U. S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1999 Commission file No.0-24511 ADVANCED OPTICS ELECTRONICS, INC. (Name of small business issuer as specified in its charter) Nevada 88-0365136 (State of incorporation) (IRS Employer Identification No.) 8301 Washington NE, Suite 4, Albuquerque, New Mexico 87113 (Address of principal executive offices including zip code) Issuer's telephone number: (505) 797-7878 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ___ The number of issuer's shares of Common Stock outstanding as of June 30, 1999 was 35,035,435 Transitional Small Business Disclosure Format (check one): Yes ___ No _X_ ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPEMENT STAGE COMPANY) FINANCIAL REPORT JUNE 30, 1999 2 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) CONTENTS Page ACCOUNTANTS' REPORT 1 FINANCIAL STATEMENTS Balance Sheet 2 Statements of Operations 4 Statements of Changes in Stockholders' Equity 6 Statements of Cash Flows 8 Notes to Financial Statements 10 NEFF & RICCI LLP - --------------------------------- CERTIFIED PUBLIC ACCOUNTANTS 7001 PROSPECT PLACE NE ALBUQUERQUE, NM 87110 Accountants' Report Board of Directors Advanced Optics Electronics, Inc. We have compiled the accompanying balance sheet of Advanced Optics Electronics, Inc. (a development stage company) as of June 30, 1999, and the related statements of operations, changes in stockholders' equity and cash flows for the quarter and six months ended June 30, 1999 and 1998, and the period from May 22, 1996 (inception) through June 30, 1999, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them. /s/ Neff & Ricci LLP Albuquerque, New Mexico August 9, 1999 1 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET June 30, 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 360,664 Certificate of deposit 104,800 Marketable equity securities 51,230 Costs and estimated earnings in excess of billings on uncompleted contract 386,575 Raw materials inventory 41,324 Related party receivables 55,508 ----------- Total current assets 1,000,101 FIXED ASSETS, at cost Furniture and fixtures 26,479 Computers 32,068 Technical equipment 122,090 Automobile 43,313 Equipment under capital lease 100,499 Leasehold improvements 15,228 Less accumulated depreciation (78,010) ----------- Total fixed assets 261,667 OTHER ASSETS Note receivable from officer 29,000 Investment in Bio Moda, Inc. 251,893 Goodwill, net of accumulated amortization of $333 4,667 Patents, net of accumulated amortization of $36,481 205,858 Note origination costs, net of accumulated amortization of $833 19,167 Other assets 30,350 ----------- Total other assets 540,935 Total assets $ 1,802,703 =========== See accompanying notes and accountants' report. 2 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) 3 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 27,602 Notes payable 5,384 Accrued liabilities 5,922 Current portion of long-term debt and capital lease obligation 40,766 ----------- Total current liabilities 79,674 ----------- Long-term portion of long-term debt and capital lease obligation 561,220 ----------- COMMITMENTS SHAREHOLDERS' EQUITY Common stock, authorized 75,000,000 shares, $.001 par value, 35,035,435 shares issued and outstanding 35,035 Additional paid-in capital 2,693,597 Deficit accumulated during the development stage (1,566,823) ----------- Total shareholders' equity 1,161,809 ----------- Total liabilities and shareholders' equity $ 1,802,703 =========== 4 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS Quarters Ended June 30, 1999 and 1998 1999 1998 ------------ ------------ REVENUES Contract revenue $ 70,000 -- ------------ ------------ COSTS AND EXPENSES General and administrative 305,972 79,428 Contract costs 78,178 52,479 Research and development 38,167 9,928 ------------ ------------ Total expenses 422,317 141,835 ------------ ------------ Operating loss (352,317) (141,835) ------------ ------------ OTHER INCOME AND (EXPENSES) Interest income 5,105 -- Unrealized gain (loss) on marketable equity securities (12,961) -- Loss on Bio Moda, Inc. (13,957) (9,288) Interest expense (5,687) (478) ------------ ------------ Total other expenses (27,500) (9,766) ------------ ------------ Net loss (379,817) (151,601) ------------ ------------ Other comprehensive income, net of tax: Unrealized holding losses on securities -- (200,020) ------------ ------------ Comprehensive loss $ (379,817) (351,621) ============ ============ Net loss per share $ (.012) (.012) ============ ============ Weighted average shares outstanding 32,343,166 13,024,275 ============ ============ See accompanying notes and accountants' report. 