8-K/A 1 k8a.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A AMENDMENT NO. 1 CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of Earliest Event Reported): April 25, 2001 KNOWLEDGE TRANSFER SYSTEMS, INC. (Exact name of registrant as specified in this Charter) Nevada 0-28417 87-6121862 --------------------------- ---------------------- ----------------- State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 110 Broadway, Oakland, CA. 94617 -------------------------------------- ----------- (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (510) 251-6230 GoThink.com Incorporated ------------------------------------------------------------ (Former name or former address, if changed since last report.) 1 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. On April 25, 2001, Knowledge Transfer Systems, Inc. acquired KT Solutions, Inc. Following are the financial statements required to be filed in connection with this acquisition. Financial statements of KT Solutions, Inc. are filed herewith as Exhibit 99.1. (a) Financial Statements. See Exhibit Index, Exhibit 99.1 (b) Pro forma financial information See Exhibit Index, Exhibit 99.1 (c) Exhibits. The following exhibits are incorporated herein by this reference: Exhibit No. Description of Exhibit ----------- ----------------------------- 10* Stock Exchange Agreement dated as of March 1, 2001, Amended to April 25, 2001 among the Registrant and enSurge, Inc. and KT Solutions, Inc. 99.1** Financial statements. ____________________________ * Incorporated by reference to the same numbered Exhibits to the Report on Form 8-K, as filed on May 2, 2001 ** Filed herewith SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Knowledge Transfer Systems, Inc. Date: June 6, 2001 By: /S/ Steve K. Burke -------------------------------- Steve K. Burke, President, Chief Executive Officer and Director 2 EXHIBIT INDEX Exhibit No. Description of Exhibit ----------- -------------------------- 10* Stock Exchange Agreement dated as of March 1, 2001, amended to April 25, 2001 among the Registrant and enSurge, Inc. and KT Solutions, Inc. 99.1** Financial statements, Index ____________________________ * Incorporated by reference to the same numbered Exhibits to the Report on Form 8-K, as filed on May 2, 2001 ** Filed herewith 3 KNOWLEDGE TRANSFER SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS Page UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS F-2 Unaudited Pro Forma Condensed Balance Sheet - March 31, 2001 F-3 Unaudited Pro Forma Condensed Statement of Operations for the Three Months Ended March 31, 2001 F-4 Unaudited Pro Forma Condensed Statement of Operations for the Year Ended December 31, 2000 F-5 Notes to Unaudited Pro Forma Condensed Financial Statements F-6 K T SOLUTIONS, INC. Report of Independent Certified Public Accountants, Hansen, Barnett & Maxwell F-8 Balance Sheets - March 31, 2001 (Unaudited) and December 31, 2000 F-9 Statements of Operations for the Three Months Ended March 31, 2001 (Unaudited) and for the Seven Months Ended December 31, 2000 F-10 Statements of Stockholder's Equity for the Seven Months Ended December 31, 2000 and for the Three Months Ended March 31, 2001 (Unaudited) F-11 Statements of Cash Flows for the Three Months Ended March 31, 2001 (Unaudited) and for the Seven Months Ended December 31, 2000 F-12 Notes to the Financial Statements F-13 Independent Accountants' Review Report, Armauino McKenna LLP F-18 Balance Sheet - March 31, 2000 F-19 Statements of Operations for the Nine Month Periods Ended March 31, 2000 and 1999 F-20 Statements of Shareholders' Deficit for the Nine Month Periods Ended March 31, 2000 and 1999 F-21 Statements of Cash Flows for the Nine Month Periods Ended March 31, 2000 and 1999 F-22 Notes to Financial Statements F-23 Independent Auditors' Report, Armauino McKenna LLP F-29 Balance Sheets - December 31, 1999 and June 30, 1999 F-30 Statement of Operations for the Six Months Ended December 31, 1999 and for the Year Ended June 30, 1999 F-31 Statements of Shareholders' Deficit for the Six Months Ended December 31, 1999 and for the Year Ended June 30, 1999 F-32 Statements of Cash Flows for the Six Months Ended December 31, 1999 and for the Year Ended June 30, 1999 F-33 Notes to Financial Statements F-34 F-1 KNOWLEDGE TRANSFER SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS The following unaudited pro forma condensed balance sheet is based on the historical balance sheet of KT Solutions, Inc. (the "Company") as of March 31, 2001 adjusted to give effect to its reorganization into Knowledge Transfer Systems, Inc. and for the issuance of additional shares of common stock for financing and for services. The unaudited pro forma condensed statements of operations are based on the historical operations of KT Solutions, Inc. and GoThink.com, Inc. included elsewhere in this report adjusted to give effect to the reorganization of KT Solutions, Inc. into Knowledge Transfer Systems, Inc. and for the issuance of additional shares of common stock for financing and for services. The accompanying unaudited pro forma condensed financial statements should be read in conjunction with financial statements, including notes thereto, of KT Solutions, Inc. included elsewhere in this report. The unaudited pro forma condensed financial statements have been prepared using the purchase method of accounting for GoThink at historical cost and reflects the effects of the reorganization and the additional stock issuances. The unaudited pro forma condensed financial statements in this report are for illustrative purposes only. Such information does not purport to represent what the Company's results of operations actually would have been had the reorganization and acquisition in fact occurred when assumed, nor is it indicative of actual or future operation results that may occur. F-2 KNOWLEDGE TRANSFER SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED BALANCE SHEET MARCH 31, 2001

F-3 KNOWLEDGE TRANSFER SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001

F-4 KNOWLEDGE TRANSFER SYSTEMS, INC. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000

F-5 KNOWLEDGE TRANSFER SYSTEMS, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The unaudited pro forma condensed balance sheet and statements of operations are based on adjustments to the historical balance sheet of KT Solutions, Inc. (the "Company") to give effect to the reorganization of the Company into Knowledge Transfer Systems, Inc. and for the issuance of additional shares of common stock for financing and for services assuming, for purpose of the pro forma condensed balance sheet, that these transactions were consummated as of April 1, 2001, and for purpose of the pro forma condensed statements of operations, that these transactions were consummated as January 1, 2000 and 2001, respectively. The unaudited pro forma condensed financial statements should be read in conjunction with the financial statements of the Company, including notes thereto, included elsewhere in this report. The unaudited pro forma condensed financial statements have been prepared using the purchase method of accounting for GoThink.com, Inc. at historical cost and reflect the effects of the reorganization and the additional stock issuances. NOTE 2 - REORGANIZATION On April 25, 2001, enSurge, Inc. consummated a Stock Exchange Agreement (the stock exchange) with GoThink.com, Inc., a