What bothers me the most is how the 5,000,000 shares to Lorrichio
(an additional 600,000 were added later on) was treated. Originally it was booked for $5,000. The current unidentified auditors correctly restated the transaction as follows:
In May 1996 the company entered into a licensing agreement with a
non-public corporate entity (Licensor) owned by the company's Executive Vice President and his family. The agreement states that principals of the licensing entity are the proprietors, manufacturers, distributors, and/or inventors/developers of phytogenics. The agreement called for the Licensor to grant an exclusive license to Amazon (User) to use the unique products, licensed patents, and all know-how in the operation and to sell all products internationally.
As consideration for the rights obtained the company agreed to:
- Provide suitable housing accommodations for the family of the Licensor's principal for a temporary period of time.
- Pay $8,000 per month for an initial period of five years.
- Provide the Licensor (designated to the principal and family)
5,000,000 shares of the company's common stock.
- Provide the Licensor with an automobile for a period of five
years plus extensions if necessary.
- Provide the Licensor with health insurance for five years plus
extensions if necessary.
- Provide the Licensor with necessary legal support for five years
plus extensions if necessary.
- Reimburse the Licensor for operational costs (travel, hotels,
etc.).
The agreement continues in force for a minimum of 99 years and carries a substantial termination penalty for both parties.
Beginning in 1996 the Licensor transferred certain proprietary formulas and processes to the company. In 1996 the company issued approximately 5,000,000 shares of its common stock to the principals of the Licensor. This stock issue was recorded (based on an audit of the company's financial statements for the year ended 12/31/96) in the accounting records at a value of $5,000. This value was based on the par value of the stock ($.001). It was subsequently determined that this treatment was incorrect. The details of the adjustments necessary to correctly show the effect of this transactions are
contained in Note 17.
Note 15: Current Legal Matters
The company was involved in one lawsuit at the balance sheet date. On October 23, 1997, the company filed a Complaint for Declaratory Relief and Damages against several parties. The company is seeking a determination of the ownership rights of one of the parties to 540,000 shares of the company's common stock which the party currently holds. The action is currently in the discovery phase and no estimate can be made of the financial impact of the suit or of the likely outcome.
Note 16: Subsequent Events
In the period between 12/31/97 and the audit report date there were no known events which would require adjustment to the financial statements. The company has undertaken several actions to combat a decline in its stock's selling price on the open market. It has informed its stockholders (via press releases issued in June 1998) that, among other actions, it was going to retire all of the "principals" common stock and replace it with preferred stock.
This action would have an anti-dilutive effect if consummated.
Note 17: 1996 Restatement (See Auditor's Report and Notes 3, 12, 13, and 14).
As indicated in the auditor's report, the 1996 financial statements were audited by other accountants. During the course of performing the audit of 1997 it became evident that certain transactions completed in 1996 required adjustment. In 1996 the company entered into a licensing agreement with a related party. Under the agreement the company received the exclusive right to
utilize certain technologies in the production of its phytogenics products. As consideration for these rights the company agreed to issue approximately 5,000,000 shares of its common stock. At the time of signing of this agreement the company's stock was trading at approximately $1.50 per share. Since there was no quantifiable value for the technologies obtained, the transaction was recorded at the par value of the stock issued ($.001 per share) or $5,000. The company subsequently determined that this transaction should have been recorded at the fair value of the stock rather than the par value. This resulted in an increase to assets and equity of $7,495,000. During the audit of the 1997 financial statements management of the company concluded that while the valuation of this transaction complied with generally accepted accounting principles, the underlying assets obtained could not be objectively valued. An adjustment was consequently posted to reflect this inability to objectively quantify any value.The net effect of these transactions was to increase Additional Paid-in Capital by $7,495,000 and increase the 1996 loss by the same amount resulting in no change to total equity or total assets. The transaction did however, generate additional operating losses. These adjustments have been audited by the current year auditors and the 1996 financial statements presented herein reflect these adjustments. A summary of the accounts affected in 1996 is as follows:
Before Restatement After Restatement
Balance Sheet Accounts
Licenses and Trademarks $ 5,000 $ 5,000
Additional Paid-In Capital $ 211,088 $ 7,706,087
Accumulated Deficit $(238,687) $(7,733,686)
Income Statement Accounts
Loss on Impairment $ 0 $ 7,495,000
Net Loss for 1996 $ (220,710) $(7,715,709) |