5 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (CONTINUED) Six Months Ended June 30, 1999 and 1998, and the Period from May 22, 1996 (Inception) Through June 30, 1999 5/22/96 (Inception) Through 1999 1998 6/30/99 ------------ ------------ ------------ REVENUES Contract revenue $ 136,375 72,000 386,575 ------------ ------------ ------------ COSTS AND EXPENSES General and administrative 412,542 132,691 1,032,677 Contract costs 164,119 87,834 437,259 Research and development 86,440 16,618 275,558 ------------ ------------ ------------ Total expenses 663,101 237,134 1,745,494 ------------ ------------ ------------ Operating loss (526,726) (165,143) (1,358,919) ------------ ------------ ------------ OTHER INCOME AND (EXPENSES) Interest income 7,069 -- 7,920 Unrealized gain (loss) on marketable equity securities (22,929) -- (29,804) Loss on Bio Moda, Inc. (38,528) (9,288) (106,952) Interest expense (8,986) (725) (16,048) ------------ ------------ ------------ Total other expenses (63,374) (10,013) (144,884) ------------ ------------ ------------ Net loss before cumulative effect of change in accounting principle (590,100) (175,156) (1,503,803) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (63,020) -- (63,020) ------------ ------------ ------------ Net loss $ (653,120) (175,156) (1,566,823) ============ ============ ============ Net loss per share before cumulative effect of change in accounting principle $ (.021) (.015) (.132) Cumulative effect of change in accounting principle (.002) -- (.006) ------------ ------------ ------------ Net loss per share $ (.023) (.015) (.138) ============ ============ ============ Weighted average shares outstanding 28,797,880 11,376,438 11,391,411 ============ ============ ============ See accompanying notes and accountants' report. 6 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Period from May 22, 1996 (Inception) Through June 30, 1999 Common Stock ------------------------------ Par Shares Value Balance, May 22, 1996 -- $ -- Stock issued to incorporators for cash 500,000 500 Stock issued for the net assets of PLZ Tech, Inc. 4,500,000 4,500 Net loss -- -- ----------- ----------- Balance, December 31, 1996 5,000,000 5,000 Stock issued in public offering 2,281,212 2,281 Net loss -- -- ----------- ----------- Balance, December 31, 1997 7,281,212 7,281 Stock issued for cash 10,979,275 10,979 Stock issued for services 2,751,000 2,751 Stock issued in exchange for note receivable 315,000 315 Purchase and retirement of treasury stock (472,200) (472) Net loss -- -- ----------- ----------- Balance, December 31, 1998 20,854,287 20,854 Stock issued for cash 3,259,180 3,259 Stock issued for services 6,026,681 6,027 Purchase and retirement of treasury stock (489,251) (489) Net loss -- -- Balance, March 31, 1999 29,650,897 29,651 Stock issued for cash 1,437,050 1,437 Stock issued for services 3,947,488 3,947 Net loss -- -- ----------- ----------- Balance, June 30, 1999 35,035,435 $ 35,035 =========== =========== See accompanying notes and accountants, report. 7 Equity (Deficit) Accumulated Additional During the Total Paid-In Development Shareholders' Capital Stage Equity $ -- -- -- 24,500 -- 25,000 281,096 -- 285,596 -- (76,902) (76,902) ----------- ----------- ----------- 305,596 (76,902) 233,694 362,720 -- 365,001 -- (84,690) (84,690) ----------- ----------- ----------- 668,316 (161,592) 514,005 1,281,728 -- 1,292,707 293,719 -- 296,470 28,685 -- 29,000 (39,913) -- (40,385) -- (752,111) (752,111) ----------- ----------- ----------- 2,232,535 (913,703) 1,339,686 151,361 -- 154,620 21,660 -- 27,687 (10,643) -- (11,132) -- (273,303) (273,303) 2,394,913 (1,187,006) 1,237,558 111,547 -- 112,984 187,137 -- 191,084 -- (379,817) (379,817) ----------- ----------- ----------- $ 2,693,597 (1,566,823) 1,161,809 =========== =========== =========== 8 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS Quarters Ended June 30, 1999 and 1998 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(379,817) (151,601) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization and depreciation expense 27,371 13,091 Unrealized loss on marketable securities 12,961 -- Loss on Bio Moda, Inc. 13,957 9,288 Issuance of common stock for services 191,084 -- Issuance of notes payable for services 50,000 -- Contract receivable (70,000) -- Other receivables (2,507) 15,679 Accrued liabilities and accounts payable (3,005) (6,531) --------- --------- Net cash applied to operating activities (159,956) (120,074) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (33,057) (34,203) Investment in Bio Moda, Inc. -- (300,000) Purchase of marketable securities (11,000) -- Purchase of certificate of deposit (54,800) -- Purchase of other assets -- -- --------- --------- Net cash applied to investing activities (98,857) (334,203) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Additions to notes payable 443,000 -- Payments on notes payable and capital lease obligation (3,173) (8,021) Issuance of common stock 112,984 113,952 Purchase of treasury stock -- (18,552) --------- --------- Net cash provided by financing activities 552,811 87,379 --------- --------- Net increase (decrease) in cash 293,998 (366,898) Cash, beginning of period 66,666 739,493 --------- --------- Cash, end of period $ 360,664 372,595 ========= ========= See accompanying notes and accountants' report. 