publicly held Nevada corporation, whereby all of the 1,368,387 issued and outstanding common stock of KT Solutions, Inc., a wholly-owned subsidiary of enSurge, Inc., were transferred to GoThink.com, Inc. in exchange for 8,000,000 shares of GoThink.com, Inc. common stock. As a result of the stock exchange, KT Solutions, Inc. became a wholly-owned subsidiary of GoThink.com, Inc. In connection with the stock exchange, the previously outstanding common stock of GoThink.com, Inc. was reverse split on a 1-for- 100 share basis, which resulted in 248,239 shares of common stock remaining outstanding. In connection with the stock exchange, GoThink.com, Inc. changed its name to Knowledge Transfer System, Inc. GoThink.com, Inc. had no assets, $57,560 of liabilities and no operations at the date of the reorganization. The stock exchange has been accounted for as a reorganization of KT Solutions, Inc., with a related 5.84-to-1 stock split and the issuance of 248,239 shares of common stock to the GoThink.com, Inc. shareholders in exchange for the assumption of the liabilities of GoThink.com, Inc. Accordingly, the historical financial statements and operations are those of KT Solutions, Inc. through the date of the reorganization. The accompanying unaudited pro forma condensed financial statements reflects the effects of the stock split and reorganization. NOTE 3 - STOCKHOLDERS' EQUITY On March 1, 2001, the Company agreed to issue 4,000,000 shares of common stock to officers and employees and consultants of KT Solutions, Inc. for services. The common stock was issued on April 25, 2001. The services were valued at $200,000, or $0.05 per share, based on an assessment of the fair value of the common stock on March 1, 2001 as determined by the Board of Directors. In connection with the reorganization, the Company entered into an agreement with a public relations firm whereby the Company issued 3,000,000 shares of common stock to the public relations firm for investor relations services to the Company over a period of two years following the reorganization. The 3,000,000 common shares issued were valued at $300,000, or $0.10 per share, based on the assessed fair value of the of the common stock on April 25, 2001 as determined by the Board of Directors, and were reflected as a prepaid expense in the accompanying unaudited pro forma condensed combined balance sheet. On March 1, 2001, the Company agreed to issue and on April 25, 2001 it issued 23,050,000 shares of common stock in exchange for notes receivable from employees and other investors totaling $1,152,500, or $0.05 per share and on April 25, 2001 it issued 2,515,000 shares of common stock in exchange for notes receivable from employees and other investors totaling $251,500, or $0.10 per share. Certain of the related investors subsequently paid $130,000 of principal on the notes receivable. The remaining notes receivable are partial recourse notes in that each investor is unconditionally obligated to pay 10% of amount of their note F-6 in addition to the return of the shares of common stock in the event of default under the terms of the notes. The shares of common stock have been accounted for in the accompanying unaudited pro forma combined balance sheet as having been issued for the notes receivable. NOTE 4 - PRO FORMA ADJUSTMENTS (a) To adjust amortization of KT Solutions, Inc. goodwill ($4,342,278) acquired on June 1, 2000, which is being amortized over a period of five years, during the period from January 1, through May 31, 2000. (b) To eliminate the discontinued operations of GoThink.com, Inc. from continuing operations. (c) To reflect the issuance of 4,000,000 shares of common stock to officers, employees and consultants for services, valued at $200,000, or $0.05 per share, based on an assessment of their fair value of the common stock on March 1, 2001, as determined by the Board of Directors. (d) To reflect the issuance of 3,000,000 shares of common stock to a public relations firm for investor relations services to the Company over a period of two years. The shares issued were valued at $300,000, or $0.10 per share, based upon an assessment of their fair value on April 25, 2001, as determined by the Board of Directors. The related expense is being recognized over a period of two years. (e) To eliminate GoThink.com's accumulated deficit. (f) To reflect the adjustment of GoThink's shares outstanding to par value of $0.001 per share. (g) To reflect the issuance of 23,050,000 shares of common stock in exchange for notes receivable from employees and investors totaling $1,152,500, or $0.05 per share and the issuance of 2,515,000 shares of common stock in exchange for notes receivable from employees and other investors totaling $251,500, or $0.10 per share. Of the total notes receivable, $130,000 were collected. F-7 HANSEN, BARNETT & MAXWELL A Professional Corporation CERTIFIED PUBLIC ACCOUNTANTS (801) 532-2200 Member of AICPA Division of Firms Fax (801) 532-7944 Member of SECPS 345 East Broadway, Suite 200 Member of Summit International Associates, Inc. Salt Lake City, Utah 84111-2693 www.hbmcpas.com REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and the Stockholder KT Solutions, Inc. We have audited the accompanying balance sheet of KT Solutions, Inc. (the Company) as of December 31, 2000 and the related statements of operations, stockholder's equity, and cash flows for the seven months ended December 31, 2000. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides 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 KT Solutions, Inc. as of December 31, 2000 and the results of its operations and its cash flows for the seven months ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company suffered losses from operations of $1,177,092 and has used $55,940 of cash in operating activities during the seven months ended December 31, 2000. As of December 31, 2000, the Company had a working capital deficit of $895,286. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. /s/ Hansen, Barnett & Maxwell HANSEN, BARNETT & MAXWELL Salt Lake City, Utah April 17, 2001, except for Note 1 - Reorganization, as to which the date is May 9, 2001 F-8 KT SOLUTIONS, INC. BALANCE SHEETS March 31, December 31, 2001 2000 ------------ ------------ (Unaudited) ASSETS Current Assets Cash $ 67,712 $ 22,144 Trade accounts receivable net of $9,961 allowance for doubtful accounts 127,774 121,598 Inventory 92,810 92,810 ------------ ------------ Total Current Assets 288,296 236,552 Property and Equipment, net of $11,622 (unaudited) and $7,677 accumulated depreciation, respectively 32,563 36,508 Deposits 12,027 12,027 Prepaid Compensation 42,740 57,075 Goodwill net of $723,714 (unaudited) and $506,599 accumulated amortization, respectively 3,618,565 3,835,679 ------------ ------------ Total Assets $ 3,994,191 $ 4,177,841 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Trade accounts payable $ 375,022 $ 599,417 Accrued liabilities 101,871 93,405 Deferred revenue 350,000 - Capital lease obligation - current portion 8,512 8,199 Notes payable - current portion 628,825 430,817 ------------ ------------ Total Current Liabilities 1,464,230 1,131,838 ------------ ------------ Long-Term Liabilities Capital lease obligation - net of current portion 8,149 10,398 Notes payable - net of current portion 77,453 - ------------ ------------ Total Long-Term Liabilities 85,602 10,398 ------------ ------------ Stockholder's Equity Preferred stock - $0.001 par value; 10,000,000; shares authorized; no shares issued or outstanding - - Common stock - $0.001 par value; 100,000,000 shares authorized; 8,000,000 shares and 6,628,515 shares outstanding 8,000 6,628 Additional paid-in capital 5,076,333 4,206,069 Accumulated deficit (2,639,974) (1,177,092) ------------ ------------ Total Stockholder's Equity 2,444,359 3,038,605 ------------ ------------ Total Liabilities and Stockholder's Equity $ 3,994,191 $ 4,177,841 ============ ============ The accompanying notes are an integral part of these financial statements. F-9 KT SOLUTIONS, INC. STATEMENTS OF OPERATIONS For the Three For the Seven Months Ended Months Ended March 31, December 31, 2001 2000 ------------ ------------ (Unaudited) Sales $ 144,541 $ 677,313 Cost of goods sold 234,786 616,363 ------------ ------------ Gross Profit (Loss) (90,245) 60,950 ------------ ------------ Expenses Write down of inventory to market value - 37,910 Royalty 326,927 277,240 General and administrative 503,571 371,843 Amortization of goodwill 217,114 506,599 Interest 325,025 44,450 ------------ ------------ Total Expenses 1,372,637 1,238,042 ------------ ------------ Net Loss $ (1,462,882) $ (1,177,092) ============ ============ Basic and Diluted Loss Per Common Share $ (0.20) $ (0.19) ============ ============ Basic and Diluted Weighted Average Common Shares Outstanding 7,333,340 6,164,064 ============ ============ The accompanying notes are an integral part of these financial statements. F-10 KT SOLUTIONS, INC. STATEMENT OF STOCKHOLDER'S, EQUITY

The accompanying notes are an integral part of these financial statements. F-11 KT SOLUTIONS, INC. STATEMENTS OF CASH FLOWS For the Three For the Seven Months Ended Months Ended March 31, December 31, 2001 2000 ----------- ----------- (Unaudited) Cash Flows From Operating Activities Net loss $(1,462,882) $(1,177,092) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 3,945 8,143 Amortization of goodwill 217,114 506,599 Amortization of prepaid compensation 14,335 59,592 Loss on disposal of equipment - 1,784 Write down of obsolete inventory - 37,910 Common stock issued for services 348,622 - Interest expense from beneficial debt conversion feature paid with common stock 304,886 - Expenses paid by shareholder - 231,296 Deferred revenue 350,000 - Changes in assets and liabilities, net of effects from purchase of KT Solutions, Inc.: Trade accounts receivable (6,176) (28,003) Inventory - (130,720) Trade accounts payable 18,733 333,619 Accrued liabilities 8,466 83,405 ----------- ----------- Net Cash Used In Operating Activities (202,957) (55,940) ----------- ----------- Cash Flows From Investing Activities Capital expenditures - (12,619) Decrease in deposits - 4,972 Cash acquired in acquisition of KT Solutions, Inc. - 1,006 ----------- ----------- Net Cash Used In Investing Activities - (6,641) ----------- ----------- Cash Flows From Financing Activities Proceeds from borrowing under notes payable 292,000 24,000 Principal payments on notes payable (41,539) (134,031) Principal payments under capital lease obligation (1,936) (4,244) Capital contribution by shareholder - 199,000 ----------- ----------- Net Cash Used In Financing Activities 248,525 84,725 ----------- ----------- Net Increase In Cash 45,568 22,144 Cash at Beginning of Period 22,144 - ----------- ----------- Cash at End of Period $ 67,712 $ 22,144 =========== =========== Supplemental Disclosure of Cash Flow Information Cash paid for interest $ 15,299 $ 31,727 =========== =========== Supplemental Schedule of Noncash Investing and Financing Activities Common stock issued in satisfaction of accounts payable $ 243,128 $ - Common stock redeemed upon the assumption of a note payable 25,000 - Equipment acquired under capital lease obligation - 22,841 Notes payable and accrued interest assumed by shareholder - 198,401 Purchase of KT Solutions, Inc.: Fair value of assets acquired - $ 4,581,520 Liabilities assumed - (997,520) ----------- Common stock issued - $ 3,584,000 =========== The accompanying notes are an integral part of these financial statements. F-12 KT SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS (Information with Respect to March 31, 2001 and to the Three Months Then Ended is Unaudited) NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Organization- On August 1, 1992 Missaticum, Inc. dba QtrainCorp was incorporated under the laws of the State of California. On October 4, 1996, its name was changed to KT Solutions, Inc. (the Company). The Company was formed for the purpose of developing technology based training solutions. It creates software programs that are used to teach and train individuals how to operate popular business and home use software programs. On June 1, 2000, the former shareholders of the Company entered into a Stock Exchange Agreement with enSurge, Inc. (enSurge) whereby enSurge acquired all of the outstanding common shares of the Company from the former shareholders in exchange for the issuance of 500,000 shares of enSurge's common stock and options to purchase 250,000 shares of enSurge's common stock at $4.00 per share. In addition, enSurge issued warrants to purchase 50,000 shares of common stock at $0.10 per share as a finders' fee. As a result, the Company was a wholly-owned subsidiary of enSurge, Inc. The acquisition of the Company was recorded by enSurge using the purchase method of accounting. The 500,000 common shares issued and the 300,000 options issued were recorded at their fair values of $2,240,000 ($4.48 per share) and $1,120,000, respectively. The value of the options was determined using the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 6.0%, expected dividend yield of 0%, volatility of 577% and expected life of 5 years. The accompanying financial statements of KT Solutions, Inc. have been prepared to reflect the effects of the purchase by enSurge which include allocation of the purchase price to the assets acquired and the liabilities assumed and recording the common stock acquired by enSurge at the purchase price as though it was issued on June 1, 2000. The assets acquired and liabilities assumed were recorded at their fair values on the purchase date. The excess of the purchase price over the fair value of the net assets acquired was $4,342,278 and was allocated to goodwill. Goodwill is being amortized over five years by the straight-line method. The following unaudited pro forma financial statement data presents the results of operations of KT Solutions, Inc. as if the acquisition by enSurge had occurred on January 1, 1999. The unaudited pro forma results have been prepared for illustrative process only and do not purport to represent what results of operations of KT Solutions, Inc. actually would have been had the acquisition been made when assumed, nor is it indicative of actual or future operating results that may occur. Years Ended December 31, ------------------------ 2000 1999 ----------- ----------- Sales $ 740,267 $ 872,445 Net loss (1,609,120) (1,201,814) Reorganization - On April 25, 2001, enSurge, Inc. consummated a stock exchange agreement with GoThink!.com, Inc., a publicly held Nevada corporation, whereby all of the 1,368,387 outstanding common shares of KT Solutions, Inc. were transferred to GoThink!.com Inc. in exchange for 8,000,000 shares of GoThink!.com, Inc. common