-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JSwQpY3ufQAcG43tfGceJoiwT6EDCPDzu7kQlf65wq5lPuZY8WNPU6CIdXBGcq77 pdoRMAdc8ralvdvvHZt9lw== 0000891554-01-506431.txt : 20020411 0000891554-01-506431.hdr.sgml : 20020411 ACCESSION NUMBER: 0000891554-01-506431 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED OPTICS ELECTRONICS INC CENTRAL INDEX KEY: 0001020657 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 880365136 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-24511 FILM NUMBER: 1796054 BUSINESS ADDRESS: STREET 1: 8301 WASHINGTON NE #4 STREET 2: STE F CITY: ALBUQUERQUE STATE: NM ZIP: 87113 BUSINESS PHONE: 5057977878 MAIL ADDRESS: STREET 1: 8301 WASHINGTON NE STREET 2: #4 CITY: ALBUQUERQUE STATE: NM ZIP: 87113 10QSB 1 d27441_10-qsb.txt QUARTERLY REPORT 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: September 30, 2001 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 5, 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 September 30, 2001 was 70,628,617 Transitional Small Business Disclosure Format (check one): Yes ____ No X FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ADVANCED OPTICS ELECTRONICS, INC. (A DEVELOPMENT STAGE COMPANY) September 30, 2001 C O N T E N T S Page REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................................................1 FINANCIAL STATEMENTS BALANCE SHEET........................................................2 STATEMENTS OF OPERATIONS...........................................3-4 STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT........................5 STATEMENTS OF CASH FLOWS..........................................6-10 NOTES TO FINANCIAL STATEMENTS....................................11-25 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Advanced Optics Electronics, Inc. We have reviewed the accompanying balance sheet of Advanced Optics Electronics, Inc. (A Development Stage Company), as of September 30, 2001, and the related statements of operations, changes in stockholders' deficit and cash flows for the quarter and nine-month period then ended. These financial statements are the responsibility of the Company's management. The financial statements of Advanced Optics Electronics, Inc. for the quarter and nine-month period ended September 30, 2000 were reviewed by other auditors whose report dated October 20, 2000 stated that they were not aware of any material modifications that should be made to those statements, before restatement, in order for them to be in conformity with accounting principles generally accepted in the United States of America. The financial statements for the 1998 and 1999 portions of the period from May 22, 1996 (inception) through December 31, 1999 were audited by other auditors, whose reports dated February 18, 2000 expressed unqualified opinions on those statements, before restatement. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review and the reports of other accountants, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America. Atkinson & Co., Ltd. Albuquerque, New Mexico November 9, 2001 -1- Advanced Optics Electronics, Inc. (A Development Stage Company) BALANCE SHEET (Unaudited) September 30, 2001 ASSETS CURRENT ASSETS Cash and cash equivalents $ 93,934 Costs and estimated earnings in excess of billings on uncompleted contract 1,409,142 ----------- Total current assets 1,503,076 ----------- PROPERTY AND EQUIPMENT, net 211,345 ----------- OTHER ASSETS Investment in Bio Moda, Inc. 207,335 Other assets 75,787 Note receivable from officer and shareholder 44,493 Intangible assets, net 36,368 ----------- Total other assets 363,983 ----------- Total assets $ 2,078,404 =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable $ 158,622 Accrued liabilities 190,592 Current portion of long-term debt 34,109 Allowance for loss on contract 690,000 ----------- Total current liabilities 1,073,323 ----------- LONG-TERM PORTION OF LONG-TERM DEBT 21,029 ----------- CONVERTIBLE DEBENTURES 1,492,774 ----------- STOCKHOLDERS' DEFICIT Capital stock - Preferred Series A, 7.5% cumulative, convertible into common stock at a rate determined by dividing the purchase price of the preferred shares by the conversion price of the common stock; $.001 par value; authorized 10,000,000 shares, no shares issued or outstanding -- Common stock - Authorized 150,000,000 shares, $.001 par value; 70,628,617 shares issued and 70,346,817 shares outstanding 70,629 Additional paid-in capital 8,646,051 Deficit accumulated during the development stage (8,962,694) Treasury stock, at cost (69,281) Notes receivable from officer for exercise of stock options (193,427) ----------- Total stockholders' deficit (508,722) ----------- Total liabilities and stockholders' deficit $ 2,078,404 ===========
The accompanying notes are an integral part of these financial statements. -2- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENTS OF OPERATIONS (Unaudited) For the Quarters ended September 30, 2001 and 2000
2000 2001 (Restated) ------------ ------------ Revenues Contract revenue $ -- $ -- ------------ ------------ Costs and expenses General and administrative 210,411 295,340 Research and development 78,380 178,821 Asset impairment -- -- ------------ ------------ Total costs and expenses 288,791 474,161 Estimated loss on contract -- 72,000 ------------ ------------ Operating loss (288,791) (546,161) ------------ ------------ Other income (expenses) Interest income 5,511 5,113 Unrealized gain (loss) on marketable equity securities -- 2,352 Loss on Bio Moda, Inc. -- (18,193) Interest expense (70,206) (4,833) ------------ ------------ Total other income (expenses) (64,695) (15,561) ------------ ------------ Net loss $ (353,486) $ (561,722) ============ ============ Net loss per share (.01) (.01) ============ ============ Weighted average shares outstanding 68,260,388 60,627,342 ============ ============
The accompanying notes are an integral part of these financial statements. -3- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENTS OF OPERATIONS - CONTINUED (Unaudited) Forthe Nine-Month Periods ended September 30, 2001 and 2000 and the Period from May 22, 1996 (Inception) through September 30, 2001
May 22, 1996 (Inception) Through 2000 September 30, 2001 (Restated) 2001 ------------ ------------ ------------ Revenues Contract revenue $ -- $ -- $ -- ------------ ------------ ------------ Costs and expenses General and administrative 771,725 2,092,687 5,709,435 Research and development 230,982 447,448 1,391,158 Asset impairments 227,570 -- 227,570 ------------ ------------ ------------ Total costs and expenses 1,230,277 2,540,135 7,328,163 Estimated loss on contract (125,000) (269,847) (690,000) ------------ ------------ ------------ Operating loss (1,355,277) (2,809,982) (8,018,163) ------------ ------------ ------------ Other income (expenses) Interest income 20,827 10,813 51,157 Unrealized gain (loss) on marketable equity securities -- 4,194 (29,368) Other investment gains -- -- 59,784 Loss on Bio Moda, Inc. -- (50,637) (176,510) Gain (loss) on disposal of assets 6,000 -- (4,306) Interest expense (126,806) (153,310) (782,268) ------------ ------------ ------------ Total other income (expenses) (99,979) (188,940) (881,511) ------------ ------------ ------------ Net loss before cumulative effect of change in accounting principle (1,455,256) (2,998,922) (8,899,674) Cumulative effect of change in accounting principle -- -- (63,020) ------------ ------------ ------------ Net loss $ (1,455,256) $ (2,998,922) $ (8,962,694) ============ ============ ============ Net loss per share before cumulative effect of change in accounting principle (.02) (.06) (.26) Cumulative effect of change in accounting principle -- -- (.002) ------------ ------------ ------------ Net loss per share $ (.02) $ (.06) $ (.26) ============ ============ ============ Weighted average shares outstanding 66,278,396 53,921,575 34,725,565 ============ ============ ============
