U. S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB/A
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
Far West Group, Inc., A Nevada Corporation
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Nevada 86-0867960
-------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or organization)
1665 East 18th Street, Suite 113
Tucson, Arizona 85719
-------------------------------- -----------
(Address of principal (zip code)
executive offices)
520-740-1119
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Issuer's telephone number
Securities to be registered under section 12 (g) of the
Act:
Title of each class Name of each exchange on which
to be so registered: each class is to be registered:
Common Stock None
Securities to be registered under section 12(g) of the
Act:
80 million shares of Common Stock, Par Value $.0001 per share
-------------------------------------------------------------
(Title of Class)
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PART I
Form 10-SB Item Location
Item Number Caption Information Page
1. Description of Business 3-10
2. Management's Discussion And
Analysis or Plan of Operations 10-15
3. Description of Property 15
4. Security Ownership of Certain
Beneficial Owners and Management 15-16
5. Directors, Executive Officers,
Promoters and Control Persons 16-19
6. Executive Compensation 19-20
7. Certain Relationships and Related
Transactions 20-21
8. Description of Securities 21
PART II
1. Market Price and Dividends on
the Registrant's Common Equity
and Other Shareholders Matters 21-23
2. Legal Proceedings 23
3. Changes in and Disagreements
With Accountants 24
4. Recent Sales of Unregistered
Securities 24-25
5. Indemnification of Directors
and Officers 25
PART III
1. Index to Exhibits 26-28
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PART I
Item 1. Business
General
FarWest Group, Inc.(The "Company" or "FarWest") was organized under
the laws of the State of Nevada in July 1996 to serve as a
water technology company dedicated to advanced water filtration
and purification. In July 1996, the Company was a party to
a triangular merger with Pro Vantage Corporation ("Pro Vantage"),
an inactive public company which had been incorporated in the State
of Florida in 1992. Pro Vantage's name was changed to FarWest Group,
Inc. Concurrently, the FarWest Pump Company ("Pump Company"),
an Arizona corporation, became a wholly owned subsidiary of the
Company. The transaction with Pro Vantage was accounted for as a
"reverse acquisition" whereby FarWest acquired Pro Vantage in a
transaction accounted for as a purchase. The purchase price has
been determined based on the fair value of Pro Vantage's net assets
at the date of acquisition. Because Pro Vantage was inactive and
had no assets or liabilities, the purchase price was determined
essentially to be zero and no goodwill was recognized in the
transaction.
In January 1997, the Company entered into a manufacturing and
marketing license agreement with the Regents of the University
of California as the operator of Lawrence Livermore National
Laboratories ("Lawrence Livermore") under the U. S. Department of
Energy Contract Number W-7405-ENG-48. Under the license the Company
obtained the rights to Lawrence Livermore's patented Capacitive
Deionization Technology (CDT). (That technology is described below.)
As the U. S. Department of
Energy ( "DOE") sponser development of CDT the Company's license
agreement with The Regents of the University of California as the
operator of Lawrenece Livermore is subject to certain rights
held by the United States Government. The United States Governmant
retains a paid-up, royalty-free nontransferable and irrevocable
world wide license. The Company's manufacturing and marketing
license is effective for the life of the patents (up to 17 years),
with most such patents expiring in the year 2010. To maintain
the license the Company must make contracted minimum annual
royalty payments to Lawrence Livermore, in the amount of $25,000
Per year. Although the Company has in the past failed to make the
minimum annual royalty payment when due, the Company has recently
brought its obligations to Lawrence Livermore current and has
made all minimum royalty payments due, including the payment
due on February 28, 2000. The agreement provides that Lawrence
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Livermore can terminate the license agreement in the event that
the Company fails to perform its obligations under the agreement
by giving the Company 60 days notice within which to cure its
obligations under the license agreement. The Company has never
received such a notice from Lawrence Livermore and, as noted above,
has recently made all payments due to date. In the future, as
the Company begins active production of products covered by the
license from Lawrence Livermore, the Company will owe Lawrence
Livermore royalty payments varying from 1 percent of product revenue
to a maximum of 5 percent of product revenue. The variation
is determined by the volume of sales, as well as the use of different
portions of the Lawrence Livermore patents in products which are
the source of the revenues which determine the royalties that
must be paid. Although FarWest is the only non-governmental
licensee for the carbon aerogel technology which is the basis of
the Company's capacitive deionization technology, the license is
non-exclusive in that Lawrence Livermore could license other
entities to use some or all of the technology covered by the
license with the Company.
In March of 1999 the Company's Board of Directors agreed to accept
an offer from Pump Company management to acquire the outstanding
shares of the Pump Company, retroactive to January 1, 1999. The
stock sales agreement was completed in May of 1999 for deferred
payments totaling $270,000 to be paid to the Pump Company for
assuming all existing liabilities, which totalled approximately
$650,000. FarWest, in July 1999, expanded its facilities to
include general administration offices and a pilot manufacturing
facility.
In early January 2000, the Company announced that it had entered
into an investment contact with Asea Brown Boveri, Inc. ("ABB")
with respect to a variety of topics. (That contract is included
as an exhibit to this Form 10-SB.) ABB agreed, pursuant to the
terms of the investment agreement, to purchase from the Company
250,000 shares of the Company's common stock at a purchase
price of $2 per share on or before December 31, 1999. That
purchase was completed and provided resources for the Company's
activities, including the payment of amounts due to Lawrence
Livermore underthe license agreement described above. In addition,
ABB purchased from the Company an additional 250,000 shares of
the Company's common stock at a purchase price of $2 in February
2000. In addition, ABB obtained options to acquire an additional
250,000 shares of FarWest Group common stock at a purchase price
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of $2 per share on each of March 30, 2000 and April 30, 2000.