stock. As a result of the stock exchange, KT Solutions, Inc. became a wholly-owned subsidiary of GoThink!.com, Inc. GoThink!.com, Inc. had 248,239 shares of common stock outstanding prior to the stock exchange but after a 1-for-100 reverse stock split. F-13 The stock exchange has been accounted for as the reorganization of KT Solutions, Inc. Accordingly, the accompanying financial statements have been restated to reflect the effects of the 5.84- for-1 equivalent stock split that resulted from 8,000,000 shares of GoThink!.com, Inc. being issued in exchange for 1,368,387 previously outstanding shares of KT Solutions, Inc. On April 23, 2001, the articles of incorporation of GoThink!.com, Inc. were amended to change the name of the Company to Knowledge Transfer Systems, Inc. and to modify the authorized capital for the Company such that the Company is authorized to issue 10,000,000 shares of preferred stock having a par value of $0.001 per share and 100,000,000 shares of common stock having a par value of $0.001 per share. The accompanying financial statements have been adjusted to reflect the change in the authorized capital. 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 these estimates. Business Condition-The Company has incurred a net loss from operations for the seven months ended December 31, 2000 of $1,177,092 and used $55,940 of cash in operating activities during that same period. As of December 31, 2000, the Company had a working capital deficit of $895,286. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company needs to obtain additional financing to fund payment of obligations and to provide working capital for operations. Management is attempting to obtain additional debt or equity capital through outside investors including an investor that may purchase the Company from enSurge and invest additional capital into the Company. Upon obtaining additional capital, of which there can be no assurance, management plans to substantially increase sales through the Internet. The Company has entered into a contract to market its products and additional potential products through a national publisher's web site. Management believes these efforts will generate sufficient cash flows from future operations, to pay the Company's obligations and realize goodwill and other assets. There is no assurance any of these transactions will occur. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Financial Instruments-The carrying amounts reported in the accompanying financial statements for cash, trade accounts receivable, trade accounts payable, accrued liabilities, capital lease obligations and notes payable approximate their fair values because of the immediate or short-term maturities of these financial instruments. Inventory-Inventory is stated at the lower of cost (using the first-in, first-out method) or market value. Inventory consists of produced software products available for sale. The Company recorded a write down of inventory in the amount of $37,910 due to obsolete inventory, during the seven months ended December 31, 2000, to reduce inventory to market value. Property and Equipment-Property and equipment are stated at cost and consist of furniture, fixtures and computer equipment. Maintenance and repairs are charged to operations while major improvements are capitalized. Upon retirement, sale, or other disposition, the cost and accumulated depreciation are eliminated from the accounts and a gain or loss is included in operations. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment, which are three to seven years. F-14 Long-Lived Assets-The realizability of long-lived assets which includes goodwill is evaluated periodically when events or circumstances indicate a possibly inability to recover the carrying amounts. An impairment loss is recognized for the excess of the carrying amount over the fair value of the assets. Fair value is determined based on estimated discounted net future cash flows or other valuation techniques available in the circumstances. This analysis involves significant management judgment to evaluate the capacity of an asset to perform within projections. Based upon management's analysis, no impairment loss was recognized, during the seven months ended December 31, 2000. Revenue Recognition-Revenue from the sale of software is recognized upon delivery and acceptance by the customer. Payments collected from customers prior to recognition of the related sales are deferred as deferred revenue. Concentration of Credit risk and Major Customer-Trade accounts receivable subject the Company to concentration of credit risk. This risk arises because $82,398 of trade accounts were from one customer which is a national franchise and has a license agreement with the Company that can be terminated 90 days notice by the customer. Sales to the customer amounted to $575,000, or 85% of sales, during the seven months ended December 31, 2000. Computer Software - Development costs incurred to design and create new software programs and training materials to be sold, leased or otherwise marketed are expensed as incurred and are charged to cost of goods sold. Costs incurred to software are expensed when incurred. Royalties - The Company incurred a 5% royalty based upon gross sales for the use of certain software until a total of $850,000 was paid. The royalty was recognized as expense as incurred through December 31, 2000. Common stock was issued in satisfaction of a portion of this royalty with the remaining amounts due under the royalty arrangement reflected as notes payable. During 2001, the Company incurred a $325,000 royalty expense related to rights to use A+ Certification Curriculum produced by Prosoft Training.com. The Company does not have an on-going royalty obligation associated with future sales. NOTE 2 - PROPERTY AND EQUIPMENT March 31, December 31, 2001 2000 -------- -------- Furniture and fixtures $ 2,500 $ 2,500 Computer equipment 41,685 41,685 -------- -------- Total Property and Equipment $ 44,185 $ 44,185 ======== ======== Depreciation expense for the seven months ended December 31, 2000 was $8,143. F-15 NOTE 3 - NOTES PAYABLE March 31, December 31, 2001 2000 ---------- ---------- 15% Note payable to a relative of an officer, due on demand, unsecured $ 20,000 $ 20,000 12% Note payable to an officer, due on demand, unsecured 3,000 3,000 24% Note payable to an officer, due on demand, unsecured 207,000 - 20% Note payable, due on demand, unsecured 75,000 75,000 8% Notes payable, due on demand, unsecured 60,000 - 12% Note payable to GoThink!, due on demand, unsecured 50,000 - 8% Note payable, due on demand, unsecured 43,025 43,025 Non-interest bearing royalty obligations, due $11,000 per month, unsecured, interest accrued at 10% due to being in default 248,253 289,792 ---------- ---------- Total Notes Payable 706,278 430,817 Less Current Portion 628,825 430,817 ---------- ---------- Notes Payable - Long-Term $ 77,453 $ - ========== ========== NOTE 4- LEASE OBLIGATIONS Operating Lease-The Company conducts its operations in a building leased from an unrelated third party, which lease expires in February 2005. Rent expense under this lease was $43,225 for the seven months ended December 31, 2000. The following is a schedule by years of future minimum rental payments. March 31, December 31, 2001 2000 ---------- ---------- Years Ending December 31: 2001 $ 56,588 $ 75,450 