BELL-HAUN SYSTEMS, INC. REPORT ON AUDITS OF FINANCIAL STATEMENTS for the nine months ended September 30, 2007 and for the years ended December 31, 2006, 2005, and 2004 [Logo] McCauley Nicolas CONTENTS -------- Independent Auditors' Report 2 Financial Statements: Balance Sheets 3 Statements of Operations and Stockholders' Deficit 4 Statements of Cash Flows 5 Notes to Financial Statements 6-12 [Logo] McCauley, Nicolas & Company, LLC The Solution is One Good Move Away Certified Public Accountants & Advisors INDEPENDENT AUDITORS' REPORT ---------------------------- To the Board of Directors and Stockholders of Bell-Haun Systems, Inc. Westerville, Ohio We have audited the accompanying balance sheets of Bell-Haun Systems, Inc. as of September 30, 2007, December 31, 2006, 2005, and 2004, and the related statements of operations and stockholders' deficit and cash flows for the nine months and years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bell-Haun Systems, Inc. as of September 30, 2007, December 31, 2006, 2005, and 2004, and the results of its operations and its cash flows for the nine months and the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ McCauley, Nicolas & Company, LLC McCauley, Nicolas & Company, LLC Certified Public Accountants Jeffersonville, Indiana November 26, 2007 702 North Shore Drive, Suite 500 Jeffersonville, IN 47130-3104 812-288-6621 fax 812-288-2885 www.mnccpa.com Kenneth N. Nicolas, CPA Ronald F Barnes, CPA, PFS Lee E. Pieper, CPA J. Patrick Byrne, CPA John C. Pieper, CPA Daniel K. McCauley, CPA, ABV J. Michael Grinnan, CPA Kenneth W. Coyle, CPA R. Kenneth Adams, CPA MEMBER PKF North American Network American Institute of CPAs AICPA PCPS Division Indiana CPA Society Kentucky Society of CPAs BELL-HAUN SYSTEMS, INC. BALANCE SHEETS September 30, 2007 and December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31, 2007 2006 2005 2004 ------------- ------------ ------------ ------------ ASSETS ------ CURRENT ASSETS Cash $ 33,294 $ -- $ 18,928 $ 18,885 Accounts receivable 146,027 106,410 185,342 175,914 Accounts receivable - officer -- -- 456 36,349 Inventory, current portion 144,819 102,011 93,951 58,361 Prepaid expenses 50 5,582 5,605 7,864 ----------- ----------- ----------- ----------- TOTAL CURRENT ASSETS 324,190 214,003 304,282 297,373 ----------- ----------- ----------- ----------- PROPERTY AND EQUIPMENT Furniture and equipment 316,753 432,983 431,629 427,349 Vehicles 17,485 43,155 43,155 51,512 Leasehold improvements 48,781 57,387 57,387 57,387 ----------- ----------- ----------- ----------- 383,019 533,525 532,171 536,248 Less accumulated depreciation (342,967) (483,319) (477,276) (486,806) ----------- ----------- ----------- ----------- PROPERTY AND EQUIPMENT, NET 40,052 50,206 54,895 49,442 ----------- ----------- ----------- ----------- OTHER ASSETS Goodwill, net 35,076 35,076 35,076 35,076 Inventory, less current portion, net 41,102 41,623 41,642 40,162 ----------- ----------- ----------- ----------- TOTAL OTHER ASSETS 76,178 76,699 76,718 75,238 ----------- ----------- ----------- ----------- TOTAL ASSETS $ 440,420 $ 340,908 $ 435,895 $ 422,053 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES Short-term bank borrowings $ 250,000 $ 170,000 $ -- $ 55,000 Current portion of long-term debt 49,478 50,057 46,399 74,795 Cash overdraft -- 3,053 -- -- Accounts payable 321,802 186,222 250,577 294,638 Accounts payable - officers 17,044 13,544 -- -- Accrued expenses 79,690 37,702 45,019 55,988 Accrued income taxes -- -- 384 50 Customer deposits 94,904 88,577 191,637 60,620 ----------- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 812,918 549,155 534,016 541,091 Accounts payable - related parties 81,000 67,000 12,500 -- Long-term debt, less current portion 114,281 148,369 201,493 153,873 ----------- ----------- ----------- ----------- TOTAL LIABILITIES 1,008,199 764,524 748,009 694,964 ----------- ----------- ----------- ----------- STOCKHOLDERS' DEFICIT Common stock, no par value, 500 shares authorized, issued and outstanding 500 500 500 500 Paid-in capital 52,035 52,035 52,035 52,035 Accumulated deficit (620,314) (476,151) (364,649) (325,446) ----------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' DEFICIT (567,779) (423,616) (312,114) (272,911) ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 440,420 $ 340,908 $ 435,895 $ 422,053 =========== =========== =========== ===========