The accompanying notes are an integral part of these financial statements. -4- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT (Unaudited) For the Period from May 22, 1996 (inception) through September 30, 2001
Common Stock Preferred Stock -------------------------- -------------------------- Par Par Shares Value 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 for cash and services 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 8,681,624 8,682 -- -- Stock issued for services 17,094,313 17,094 -- -- Intrinsic value of beneficial conversion feature of -- -- -- -- notes payable Fair value of warrants related to notes payable -- -- -- -- Purchase and retirement of treasury stock (489,251) (489) -- -- Purchase of treasury stock -- -- -- -- Sale of treasury stock -- -- -- -- Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, December 31, 1999 46,140,973 46,141 -- -- Stock issued for cash 782,000 782 710 1 Stock issued for services 3,955,202 3,955 -- -- Purchase of treasury stock -- -- -- -- Sale of treasury stock -- -- -- -- Exercise of stock options for notes receivable 1,850,000 1,850 -- -- Amortization of discount on convertible preferred stock -- -- -- -- Exercise of preferred stock conversion feature 9,200,000 9,200 -- -- Issuance of convertible debentures -- -- -- -- Exchange of preferred stock for convertible debentures -- -- (710) (1) Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, December 31, 2000 61,928,175 61,928 -- -- Stock issued for services 1,475,000 1,475 -- -- Purchase of treasury stock -- -- -- -- Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, March 31, 2001 63,403,175 63,403 -- -- Stock issued for services 1,835,000 1,835 -- -- Stock issued for cash 652,778 653 -- -- Stock issued upon debt conversion 301,205 301 -- -- Purchase of treasury stock -- -- -- -- Cancellation of shares (300,000) (300) -- -- Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, June 30, 2001 65,892,158 65,892 -- -- Stock issued for services 3,081,749 3,082 -- -- Stock issued for cash 730,000 730 -- -- Stock issued upon debt conversion 924,710 925 -- -- Purchase of treasury stock -- -- -- -- Issuance of convertible debentures -- -- -- -- Net loss -- -- -- -- ----------- ----------- ----------- ----------- Balance, September 30, 2001 70,628,617 $ 70,629 -- $ -- =========== =========== =========== ===========
Treasury Stock --------------------------------- Equity (Deficit) Notes Additional During the Receivable Total Paid-In Development From Stockholders' Shares Cost Capital Stage Officer Deficit - ----------- ----------- ----------- ----------- ----------- ----------- -- -- $ 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 -- -- 855,101 -- -- 863,783 -- -- 1,469,320 -- -- 1,486,414 -- -- 174,610 -- -- 174,610 -- -- 125,000 -- -- 125,000 -- -- (10,643) -- -- (11,132) (229,000) (41,760) -- -- -- (41,760) 85,000 11,130 24,334 -- -- 35,464 -- -- -- (2,725,804) -- (2,725,804) - ----------- ----------- ----------- ----------- ----------- ----------- (144,000) (30,630) 4,870,257 (3,639,507) -- 1,246,261 -- -- 1,012,710 -- -- 1,013,493 -- -- 1,726,197 -- -- 1,730,152 (63,500) (46,486) -- -- -- (46,486) 142,400 22,542 54,771 -- -- 77,313 -- -- 220,150 -- (193,427) 28,573 -- -- 159,677 -- -- 159,677 -- -- 533,678 -- -- 542,878 -- -- 263,830 -- -- 263,830 -- -- (701,363) -- -- (701,364) -- -- -- (3,867,931) -- (3,867,931) - ----------- ----------- ----------- ----------- ----------- ----------- (65,100) (54,574) 8,139,907 (7,507,438) (193,427) 446,396 -- -- 174,773 -- -- 176,248 (17,300) (3,207) -- -- -- (3,207) -- -- -- (531,071) -- (531,071) - ----------- ----------- ----------- ----------- ----------- ----------- (82,400) (57,781) 8,314,680 (8,038,509) (193,427) 88,366 -- -- 131,203 -- -- 133,038 -- -- 39,347 -- -- 40,000 -- -- 19,699 -- -- 20,000 (13,900) (2,012) -- -- -- (2,012) -- -- (46,950) -- -- (47,250) -- -- -- (570,699) -- (570,699) - ----------- ----------- ----------- ----------- ----------- ----------- - ----------- ----------- ----------- ----------- ----------- ----------- (96,300) (59,793) 8,457,979 (8,609,208) (193,427) (338,557) -- -- 64,722 -- -- 67,804 -- -- 27,497 -- -- 28,227 -- -- 26,978 -- -- 27,903 (185,500) (9,488) -- -- -- (9,488) -- -- 68,875 -- -- 68,875 -- -- -- (353,486) -- (353,486) - ----------- ----------- ----------- ----------- ----------- ----------- $ (281,800) $ (69,281) $ 8,646,051 $(8,962,694) $ (508,722) $ (193,427) =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -5- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENTS OF CASH FLOWS (Unaudited) For the Quarters ended September 30, 2001 and 2000
2000 2001 (Restated) --------- --------- Cash flows from operating activities Net loss $(353,486) $(561,722) Adjustments to reconcile net loss to net cash used in operating activities Interest on convertible debentures -- -- Intrinsic value of conversion features 68,875 -- Amortization and depreciation expense 23,411 26,578 Amortization of discounts on convertible notes -- -- Unrealized (gain) loss on marketable securities -- -- Loss on Bio Moda, Inc. -- -- Asset impairment -- -- Issuance of common stock for services 67,804 90,560 Issuance of notes for services -- 20,000 Marketable equity securities -- (132) Increase in costs in excess of billings on uncompleted contract (88,333) (12,460) (Increase) in other assets (6,374) -- Increase in other receivables -- 45,524 Increase in allowance for loss on contract -- -- Increase in accrued liabilities and accounts payable 80,568 158,606 --------- --------- Net cash used in operating activities (207,535) (233,046) --------- ---------
The accompanying notes are an integral part of these financial statements. -6- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) For the Quarters ended September 30, 2001 and 2000
2001 2000 --------- --------- Cash flows from investing activities Purchase of equipment (4,149) (13,873) Sale of marketable securities -- 66,825 (Increase) in certificate of deposits -- (3,504) Purchase of marketable securities -- (30,759) --------- --------- Net cash (used in) provided by investing activities (4,149) 18,689 --------- --------- Cash flows from financing activities Additions to notes payable -- 430,000 Payments on notes payable and capital lease obligations (8,160) (13,107) Issuance of capital stock 28,227 -- Sale of treasury stock -- 27,543 Purchase of treasury stock (9,488) (4,986) Proceeds from issuance of preferred stock -- 160,000 Proceeds from issuance of convertible debenture 200,000 -- --------- --------- Net cash provided by financing activities 210,579 599,450 --------- --------- NET (DECREASE) INCREASE IN CASH (1,105) 385,093 Cash and cash equivalents, beginning of period 95,039 393,127 --------- --------- Cash and cash equivalents, end of period $ 93,934 $ 778,220 ========= =========