2002 84,540 84,540 2003 84,540 84,540 2004 84,540 84,540 2005 14,090 14,090 ---------- ---------- Total $ 324,298 $ 343,160 ========== ========== Capital Lease - In June 2000, the Company entered into a capital lease obligation for computer equipment. This lease expires in December 2002. Equipment under the capital lease was as follows: March 31, December 31, 2001 2000 ---------- ---------- Equipment $ 22,841 $ 22,841 Less: Accumulated depreciation 6,852 4,568 ---------- ---------- Net Cost $ 15,989 $ 18,273 ========== ========== F-16 The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments: March 31, December 31, 2001 2000 ---------- ---------- Years Ending December 31: 2001 $ 7,839 $ 10,452 2002 10,452 10,452 ---------- ---------- Total minimum lease payments 18,291 20,904 Less: Amount representing executory costs (1,512) (1,728) ---------- ---------- Net minimum lease payments 16,779 19,176 Less: Amount representing interest (118) (579) ---------- ---------- Present value of net minimum lease payments 16,661 18,597 Less: Current portion 8,512 8,199 ---------- ---------- Capital Lease Obligation - Long Term $ 8,149 $ 10,398 ========== ========== NOTE 5-STOCKHOLDER'S EQUITY During the seven months ended December 31, 2000, enSurge contributed $628,697 to the Company. enSurge paid $231,296 of expenses in behalf of the Company, contributed $199,000 in cash to the Company and assumed $198,401 of notes payable and accrued interest. On February 14, 2001, enSurge, Inc. issued 1,289,445 shares of common stock to creditors of the Company in satisfaction of $243,128 of trade accounts payable. The capital contributions to the Company by enSurge, Inc. was recorded at the fair value of the enSurge, Inc. common stock issued of $548,014. The beneficial conversion feature related to the excess value given to the creditors of $304,886 was recognized as interest expense. F-17 INDEPENDENT ACCOUNTANTS' REVIEW REPORT Board of Directors and Shareholders KT Solutions, Inc. Oakland, California We have reviewed the accompanying balance sheet of KT Solutions, Inc., as of March 31, 2000, and the related statements of operations and shareholders' deficit for the nine month periods ended March 31, 2000 and 1999, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of KT Solutions, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, 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 reviews, with the exception of the matters described in the following paragraph, 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 generally accepted accounting principles. A statement of cash flows for the nine month periods ended March 31, 2000 and 1999 has not been presented. Generally accepted accounting principles require that such a statement be presented when financial statements purport to present financial position and results of operations. /s/ Armanino McKenna LLP ARMANINO MCKENNA LLP August 15, 2000 F-18 K T SOLUTIONS, INC. Balance Sheet March 31, 2000 (See Independent Accountants' Review Report) ASSETS Current assets Cash $ 33,911 Accounts receivable - trade, net of allowance for doubtful accounts of $9,961 145,433 ----------- Total current assets 179,344 Property and equipment, net 37,109 Other assets 21,233 ----------- $ 237,686 =========== LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Accounts payable $ 227,147 Royalties payable 380,296 Accrued interest 88,006 Advances from shareholder 38,025 Other accrued liabilities 9,024 Current portion of capital lease obligation 8,708 Notes payable 193,650 ----------- Total current liabilities 944,856 ----------- Capital lease obligation 17,016 Total liabilities 961,872 ----------- Shareholders' deficit Preferred stock, no par value, 10,000,000 shares authorized; 435,002 shares issued and outstanding 330,577 Common stock, no par value, 5,000,000 shares authorized; 816,753 shares issued and outstanding 99,713 Accumulated deficit (1,154,476) ----------- Total shareholders' deficit (724,186) ----------- $ 237,686 =========== The accompanying notes are an integral part of these financial statements. F-19 K T SOLUTIONS, INC. Statements of Operations For the Nine Month Periods Ended March 31, 2000 and 1999 (See Independent Accountants' Review Report) 2000 1999 ---------- ---------- Sales $ 609,344 $ 985,253 Cost of sales 164,321 150,204 ---------- ---------- Gross profit 445,023 835,049 ---------- ---------- Operating expenses General and administrative expenses 430,705 410,856 Research and development costs 209,002 378,253 Selling expenses 3,637 1,051 ---------- ---------- Total operating expenses 643,344 790,160 ---------- ---------- Income (loss) from operations (198,321) 44,889 ---------- ---------- Other income (expense) Miscellaneous income 17,352 14,984 Interest expense (33,724) (26,925) Other income 2,645 5,769 ---------- ---------- Total other expenses (13,727) (6,172) ---------- ---------- Income (loss) before provision for income taxes (212,048) 38,717 Provision for income taxes 800 1,010 ---------- ---------- Net income (loss) $ (212,848) $ 37,707 ========== ========== The accompanying notes are an integral part of these financial statements. F-20 K T SOLUTIONS, INC. Statements of Shareholders' Deficit For the Nine Month Periods Ended March 31, 2000 and 1999 (See Independent Accountants' Review Report)

The accompanying notes are an integral part of these financial statements. F-21 K T SOLUTIONS, INC. Statements of Cash Flows For the Nine Month Periods Ended March 31, 2000 and 1999 (See Independent Accountants' Review Report) 2000 1999 ---------- ---------- Cash flows from operating activities Net income (loss) $ (212,848) $ 37,707 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 5,832 4,982 Deferred revenue - (444,341) Changes in assets and liabilities accounts Accounts receivable - trade 52,658 350,882 Deposits 2,440 439 Accounts payable 110,050 87,877 Royalties payable 87,300 22,831 Accrued interest 29,006 18,102 Accrued liabilities (37,995) (35,531) ---------- ---------- Net cash provided by operating activities 36,443 42,948 ---------- ---------- Cash flows from investing activities Capital expenditures (7,653) - ---------- ---------- Net cash used in investing activities (7,653) - ---------- ---------- Cash flows used in financing activities Principal payments on indebtedness (12,574) - Principal payments on capital lease obligation (2,076) - Payments on advances from shareholders - (31,950) ---------- --------- Net cash flows used in financing activities (14,650) (31,950) ---------- ---------- Net increase in cash 14,140 10,998 Cash at beginning of period 19,771 6,798 ---------- ---------- Cash at end of period $ 33,911 $ 17,796 ========== ========== Supplemental disclosures of cash flow information Cash paid during the year for Income taxes $ 800 $ 800 ========== ========== Debt conversion to shares of stock $ - $ 31,315 ========== ========== Debt issued to purchase shares of stock $ 61,224 $ - ========== ========== Equipment financed by capital lease $ 27,800 $ - ========== ========== The accompanying notes are an integral part of these financial statements. F-22 KT SOLUTIONS, INC. Notes to Financial Statements MARCH 31, 2000 AND 1999 _________________________ 1. General and Summary of Significant Accounting Policies General The company was incorporated under the laws of California and commenced operations in 1982, as Missaticum, Inc. In 1982, the