   
                                  (PRINCIPAL FINANCIAL OFFICER)






<PAGE>



               EXHIBIT INDEX


EXHIBIT 11 - Computation of Earnings per Share

EXHIBIT 27 - Financial Data Schedule (Electronic Filing Only)




<PAGE>


                                   EXHIBIT 11


                                ELECTRO-OPTICAL SYSTEMS CORP.
                  CALCULATION OF BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
                            (In thousands except per share amounts)

                                                     FOR THE THREE MONTHS
                                                         ENDED March 31
                                                    1998              1997
                                                    ------          ------
Weighted average shares of
  common stock outstanding                        21,085            15,488

Diluted shares outstanding (1)                    21,085            15,488

Net income(loss)                                  $ (125)           $  (25)

Net income(loss) attributable
 to common stockholders                           $  (125)          $  (25)
                                                  =======           =======
Basic and diluted
earnings(loss) per share(1)                       $ (0.01)          $ (0.0)
                                                  ======        ======


(1) The Company has no potentially dilutive securities.

<PAGE>


K:\practice\MARCH10Q

Ex. 27
Financial Data Schedule

                                           ELECTRO-OPTICAL SYSTEMS CORP.

                                              FINANCIAL DATA SCHEDULE

ARTICLE                                                        5
RESTATED
MULTIPLE                                                      1,000
CURRENCY                                                      U.S. DOLLARS
PERIOD TYPE:                                                  YEAR
EXCHANGE RATE:                                                1
FISCAL YEAR END:                                              DEC- 31-1998
PERIOD START:                                                 JAN-1-1998
PERIOD END:                                                   MARCH-31-1998
CASH:                                                                  0
SECURITIES:                                                            0
RECEIVABLES:                                                           0
ALLOWANCES:                                                            0
INVENTORY:                                                             0
CURRENT ASSETS:                                                        0
PP&E:                                                                 72
DEPRECIATION:                                                       (17)
TOTAL ASSETS:                                                        280
CURRENT LIABILITIES:                                                 911
BONDS:                                                                 0
PREFERRED MANDATORY:                                                   0
PREFERRED:                                                             0
COMMON:                                                            2,109
OTHER SE:                                                              0
TOTAL LIABILITY AND EQUITY:                                          280
SALES:                                                                 0
TOTAL REVENUES:                                                        0
CGS:                                                                   0
TOTAL COSTS:                                                         570
OTHER EXPENSES:                                                        0
LOSS PROVISION:                                                        0
INTEREST EXPENSE:                                                      0
INCOME PRETAX:                                                         0
INCOME CONTINUING:                                                     0
DISCONTINUED:                                                          0
EXTRAORDINARY:                                                         0
CHANGES:                                                               0
NET INCOME:                                                        (570)
EPS PRIMARY:                                                      (.012)
EPS DILUTED:                                                      (.012)

HWD:  387164-1




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