NON CASH INVESTING AND FINANCING TRANSACTIONS During the quarter ended September 30, 2001, $27,903 of debentures were converted into 924,710 shares of the Company's common stock. The accompanying notes are an integral part of these financial statements. -7- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) For the Nine-Month Periods ended September 30, 2001 and 2000 and the Period from May 22, 1996 (Inception) through September 30, 2001
May 22, 1996 (Inception) Through September 30, 2001 2000 2001 ----------- ----------- ----------- Cash flows from operating activities Net loss $(1,455,256) $(2,998,922) $(8,962,694) Adjustments to reconcile net loss to net cash used in operating activities Interest on convertible debentures 50,000 -- 50,000 Intrinsic value of conversion features 68,875 -- 535,603 Amortization and depreciation expense 94,561 128,958 421,202 Write off of organization costs -- -- 63,020 Amortization of discounts on convertible notes -- 138,155 295,209 Unrealized (gain) loss on marketable securities -- (4,194) 29,368 (Loss) gain on disposal of assets (6,000) -- 4,306 Loss on Bio Moda, Inc. -- 50,637 176,510 Asset impairment 227,570 -- 227,570 Issuance of common stock for services 329,640 1,596,222 3,842,676 Issuance of notes for services -- 20,000 50,000 Increase in costs in excess of billings on uncompleted contract (263,653) (48,087) (1,409,142) Marketable equity securities -- (421) -- (Increase) in other assets (1,745) -- (81,620) Increase (decrease) in inventory -- 6,000 (35,293) Increase in allowance for loss on contract 125,000 56,712 690,000 Increase in other receivables -- 76,554 -- Increase in accrued liabilities and accounts payable 133,188 88,422 349,414 Other non-cash expenses -- -- 33,447 Accrued interest -- -- 30,667 ----------- ----------- ----------- Net cash used in operating activities (697,820) (889,964) (3,689,757) ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. -8- Advanced Optics Electronics, Inc. (A Development Stage Company) STATEMENTS OF CASH FLOWS - CONTINUED (Unaudited) Forthe Nine-Month Periods ended September 30, 2001 and 2000 and the Period from May 22, 1996 (Inception) through September 30, 2001
May 22, 1996 (Inception) Through September 30, 2001 2000 2001 ----------- ----------- ----------- Cash flows from investing activities Purchase of equipment (27,885) (60,835) (380,128) Investment in Bio Moda, Inc. -- -- (383,845) Sale of marketable securities -- 100,642 40,665 Purchase of marketable securities -- (59,642) (70,034) Decrease (increase) in certificate of deposits 107,426 (2,102) -- Proceeds from sale of equipment 23,800 -- 23,800 Purchase of other assets (6,653) -- (239,785) Redemption of sale of Wizard Technologies, Inc. -- 65,000 -- ----------- ----------- ----------- Net cash provided by (used in) investing activities 96,688 43,063 (1,009,327) ----------- ----------- ----------- Cash flows from financing activities Additions to notes payable -- 430,000 622,776 Payments on notes payable and capital lease obligations (42,741) (39,586) (214,849) Issuance of capital stock 68,227 853,493 3,628,211 Collection of officer notes -- -- 28,573 Sale of treasury stock -- 77,313 112,777 Purchase of treasury stock (14,707) (46,486) (144,470) Proceeds from issuance of convertible preferred stock -- 160,000 485,000 Proceeds from issuance of convertible debenture 275,000 -- 275,000 ----------- ----------- ----------- Net cash provided by financing activities 285,779 1,434,734 4,793,018 ----------- ----------- ----------- NET (DECREASE) INCREASE IN CASH (315,353) 587,833 93,934 Cash and cash equivalents, beginning of period 409,287 190,387 -- ----------- ----------- ----------- Cash and cash equivalents, end of period $ 93,934 $ 778,220 $ 93,934 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -9- NON CASH INVESTING AND FINANCING TRANSACTIONS During the nine-month periods ended September 30, 2001, $47,903 of debentures were converted into 1,225,915 shares of the Company's common stock. The accompanying notes are an integral part of these financial statements. -10- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (Unaudited) September 30, 2001 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. Notes to Interim Financial Statements The interim financial data is unaudited, however in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim period. The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company's financial statements filed as part of the Company's December 31, 2000 Form 10-KSB. This quarterly report should be read in conjunction with such annual report. 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 displays will include advertising billboards, flat panel computer monitors, and cockpit displays. The Company plans to focus on producing and selling the large-scale flat panel displays for outdoor advertising billboards. 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. As of September 30, 2001, completion of this contract was behind schedule. While management believes the contract will ultimately be completed, there can be no certainty that this will be accomplished because the technology has not yet been used in a commercial application. In addition, the Company may be required to obtain additional capital in order to fund the completion of the contract. The accompanying notes are an integral part of these financial statements. -11- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Description of Business - Continued The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which are based on certain underlying assumptions, including the assumption that the Company will continue as a going concern. The Company is a development stage enterprise and has not yet earned revenues from its planned principal operations and has a net capital deficiency. The Company's entry into its intended operational stage is dependent upon its ability to continue to generate sufficient working capital and to develop a market accepted product line. The accompanying financial statements do not include any adjustments that might result from the resolution of this uncertainty. Cash and Cash Equivalents Cash and cash equivalents include all cash balances and highly liquid instruments with original maturities of three months or less. The Company's cash deposits are maintained in local branches of national financial institutions and are insured by the Federal Deposit Insurance Corporation up to $100,000 at each institution. Cash balances may from time to time exceed these insurance limits, but management believes the Company is not exposed to any risk of loss from these deposits. Revenue and Cost Recognition The Company recognizes revenue on its contract in process using the completed contract method, under which contract revenues and costs are recognized when the contract is completed, with estimated losses recognized when it becomes evident that contract costs will exceed contract revenues. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, overhead, equipment depreciation, and interest. The contract to produce two outdoor advertising billboards totals $1.7 million, with $885,000 assigned to the first unit. An estimated loss of approximately $690,000 from production of the first unit has been recognized through September 30, 2001. The Company's estimated cost to complete as of September 30, 2001 is $164,299, which is expected to be funded with cash, billings on the contract, and contributed capital. In accordance with the contract terms, the anticipated delivery date of the first unit is October 15, 2001. During the contract period, the Company is entitled to bill the customer as the following milestones are met: The accompanying notes are an integral part of these financial statements. -12- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Revenue and Cost Recognition - Continued Completion of board design $ 65,000 Production 265,000 Completion 265,000 Acceptance after installation 290,000 Billings and collections through September 30, 2001 have totaled $89,873. Adjustments to the original estimates of total contract revenues, total contract costs, and the 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 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. It is at least reasonably possible that the estimate of completion costs for this contract will be further revised in the near-term. Investment As of September 30, 2001, the Company owned 16.4% of the outstanding common stock of Bio Moda, Inc., an unconsolidated investment accounted for using the cost method. Prior to December 31, 1999, the Company's ownership was sufficient for the investment to be accounted for using the equity method. The carrying value of the investment as of September 30, 2001 is the original investment cost adjusted by the Company's proportionate interest in losses reported by the investee through December 31, 1999. Property, Plant and Equipment Property, plant and equipment are carried at cost. Repair and maintenance costs are charged against income as incurred. Asset additions, renewals and betterments are capitalized at cost and depreciated using the straight-line method over estimated useful lives ranging from 3 to 15 years. Other Assets Intangible assets are carried at historical cost, net of accumulated amortization. Patents are amortized on a straight-line basis over their estimated useful lives of 8 years. Goodwill is amortized over 10 years. Debt origination costs are amortized over 3 years. The accompanying notes are an integral part of these financial statements. -13- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Other Assets - Continued In the second quarter of 2001, the Company recorded an impairment write-down of patents in the amount of $227,570, based on an uncertainty regarding the amounts and timing of future cash flows. As of September 30, 2001 the carrying value of patents is $1. Certain assets previously classified as inventory are no longer used in the Company's on-going production processes, and are held for sale. Management estimates that the net realizable value of these items exceeds their carrying value as of September 30, 2001. Research and Development Costs Research and development costs are expensed as incurred. Income Taxes The Company accounts for income taxes using the liability method, under which, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Loss Per Share Loss per share is computed on the basis of the weighted average number of common shares outstanding during the period and did not include the effect of potential common stock as their inclusion would reduce loss per share. The numerator for the computation is the net loss and the denominator is the weighted average shares of common stock outstanding. Certain options and warrants outstanding were not included in the computation of loss per share because their inclusion would reduce loss per share. 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 and loss recognition based on the completed contract method, loss allowances, and the valuation of common stock issued for services. The accompanying notes are an integral part of these financial statements. -14- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED Stock-Based Compensation The Company has elected to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and to furnish the proforma disclosures required by Statement on Financial Accounting Standards No. 123, Accounting for Stock Based Compensation. See note 10. Comprehensive Income In 2001 and 2000, the Company had no changes in equity which constituted components of other comprehensive income. NOTE 2. NOTES RECEIVABLE Notes receivable at September 30, 2001, consist of the following: Due from officer $29,493 Note receivable from former shareholder, interest at 8% and due on demand 15,000 ------- $44,493 ======= The Company also has notes receivable from an officer totaling $193,427 which bear interest at 10% per annum, and are due in 2003. These notes were received as consideration upon exercise of stock options. Management considers these notes to be fully collectible. NOTE 3. INVESTMENTS As of September 30, 2001, the Company owned 879,707 or 16.4% of the 5,373,858 outstanding shares of Bio Moda, Inc. The Company's interest in Bio Moda has declined from 22% in 1998 to its present level, as Bio Moda has issued additional shares in the course of its financing activities. As of September 30, 2001, the Company had options to purchase an additional 187,000 shares at $0.485 cents per share. 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 September 30, 2001, was in the process of conducting clinical trials. The accompanying notes are an integral part of these financial statements. -15- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 3. INVESTMENTS - CONTINUED 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. The recoverability of the investment in Bio Moda, Inc. is supported by two recent private placements that were completed at a share price greater than the carrying value of the asset. The investment in Bio Moda, Inc. is accounted for using the cost method. A summary of the investment is as follows: Original cost $ 383,845 Share of net loss (134,010) Amortization of excess of cost over book value (42,500) --------- Carrying value of investment in Bio Moda, Inc. $ 207,335 ========= NOTE 4. LONG-TERM OBLIGATIONS As of September 30, 2001, the Company's long-term obligations were as follows: Notes payable to a financial institution, due in monthly payments aggregating $3,221 through October 2003, bearing interest at bank prime rate plus 1.5%, collateralized by operating equipment and a vehicle $55,138 Less: Current portion 34,109 ------- $21,029 ======= Future principal payments on long-term obligations for the years ending September 30, are as follows: 2002 $34,109 2003 20,811 2004 218 ------- $55,138 ======= The accompanying notes are an integral part of these financial statements. -16- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 5. CONVERTIBLE DEBENTURES 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. Effective August 1, 1999, the notes were 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 or the time of exercise. 