9 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (CONTINUED) Six Months Ended June 30, 1999 and 1998, and the Period from May 22, 1996 (Inception) Through June 30, 1999 5/22/96 (Inception) Through 1999 1998 12/31/98 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (653,120) (175,156) (1,566,823) Adjustments to reconcile net loss to net cash provided by operating activities: Amortization and depreciation expense 50,900 22,561 157,671 Write off of organization costs 63,020 -- 63,020 Unrealized loss on marketable securities 22,929 -- 29,804 Loss on Bio Moda, Inc. 38,528 9,288 106,952 Issuance of common stock for services 218,771 -- 515,241 Issuance of notes payable for services 50,000 -- 50,000 Contract receivable (136,375) (72,000) (386,575) Other receivables (8,461) 8,179 (65,858) Inventory (41,324) -- (41,324) Accrued liabilities and accounts payable (1,889) 516 33,524 ---------- ---------- ---------- Net cash applied to operating activities (397,021) (206,612) (1,104,368) ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (60,662) (34,752) (239,178) Investment in Bio Moda, Inc. -- (300,000) (358,845) Purchase of marketable securities (11,000) (35,191) (81,034) Purchase of certificate of deposit (54,800) -- (104,800) Purchase of other assets (10,000) -- (96,777) ---------- ---------- ---------- Net cash applied to investing activities (136,462) (369,943) (880,634) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Additions to notes payable 443,000 -- 537,726 Payments on notes payable and capital lease obligation (9,937) (11,671) (100,855) Issuance of common stock 267,604 904,952 1,950,312 Purchase of treasury stock (11,132) (18,552) (41,517) ---------- ---------- ---------- Net cash provided by financing activities 689,535 874,729 2,345,666 ---------- ---------- ---------- Net increase (decrease) in cash 156,052 298,174 360,664 Cash, beginning of period 204,612 74,421 -- ---------- ---------- ---------- Cash, end of period $ 360,664 372,595 360,664 ========== ========== ========== See accompanying notes and accountants' report. 10 ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) See accompanying notes and accountants' report. 11 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business. Advanced Optics Electronics, Inc. (the Company) is a developmental stage technology company with its principal focus on the development and production of large-scale flat panel displays. The Company is currently continuing its research and development of this product. Upon substantial completion of the research and development of the large flat panel display, the Company plans to make the transition from a developmental stage company to selling and producing this product. The market for the large-scale flat panel will include, but not be limited to, cockpit displays, flat panel computer monitors, and advertising billboards. Advanced Optics Electronics, Inc. plans to focus on producing and selling the large-scale flat panel displays for outdoor advertising billboards, which is currently the only industry segment it operates in. The Company has obtained a contract to produce two outdoor advertising billboards using its flat panel display technology. This is the first commercial application of the Company's technology. The success of the Company will depend on its ability to commercialize its technology and complete this contract. In addition, the Company will be required to obtain additional capital in order to fund the completion of the contract. Cash and Cash Equivalents. Cash and cash equivalents include all cash balances and highly liquid debt instruments with an original maturity of three months or less. The Company's cash and certificates of deposit are deposited in financial institutions and are insured only up to $100,000 by the Federal Deposit Insurance Corporation. Marketable Equity Securities. The Company classifies all of its marketable equity securities as trading securities. Trading securities are carried at fair value with the unrealized gains and losses reported in the income statement. As of June 30, 1999, gross unrealized gains were $24,983 and gross unrealized losses were $54,787. Realized gains and losses were not material. Inventory. Inventory consists of raw materials and is carried at the lower of cost (specific identification) or market. Equity Investment. The investment in Bio Moda, Inc. is accounted for using the equity method. Under this method, income and losses reported by the investee are recorded by the Company in its proportionate interest at the time they are recognized by the investee. The original cost of the Bio Moda, Inc. investment exceeded the Company's proportionate interest in Bio Moda's book value. This difference is being amortized over a 15 year period. Depreciation. Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets ranging from 3 to 10 years using straight line and declining balance methods. 12 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Other Assets. Organization costs were amortized on a straight-line basis over the period to be benefited of five years up until December 31, 1998. Patents are amortized on a straight-line basis over the remaining estimated useful life of 15 years. Goodwill is amortized over the period to be benefited, or 40 years, whichever is less. Debt origination costs are amortized over the life of the related notes payable. The Company continually reviews other assets to assess recoverability from estimated future net cash flows. To date, these reviews have not resulted in a reduction of other assets. Research and Development Costs. Research and development costs are expensed as incurred. Income Taxes. The Company accounts for its income taxes using the liability method. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company has provided a valuation allowance to offset the benefit of any net operating loss carryforwards or deductible temporary differences. Loss per share. Loss per share is computed on the basis of the weighted average number of common shares outstanding during the year and did not include the effect of potential common stock as their effect would be antidilutive. The numerator for the computation is the net loss and the denominator is the weighted average shares of common stock outstanding. Effect of New Accounting Pronouncements. Statement of Position 98-5 Reporting the Costs of Start-up Activities requires that organization costs be expensed. The Company applied this new accounting pronouncement effective January 1, 1999. The impact of this change in accounting principle was to reduce assets and increase the deficit accumulated during the development stage by $63,020 as of December 31, 1998 and is presented as the cumulative effect of an accounting change on the statement of operations. There are no related income tax amounts. Use of 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. The principal areas requiring estimation are revenue recognition based on the percentage of completion method, loss reserves and the valuation of common stock issued for services. 13 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue and Cost Recognition. The Company recognized revenue on its contract in process using the percentage-of-completion method of accounting, which is based on the proportion of the contract cost incurred to the estimated total contract cost. Costs incurred and estimated earnings in excess of billings represent the revenue recognized that has not yet been billed. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, overhead, and equipment depreciation. The contract to produce two outdoor advertising billboards totals $1.7 million, with $885,000 allocated to the first unit. An estimated total loss of approximately $51,000 in the first unit has been recognized as of June 30, 1999. The Company's estimated cost to complete as of June 30, 1999 is $495,000 which it expects to fund with cash, billings on the contract and additional capital. In accordance with the contract, the Company will bill the customer when certain milestones have been met. There were no billings as of June 30, 1999. Adjustments to the original estimates of total contract revenue, total contract cost, and extent of progress toward completion are often required as work progresses under the contract and as experience is gained, even though the scope of the work required under the contract may not change. The nature of accounting for contracts is such that refinements of the estimating process for continuously changing conditions and new developments are a characteristic of the process. Accordingly, provisions for losses on contracts are made in the period in which they become evident under the percentage-of-completion method. Reclassifications. Certain amounts in 1998 financial statements have been reclassified to conform with 1999 presentation. NOTE 2. RELATED PARTY RECEIVABLES Related party receivables at June 30, 1999, consist of the following: Due from officer $ 40,508 