ABB gave the Company notice in April 2000 that it would not
exercise its equity options; therefore, all future options and
rights in the purchase agreement were forfeited.
The Technology
The Company's capacitive deionization technology, or CDT, uses
deionization to convert a contaminated water supply into a "clean"
water stream and a waste stream. As implemented by the Company, the
technology involves coating pairs of electrodes with a carbon
coating known as carbon aerogel. The carbon aerogel is porous and
has an extremely high ratio of ion collection area to surface
area, due to the structure of the aerogel. In fact, the ion
collection area presented by carbon aerogel is greater than 60,000
times the surface area of the electrode. In the Company's system,
a salt water or impure water stream is passed through an
electrostatic field established between pairs of electrodes coated
with carbon aerogel. The negative electrode attracts positively
charged ions, such as calcium or magnesium, while the positive
electrode attracts negatively charged ions such as chloride or
nitrate. Those ions are pulled out of suspension in the water stream
and held by the electrodes in the carbon aerogel, until either the
power is turned off or the electrode charge is reversed. As a
result, with a relatively low application of energy, the Company's
technology is able to remove a wide variety of contaminants or other
molecules from a water stream through the creation and holding of
charged particles.
FarWest is a development-stage technology company which has completed
development of its first release CDT unit and has commenced in-house
prototype manufacturing and construction of demonstration and pilot
water treatment plants for clients. As discussed above, the Company
obtained a license to develop and manufacture a carbon aerogel
CDT product, covered by Lawrence Livermore Patents, for commercial
use in the desalination, filtration, and purification of water.
The Lawrence Livermore license authorized FarWest to manufacture,
market and enhance the CDT, specifically in the fields of:
Desalination and Brackish Water
Groundwater remediation
Pure water for Boiler Applications
Ultrapure water for manufacturing
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Nuclear Waste remediation
Medical Applications
Bottled water for drinking
The aerogel product licensed from Lawrence Livermore Laboratories
in January 1997 operated at low voltage levels(compatible with solar
energy sources) with resulting favorable operating economics, but
the cost of manufacture with the original technology was too high
to be commercially competitive. Therefore, initial Company efforts
were focused on cost reduction programs. Those programs, aimed at
reducing the manufacturing cost of carbon aerogel, included improve-
ments related to utilizing equally effective but less costly materials
as a base for the carbon aerogel and developing systems which allow
the waste stream to access both sides of carbon aerogel, as opposed
to the single side of carbon aerogel which could be accessed in
the form in which the technology was developed by Lawrence
Livermore. In addition, the Company continues its efforts to
develop proprietary improvements to further reduce the cost of
manufacturing and operation of the CDT system.
Since 1997 with expenditures of over $900,000, FarWest has increased
the cost-effectiveness of the original aerogel product by approx-
imately 15 times. (The Company's expenditures included research
and development spending of $234,000 in 1998 and over $500,000
in 1999.) The Company believes that its current version of the
CDT product is competitive with other water remediation methods,
particularly for brackish water(up to 10,000 parts total dissolved
solids (TDS) per million), in light of its low power and other
operating cost advantages. CDT, as developed by the Company, has
been reviewed by Lawrence Livermore and several large companies
familiar with Reverse Osmosis and other water treatment systems.
Officials from foreign governments such as Jordan and South Africa
have indicated an interest in the Company's technology and the
response from those government officials, as well as the interest
in the technology shown by ABB and other significant companies,
lead the Company to believe that the technology will be competitive.
The Company believes that CDT is the only available economically
viable alternative to Reverse Osmosis, the most widely used system,
for a broad spectrum of large-scale brackish water purification
applications.
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While the basic carbon aerogel patent is controlled and licensed by
the U.S. Government,through Lawrence Livermore, there are a number
of improvements in other materials and processing which have
been developed by, and are proprietary to FarWest, and need not
be licensed back to Lawrence Livermore. The Company believes
that the improvements account for the significant improvement in cost
effectiveness of CDT. It is expected that one or more of these
proprietary improvements will be patented by FarWest and certain
others may be maintained as "trade secrets" to avoid disclosing
them in patent filings. Although to date the company has not
obtained patents on any of its improvements on the base technology
license from Lawrence Livermore, the Company is continuing to
evaluate with its counsel the best policy regarding protection
of intellectual property rights. Those strategies could include
filing patents with regard to certain of the improvements, treating
the improvements and developments as trade secrets or pursuing
other intellectual property strategies for the protection of
the technology developed by the Company from the Lawrence Livermore
technology.
The Business
In 1998 the Company began a marketing effort to bring its carbon
aerogel technology to the attention of the water treatment market.