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. The intrinsic value of the conversion feature of the principal and accrued interest was estimated to be $174,610. This entire amount has been recorded as an increase in paid-in capital and a charge to interest expense. The convertible notes also include detachable warrants for the purchase of 12,500,000 shares of common stock at the lower of 75 percent of the closing bid price of a share of common stock at the time of exercise or September 1, 1999. The warrants expire on June 3, 2002. Management estimates that approximately half the warrants will be exercised prior to expiration. Management estimated the fair market value of these warrants at $125,000 and recorded this amount as an increase in paid-in capital and a discount to the convertible notes payable. The discount is being amortized over the two-year life of the notes. A significant contingency required by the aforementioned convertible note and warrant agreements is the registration of the underlying shares with the Securities and Exchange Commission. The Company is to use its best efforts to register these shares and is in the process of preparing the registration statement. On June 12, 2000, the Company entered into an agreement that modified the convertible notes agreement entered into on June 3, 1999. The result of the modified agreement was the issuance of 9,200,000 shares of the Company's common stock upon conversion of the convertible notes plus accrued interest through June 12, 2000, which totaled $542,878. This transaction constituted a conversion of the outstanding convertible notes, and as such, $40,058 of unamortized intrinsic value of the conversion feature was charged to interest expense during the quarter. In addition, the modified agreement voided the related 12,500,000 detachable warrants, and, as a result, the unamortized discount of $72,917 on the estimated fair market value of $125,000 for the warrants was charged to interest expense during the quarter. The accompanying notes are an integral part of these financial statements. -17- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 5. CONVERTIBLE DEBENTURES - CONTINUED On September 15, 2000, the Company entered into an agreement to issue a total of $10,000,000 in convertible notes which bear interest at an annual rate of 8 percent. The Company has authorized the initial sale of $2,000,000 of the convertible notes, and has entered into a structured facility with purchasers in which the purchasers shall be obligated to purchase the remaining $8,000,000 of convertible notes. The Company's right to require the purchasers to purchase notes commences on the actual effective date of the registration of the Company's securities in an amount equal to the securities that would be convertible upon issuance of the notes. The related agreement provides for a limit on the amount of obligation notes that the Company may require the purchasers to purchase in a given month. On September 15, 2000, the Company issued $500,000 of the initial $2,000,000 in convertible notes which bear interest at an annual rate of 8 percent and mature (principal and interest) on September 15, 2003. Effective as of the issuance date, the notes are convertible into shares of common stock at the lesser of a 25 percent discount to the average of the three lowest closing bid prices during the thirty trading days prior to the issue date of this note and a 20 percent discount to the average of the three lowest closing bid prices for the ninety trading days prior to the conversion date. The notes were issued in exchange for $430,000 in cash, $20,000 in legal services and $50,000 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. The intrinsic value of the conversion feature of the principal and accrued interest was estimated to be $238,830. This has been recorded as an increase in paid-in capital and a charge to interest expense. The convertible notes also include detachable warrants for the purchase of 500,000 shares of common stock. Management has estimated the fair market value of these warrants at $25,000 and recorded this amount as an increase in paid-in capital and a discount to the convertible notes payable. The discount is being amortized over the three-year life of the notes. A significant contingency required by the aforementioned convertible notes is the registration of the underlying shares with the Securities and Exchange Commission. The Company is to use its best efforts to register these shares and the registration statement has been filed. On November 7, 2000, the Company entered into an agreement that modified the outstanding convertible preferred agreements entered into on March 8, 2000 and August 2, 2000. The new agreement resulted in the exchange of outstanding preferred stock plus additional consideration for the Company's 7.5 percent convertible debentures due November 7, 2003. The total amount of the debentures is $740,677, including accrued interest of $30,677. The debentures are convertible into shares of common stock at the lesser of the stocks closing price on March 8, 2000 and 77.5 percent of the average of the five lowest closing bid prices for 20 days before November 2, 2000. The accompanying notes are an integral part of these financial statements. -18- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 5. CONVERTIBLE DEBENTURES - CONTINUED The intrinsic value of the conversion feature of the principal and accrued interest was estimated to be $227,898. The convertible debentures also include detachable warrants for the purchase of 71,000 shares of common stock. Management has estimated the fair market value of these warrants at $3,550. During the quarters ended September 30, 2001 and June 30, 2001, debenture holders converted convertible debentures in the amount of $27,903 and $20,000, respectively into shares of the Company's common stock. This conversion reduces the convertible debenture liability and increases equity. NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's carrying values and methodologies for estimating the fair values of its financial instruments are as follows: Cash, cash equivalents, and certificates of deposit, costs in excess of billings on uncompleted contract, and accounts payable. The carrying amounts reported in the accompanying balance sheet approximate fair values. Notes receivable. Management estimates that the carrying amounts are reasonable estimates of their fair values. Long-term obligations. Notes payable to bank have variable rates that reflect currently available terms for similar debt, and accordingly the carrying values are reasonable estimates of their fair values. Due to the short-term maturity of the capital lease, management estimates that the carrying value approximates its fair value. Convertible debentures. Management estimates the carrying values to approximate their fair values. Notes receivable from officer. Management estimates these notes to be fully collectible, and that the carrying values are reasonable estimates of their fair values. The accompanying notes are an integral part of these financial statements. -19- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 6. FAIR VALUE OF FINANCIAL INSTRUMENTS - CONTINUED The carrying amounts and fair values of the Company's financial instruments as of September 30, 2001 are as follows: Estimated Carrying Fair Amount Value ---------- ---------- Cash and cash equivalents $ 93,934 $ 93,934 Costs in excess of billings on uncompleted contract 1,409,142 1,409,142 Notes receivable 44,493 44,493 Accounts payable 158,622 158,622 Long-term obligations 