See notes to financial statements. 3 BELL-HAUN SYSTEMS, INC. STATEMENTS OF OPERATIONS AND STOCKHOLDERS' DEFICIT for the nine months ended September 30, 2007 and the years ended December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31, 2007 2006 2005 2004 ------------- ------------ ------------ ------------ NET SALES $ 1,343,015 $ 1,551,766 $ 1,768,355 $ 1,987,669 DIRECT MATERIAL COSTS 530,005 626,547 603,845 819,245 ----------- ----------- ----------- ----------- GROSS PROFIT 813,010 925,219 1,164,510 1,168,424 ----------- ----------- ----------- ----------- OPERATING EXPENSES Salaries and wages 618,656 723,610 770,931 821,456 Contract labor 1,450 21,693 15,088 8,776 Employee benefits 39,274 48,997 46,289 48,550 Payroll taxes 45,526 59,205 41,207 50,688 Insurance 10,559 17,795 15,720 15,840 Rent 78,103 111,827 103,227 94,625 Professional fees 9,291 8,303 26,351 32,568 Other direct costs 22,291 87,048 43,352 43,110 Depreciation 3,623 6,043 9,454 29,360 Telephone 11,923 5,581 17,681 20,150 Utilities 8,100 10,800 10,800 9,200 Office and postage expense 7,387 10,063 16,269 20,192 Travel and lodging 7,868 6,395 5,996 17,157 Automobile expenses 12,201 16,518 24,656 17,268 Bank service charges 27,234 20,910 14,818 10,454 Miscellaneous expenses 5,355 1,344 4,518 8,780 Dues and subscriptions 2,330 2,356 3,987 7,119 Inventory, less current portion, net 2,932 5,790 7,461 9,636 Repairs and maintenance 96 -- 13,289 11,801 Advertising and marketing 4,069 3,299 5,366 7,288 Bad debt expense -- -- -- 587 ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 918,288 1,167,577 1,196,460 1,284,605 ----------- ----------- ----------- ----------- OPERATING LOSS (105,258) (242,358) (31,950) (116,181) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSES) Interest income -- -- 9 7 Interest expense (37,876) (27,950) (26,875) (31,690) Miscellaneous income -- 158,806 20,158 1,250 Loss on disposal of property and equipment (1,029) -- (545) -- ----------- ----------- ----------- ----------- TOTAL OTHER INCOME (EXPENSES) (38,905) 130,856 (7,253) (30,433) ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (144,163) (111,502) (39,203) (146,614) PROVISION FOR INCOME TAXES -- -- -- -- ----------- ----------- ----------- ----------- NET LOSS (144,163) (111,502) (39,203) (146,614) STOCKHOLDERS' DEFICIT, beginning of year/period (476,151) (364,649) (325,446) (178,832) ----------- ----------- ----------- ----------- STOCKHOLDERS' DEFICIT, end of year/period $ (620,314) $ (476,151) $ (364,649) $ (325,446) =========== =========== =========== ===========
See notes to financial statements. 4 BELL-HAUN SERVICES, INC. STATEMENTS OF CASH FLOWS for the nine months ended September 30, 2007 and the years ended December 31, 2006, 2005, and 2004
September 30, December 31, December 31, December 31, 2007 2006 2005 2004 ------------- ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(144,163) $(111,502) $ (39,203) $(146,614) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation 3,623 6,043 9,454 29,360 Loss on disposal of property and equipment 1,029 -- 545 -- Bad debt expense -- -- -- 587 Forgiveness of accounts payable to related party -- -- (158,806) -- (increase) decrease in: Accounts receivable (39,617) 78,932 (9,428) (26,125) Accounts receivable - officer -- 456 35,893 (36,349) Inventory (42,287) (8,041) (37,070) 161,586 Prepaid expenses 5,532 23 2,259 29,680 Increase (decrease) in: Cash overdraft (3,053) 3,053 -- (12,547) Accounts payable 135,580 (64,355) 114,745 115,272 Accounts payable -officer 3,500 13,544 -- (40,000) Accrued expenses 41,988 (7,317) (10,969) (12,580) Accrued income taxes -- (384) 334 50 Customer deposits 6,327 (103,060) 131,017 16,490 --------- --------- --------- --------- Net cash provided (used) by operating activities (31,541) (192,608) 38,771 78,810 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment -- (1,354) (6,951) (810) Inventory, less current portion, net 5,502 -- 700 -- --------- --------- --------- --------- Net cash provided (used) by investing activities 5,502 (1,354) (6,251) (810) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Short-term bank borrowings (payments), net 80,000 170,000 (55,000) 4,421 Proceeds from issuance of long-term debt -- -- 52,510 -- Principal payments on long-term debt (34,667) (49,466) (42,487) (63,536) Accounts payable - related parties 14,000 54,500 12,500 -- --------- --------- --------- --------- Net cash provided (used) by financing activities 59,333 175,034 (32,477) (59,115) --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH 33,294 (18,928) 43 18,885 CASH AT BEGINNING OF YEAR/PERIOD -- 18,928 18,885 -- --------- --------- --------- --------- CASH AT END OF YEAR/PERIOD $ 33,294 $ -- $ 18,928 $ 18,885 ========= ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Acquisition of property and equipment: Cost of property and equipment $ -- $ (1,354) $ (16,152) $ (810) Property and equipment purchased with debt -- -- 9,201 -- --------- --------- --------- --------- Net cash used to acquire property and equipment $ -- $ (1,354) $ (6,951) $ (810) ========= ========= ========= ========= SUPPLEMENTARY INFORMATION Cash payments for: Interest paid $ 37,876 $ 27,950 $ 26,875 $ 31,690 ========= ========= ========= =========