The Company believes that potential customers for the Company's
CDT technology will initially include government organizations
in developing nations, particularly those in the middle east,
north Africa and Asian Pacific geographic areas where access
to sufficient amounts of potable water is of concern. In addition
to government organizations seeking to insure appropriate water
supplies for their citizens, the Company believes that international
and humanitarian groups will also be interested in pursuing the
Company's technology as a means of providing humanitarian relief
in areas suffering from water shortages. The Company also believes
that potential users of its technology include corporations in
both the United States and other major global markets that require
water purification and filtration. The Company believes that its
technology could have market applications in industries such as
electronic manufacturing, medical manufacturing and multiple
waste water treatment applications. In order to reach its
prospective customers, Farwest expects to concentrate on water
industry seminar presentations, technology papers and technology
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demonstrations to reach its target market. In addition, the
Company plans to expand its outsourcing of Internet resources to
provide additional technical information and provide access to
information about its technology to potential international
customers. The Company's marketing efforts are occurring in the
context of the pervasive world-wide search for water safe to
drink and water suitable for agriculture, industry, and other
applications. CDT is capable of treating a wide range of water
inputs and can provide from a single CDT system a range of outputs,
geared to the ultimate use of purified water, that is, human
consumption, agriculture, or ultra-pure water for industrial and
medicinal use. CDT is thus not confined to a particular niche
in the water treatment industry. The industry as a whole has
become a focus of interest among the sources of international grant
and loan financing due to the belief that a global water crisis
is imminent.
The Company shifted its emphasis in 1999 to bring its prototype
manufacturing capability on-line to satisfy at least the first
two demonstration systems and one pilot plant for which it had
already committed [Arizona Public Service, for industrial water
and solar power use; Carlsbad, Cal., for municipal water; and the
Kingdom ofJordan for municipal water, in final negotiations]. The
Arizona Public Service pilot CDT system is funded by the client.
One-third was paid with the contract, one-third will be paid on
delivery in the second quarter 2000 and the remainder on proof of
operations. The Carlsbad CDT System contract is funded by
FarWest Group. Including installation, the project cost for the CDT
system is approximately $200,000 and is scheduled for June 2000
installation. These two projects are funded by APS payments and
private placement funds. The Company expects to be significantly
dependent on the agreement with the Kingdom of Jordan. Under that
agreement, which is expected to be finalized during the second
quarter, the Company and the Kingdom of Jordan will establish
a pilot plant which will have the capacity to produce up to 100,000
gallons of drinking water per day and will carry an estimated value
of approximately $1,000,000. The drinking water will be processed
from a brackish water input. The pilot plant is to be shipped in
December of 2000 for January installation. If the pilot plant is
successfully operated for 6 to 12 months, the Kingdom of Jordan and
the Company will expand the contract to create a production plant
producing over 20 million gallons of drinking water per day. That
contract will also include the establishment of a joint venture CDT
assembly plant in Jordan. The Company will initially generate
revenue from the sale of the CDT system and from annual service
contracts.
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To manufacture the large quantities of carbon aerogel
expected to be required to meet future industrial demands, beyond
the limited requirements of demonstration and pilot plant
facilities, FarWest must arrange major plant financing perhaps,
in part, against delivery contracts, or as joint venture
operations. The Company is currently exploring strategic
corporate partnerships as well as evaluating suitable out-
sourcing manufacturing partnerships for short-term requirements.
Sales and Marketing
FarWest expects to operate primarily as a supplier of CDT units and
the related electronic control systems to builders of new water
treatment plants or as replacement technology for other water
treatment equipment as it becomes obsolete or too costly to operate
and maintain. The CDT units will represent a substantial part of
the cost of new or renovated water treatment facilities.
The Company does not expect to develop its own capability to act as
prime contractor for engineering, constructing, operating, and owning
treatment plants. It will engineer and construct pilot plants,
and will support the planning, proposing, training, and maintenance
activities of prime contractors who contract to install CDT-based
plants. The Company expects to sell purchasers, both private and
governmental, on the merits of using CDT, either alone or in
conjunction with prime contractors where it has entered into selling
or strategic relationships.
In some countries, FarWest is negotiating with potential partners,
local or international, capable of engineering and executing major
water treatment plant construction and subsequent operation. The
contract with the Kingdom of Jordan includes an initial payment
of approximately $300,000 at contract signing plus progress payments
during the construction of the CDT system.
Discontinued Operations: Well Drilling and Pump Services
FarWest Pump Company was formed to provide drilling and pump services
in Arizona and Western New Mexico. It included an operating
division, Arizona Well Services, which provided wholesale parts
services to FarWest Pump and other clients. In the fourth quarter
of 1998 discussions were initiated with Pump Company management
for the purchase of Pump Company. In March
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1999, the Company's Board of Directors agreed to sell FarWest
Pump to its management team effective January 1, 1999. A
Purchase Agreement was entered into May 24, 1999, whereby the
stock of FarWest Pump was acquired by the Pump Company Management
team for deferred guaranteed payments from the Company of two
hundred seventy thousand ($270,000.00) dollars as consideration
for the assumption of all net liabilities (over $650,000) of the
Pump Company. The Company realized a gain of almost $500,000 from
this transaction (See Note 2 to the financial statements).
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Financial Condition and Results of Operations
The Company has recently completed its development stage operations.
Pilot operations began in the second quarter of 2000. From execution
of the Lawrence Livermore licenses in January 1997 through the current
period, the Company has concentrated its efforts primarily on
improving the cost performance basis of the CDT technology.
During 1997, 1998, and 1999, the Company did not generate revenues
although the pilot contracts were received during the period.
The Company currently is negotiating additional pilot contracts
and alliances; however, revenue recognition will not occur prior
to the third quarter 2000.
