RELATED PARTY AND FORMER OFFICERS NOTES PAYABLE

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Note 4. RELATED PARTY AND FORMER OFFICERS NOTES PAYABLE

In December 2007, the former Chief Operating Officer and former Chief Executive Officer collectively forgave $1,416,500 of their outstanding accrued salaries ($1,387,500) and note payable ($29,000) balances. In December 2012, the former Chief Operating Officer forgave $80,000 of the accrued salaries balance. The amount forgiven has been accounted for as contributed capital. Additionally, the Company repaid $5,000 of the former Chief Executive Officer’s note payable balance. The remaining unpaid notes payable balances totaling $897,000 and $995,000 at December 31, 2012 and 2011 comprised of loans payable of $450,000 and $447,000, and $450,000 and $545,000 to its former Chief Operating Officer and Chief Executive Officer, respectively.

The loans bore interest at 5.5% per annum and were initially due December 31, 2002 and have been mutually extended. Under the terms of the note extensions dated December 12, 2007, the loans bear interest at 5% per annum and are now due. The Company has recorded interest expense for notes payable to these former officers of approximately $50,000 and $50,000 for the years ended December 31, 2012 and 2011, respectively. Accrued interest related to these notes payable approximated $482,000 and $432,000 as of December 31, 2012 and 2011, respectively and is included in accrued liabilities, related parties.

The related party note payable of $447,000 and its accrued interest have been classified at December 31, 2012 and 2011 to long-term because the holder has waived his right to call the note and related interest until after March 31, 2014.