company changed its name to Qtrain Corporation and, in 1995, it again changed its name to KT Solutions, Inc., ("the Company"). The final name change occurred when current management assumed control of the Company. The Company is a developer of technology- based training solutions focused on the information technology education market. The Company has recently signed numerous distribution agreements with companies that market their products on the Internet. The Company's offices are located in Oakland, California. The Company grants credit to its customers, the largest percentage of whom are franchise operations of a national franchise that operates throughout the world. Basis of presentation The Company uses the accrual basis of accounting for financial statement purposes and the cash basis of accounting for tax reporting purposes. Cash Cash includes cash and cash equivalents. The Company considers cash in banks and short-term investments with original maturities of three months or less to be cash equivalents. Income taxes The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" in fiscal year ended June 30, 1999 and has applied the provisions of the statement on a retroactive basis to all the previous years. Deferred income taxes result from temporary differences in the recognition of accounting transactions for tax and financial reporting purposes. Revenue recognition The Company is engaged as a seller and licensor of software. Sales revenue is recognized upon delivery of the software. F-23 KT SOLUTIONS, INC. Notes to Financial Statements MARCH 31, 2000 AND 1999 _________________________ 1. General and Summary of Significant Accounting Policies (continued) Property and Equipment Property and equipment is stated at cost. Expenditures for major improvements are capitalized at cost, while maintenance and repairs are expensed as incurred. Depreciation of property and equipment is computed primarily by the straight-line method over the estimated useful lives of the related assets which range from 3 to 7 years. 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. 2. Going Concern The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in recent years, with the exception of the year ended June 30, 1999. As of March 31, 2000, total liabilities exceed total assets by $724,186. Subsequent to March 31, 2000, management agreed to transfer 100% of the outstanding shares, both preferred and common of the Company to another company in exchange for stock of the second company. (See Note 14) Realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, its ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken, including the sale of the Company, as well as the signing of various distribution agreements, will improve the Company's operating performance to allow the Company to continue as a going concern. F-24 KT SOLUTIONS, INC. Notes to Financial Statements MARCH 31, 2000 AND 1999 _________________________ 3. Royalty Agreements The Company, in 1995, entered into settlement agreements with four former shareholders as part of the current management's acquisition agreement. The former shareholders were to drop all claims against the Company and were not to compete with the Company. The Company is in arrears in its payments to these individuals; thereby, effectively waiving its non-competition rights. In addition, these individuals are allowed to convert up to 25% of the balance due them into shares of common stock of the Company, should it issue shares in a private placement or public offering. As of March 31, 2000, none of the individuals have expressed an interest in acquiring any Company stock or competing with Company operations. Royalties' payable under these agreements totaled $380,296 as of March 31, 2000. 4. Property and Equipment Property and equipment consisted of the following at March 31, 2000: Computers and equipment $ 41,472 Office equipment and furniture 38,129 Equipment under capital lease 27,800 --------- 107,401 Less accumulated depreciation (70,292) --------- $ 37,109 ========= Depreciation expense for the nine months ended March 31, 2000 and 1999 was $5,832 and $4,982, respectively. 5. Notes Payable Notes payable as of March 31, 2000, consisted of the following: Note payable to related party - unsecured; interest at 15%. Final payment due on demand. Interest payments due monthly. $ 20,000 Note payable to shareholder - unsecured; no monthly payments due. Note is convertible into preferred stock at the option of the note holder, provided certain conditions are met. Interest accrues at 20% annually. 120,000 F-25 KT SOLUTIONS, INC. Notes to Financial Statements MARCH 31, 2000 AND 1999 _________________________ 5. Notes Payable (continued) Note payable to former shareholder, secured by stock certificates. Monthly principal payments of $2,000, bearing interest at 10%, with the balance due in full on October 1, 2000. $ 53,650 --------- 193,650 LESS CURRENT PORTION (193,650) --------- Long-term portion $ - ========= 6. Leases The Company leases its facilities in Oakland from an unrelated third party. Annual rent under this five-year lease, which expires on February 28, 2005, escalates each year as described in the agreement. Facility rent expense for the nine months ended March 31, 2000 and 1999 was $21,380 and $______, respectively. In January 2000, the Company entered into a capital lease agreement to purchase computer equipment. The cost of the equipment was $27,800, with related accumulated depreciation of $2,317 as of March 31, 2000. The capital lease provides that the Company pay the taxes, insurance and maintenance expenses relating to the leased property. The terms of the lease provide for payments of $871 per month over 36 months, including interest at 8%. The following sets forth total future minimum lease payment obligations for the fiscal years ended: Capital Operating Year Ended June 30, Lease Lease ------------------- --------- ----------- 2000 $ 2,613 $ - 2001 10,452 54,672 2002 10,452 59,304 2003 5,226 63,936 2004 - 63,936 2005 - 42,624 --------- ----------- Total minimum lease payments 28,743 $ 284,472 Less amount representing interest 3,019 =========== --------- Present value of minimum lease payments $ 25,724 ========= Less: current portion 8,708 -------- $ 17,016 ======== F-26 KT SOLUTIONS, INC. Notes to Financial Statements MARCH 31, 2000 AND 1999 _________________________ 7. Preferred Stock The Company's preferred stock is eligible to receive a $6 dividend on an annual basis should the Board of Directors elect to declare dividends. No dividends were declared during the year ended June 30, 1999 or the nine months ended March 31, 2000. 8. Advances from Shareholder The Company's majority shareholder, along with another company controlled by the Company's majority shareholder, have combined to advance funds to the Company. Neither of these related parties is currently charging the Company interest and amounts advanced are due on demand. As of March 31, 2000, the outstanding balance was $38,025. 9. Income Taxes The provision for income taxes reflected in the statements of operations contains only the minimum state income tax amounts, as the Company has sustained losses during its history and has net operating loss carryforwards sufficient to offset taxable income. As of March 31, 2000, the Company had $508,441 in net operating loss carryforwards set to expire beginning in 2011. However, a valuation reserve has been set up to reserve 100% of this potential asset, as the realization of this asset does not meet the more likely than not threshold required by FAS #109. 10. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivables. Concentrations of credit risk with respect to trade receivables arise because the largest percentage of customers granted credit are franchise operations of a national franchisee who has a license agreement with the Company that can be terminated in 90 days at the convenience of the licensee. Sales under one licensing agreement comprised ___% and ____% of the Company's revenues during the periods ended March 31, 2000 and 1999, respectively. Accounts receivable-trade from this licensing agreement aggregated $128,609 as of March 31, 2000. F-27 KT SOLUTIONS, INC. Notes to Financial Statements MARCH 31, 2000 AND 1999 _________________________ 11.Related Party Transactions Notes payable All of the Company's debt has been issued to either shareholders or former shareholders. See Note 5 for description of terms and amounts. Advances payable The Company has received advances from its majority shareholder as described in Note 8. 12.Stock Options As of June 1997, the Company had granted to two employees the option to purchase shares of the Company's common stock. A total of 15,000 shares were reserved for their purchase at $0.075 per share and 5,000 shares at $1.00, although the shares were not part of a formal stock option plan. In January 1998, an additional 15,000 shares were reserved for one of these employees with a purchase price of $2.00 per share. The option to purchase shares vests ratably over a four-year period. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Since the exercise price of the options exceeded the fair market value of the common stock when the options were granted, no compensation cost has been recognized for options granted. Had compensation cost for stock options granted been determined based on the fair value of the options consistent with the provisions of SFAS No. 123, the Company's net income for the periods ended March 31, 2000 and 1999 would have been reduced negligibly. At March 31, 2000, 35,000 options had been issued with a weighted-average price per share of $1.03. Approximately, 15,000 options were exercisable at March 31,2000. 13. Subsequent Events Subsequent to March 31, 2000, the Company repriced the options to purchase shares of Company common stock for one of its employees to $0.75 per share. The compensation related to this change is considered negligible. Also, subsequent to March 31, 2000, iShopper.com, Inc. issued 500,000 shares of common stock to the common and preferred shareholders of the Company in return for 100% of the outstanding shares of the Company's stock F-28 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders KT Solutions, Inc. Oakland, California We have audited the accompanying balance sheets of KT Solutions, Inc., (a California corporation) as of June 30, 1999 and December 31, 1999, and the related statements of operations, shareholders' deficit, and cash flows for the periods then ended. These financial statements are the responsibility of the management of KT Solutions, Inc. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. 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 audit provides 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 KT Solutions, Inc. as of June 30, 1999 and December 31, 1999, and the results of its operations and its cash flows for the periods then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company's recurring operating losses and lack of working capital raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to those matters also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Armanino McKenna LLC ARMANINO MCKENNA LLP May 12, 2000 F-29 KT SOLUTIONS, INC. Balance Sheets December 31, 1999 and June 30, 1999

The accompanying notes are an integral part of these financial statements. F-30 Six Months Ended Year Ended December 31, June 30, 1999 1999 ----------- ----------- Sales $ 372,755 $ 1,282,792 Cost of sales 107,817 229,350 ----------- ----------- Gross profit 264,938 1,053,442 Operating expenses General and administrative expenses 297,634 575,284 Research and development costs 130,335 449,945 Selling expenses 2,637 1,563 ----------- ----------- Total operating expenses (165,668) 26,650 ----------- ----------- Income (loss) from operations Other income (expense) Miscellaneous income 10,638 21,414 Interest expense (21,285) (36,784) Other income 3,573 7,049 ----------- ----------- Total other expenses (7,074) (8,321) ----------- ----------- Income (loss) before provision for income taxes (172,742) 18,329 Provision for income taxes 800 800 ----------- ----------- Net income (loss) $ (173,542) $ 17,529 =========== =========== The accompanying notes are an integral part of these financial statements. F-31 KT SOLUTIONS, INC. Statements of Shareholders' Deficit For the Periods Ended December 31, 1999 and June 30, 1999

The accompanying notes are an integral part of these financial statements. F-32 KT SOLUTIONS, INC. Statements of Cash Flows For the Periods Ended December 31, 1999 and June 30, 1999

The accompanying notes are an integral part of these financial statements. F-33 KT SOLUTIONS, INC. Notes to Financial Statements JUNE 30 AND DECEMBER 31, 1999 _________________________ 1. General and Summary of Significant Accounting Policies General The Company was incorporated under the laws of California and commenced operations in 1982, as Missaticum, Inc. In 1982 the Company changed its name to Qtrain Corporation and in 1995 it again changed its name to KT Solutions, Inc. The final name change was due to a change in ownership when current management assumed control of the Company. The Company is a developer of technology-based training solutions focused on the information technology education market. The Company has recently signed numerous distribution agreements with companies that market their products on the Internet. The Company's offices are located in Oakland, California. The Company grants credit to customers, the largest percentage of whom are under a single franchise that operates throughout the world. Basis of presentation The Company uses the accrual basis of accounting for financial statement purposes and the cash basis of accounting for tax reporting purposes. Cash Cash includes cash and cash equivalents. The Company considers cash in banks and short-term investments with original maturities of three months or less to be cash. Income taxes The Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" in fiscal year ended June 30, 1999 and has applied the provisions of the statement on a retroactive basis to all the previous years. Deferred income taxes result from temporary differences in the recognition of accounting transactions for tax and financial reporting purposes. Software revenue recognition policies The Company is engaged as a seller and licensor of software. Revenue is recognized upon delivery of the software. F-34 KT SOLUTIONS, INC. Notes to Financial Statements JUNE 30 AND DECEMBER 31, 1999 _________________________ 1. General and Summary of Significant Accounting Policies (continued) 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. 