55,138 55,138 Convertible debentures 1,492,774 1,492,774 Notes receivable from officer 193,427 193,427 NOTE 7. INCOME TAXES As of September 30, 2001, the Company had a net operating loss carryforward of approximately $9 million which expires in varying amounts between 2011 through 2016. Realization of this potential future tax benefit is dependent on generating sufficient taxable income prior to expiration of the loss carryforward. The deferred tax asset related to this potential future tax benefit has been offset by a valuation allowance in the same amount. The amount of the deferred tax asset ultimately realizable could be increased in the near term if estimates of future taxable income during the carryforward period are revised. NOTE 8. OPERATING LEASES The Company occupies administrative, engineering, and manufacturing facilities under operating leases which expire in February 2002. The leases call for aggregate minimum monthly lease payments of $4,225. Lease expense totaled $12,675 and $11,200 for the quarters ended September 30, 2001 and 2000, respectively, $38,025 and $33,600 for the nine-month periods ended September 30, 2001 and 2000, respectively, and $135,234 in the period from May 22, 1996 (inception) through September 30, 2001. Future minimum lease payments under the long-term operating lease are $21,125 through February 2002. The accompanying notes are an integral part of these financial statements. -20- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 9. 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 accounting for as a purchase, with assets acquired and liabilities assumed recorded at their book values, determined in accordance with generally accepted accounting principles. Intangible assets of PLZ Tech acquired in the purchase transaction were carried at historical book values. Research and development costs of PLZ Tech were expensed as incurred. 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 for cash and services. During 1998, the Company repurchased 472,200 of its outstanding stock in exchange for $10,000 in notes receivable and $20,385 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 note bears interest at the rate of 7 percent with interest due semiannually and the principal due July 2001. In 1999, the Company repurchased 489,251 shares of its outstanding stock for $11,132 in cash. These shares were retired. The Company also repurchased 229,000 shares for $41,760 and resold 85,000 of these shares for $35,464. The remaining 144,000 treasury shares have been recorded at cost. The Company also sold 8,681,624 shares for $863,782 in cash, and issued 17,094,313 shares for services from contractors, officers and others, which were valued at $1,486,414. During the quarter ending March 31, 2000, the Company sold 782,000 shares of its common stock for $368,495 in cash, and issued 1,791,733 shares of its common stock for services from contractors, officers and others, which were valued at $1,120,233. The value of the services is included in the costs and expenses on the Statements of Operations. The accompanying notes are an integral part of these financial statements. -21- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 9. EQUITY TRANSACTIONS - CONTINUED Also during this quarter, the Company sold 25,000 shares of its treasury stock for $49,770 and repurchased 6,500 shares for $7,683. The repurchased shares have been recorded at cost. On March 14, 2000, the Company issued 550 shares of its Series A convertible preferred stock for $550,000. Related finder fees and attorney fees were $65,000, and were netted against the proceeds for a net increase in cash and equity of $485,000. Effective June 14, 2000, the shares were convertible into shares of common stock at the lesser of 110 percent of the closing bid price of a share of common stock on March 13, 2000 or 77.5 percent of the average of the five lowest closing bid prices for the common stock for the twenty trading days immediately preceding the conversion date. Management estimated the intrinsic value of the conversion feature to be $159,677. This has been recorded as an increase in paid-in capital and a discount to the convertible preferred stock, with related amortization being charged to retained earnings as constructive dividends. The discount is being amortized over a 90-day period, which is the period from the date of issuance to the point at which the preferred shares can be converted to common shares. The convertible preferred stock also includes detachable warrants for the purchase of 55,000 shares of common stock at a purchase price per share equal to 110 percent of the closing bid price for the common stock on the closing date (March 8, 2000). The warrants expire on March 8, 2005. The detachable warrants have not been valued in the accompanying financial statements, as management estimates their fair market value to be immaterial. During the quarter ended June 30, 2000, the Company issued 1,247,970 shares of its common stock for services from contractors, officers and others, which were valued at $385,429. The value of the services is included in the costs and expenses on the Statements of Operations. The Company also repurchased 44,000 shares of its outstanding common stock for $33,817 in cash. These shares remained in treasury at June 30, 2000, and have been recorded at cost. Also during this quarter, an officer of the Company exercised 1,000,000 stock options at a price of $0.12 per share. The Company issued a note receivable to the officer in the amount of $120,000 for the shares. Interest for the first quarter was prepaid. During the quarter ended September 30, 2000, the Company issued 300,000 shares of its common stock for services from contractors, officers and others, which were valued at $90,260. The value of the services is included in the costs and expenses on the Statements of Operations. The Company also sold 45,000 shares of its outstanding common stock for $27,543 in cash and repurchased 13,000 shares of its outstanding common stock for $4,986. These shares remained in treasury at September 30, 2000, and have been recorded at cost. The accompanying notes are an integral part of these financial statements. -22- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 9. EQUITY TRANSACTIONS - CONTINUED An officer of the Company exercised 850,000 stock options at a price of $0.12 per share. The Company issued notes receivable to the officer in the amount of $102,000 for the shares. Also, during the quarter the Company issued 160 shares of preferred stock for $160,000 in cash. During the quarter ended December 31, 2000, the Company issued 615,500 shares of common stock for services from contractors, officers and others, valued at $130,275. During the quarter ended March 31, 2001, the Company issued 1,475,000 shares of common stock for services from contractors, officers and others, valued at $176,248. During the quarter ended June 30, 2001, the Company issued 1,835,000 shares of common stock for services from contractors, officers and others, valued at $133,038. The Company canceled 300,000 shares of common stock originally issued for services during the quarter ended March 31, 2001 for services valued at $47,250. The value of the services is included in the costs and expenses on the Statements of Operations. The