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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 SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-28946
Electro-Optical Systems Corp.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5-2254748
(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 September 30, 1998.
TOTAL NUMBER OF PAGES: 15 EXHIBIT INDEX BEGINS ON PAGE 14
<PAGE>
Electro-Optical Systems Corp
Index
Part I. Financial Information
Item 1. Condensed Financial Statements
Condensed Balance Sheet as of September 30, 1998 and
December 31, 1997
Condensed Statement of Operations for the three months ended
and the nine months ended September 30, 1998 and
September 30, 1997
Condensed Statement of Cash Flows for the three months ended
and nine months ended September 30, 1998 and
September 30, 1997
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>
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PART 1 - FINANCIAL INFORMATION
================================================================================
Electro-Optical Systems Corp.
Condensed Balance Sheet
(Dollars in thousands)
<TABLE>
<S> <C> <C>
September 30, December 31,
Assets 1998 1997
Current Assets (unaudited) (unaudited)
Cash $ - $ 455
Total Current Assets - 455
Property & Equipment
Computer Equipment & Office Eqpt 72 8
Accumulated Depreciation (17) -
Total Property & Equipment 55 8
Deposit 51 20
Total Assets 106 483
Liabilities & Stockholders' Equity
Liabilities
Current Liabilities
Trade Payables 414 268
Accrued Liabilities 417 328
Notes Payable 300 8
Total Current Liabilities 1,131 604
Stockholders' Equity
Common Stock, $.001 par value
Authorized - 250,000,000 and 250,000,000 shares
as of September 30, 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 (904) (353)
Total Stockholders' Equity (1,025) (121)
Total Liabilities & Stockholders' Equity $ 106 $ 483
</TABLE>
See accompanying notes.
<PAGE>
Electro-Optical Systems Corp.
Condensed Statements of Operations
(Unaudited)
(In thousands, except per share value)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
INCOME 1998 1997 1998 1997
---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ - $ - $ - $ -
Cost of Revenues - - - -
---------------- -------------- -------------- ---------------
Gross Profit - - - -
---------------- -------------- -------------- ---------------
OPERATING EXPENSES
Research and 0 0 122 0
Development
Sales and Marketing 7 0 127 0
General and 113 25 644 75
Administrative
---------------- -------------- -------------- ---------------
Total Operating 120 25 893 75
Expenses
Other Income (5) 0 (11) 0
(Expense)
================ ============== ============== ===============
NET LOSS $ (125) $ (25) $ (904) $ (75)
Basic and diluted loss $ (0.01) $ (0.00) $ (0.04) $ (0.00)
per share
Weighted average number
of
common shares 21,085 15,488 21,085 15,488
outstanding
</TABLE>
See accompanying notes.
<PAGE>
Electro-Optical Systems Corp.
Condensed Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
1998 1997 1998 1997
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Cash used in operating activities:
Net Loss $ (125) $ (25) $ (904) $ (75)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 6 - 17 -
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Deposits - - (31) -
Increase (decrease) in liabilities:
Trade Payables & Accrued liabilities 112 (6) 236 32
Total Adjustments 118 (6) 222 32
Net cash used in operating activities (7) (31) (682) (43)
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 - 31 300 43
Proceeds from issuance of common stock - - - -
------------- ------------ ----------- -------------
Net cash provided by financing activities - 31 292 43
Net increase (decrease) in cash (7) - (454) -
Cash and equivalents at beginning of period 7 - 454 -
============= ============ =========== =============
Cash and equivalents at end of period $ - $ - $ - $ -
============= ============ =========== =============
</TABLE>
See accompanying notes.
<PAGE>
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ELECTRO-OPTICAL SYSTEMS CORP.
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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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 1998, the
Company incurred net losses of approximately $125,000 and $904,000,
respectively. This compares to net losses of approximately $25,000 and $75,000,
respectively, for the comparable periods in 1997. The third quarter increase in
net loss of approximately $100,000 was primarily due to an increase in G&A
headcount. The $829,000 increase in net loss for the nine months ended September
30, 1998 was primarily due to an increase in research and development expenses
of $122,000, an increase in sales and marketing expenses of $127,000, and
increase in G&A expenses of $569,000.
REVENUE AND GROSS PROFIT
For the three and nine month periods ended September 30, 1998 and
September 30, 1997, the Company reported no revenues.