Note receivable from former shareholder bearing interest at 8% and due in February, 1999 15,000 --------- $ 55,508 ========= The note receivable from former shareholder was issued for $10,000 in the Company's common stock and $5,000 in cash. 14 NOTE 3. INVESTMENT IN BIO MODA, INC. During 1998 the Company increased its investment in Bio Moda, Inc. to 21.93 percent. Bio Moda, Inc. is a development stage company involved primarily in the development of technology for the early detection of lung cancer. As a development stage company, Bio Moda, Inc. has not had any revenues and, as of June 30, 1999, was in the process of conducting clinical trials. There is currently no active market for the common stock of Bio Moda, Inc. The ultimate value of the Company's investment in Bio Moda, Inc. will depend on its ability to complete its research and either commercialize or sell its proprietary technology. A summary of the financial data relative to Bio Moda, Inc. as of December 31, 1998 is as follows: Assets: Current assets $ 56,223 Other assets 17,000 ------------ $ 73,223 ============ Liabilities and equity Current liabilities $ 32,148 Notes payable to stockholders 84,884 Common stock 372,273 Deficit accumulated during the development stage (416,082) ------------ $ 73,223 ============ The investment in Bio Moda, Inc. is accounted for using the equity method. A summary of the investment as of June 30, 1999 is as follows: Original cost, all of which exceeded book value $ 358,845 Share of net loss (78,080) Amortization of excess of cost over book value (28,872) ------------ Net investment $ 251,893 ============ 15 NOTE 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION Capital Lease Obligation. In July, 1998, the Company entered into a capital lease agreement for equipment valued at $100,499 (net book value of $77,048 at June 30, 1999). The Company made a down payment of $20,170. The remaining amount was financed on a lease with 36 monthly payments of $2,810. Future minimum lease payments are as follows for the years ending June 30: 2000 $ 33,720 2001 33,720 ------------ 67,440 Less amounts representing interest (10,748) ------------ $ 56,692 ============ Long-Term Debt. In October 1998, the Company obtained a note payable from a bank as part of the purchase of an automobile. The note is due in monthly installments of principal and interest (fixed rate of 8 percent) of $817 until October 2002. The note is secured by the automobile and the balance outstanding at June 30, 1999 was $29,743. In April 1999, the Company obtained a note payable from a bank to purchase equipment. The note is due in 36 monthly installments of principal and interest (bank index rate plus 1.5 percent which was 9.25 percent at June 30, 1999) of $409. The note is secured by equipment and the balance outstanding at June 30, 1999 was $12,592. Convertible Notes. On June 3, 1999, the Company issued $500,000 in convertible notes which bear interest at an annual rate of 8 percent and mature (principal and interest) on May 31, 2001. The notes are convertible into shares of common stock at a 25 percent discount to the closing bid price of a share of common stock at the time of conversion The notes were issued in exchange for $430,000 in cash $50,000 in legal services and $20,000 in commissions. The commissions have been capitalized as debt origination costs and are being amortized over the life of the notes. The notes are unsecured. Principal payments for long-term debt and convertible notes for the years ending June 30 are as follows: 2000 $ 12,542 2001 515,359 2002 12,845 2003 4,548 ---------- $ 545,294 ========== 16 NOTE 5. EQUITY TRANSACTIONS The Company was initially capitalized through the issuance of 500,000 shares for $25,000 in cash. In November 1996, the Company issued 4,500,000 shares in exchange for the outstanding shares of PLZ Tech, Inc. The transaction was accounted for as a purchase and net assets of $285,596, consisting primarily of patents and equipment were recorded. In previous financial statements, the Company did not present unclaimed shares resulting from the merger with PLZ Tech, Inc. as outstanding shares. In the accompanying 1997 and prior financial statements the number of shares outstanding has been restated to include these shares. During 1997 the Company issued 2,281,212 shares of stock in a public offing, primarily for cash. During 1998, the Company repurchased 472,200 of its outstanding stock in exchange for $10,000 in notes receivable and $30,385 in cash in various transactions. This stock was subsequently retired. The Company also issued 9,274,811 shares of common stock in exchange for $1,292,707 in cash, net of sales commissions and other direct costs. Certain of these sales included price