Company issued 676,205 shares of common stock for $40,000. Also, during this quarter, the Company repurchased 13,900 shares of common stock for $2,012. The repurchased shares have been recorded at cost. During the quarter ended September 30, 2001, the Company issued 3,081,749 shares of common stock for services from contractors, officers and others, valued at $67,804. The value of the services is included in the costs and expenses on the Statements of Operations. The Company issued 730,000 shares of common stock for $28,227. Also, during this quarter, the Company repurchased 185,500 shares of common stock for $9,488. The repurchased shares have been recorded at cost. The accompanying notes are an integral part of these financial statements. -23- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 10. STOCK PLANS On January 4, 1999, the Company established the Incentive Stock Option Plan. Pursuant to the Plan, up to 10,000,000 shares of the Company's common stock may be granted as options to key employees. The shares issued upon exercise of the options may be authorized and unissued shares or shares held by the Company in its treasury. The exercise date of the options is based on the related agreement as approved by the Board of Directors. The Incentive Stock Option Plan expires on January 4, 2009. Options awarded under the Plan have four-year terms and vest ratably over one to two year periods. As of September 30, 2001, there were 6,175,000 shares available under the Plan for future awards. No stock options were issued during the nine-month periods ended September 30, 2001. The Company applies APB Opinion No. 25 in its accounting for the Plan, and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, the Company's net loss and loss per share would have been increased to the proforma amounts indicated as follows:
Years ended December 31, 2000 1999 1998 --------------- -------------- ------------- Net loss, as reported $ (3,199,935) $ (2,725,804) $ (752,111) Proforma net loss (3,575,534) (2,940,633) (752,111) Loss per share, as reported (0.055) (0.072) (0.055) Proforma loss per share (0.061) (0.078) (0.055)
The fair value of each option grant for the above proforma disclosure is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividends of $0 per year; expected volatility of 42.3 percent; risk-free interest rate of 6.0 percent; and expected lives of four years. Total stock options granted and unexercised were 3,825,000 as of September 30, 2001. The shares issued upon exercise of the options may be authorized and unissued shares or shares held by the Company in its treasury. The exercise date of options granted is based upon the related agreement as approved by the Board of Directors. The Company also issued Stock Purchase Warrants to key employees. The total number of "warrant shares" issued under these agreements was 3,425,000 shares, exercisable at any time until they expire on June 15, 2004. The price established for the shares ranges from $0.15 to $0.41 per share. The accompanying notes are an integral part of these financial statements. -24- Advanced Optics Electronics, Inc. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) September 30, 2001 NOTE 10. STOCK PLANS - CONTINUED A summary of the common stock option and warrant activity for employees, directors and officers is as follows:
Weighted Warrants Average and Exercise Options Prices Exercisable -------------- -------------- --------------- Balance, December 31, 1997 153,954 $ 0.58 153,954 Balance, December 31, 1998 153,954 0.58 153,954 Granted 6,900,000 0.16 Expired (153,954) 0.58 -------------- Balance, December 31, 1999 6,900,000 0.16 6,185,000 =============== Cancelled (2,775,000) 0.72 Replacement 2,775,000 0.34 Granted 6,200,000 0.72 Exercised (2,000,000) 0.12 -------------- Balance, December , 2000 11,100,000 0.27 9,517,500 ============== ============= =============== Balance, September 30, 2001 11,100,000 0.27 10,361,250 ============== ============= ===============
The option prices established for the shares upon exercise ranges from $0.12 to $0.34 per share, and expire through October 2004. NOTE 11. ACCOUNTING CHANGES The financial statements for the quarter and nine-month periods ended June 30, 2000 have been retroactively restated to give effect to a change in accounting for the Company's long-term contract and changes in estimated useful lives of intangible assets. The effect of these changes was to increase net loss for the three and nine-month periods ended September 30, 2000 by $6,199 and $12,398, respectively, and to increase net loss per share for both periods by a deminimus amount. The accompanying notes are an integral part of these financial statements. -25- ADVANCED OPTICS ELECTRONICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION . 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. OVERVIEW Advanced Optics Electronics, Inc. is a technology company whose primary focus is the development, production and sales of its electronic flat panel displays. The primary initial product will be marketed to users of outdoor advertising billboards. We believe that our product line has the potential to create a new segment of the outdoor advertising industry. Our systems software and electronic displays represent an innovative approach to advertising that takes advantage of the recent technological convergence of broadcast and billboard media and the World Wide Web. The accompanying notes are an integral part of these financial statements. -26- Our goal is to create a product line based on technology that is scalable both in terms of size and resolution to meet a wide range of requirements related to site, economics and use from our potential customers. We also plan the development of a leasing program and an Owned & Operated group. The major advantages and features of the Display are: o Brightest display ever available (35,000 nits) o Widest viewing angle available o Smallest dot pitch available for outdoor large-scale displays (8 mm dot pitch) o High definition picture quality o Modular assembly (1 meter increments) for scaleable and shapeable architectures o True Color (24 bit) o Full motion video (up to 120 frames per second) o Transportable for mobile operations o Weather resistant for outdoor applications o Modest power requirements o Minimum 5 year continual use lifetime o Real-time live video feeds o Broadcast/simulcast applications o Supports streaming video o Uses industry standard DVI protocol for high speed data linking and digital video interfacing o Satellite linkable Proprietary Billboard software capabilities are: o Manage and update display content remotely o Works with all image file formats and digital video editors o Secure Internet or WAN communications o WEB-based status monitoring o Provides time, temperature and other dynamic content inserts The Company was organized as a Nevada corporation on May 22, 1996. On November 7, 1996, the Company acquired the business and patents of PLZTech, a company involved in the development of flat panel displays. Our operating activities have related primarily to the initial planning and development of our product and building our operating infrastructure. We have completed, tested, and measured the performance of, our prototype and are currently in the manufacturing process