OPERATING EXPENSES
Total operating expenses for the three and nine month periods ended
September 30, 1998 of $120,000 and $893,000, respectively, increased
approximately $95,000 (380%) and $818,000 (1,091%) from the same periods 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 and nine month
periods ended September 30, 1998 as compared to the same periods in 1997:
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended Six Months Ended
September 30, 1998 September 30, 1998
Increase (Decrease) Increase (Decrease)
$ % $ %
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Research and Development 0 N/A 122 N/A
Sales and Marketing 7 N/A 127 N/A
General and Administrative 88 352% 569 759%
---------------- ---------------- ---------------- -----------------
95 380% 818 1091%
</TABLE>
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.
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.
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
B. LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Cash and working capital (deficit) as of September 30, 1998
were approximately $0 and ($1,131,000), respectively, compared to approximately
$455,000 and ($149,000), respectively, as of December 31, 1997. The decrease in
the Company's cash as of September 30, 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 (i) all of the software that
it has developed for sale to others is Y2K compliant and (ii) all of the
developers of other software that it has acquired for use in its business have
publicly stated that their products are also Y2K compliant. However, the Company
has not yet determined the 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 resources necessary to
resolve remaining significant Y2K issues in a timely manner.
<PAGE>
SUBSEQUENT TO SEPTEMBER 30, 1998
ELECTRO-OPTICAL SYSTEMS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
The Company believes that its existing working capital will be
insufficient to meet its expected working capital for 1999. 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.
C. FACTORS THAT MAY AFFECT FUTURE RESULTS
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.
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.
Need for Additional Funds. The Company believes that its existing working c
apital will be insufficient to meet its expected working capital needs through
the remainder of 1998. Accordingly, the Company is reviewing the options
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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 $2,002,000 since inception through September 30, 1998, including a
net loss of approximately $904,000 for the nine months ended September 30, 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 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
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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. 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
<PAGE>
ELECTRO-OPTICAL SYSTEMS CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS - (CONTINUED)
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.
Concentration of Ownership; Control by Management. As of September 30, 1998, 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
In its Annual Report on Form 10-K, filed October 2, 1998, the Company
disclosed the action commenced by the Securities and Exchange Commission. No
further developments have occurred in the action during the period reported
hereunder. 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 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
<PAGE>
PART II
OTHER INFORMATION
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 its investigation.
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)
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 FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
Weighted average shares of
common stock outstanding 21,085 15,488 21,085 15,488
Diluted shares outstanding (1) 21,085 15,488 21,085 15,488
Net income(loss) $ (125) $ ( 25) $ (904) $( 75)
Net income(loss) attributable
to common stockholders $ (125) $ ( 25) $ (904) $( 75)
======= ======= ======= =======
Basic and diluted
earnings(loss) per share(1) $ (0.01) $ (0.0) $ (0.04) $ (0.0)
======= ======= ======= =======
(1) The Company has no potentially dilutive securities.
<PAGE>
K:\practice\Sept10q
Ex. 27
Financial Data Schedule
ELECTRO-OPTICAL SYSTEMS CORP.
FINANCIAL DATA SCHEDULE
ARTICLE 5
RESTATED
MULTIPLE 1,000
CURRENCY U.S. DOLLARS
PERIOD TYPE: QUARTER
EXCHANGE RATE: 1
FISCAL YEAR END: DEC- 31-1998
PERIOD START: JUNE-1-1998
PERIOD END: SEPT-30-1998
CASH: 0
SECURITIES: 0
RECEIVABLES: 0
ALLOWANCES: 0
INVENTORY: 0
CURRENT ASSETS: 0
PP&E: 55
DEPRECIATION: (17)
TOTAL ASSETS: 106
CURRENT LIABILITIES: 1,131
BONDS: 0
PREFERRED MANDATORY: 0
PREFERRED: 0
COMMON: 2,109
OTHER SE: 0
TOTAL LIABILITY AND EQUITY: 106
SALES: 0
TOTAL REVENUES: 0
CGS: 0
TOTAL COSTS: 120
OTHER EXPENSES: 5
LOSS PROVISION: 0
INTEREST EXPENSE: 0
INCOME PRETAX: 0
INCOME CONTINUING: 0
DISCONTINUED: 0
EXTRAORDINARY: 0
CHANGES: 0
NET INCOME: (125)
EPS PRIMARY: (.01)
EPS DILUTED: (.01)
HWD: 387161-1