maintenance agreements resulting in the issuance of an additional 1,704,464 shares of stock in 1998. In 1998 the Company issued 2,751,000 shares of common stock in exchange for services from contractors, officers and others. These shares were valued at the estimated fair market value for similar issuances of stock and amounted to $296,470. The Company also issued 315,000 shares to an officer in exchange for a note receivable of $29,000. The notes bears interest at the rate of 7 percent with interest due semiannually and the principal due July, 2001. During the quarter ended March 31, 1999, the Company repurchased 489,251 shares of its outstanding stock for $11,132 in cash. These shares were retired. The Company also sold 3,259,180 shares for $154,620 in cash and issued 5,537,430 shares for services which were valued at $27,687. During the quarter ended June 30, 1999, the Company sold 1,437,050 shares of common stock for $112,984 in cash and issued 3,947,488 shares in exchange for services from officers and directors. 17 NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The following are the carrying amounts and methods used by the Company in estimating its fair value of financial instruments. Cash and Certificates of Deposit. The carrying amounts reported in the balance sheet approximate fair value. Marketable Equity Securities. The fair value reported in the balance sheet was based on current market prices. Notes Receivable. Management estimates the fair value of notes receivable approximates the carrying value due to their short terms. Notes Payable. Management estimates the fair value of notes payable approximates the carrying value due to their short terms. Capital Lease and Long-Term Debt. Management estimates the fair value of capital lease obligations and notes payable approximates the carrying value due to their short terms and the fact that they were entered into recently. The carrying amounts and fair values of the Company's financial instruments are as follows at June 30, 1999: Estimated Carrying Fair Amount Value Cash and cash equivalents $ 360,664 360,664 Certificate of deposit 104,800 104,800 Marketable equity securities (with an original cost of $81,034) 51,230 51,230 Notes payable 29,000 29,000 Long-term debt and capital lease obligation 601,986 601,986 18 NOTE 7. INCOME TAXES At June 30, 1999, the Company had deferred tax assets amounting to approximately $520,000. The deferred tax assets consist primarily of the tax benefit of net operating loss carryforwards and are fully offset by a valuation allowance of the same amount. The net change in the valuation allowance for deferred tax assets was an increase of approximately $120,000 in the quarter ending June 30, 1999 and $200,000 for the six months ending June 30, 1999. The net change is due primarily to the increase in net operating loss carryforwards. At June 30, 1999, the Company had net operating loss carryforwards of approximately $1,300,000 available to offset future state and federal taxable income. These carryforwards will expire in 2016 to 2018 for federal tax purposes and 2001 to 2003 for state tax purposes. NOTE 8. COMMITMENTS The Company has a non-cancelable operating lease agreement for its office and production space. The agreement is through June 2000 with an option to renew for one additional year. Rent expense during the quarters ending June 30, 1999 and 1998 was $8,150 and $3,900, respectively. For the six months then ended it was $18,025 and $6,000, respectively. Future minimum lease payments for the years ending June 30, are as follows: 2000 $ 32,400 As of June 30, 1999, there was one stock option outstanding for the purchase of 153,954 shares at $.58 per share by an officer of the Company. The option expires August 1, 1999. During the six months ended June 30, 1998 and 1999, there was no stock option activity. 19 ADVANCED OPTICS ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Advanced Optics Electronics, Inc. (ADOT-NASDAQ BB) (the "Company") is a development stage technology company based in Albuquerque, New Mexico. The Company is primarily engaged in the development, production and sales of its novel and innovative electronic flat panel displays. The result of research and development activities will be the manufacturing of large-scale flat panel displays utilizing its patented technology. These large-scale flat panel displays will be marketed and sold to the outdoor advertising billboard market. Forward - Looking Statements This Quarterly Report contains forward-looking statements about the business, financial condition and prospects of the Company that reflect assumptions made by management and management's beliefs based on information currently available to it. The Company can give