2. Going Concern The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. However, the Company has sustained substantial operating losses in recent years, with the exception of the year ended June 30, 1999. As of December 31, 1999, total liabilities exceed total assets by $684,880. Management is currently in negotiations with outside investors regarding potential equity financing. Realization of a major portion of the assets in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to meet its financing requirements, and the success of its future operations. Management believes that actions presently being taken including the potential sale of the Company as well as signing the various distribution agreements, will revise the Company's operating and financial requirements to provide opportunity for the Company to continue as a going concern. 3. Royalty Agreements The Company, at its inception, entered into settlement agreements with four former shareholders as part of the current management's acquisition agreement. The individuals were to drop all claims against the Company and were not to compete with the Company. The Company is in arrears in its payments to these individuals, by not paying these individuals, the Company has effectively waived its non-competition right. In addition, these individuals are allowed to convert up to 25% of the balance due them into shares of stock of the Company, should it issue shares in a private placement or public offering. None of the individuals have expressed an interest in acquiring any stock or competing with the Company. F-35 KT SOLUTIONS, INC. Notes to Financial Statements JUNE 30 AND DECEMBER 31, 1999 _________________________ 4. Property and Equipment Property and equipment is stated at cost. Expenditures for major improvements are capitalized at cost, while maintenance and repairs are expensed as incurred. Depreciation of property and equipment is computed primarily by the straight-line method over the estimated useful lives of the related assets. December 31, June 30, 1999 1999 ---------- ---------- Computers and equipment $ 33,819 $ 33,819 Office equipment and furniture 38,129 38,129 71,948 71,948 Less accumulated depreciation (66,620) (64,460) ---------- ---------- $ 5,328 $ 7,488 ========== ========== Depreciation expense for the periods ended December 31, 1999 and June 30, 1999 was $2,160 and $6,642, respectively. 5. Notes Payable Notes payable as of December 31, 1999 and June 30, 1999, consisted of the following:

6. Operating Leases The Company leases its facilities in Oakland from an unrelated third party. Annual rent under this five-year lease, which expires on February 28, 2005, escalates each year as described in the agreement. Future minimum lease payments for the years ended June 30 under this lease are as follows: 2000 - $12,700; 2001 - $54,672; 2002 - $59,304; 2003 - $63,936; 2004 - $63,936 and 2005 - $42,624. 7. Preferred Stock The Company's preferred stock is eligible to receive a $6 dividend on an annual basis should the board of directors elect to declare dividends. No dividends were declared during the year ended June 30, 1999 or the six months ended December 31, 1999. 8. Advances from Shareholder The Company's majority shareholder, along with another company controlled by the Company's majority shareholder, have combined to advance funds to the Company. Neither of these related parties is currently charging the Company interest and the amounts are due on demand. As of December 31 and June 30, 1999, the outstanding balances were $36,525 and $37,608, respectively. F-37 KT SOLUTIONS, INC. Notes to Financial Statements JUNE 30 AND DECEMBER 31, 1999 _________________________ 9. Income Taxes The provision for income taxes reflected in the statements of operations contains only the minimum state income tax amounts, as the Company has sustained losses during its history and has net operating loss carryforwards sufficient to offset taxable income. As of December 31, 1999, the Company had $508,441 in net operating loss carryforwards set to expire beginning in 2011. However, a valuation reserve has been set up to reserve 100% of the potential asset, as the benefits are not likely to be recognized given the Company's historical losses. 10. Major Customers Sales under one licensing agreement comprised 84.3% and 86.8% of the Company's revenues during the periods ended December 31, 1999 and June 30, 1999, respectively. Related receivables from this license agreement aggregated $100,598 and $195,279 as of December 31, 1999 and June 30, 1999, respectively. 11. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of trade accounts receivables. Concentrations of credit risk with respect to trade receivables arise because the largest percentage of customers granted credit are franchise operations of a national franchisee who has a license agreement with the Company that can be terminated in 90 days at the convenience of the licensee. 12. Related Party Transactions Notes payable All of the Company's debt has been issued to either shareholders or former shareholders. See Note 5 for description of terms and amounts. Advances payable The Company has received advances from its majority shareholder as described in Note 8. F-38 KT SOLUTIONS, INC. Notes to Financial Statements JUNE 30 AND DECEMBER 31, 1999 _________________________ 13.Stock Options As of June 1997, the Company had granted to two employees the option to purchase shares of the Company's stock. A total of 15,000 shares were reserved for their purchase at $0.075 and 5,000 shares at $1.00, although they were not part of a formal stock option plan. In January 1998, an additional 15,000 shares were reserved for one of these employees with a purchase price of $2 per share. The option to purchase shares amortizes ratably over a four-year period. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for options granted. Had compensation cost for stock options granted been determined based on the fair value of the options consistent with the provisions of SFAS No. 123, the Company's net income for the periods ended December 31, and June 30, 1999 would have been reduced negligibly. A summary of the status of the plan as of December 31, 1999, and the changes during the year then ended is presented below: Weighted Average Stock Price Per Options Share -------- ---------- Outstanding at June 30, 1998 35,000 $0.46 Granted - - Exercised - - Expired / Forfeited - - Outstanding at June 30, 1999 35,000 $0.46 Vested shares at June 30, 1999 15,000 $0.46 Exercisable shares at June 30, 1999 35,000 $0.46 Granted - - Exercised - - Expired / Forfeited - - Outstanding at December 31, 1999 35,000 $0.46 Vested shares at December 31, 1999 18,750 $0.46 Exercisable shares at December 31, 1999 35,000 $0.46 F-39 KT SOLUTIONS, INC. Notes to Financial Statements JUNE 30 AND DECEMBER 31, 1999 ___________________________ 14.Subsequent Events Subsequent to December 31, 1999, the Board of Directors signed a letter of intent to acquire 100% of the outstanding shares of stock in one of its vendors in exchange for newly issued shares of the Company. The Company entered into a capital lease agreement with a third party to finance the purchase of computer equipment. The lease commenced in January, 2000 and has a 36-month term with monthly payments of $871. Finally, subsequent to December 31, 1999, the Company signed a letter of intent to sell 100% of its outstanding shares of stock to another company. F-40

GOTHINK COM INC 8-K/A