The Company was funded initially through the merger of the Pump
Co. and investment by the major shareholder. Since 1998 funding
has been through private placements, which totaled approximately
$2,000,000. Private placement opportunities combined with management
funding are expected to continue in 2000. Equity financing will
be required to provide the operating capital required by the
Company until the Company begins to receive funding from the Kingdom
of Jordan pursuant to the contract with that country. In addition,
the Company has discussed with its auditors the status of the Company
necessary to eliminate the going concern opinion included with
respect to the financial statements included in this Form 10. The
Company's auditor continues to express concern over the going concern
status of the Company. Until sufficient equity investment or projected
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revenues are generated this condition will remain in effect.
Operations for the Next Twelve Months
Business opportunities for the next twelve months include inter-
national CDT systems sales to governments and major multi-national
industrial corporations and additional U.S. pilot sales. All
future pilot sales being discussed will generate product revenue
and gross profit. Several opportunities are now being discussed
including: governments, humanitarian trust funds, industrial joint
ventures, market sectors, and geographic distribution agreements.
The Company is engaged in a variety of pilot plants activities.
Those activities can be categorized into two sectors: In the first;
the pilot plant is manufactured and installed at Company expense
to continue the development of the Company's CDT technology and to
prove the concept for which a larger production plant might be
established. A second type of pilot program is to produce revenue
and achieve contracts for larger production CDT systems, to be built
in the future. Pilot contracts usually last from 3 to 12 months.
Some contracts, such as the pilot program with the Kingdom of Jordan
described above, will generate revenue for the Company. The Company
does not expect to require funds beyond equity investments being
negotiated and payments to be made by the Kingdom of Jordan under
its contract in order to complete the other pilot programs
referenced in this Form 10-SB.
The Company recognizes the financial investment required to support
the potential business opportunities which are being discussed.
There is no guarantee that the Company can obtain the funding
necessary to develop the manufacturing and engineering infrastructure
to complete the potential CDT orders. The Company is currently
discussing financing options which include:
-Equity investment with application marketing rights with a
Japanese multi-national corporation.
-Corporate Partnership for Manufacturing which could be
expanded to include marketing services;
-Joint ventures with an international investment group; and
-European government-sponsored program.
In addition, a religious humanitarian fund is evaluating equity
investment in the Company and CDT installation opportunities in the
Mid-East. Management believes that there is a probability of
obtaining the required financing for the next twelve months through
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one of the above. However, there is no assurance that such funding
will be obtained in the time cycle required to support ongoing
Company operations.
Limited Operating History
The Company, although having completed its development stage, has
had a limited operating history upon which an evaluation of
its future performance and prospects could be made. The Company's
prospects must be considered in light of the risks, expenses, delays,
problems, and difficulties frequently encountered in the establish-
ment of a new business in an emerging and evolving industry. Since
inception, the Company has generated no revenues and has incurred
operating losses resulting in a working capital deficit. Inasmuch
as the Company will have an increasing level of operating expenses
and will be required to make significant up-front expenditures in
connection with the proposed development of its business, the
Company anticipates that losses will continue for at least the next
twelve months or until such time as the Company is able to generate
sufficient revenues to finance its operations and the costs of
continuing expansion. There can be no assurance that the Company
will be able to generate significant revenues or achieve profitable
operations. In addition to the efforts described above, the
Company will engage in a variety of research and development
activities during the next 12 months. The Company will continue
to seek to improve the price performance and efficiency of the
carbon aerogel. In addition, the Company will concentrate on
increasing the efficiency of power utilization and power recapture,
as well as to automate manufacturing and increase the ability
to monitor and control its pilot systems through the internet.
Need for Additional Financing
The Company is dependent upon the proceeds of private placements
of the Company's securities to implement its business plan and to
finance its working capital requirements. There are no plans to
do any type of public offering of the Company's securities.
Should the Company's plans or its assumptions change or prove to
be inaccurate or offering proceeds be insufficient to fund the
Company's operations, the Company would be required to seek
additional financing sooner than anticipated. Management is
confident it will be able to continue obtaining equity investment
principally through private placements such as pursuant to the
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Agreement with ABB.
There can be no assurances given that the Company will be successful
in generating sufficient revenues from its planned activities
or in raising sufficient capital to allow it to continue as a going
concern, which contemplates increased operating expenses,
acquisition of assets and the disposition of liabilities in the
normal course of business. These factors can affect the ability
of the Company to implement its general business plan including
the completion of the required manufacturing facilities and cont-
inued proprietary CDT product improvements.
As disclosed in Item 1, the Company recently expanded its facility
and is now engaged in preliminary discussions for the development
of a new facility at Lawrence Livermore in which the Company's
operations would be housed. Final decisions regarding any such
future activity will be dependent on the Company's ability to
negotiate a transition to a new facility which does not require
significant capital investment by the Company, but instead involves
only monthly lease payments in a range acceptable to the
Company. As a result, the Company's activities with regard to
possible expansion of its physical facilities are not expected to
have a significant adverse effect on the Company's budget or
working capital.
As disclosed elsewhere herein, full utilization of the Company's
CDT technology will require the establishment of a carbon aerogel
production facility, to produce the CDT systems incorporating the
aerogel technology and the capacitive deionization technology.
The Company believes that a production facility will have an
initial cost of approximately $5 million. Although the Company
has no commitments with any party to provide such funding, the
funding of such a facility is being discussed with both organiza-
tions skilled in the establishment of manufacturing facilities
and financial parties considering additional investment or joint
ventures.