See notes to financial statements. 5 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Bell-Haun Systems, Inc. (the Company) is presented to assist in understanding the financial statements. The financial statements and notes are representations of the Company's management, who is responsible for its integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements. The more significant accounting policies are as follows: Nature of Operations - -------------------- The Company specializes in the sale, installation, maintenance, and ongoing support of business telephone systems, wireless services, voice messaging platforms and conference calling services to businesses throughout their region. The Company began doing business in 1977 and is located in Westerville, Ohio. Use of Estimates - ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities, if any) 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. Cash Equivalents - ---------------- The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. There were no cash equivalents at September 30, 2007 and December 31, 2006, 2005, and 2004. Accounts Receivable - ------------------- The Company uses the allowance for bad debts method of valuing doubtful receivables which is based on historical experience, coupled with a review of the current status of existing receivables. Management has determined no allowance for doubtful receivables was required at September 30, 2007, December 31, 2006, 2005, and 2004. Inventory - --------- Inventory consists principally of purchased equipment and material used in the installation of telephone systems and is stated at the lower of cost or market on a first-in, first-out basis. 6 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--Continued NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued Property and Equipment - ---------------------- Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred; renewals or betterments are capitalized. Gain or loss on retirements or disposition of assets is credited or charged to operations, and the respective costs and accumulated depreciation are eliminated from the accounts. Depreciation is provided on the basis of estimated useful lives of the assets using the straight-line and declining-balance methods. The estimated useful lives are generally 3 to 10 years for furniture and equipment, 5 years for vehicles, and 5 to 40 years for leasehold improvements. Accounting for Goodwill - ----------------------- In June 2001, the Financial Accounting Standards Board issued Statement of Financial Standards (Statement) No. 142, "Goodwill and Other Intangible Assets." This Statement changed the accounting for goodwill by requiring companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life. Instead, goodwill and intangible assets deemed to have an indefinite useful life will be subject to an annual review for impairment. Intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The Company adopted Statement 142 effective January 1, 2002 and, accordingly, ceased amortizing amounts related to goodwill beginning January 1, 2002. The goodwill is related to the purchase of National Communications Systems, Inc. in 1998. Management has determined that none of the goodwill recorded was impaired as of September 30, 2007, December 31, 2006, 2005 and 2004 and has a value of $35,076. Income Taxes - ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires the use of the "liability method" of accounting for income taxes. Accordingly, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of the assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Current income taxes are based on the year's income taxable for federal and state income tax reporting purposes. Revenue Recognition Revenue is recognized under the accrual method as the services are rendered to the customer. Advertising - ----------- The Company's policy is to expense advertising costs as incurred. Sales Tax - --------- Sales tax is recognized net of revenues received. 7 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--Continued NOTE 2--INVENTORY Inventory which is shown on the Balance Sheets consists of various telephone, electrical and other supply parts used in the communication system. The inventory listed as noncurrent represents that portion of inventory on hand that is not expected to be immediately sold, but still has value. The total amount of inventory on hand is as follows: September 30, December 31, December 31, December 31, 2007 2006 2005 2004 ------------- ------------ ------------ ------------ Current $144,819 $102,011 $ 93,951 $ 58,361 Non-current 41,102 41,623 41,642 40,162 ------------- ------------ ------------ ------------ Total inventory $185,921 $143,634 $135,593 $ 98,523 ============= ============ ============ ============ Due to changing market conditions in the communications industry, management has conducted