of our production model. The accompanying notes are an integral part of these financial statements. -27- We expect our principal source of revenue to be derived from sales of our electronic display product. To date we have recognized limited revenue, but we have developed a functioning prototype and we anticipate sales by the third quarter 2001. The company has set the price for its units at $395,000 and $1,490,000 respectively for its 2 meter x 3 meter and its 3 meter x 8 meter flat panel displays. The company has completed a marketing film that is being distributed on a national and international basis. The recipients who receive this film are institutional investors and qualified potential buyers of the flat panel displays. Our operating expenses have increased significantly since our inception, and the rate of increase has risen since last year. This is due to increased engineering and management staff and investments in operating infrastructure. Since our inception we have incurred significant losses and, as of September 30, 2001, had an accumulated deficit of $8,331,638. RESULTS OF CONTINUING OPERATIONS Due to our limited operating history, we believe that period-to-period comparisons of our results of operations are not fully meaningful and should not be relied upon as an indication of future performance. Comparison of the Nine-Month Periods Ended September 30, 2001 and 2000 Revenue. During the quarter ended March 31, 2001, the Company changed the accounting for our contract to the completed contract method. According to this way of accounting for contracts, we are booking no revenue until the completion of the contract. Please note that the revenue for the same period in 2000 has been restated and is now $0. Billings and collections through September 30, 2001 have totaled $89,873. Product Development. Product development expenses consist primarily of personnel expenses, consulting fees and depreciation of the equipment associated with the development and enhancement of our flat panel displays. Research development and technical costs decreased to $230,982 in the first nine months of 2001 from $447,448 in the first nine months of 2000. This reduction reflects our transition from development to production and manufacturing. We believe, however, that continued investment in product development is critical to attaining our strategic objectives and, as a result, expect product development expenses to increase significantly in future periods. We expense product development costs as they are incurred. General and Administrative. General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services, travel, general corporate activities, and the depreciation and amortization of office furniture and leasehold improvements. The accompanying notes are an integral part of these financial statements. -28- General and administrative costs decreased to $771,725 in the first nine months of 2001 from $2,092,687 in the first nine months of 2000. The decrease was primarily due to increased duties handled by in-house personnel and a reduction in professional service fees and expenses. Due to the growth of our business and anticipated expansion of our staff, we expect general and administrative costs to increase in the future. The costs associated with being a publicly traded company and anticipated future strategic acquisitions will also be a contributing factor to increases in this expense. Patents. In the second quarter of 2001, the Company recorded an impairment write-down of patents in the amount of $227,570, based on an uncertainty regarding the amounts and timing of future cash flows. As of September 30, 2001 the carrying value of patents is $1. Other Income (Expense). Other income (expense) consists of interest and other income and expense. Interest income increased to $20,827 in the first nine months of 2001 from $10,813 in the first nine months of 2000. The increase in interest income was due to an increase in our average net cash and cash equivalents balance over the previous nine month period. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have funded our operations primarily through the private placement of debt and equity securities. As of September 30, 2001 we have raised net proceeds of $4,795,200. Advanced Optics Electronics, Inc. filed a registration statement, and a subsequent amendment, on form SB2 related to common shares underlying the Company's convertible debenture financings. The SB2 was declared effective on November 6, 2001. We have also utilized equipment loans and capital lease financing. As of September 30, 2001 we have a balance of $55,138 on the equipment loans and no remaining balance on the capital lease. In August 1998 Advanced Optics Electronics, Inc. entered into a lease agreement for the financing of equipment for the development of its flat panel display systems. The Company is required to repay the $101,000 in equal monthly payments of the lease. Monthly payments on the lease are approximately $2,850. The term of the lease is 3 years and is backed by the credit of the Company. This obligation was satisfied and paid in full during the second quarter. The Company's holding in BioModa, Inc will provide additional liquidity. BioModa is a biomedical development company. The Company's ownership of BioModa, as of September 30, 2001 was approximately 16%. No immediate family members of officers or directors of Advanced Optics Electronics, Inc. are securities holders of BioModa with the exception of Harold Herman, who is a director of Advanced Optics Electronics, Inc. and a small minority shareholder in BioModa. The recoverability of the investment in Bio Moda, Inc. is supported by two recent private placements that were completed at a share price greater than the carrying value of the asset. The accompanying notes are an integral part of these financial statements. -29- During the first nine months ended September 30, 2001 $39,437 was spent for the purchase of equipment. Product development expenditures were $78,380 for the quarter ended September 30, 2001. Funds for operations, product development and capital expenditures were provided from the sale of securities and cash reserves. As of September 30, 2001, we had approximately $93,934 of cash and cash equivalents. 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 2001. 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 2001. 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 2001 there was a 4,736,459 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 2001. Item 5. Other Information - Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K A report was filed on Form 8-K related to the Company's Change of Certifying Accountant. The date of the report was September 26, 2001. The accompanying notes are an integral part of these financial statements. -30- 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 authorized. Dated: November 19, 2001 ADVANCED OPTICS ELECTRONICS, INC. BY:/s/John J. Cousins --------------------------- John J. Cousins Vice President of Finance (Principal Accounting Officer) BY:/s/Leslie S. Robins --------------------------- Leslie S. Robins Executive Vice President (Principal Executive Officer) The accompanying notes are an integral part of these financial statements. -31- -----END PRIVACY-ENHANCED MESSAGE-----