Technology
Capacitive Deionization Technology which was licensed from Lawrence
Livermore has been and remains the foundation of the Company's
future. The Company has concentrated its efforts on
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adding proprietary enhancements to CDT to provide insulation from
not only other technologies but as protection if Lawrence
Livermore decided to consider other licensees. Any other licensee
would have to license Lawrence Livermore's 1996 CDT Technology
and avoid FarWest's proprietary rights and trade secrets to enter
the market. FarWest has discussed the possibility of obtaining
an exclusive license from Lawrence Livermore; however, there is
no guarantee even if the Company has financing which creates a
strong balance sheet that continuing negotiations with Lawrence
Livermore will result in any exclusive arrangement with respect
to the CDT technology.
Other Business Matters
Government Approvals and Regulations. The Company is aware that
complying with governmental regulations, particular approvals
required from the Environmental Protection Agency with respect to
emission controls will be required at any aerogel manufacturing
facility established by the Company. The Company will adopt
policies and procedures to ensure compliance with the EPA's
requirements as part of the establishment of any such manufacturing
facility. As the Company is aware that compliance with such
environmental regulations will impose material cost and
administration burdens on the Company. The Company will not proceed
with the development of any manufacturing facility unless it has
the financial and personnel resources to assure compliance with
federal, state and local laws intended to protect the ervironment.
Year 2000. The Company did not experience any year 2000 problems
and has confirmed that status by reviewing and testing its computer
systems after January 1, 2000. None of the third parties with
which the Company engages in business have experienced any year
2000 problems that, to the best of the Company's knowledge, had
any effect on the Company itself.
Reporting Comprehensive Income. Statement of Financial Accounting
Standards No. 130 establishes standards for reporting and display
of comprehensive income, its components, and accumulated balances.
Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions
to owners. The company will be required to show its pension
liability adjustments and foreign currency translation adjustments
in comprehensive income.
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Accounting for Post-Retirement Benefits. The Company provides no
post-retirement benefits; therefore, FASB No.106 will have no
impact on the Company's financial position or operations.
Inflation. The Company does not expect the current rate of
inflation to have any effect on its operations in the foreseeable
future.
Information regarding and factors affecting forward-looking state-
ments. Forward-looking statements include statements concerning
plans, objectives, goals, strategies, future events or performances
and underlying assumption, and other statements which are other
than statements of historical facts. Certain statements contained
herein are forward-looking statements and, accordingly, involve
risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in the forward-
looking statements. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitations,
management's examination of historical operating trends, data
contained in the Company's records and other data available from
third parties, but there can be no assurance that management's
expectations, beliefs, or projections will result, or be achieved,
or accomplished.
Item 3. Properties
The Company maintains administrative offices at 1665 East 18th
Street, Suite 113, Tucson, Arizona 85719. There is approximately
1,500 square feet of administrative space. At the same location
the Company has completed a prototype system assembly facility of
approximately 3,000 square feet. This is leased space which offers
expansion capability as needed.
The Company is in discussions with an investment group in
California to build a Research and Development Center which
would be adjacent to Lawrence Livermore and be operational within
the next year. The Corporate Headquarters may also be relocated
to this Livermore, California location. However, at this time
the Company has no definitive agreements for any additional
or different facilities and will pursue any such arrangements
only if financial resources are available.
Item 4. Security Ownership of Certain Beneficial Owners and
Management
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Item 5 sets forth the number of shares of common stock of holders
of the Company known to the Company and to beneficial owners
of more than five (5%) percent of its Common Stock at March 31,
2000.
Item 5. Directors and Officers of Registrant
(a)As of December 31, 1999 and March 31, 2000, the following persons
served as directors of the Registrant.
Shares % of out-
Beneficially standing
Name and Age Position Since Owned Stock
Clark Vaught (49) Chairman of 1996 2,685,000 32.89%
The Board(2)
and CEO
Dallas Talley (66) President 1998 616,373 7.55%
Financial Officer(3)
and Director
Chris Sheppard (42) Vice President 1997 430,000 5.27%
Director(4)
Thomas Friezen (41) Director 1996 262,000 3.21%
Dr. Nicholas Yensen (53) Director 1997 130,000 1.59%
All Officers and Directors as a Group 4,123,373 50.51%
(as of March 31, 2000)
Beneficial owner:
ABB, Inc. Owner 2000 500,000 6.12%
All officers, directors and beneficial owner
as a group (March 31, 2000) 4,623,373 56.63%
1. Except as noted, all shares benefically owned by each person
as of March 31, 2000.
2. Includes 10,000 shares jointly owned with Ms. Channa Crews,
Mr. Vaught's wife.
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3. Includes 13,400 shares held by Ms. Sherry Talley, Mr.
Talley's wife.
4. Includes 5,000 shares held by Mr. Sheppard's wife.
No officer or director listed in the foregoing table has any options,
warrants, conversion rights or privileges to acquire additional
shares which are exercisable during the sixty days after the date
hereof.
(b) Executive Officers
The executive officers of Registrant are identified in subpart (a)
above.
Management
The FarWest Management team has extensive experience in the
establishment and management of entrepreneurial and publicly-
held technology companies.
Clark Vaught, Chairman, CEO, and principal shareholder, founded
FarWest Pump and developed it into today's FarWest Group. His
background with Westinghouse Hanford Systems aptly prepares him
for the technology driven CDT market. Management experience includes
large aquifer development projects; water management for White
Sands Missile Range, and several Arizona City programs.