a review of the inventory in all of its product lines. As a result, a provision for inventory losses totaling $61,653, $62,434, $62,463 and $60,244 as of September 30, 2007 and December 31, 2006, 2005, and 2004 was recorded to write down inventory to its net realizable value. This was based on the Company's best estimates. It is at least reasonably possible that the estimates used by the Company to determine its provision for inventory losses could be different from the actual amounts. NOTE 3--SHORT-TERM BANK BORROWINGS During 2007, the Company had an open line of credit with Fifth Third Bank in the amount of $250,000, due upon demand expiring March 31, 2008. Interest is calculated at prime plus 1% (9.25% at September 30, 2007). The line of credit is secured by all business assets. The outstanding line of credit at September, 30 2007 was $250,000. During 2006, the Company had an open line of credit with Fifth Third Bank in the amount of $250,000, due upon demand expiring March 31, 2007. Interest was calculated at prime plus 1 (9.25% at December 31, 2006). The line of credit was secured by all business assets. The outstanding line of credit at December 31, 2006 was $170,000. During 2004, the Company had an open line of credit with The Huntington National Bank in the amount of $55,000, due upon demand. Interest was calculated at prime plus 1 % (5.75% at December 31, 2004). The line of credit was secured by all business assets. The outstanding line of credit at December 31, 2004 was $55,000. The line was paid off in 2005. 8 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS-Continued NOTE 4--LONG-TERM DEBT Long term debt is summarized as follows:
September 30, December 31, December 31, December 31, 2007 2006 2005 2004 ------------- ------------ ------------ ------------ Note payable to The Huuntington National Bank at 7.5%, due in monthly installments of $4,979, including interest, maturing September 2010, secured by a building owned by a related party $ 163,759 $ 194,316 $ 240,760 $ -- Note payable to The Huntington National Bank at 9.24%, due in monthly installments of $1,369 including interest, paid off May 2007, secured by a vehicle -- 4,110 7,132 -- Note payable to The Huntington National Bank at 6.75%, in monthly installments of $7,291, including interest, refinanced August 2005, secured by a building -- -- -- 228,668 --------- --------- --------- --------- Total long-term debt 163,759 196,426 247,892 228,668 Less current portion of long-term debt (49,478) (50,057) (46,399) (74,795) --------- --------- --------- --------- Total noncurrent portion of long-term debt $ 114,281 $ 148,369 $ 201,493 $ 153,873 ========= ========= ========= =========
Long-term debt matures as follows: September 30: 2008 $ 49,478 2009 52,977 2010 57,090 2011 4,214 -------- $163,759 ======== NOTE 5--INCOME TAXES The provision for income taxes consists of the following components: September 30, December 31, December 31, December 31, 2007 2006 2005 2004 ------------- ------------ ------------ ------------ Current tax provision: Federal $ -- $ -- $ -- $ -- State -- -- -- -- Local -- -- -- -- -------- -------- -------- -------- Total current tax provision -- -- -- -- Deferred tax benefit: Federal (21,900) (18,100) (4,500) (22,853) State (7,600) (6,300) (1,600) (7,577) Local (200) (1,100) 1,500 (1,826) Valuation allowance 29,700 25,500 4,600 32,256 -------- -------- -------- -------- Total deferred tax benefit -- -- -- -- -------- -------- -------- -------- Provision for income taxes $ -- $ -- $ -- $ -- ======== ======== ======== ======== 9 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--Continued NOTE 5--INCOME TAXES--Continued The principal sources of timing differences relate to the use of depreciation methods, the recognition of certain expenses for tax versus financial reporting purposes and the net operating losses of the Company. Deferred taxes were calculated using the lowest applicable tax rate. The Company has a cumulative net deferred tax asset of approximately $206,800, $177,100, $151,600 and $147,000 at September 30, 2007 and at December 31, 2006, 2005, and 2004, respectively. Realization of the deferred tax asset depends on generating sufficient taxable income before expiration of the loss carryforwards. Because of the historical trend of cumulative tax losses, the realization of the deferred tax asset may not occur in the near term. Thus, a valuation allowance for the full amount of the deferred tax asset has been provided. Components of the net operating loss at September 30, 2007 consist of the following: Year Ended: September 30, 2007 $147,040 Expires 12/31/2027 12/31/2006 129,734 Expires 12/31/2026 12/31/2005 40,112 Expires 12/31/2025 12/31/2004 147,676 Expires 12/31/2024 12/31/2002 453,719 Expires 12/31/2022 12/31/2000 50,826 Expires 12/31/2020 -------- $969,107 ======== NOTE 6--RELATED PARTY TRANSACTIONS The Company leases its office space from a partnership that is a related party due to common ownership. The current monthly lease payment, including basic common area maintenance charges, is $9,502. The lease expires September 30, 2008. Rent expense charged to operations under this lease totaled $78,103; $111,827; $103,227; and $94,625 for the nine months ended September 30, 2007 and the years ended December 31, 2006, 2005, and 2004, respectively. There were $6,782; $0; $72,879 and $2,627 of payables to the partnership included in Accounts Payable at September 30, 2007 and December 31, 2006, 2005, and 2004, respectively. In addition, the partnership agreed to forgive the payable owed by the Company at December 31, 2006. The amount forgiven totaled $158,806 and is included in Miscellaneous Income for 2006. The future minimum lease payments for the noncancelable leases at September 30, 2007 are: September 30: 2008 $114,027 ======== During the year ended December 31, 2004, the Company received certain services from TBMH, Inc., a related party due to common ownership. There was $8,280 of related party payables included in Accounts Payable at December 31, 2004. 10 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--Continued NOTE 6--RELATED PARTY TRANSACTIONS--Continued During the nine months ended September 30, 2007 and the years ended December 31, 2006, and 2005, related parties advanced funds to the Company for various operating expenses. Payables to related parties were as follows: September 30, December 31, December 31, 2007 2006 2005 ------------- ------------ ------------ 935 Eastwind Partnership $74,500 $60,500 $ 8,500 TBMH, Inc. 6,500 6,500 4,000 ------- ------- ------- Accounts payable - related parties $81,000 $67,000 $12,500 ======= ======= ======= NOTE 7--RECEIVABLES AND PAYABLES FROM OFFICERS During the nine months ended September 30, 2007 and the years ended December 31, 2006, 2005, and 2004, the officers have advanced funds and/or received advances from the Company. These advances have no defined terms and are non-interest bearing. The balances due to and from the officers have been netted for financial statement purposes. The net amount payable to officers was $17,044 and $13,544 at September 30, 2007 and December 31, 2006, respectively. The net amount receivable from officers was $456 and $36,349 at December 31, 2005 and 2004, respectively. NOTE 8--RETIREMENT PLAN The Company has a 401 (k) profit sharing plan for the benefit of its employees. The Plan provides that employees may defer percentages of their gross wages into a Plan. Employees must meet certain criteria such as length of service, age, and hours worked per year before they can(.) participate. Management has elected not to contribute to the Plan during the nine months ended September 30, 2007 and the years ended December 31, 2006, 2005, and 2004. NOTE 9--CONCENTRATION OF CREDIT RISK Cash Concentration Risk - ----------------------- The Company maintains its cash balances at financial institutions, which at times may be in excess of FDIC (Federal Deposit Insurance Corporation) insured limits. Major Customers - --------------- The Company has a long-standing relationship with a cellular communications carrier. This customer accounted for approximately 14%, 16%, 17% and 20% of the Company's sales for the period ended September 30, 2007 and years ended December 31, 2006, 2005 and 2004, respectively. Major Suppliers - --------------- The Company had three suppliers that accounted for approximately 90%, 96%, 94%, and 84% of the Company's. purchases for the period ended September 30, 2007 and years ended December 31, 2006, 2005 and 2004, respectively. 11 BELL-HAUN SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS--Continued NOTE 10--WORKING CAPITAL The Company has a working capital deficit at September 30, 2007 of $488,728 (current assets of $324,190 less current liabilities of $812,918). Management recognizes the impact the operating losses have had and their effect of the working capital deficit, but anticipates with the future sale of the Company, as discussed further in Note 11, it should allow the Company to meet its working capital needs. NOTE 11--SALE OF BUSINESS UNDER AN OUTSTANDING LETTER OF INTENT The Company has entered into a letter of intent to sell all outstanding shares of the Company and all of the business assets (including but not limited to equipment, inventory, furniture, fixtures, customers, customer lists, contracts, business names, trademarks and intellectual property) and business obligations to an unrelated party for a sales price estimated to be approximately $1,500,000. This amount will be paid with a combination of stock, assumption of debt and a promissory note. The transaction is scheduled to be completed in December 2007. 12