F-7

SOLARATTIC, INC.
STATEMENTSOF CASH FLOWS (Continued)

Year Ended December 31

1997

1998

Supplemental Disclosures of Cash Flow
Information
Cash payments for interest
Income taxes paid

$11,659
$-

$16,900
$-

Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of common stock for services
Issuance of common stock for prepaid rent
Issuance of common stock for stock notes receivable

$5,000
$49,644
$-

$12,000
$-
$33,500

See Notes to Financial Statements.

F-8

NOTES TO FINANCIAL STATEMENTS

.

Note 1

NatureofBusinessandSignificantAccountingPrinciples

Nature of operations:

SolarAttic, Inc. (the Company), a Minnesota corporation, was formed on August 11, 1986 and
was in the development stage through December 31, 1996.The year 1997 is the first year during
which it was considered an operating company.Sales are currently throughout the continental
United States.However, markets for the Company’s technology and products are international in
nature.Products sold included primarily swimming pool heaters, space heaters and ventilation
systems.Sales are direct to consumers and through dealers.

Basis of financial statement presentation and accounting estimates:

The accompanying financial statements are presented in accordance with generally accepted
accounting principles.In preparing the financial statements, management is required to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes.Actual results could vary from those estimates.

Cash equivalent policy and cash flows:

For purposes of reporting cash flows, cash and equivalents is comprised of bank checking
accounts.

Accounts receivable:

Management has determined that no allowance for uncollectable accounts is necessary at December
31, 1997 and 1998.

Inventories:

Inventories are valued at the lower of cost (first-in, first-out method) or market.Inventory is
comprised primarily of raw materials.

Furniture and equipment:

Furniture and equipment is recorded at cost, less accumulated depreciation.Depreciation is
provided on a straight-line basis over the estimated useful life of three to seven years.

Patent:

The Company has capitalized costs related to acquiring a patent, which are being amortized using
the straight-line method over 9.5 years.All other patent costs are expensed as incurred.

Customer list:

The Company has capitalized costs related to acquiring a customer list, which are being amortized
using the straight-line method over 7 years.

Other liabilities:

The Company has credit cards payable, which are backed by the personal guarantee of an officer.

Research and development:

Research and development costs are charged to operations as incurred and totaled $1,853 and
$10,086 for 1997 and 1998, respectively.

F-9

NOTES TO FINANCIAL STATEMENTS(CON’T)

.

Note 1NatureofBusiness ... Continued

Stock based compensation:

In 1995, the Financial Accounting Standards Board issued SFAS No. 123,Accounting for Stock-
Based Compensation.As permitted by this Standard, the Company will continue to measure
compensation cost using the intrinsic value-based method of accounting prescribed by the
Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees.

Stock issuance costs:

The Company has recorded prepaid stock issuance costs for legal and other expenses incurred in
connection with its SCOR (small corporate offering registration) and other stock offerings.As of
December 31, 1998, $7,000 of prepaid stock issuance costs has been deducted from the proceeds
directly related to issuance of common stock.Management continues to actively pursue sales of
common stock.The remaining prepaid stock issuance costs will be deducted from future proceeds
related to stock issuance, or expensed against net income only to the extent that future proceeds
derived from issuing the stock do not exceed total prepaid stock issuance costs.

Stock notes receivable:

The Company has recorded two stock notes receivable, which are recorded on the Company’s
Balance Sheet as a reduction in stockholder’s equity. At December 31, 1998, the total amount of
these receivables is $33,500. Payments of $1,500 per month are made on $31,500 of this total
over a period of 24 months. The remaining $2,000 is paid in two installments during 1999.

Income taxes:

The Company has adopted FASB Statement No. 109,Accounting for Income Taxes,which
requires an asset and liability approach to financial accounting and reporting for income taxes.
Under the asset and liability method, deferred tax assets are recognized for deductible temporary
differences and operating loss or tax credit carry forwards and deferred tax liabilities are recognized
for taxable temporary differences.Temporary differences are the differences between the amounts
of assets and liabilities recorded for income tax and financial reporting purposes.Deferred tax
assets are reduced by a valuation allowance when management determines that it is more likely than
not that some portion or all of the deferred tax assets will not be realized.Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.