Dallas Talley, President, also currently serving as Financial
Officer, has over twenty years of high tech senior executive
experience. He has been CEO of Qantel Business Computers,
a New York Stock Exchange listed company, and of two NASDAQ
technology companies. He has also been a founder/director
of several emerging companies, was executive partner in an Inter-
national Technology Marketing and Licensing partnership and
served as a director of the American Electronics Association and
as Chairman of its Silicon Valley Chapter.
Chris Sheppard, Vice President, has had management experience in
several high technology fields. This includes the "Star Wars"
SDI program where he consulted for Lockheed and Martin Marietta.
He has been employed at Lawrence Livermore National Laboratories
and other National Laboratories. His background also includes
experience as Chief Mechanical Engineer for Kaman Aerospace.
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At December 31, 1999, the Company employed six people full time and
six consultants on a part-time basis.
The future success of the Company depends to a significant extent
upon certain senior management, technical personnel, and development
personnel. The Company also believes that its future success will
depend in large part on its ability to hire and retain highly
skilled technical, managerial, and marketing personnel, as well as
to attract and retain replacements for or additions to such personnel
in the future. Demand for new, specially trained and experienced
personnel has increased worldwide. The loss of certain key
employees or the Company's inability to attract and retain other
qualified employees could have a material adverse effect on the
Company's business. In order to reduce this risk to the Company,
the Company's legal counsel has recently prepared employment
contracts for Mr. Vaught, Mr. Talley and Mr. Sheppard. Each of
those agreements has a two year term, effective on January 1, 2000
and ending on December 31, 2001. However, each agreement is
automatically extended by an additional year upon each
anniversary of the agreement. The contracts will be submitted
to the Board of Directors for approval at the May 2000 meeting.
The Company's Board of Directors will evaluate the need for the
Company to enter into future employment agreements with other
employees.
Board of Directors.
The Company's Board of Directors currently consists of five (5)
members. The Company's By-laws permit the Board of Directors to
consist of any number of members greater than two (2), as determined
by the then-current Board of Directors.
Employees who serve on the FarWest Board of Directors include Mr.
Vaught, Mr. Talley, and Mr. Sheppard, who are identified above
in "Management". Other Directors are:
Tom Friezen (41) is CFO of a $150 million Food Processing
Cooperative. He manages the financial operations and oversees the
legal activities of that company.
Dr. Nick Yensen(53) has served as a director and consultant to
the company. Dr. Yensen is a recognized expert in saltwater
technology. He is president of NyPa International, with
subsidiaries and projects throughout the world.
18
<PAGE>
The Company does not have a nominating committee of the Board
of Directors. The by-laws of the Company provide that the Board of
Directors may set the number of directors, provided that such
number must be at least two. The Board of Directors has adopted
a resolution indicating that the Board of Directors of the Company
is to consist of seven (7) members. At the current time,there are
two (2) vacancies on the Board and Dr. Nicholas Yensen has not been
nominated for re-election. Mr. Vaught, Mr. Talley, Mr.Shepperd and
Mr. Friezen have been nominated for re-election to the Board of
Directors at the annual meeting to be held on May 23, 2000. As
a result, if the nominees presented by the Board of Directors in
the Company's proxy statement dated April 29, 2000 are elected at
the annual meeting, there will be three vacancies on the Board of
Directors. Under the Company's by-laws, these vacancies may be
filled by the vote of then current members of the Board of Directors,
with the directors so elected to stand for election at the Company's
next annual meeting. The Company is evaluating qualified individuals
to serve as "outside" (non-employee ) members of the Board of
Directors.
Item 6. Executive Compensation
Summary Compensation Table
Annual Other
Name and Principal Compensation non-cash
Position Year Salary Compensation2 Total
Clark Vaught 1999 $37,500 $105,000 $142,500
Dallas Talley 1999 $37,500 $105,000 $142,500
Chris Sheppard 1999 $37,50 $ 37,625 $ 75,125
Clark Vaught 1998 $96,000 $ - $ 96,000
Dallas Talley 1998 $72,000 $ - $ 72,000
Chris Sheppard 1998 $72,000 $ - $ 72,000
Clark Vaught 1997 $72,000 $ - $ 72,000
Dallas Talley1 1997 $ - $ - $ -
Chris Sheppard 1997 $60,000 $ - $ 60,000
Clark Vaught - Chairman of the Board, Chief Executive Officer.
Dallas Talley - President, Financial Officer, and Director.
Chris Sheppard - Vice President Development and Director.
1 Mr. Talley joined the Company in March 1998.
19
<PAGE>
2 Represents the issuance of Common Stock in satisfaction of
accrued, unpaid salary.
There are currently no Long-Term Compensation programs in effect
for officers or directors.
1998-1999 Stock Option Grants
NONE
The Company does not provide cash compensation for the members of
the Company's Board of Directors, in their roles as directors.
(Directors who are employees receive the compensation described
above for their services as employees of the Company.) However,
each director is reimbursed for direct expenses incurred due to
service on the Board of Directors. Each director who is
not an employee also is granted an option to acquire 100,000
shares of the Company's Common Stock, for three years service on
the Board of Directors. One third of the options granted to
each "outside" director are vested on the date of grant and one
third on each of the next two anniversaries of the date they
joined the Board of Directors. Currently the outside directors
are totally vested; outside Directors elected at the annual
shareholders meeting will receive options as described above.
Item 7. Certain Relationships and Related Transactions.
Pump Company Management, which includes Channa Crewes (Mr. Clark
Vaught's wife), Joel Rodriques, Chris Wortman and Brian Vaught(Mr.