no assurance that the expectations indicated by such forward-looking statements will be realized. If any of management's assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, the Company's actual results may differ materially from those indicated by the forward-looking statements. The key factors that are not within the Company's control and that may have a direct bearing on operating results include, but are not limited to, the acceptance by customers of the Company's products, the Company's ability to develop new products cost-effectively, the ability of the Company to raise capital in the future, the development by competitors of products using improved or alternative technology, the retention of key employees and general economic conditions. There may be other risks and circumstances that management is unable to predict. When used in this Quarterly Report, words such as, "believes," "expects," "intends," "plans," "anticipates" "estimates" and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions. All forward-looking statements are intended to be covered by the safe harbor created by Section 21E of the Securities Exchange Act of 1934. Liquidity and Capital Resources The Company relies upon the purchase of its securities by investors to provide capital. Capital is required for the development of prototype units and manufacturing operations. Operating revenues from initial contracts also contribute to operating liquidity. The Company's holding of stock in BioModa, Inc will provide additional liquidity. 20 BioModa is a biomedical development company. The Company's ownership of BioModa, as of June 30, 1999, was 21.93%. No immediate family members of officers or directors of Advanced Optics Electronics, Inc. are securities holders of BioModa. During the six months ended June 30, 1999 $147,102 was spent for the purchase of equipment and product development costs. Funds for operation needs, product development and capital expenditures were provided from the sale of securities and cash reserves. Product development expenditures are expected to be approximately $250,000 in fiscal 1999. Management believes that sales of securities, cash reserves and contract revenue will provide adequate liquidity and capital resources to meet the anticipated development stage requirements through the end of fiscal year 1999. At that time it is anticipated that sales of flat panel displays will begin and contribute to operating revenues. It is anticipated that these sales will provide the additional capital resources to fund the proportionately higher working capital requirements of production and sales initiatives. The Company currently has no other significant commitments for capital expenditures in 1999. Results of Continuing Operations Comparison of the Six-Month Periods Ended June 30, 1999 and 1998 Revenues increased to $136,375 in the first half of 1999 as compared to $72,000 in the first half of 1998. Research, development and technical costs increased to $86,440 in the first half of 1999 from $16,618 in the first half of 1998. The increase in these costs is due primarily to increased research and development efforts and resources. General and administrative costs increased to $412,542 in the first half of 1999 from $132,691 in the first half of 1998 due to increases in salaries related to additional personnel and increases in professional fees. Depreciation increased to $78,010 in the first half of 1999 from $9,610 in the first half of 1998 due primarily to depreciation expense for equipment purchased and acquired under capital leases. 21 PART II. OTHER INFORMATION Item 1. Legal proceedings The Company is not a party to any legal proceeding, the adverse outcome of which, in management's opinion, would have a material adverse effect on the Company's operating results. Item 2. Changes in securities During the second quarter of fiscal year 1999 there was a 9,356,885 increase in shares of common stock. Item 3. Defaults upon senior securities - Not applicable Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of the Company's security holders during the second quarter of fiscal year 1999. Item 5. Other Information - Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the company during the three-month period ending June 30, 1999 22 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report on Form 10QSB to be signed on its behalf by the undersigned, thereunto duly autorized. Dated: August 12, 1999 ADVANCED OPTICS ELECTRONICS, INC. BY: /s/ John J. Cousins ---------------------------------- John J. Cousins Chief Accounting Officer (Principal Accounting Officer) BY: /s/ Leslie S. Robins ---------------------------------- Leslie S. Robins Executive Vice President (Principal Executive Officer) 24