Clark Vaught's brother), approached the Company's Board of Directors
to acquire the Pump Company in late 1998. The Company's Board
of Directors, at its March 1999 meeting, approved the sale of the
Pump Company to the Pump Company's management team effective as of
January 1, 1999. As discussed in Item 6, to induce the Pump Company
management to assume Pump Company's net liabilities of approximately,
$650,000, FarWest agreed to pay deferred payments of $70,000.
In addition, the Company had an account payable of 207,000 to Mr.
Clark Vaught, the Company's chairman which Mr. Vaught agreed to
assign to the Pump Company. As of January 31, 2000 the Company
has paid to the Pump Company $200,000. In addition, $70,000 will
be paid to the Pump Company upon an additional significant equity
investments.
The only investments within the past two years (1998 and 1999)
involving management were the payment of accrued salaries
20
<PAGE>
through the issuance of restricted common stock. Mr. Vaught and
Mr. Talley each converted $105,000 of salaries accrued during the
last two years to stock as indicated in Item 6. No other
director, officer, or beneficial owner of over 5 percent of a
class stock had involvement in any transaction exceeding $60,000.
Item 8. Description of Securities
(a)Common Stock
The Company is authorized to issue 80,000,000 shares of Common
Stock with a par value of $0.001 per share. As of March 31, 2000,
here were 8,163,532 shares of Common Stock outstanding on a fully
diluted basis, including options and warrants to purchase 910,000
shares of Common stock at prices from $0.50 to $2.00 per share.
The holders of Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of
stockholders. There is no cumulative voting for election of
directors. Subject to the prior rights of any series of Preferred
Stock, which may from time to time be outstanding in the future, the
holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of
funds legally available therefor, and, upon the l iquidation,
dissolution or winding up of the Company, are entitled to
share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation preference on
the Preferred Stock, if any. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common
Stock into any other securities.
(b)Preferred Stock
The Company is authorized to issue up to 20,000,000 shares of
Preferred Stock with a par value of $0.01 per share. The Preferred
Stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the Board of Directors,
without further action by stockholders, and may include voting
rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion,
redemption rights, and sinking fund provisions.
PART II
Item 1. Market for Registrant's Common Stock and Related
21
<PAGE>
Stockholder Matters
(a)Stock Prices and Dividend Information
The Common Shares of the Company traded on the NASDAQ Over-the-
Counter market under the trading symbol "FWST" from July 1996 through
December 2, 1999, at which time the Company's shares were removed
from the NASDAQ Over-the-Counter system and began to trade in the
"pink sheets." Broker-Dealers are not able to market the Company's
securities under Rule 15g-1 to 9; however, the Broker-Dealers
may buy or sell shares when directed by their clients pursuant to
Rule 15g. Upon final compliance by the Company, Broker-Dealers
will have current financial information and will be able to buy
and sell the securities of the Company in accordance with
SEC regulations for financial reporting OTC-BB companies.
The following NASDAQ supplied table sets forth for the period
indicated the high and low bid prices during the period prior to
December 2, 1999. The quotations below reflect inter-dealer prices,
without retail markup, markdown or commission and may not
represent actual transactions. For current price information, FWST
shareholders are encouraged to consult publicly available sources.
1999 High Low
First Quarter 1 1/8 1/4
Second Quarter 5 1/4 2 1/32
Third Quarter 3 1/8 1 1/2
1998
First Quarter 1 1/4 5/16
Second Quarter 3/4 5/16
Third Quarter 3/4 1/2
Fourth Quarter 9/16 1/4
1997
First Quarter 1 3/8 1/8
Second Quarter 1/2 1/4
Third Quarter 1 1/4
Fourth Quarter 1 3/16 1/4
At March 31, 2000, the Company had 8,163,532 Common Shares
outstanding on a fully diluted basis and had approximately three
hundred and fifty (350) shareholders of record.
22
<PAGE>
The Company has no fixed dividend policy. The Board of Directors
from time to time having regard to operating results, capital
requirements and general financial condition and requirements may
consider dividend distributions. The Company has paid no dividends
at any time. For the foreseeable future, it is anticipated that
the Company will use all available cash flows to finance its growth
and that dividends will not be paid to shareholders.
(b)Reports to Security Holders
Prior to the filing of this Form 10, the Company has not been
obligated to file quarterly or annual reports with the SEC. The
Company will now become obligated to file those reports with
the SEC. The public may read and copy any material files with
the SEC at the SEC's Public Relations Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and/or obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the Company has become an
electronic filer and as such, all items filed by the Company with
the SEC which contain reports, information statements, and other
information regarding issuers that file electronically with the
SEC, will be available at the SEC's website. That site is
available at http://www.sec.gov. The Company also maintains an
Internet site which contains information about the Company. The
site is available at http//www.farwestgroup.com.
Item 2. Legal Proceedings
Three former employees of the Company or its former subsidiary, the
Pump Company, have filed a lawsuit alleging that the Company failed
to pay them certain wages or provided them with certain stock options.
Pump Company has also entered the lawsuit and asserted various claims
against the three former employees and their current employer,
including conversion, civil conspiracy, wrongful interference with
contractual relationships, and violation of trade secrets. The
former employees seek to recover approximately $250,000 in future
wages and, in the aggregate, have asked to be awarded stock options
permitting the purchase of up to 630,000 shares of stock of the
Company at $.25 per share. The employees have also requested that
any damages awarded be trebled under Arizona law applicable to the
failure of an employer to pay wages. The Company is contesting this
matter vigorously. The Company does not believe that there is
validity to the claims; however, should the Company be required to
pay damages as a result of the litigation, the payments of such
damages may have an adverse effect upon its financial condition.
23
<PAGE>
Item 3. Changes in and Disagreements with Accountants
There have been no disagreements on accounting and financial
disclosures from the inception of the Company through to the date
of this Registration Statement.
On November 1, 1997, the Company's shareholders approved the
appointment of Jackson & Rhodes P.C. as the Company's auditors
for the periods ending December 31, 1997, December 31, 1998, and
December 31, 1999. The Company's audited financial statements
for the period ending December 31, 1997 and December 31, 1998
and the unaudited financial statement for the period September 30,
1999 are a part of this Registration Statement. The statements
for the years ending December 31, 1998 and 1997 were audited by
Jackson & Rhodes, as indicated in their report with respect hereto,
and are included in reliance upon the authority of said firm as
experts in giving said report.
Item 4. Recent Sales of Unregistered Securities
In March of 1999, the Company issued 1,643,000 shares to a group
including directors, officers, employees, consultants, and service
providers as compensation for services previously furnished the
Company. These shares, which have a two year restriction, were
issued at a rate of $0.25 per share bid based on the average bid
price of the common stock at the date of authorization. The shares
were issued in reliance upon Section 4(2) of the Securities Act of
1933.
In April 1999, the Company issued 626,500 shares of Common Stock
of the Company to a group of investors under Rule 504 of Regulation
D as additional capital for the Company. The Company received
$283,250 for those shares. The market price of the company
shares of the Company when this private placement was subscribed
ranged from $0.25 to $0.75 during the months of March and April
1999, prior to the transaction. The pricing of the placement
$0.32 to $0.50) was determined with reference to the mid-
range of prices during the prior month with a discount to
reflect the restrictive nature of these securities.
In 1998, the Company issued a convertible promissory note to
Electric & Gas Technology, Inc. The promissory note provided for
a loan of $375,000 and was issued in reliance of the exemption
24
<PAGE>
contained in section 4(2) of the Securities Act of 1933. Under
that note the Company borrowed a total of $226,666; the note
provided that both the principal amount and the accrued interest
could be converted into shares of the Company's common stock at
a price of $.50 per share.
In September, 1999, the Company issued warrants for the purchase
of 410,000 shares of its Common Stock, with exercise prices from
$0.50 to $1.70 per share and expiring in 2002. The warrants were
issued in settlement of a dispute with a party which had sought
to obtain financing for the Company and for legal service. The
warrants were issued in reliance upon the exemption found in
Section 4(2) of the Securities Act of 1933.
As discussed in Item I, in December 1999 and Febraury 2000 the
Company sold a total of 500,000 shares of its common stock to ABB,
Inc. for an aggragate consideration of $1,000,000. That transaction
was completed in reliance of the exemption in section 4(2) of the
Securities Act of 1933.
Item 5. Indemnification of Directors and Officers
The Bylaws of the Company and the statutes of the State of Nevada
give the Company the power to indemnify any director, officer,
manager, employee or agent, who was or is a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, against certain
liabilities and expenses incurred in connection with the action,
suit or proceeding. The Bylaws of the Company provide that
the Company shall indemnify any such directors, officers, managers,
employees or agents to the full extent provided under applicable
provisions of the Nevada Statutes. These provisions do not affect
the availability of equitable remedies, such as an action to enjoin
or rescind a transaction involving a breach of fiduciary duty,
although, as a practical matter, equitable relief may not be
available. In the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended. As a result,
the above provisions may not limit liability of the directors for
violations of, or relieve them from the necessity of complying
with, the federal securities laws.
PART III
25
<PAGE>
Item 1. Index to Exhibits
The Company attaches the following material exhibits to this
Registration Statement.
1.Financial Statements
Consolidated financial statements of FarWest Group, Inc.
Page
(a)Report of Independent Certified Accountants. 29
(b)Consolidated Balance Sheets for the years
ended December 31,1997 and December 31, 1998
and the nine months ended September 30, 1998
and September 30, 1999. 30
(c)Consolidated Statements of Operations for
the years ended December 31, 1997 and
December 31, 1998 and the nine months ended
September 30, 1998 and September 30, 1999. 31
(d)Consolidated Statements of Changes in
Stockholders' Equity for the two years ended
December 31, 1997 and December 31, 1998 and
the nine months ended September 30, 1998. 32
(e)Consolidated Statements of Cash Flows for
the years ended December 31, 1997 and
December 31, 1998 and the nine months ended
September 30, 1998 and September 30, 1999. 33
(f)Notes to the Consolidated Financial
Statements 34-46
2.Exhibits
Regulation S-K
Designated Number
(a)*The Articles of Merger of Pro Vantage, Inc. into
FarWest Group, Inc. dated July 2, 1996 (filed as
Exhibit 2.1 to Registration Statement form 10SB dated
November 22, 1999, Registrant No. CIK
#0001098584 and incorporated herein by reference). (2)
(b)*Agreement and Certified Board Resolution of Board of
Directors of Provantage, Inc. (filed as exhibit 2.2 to
26
<PAGE>
Registration statement form 10SB dated November 22, 1999,
Registrant No. CIK #0001098584 and incorporated herein
by reference). (2)
(c)*Stock Purchase Agreement (REVISED) between FarWest
Group, Inc. and New Pumpco dated May 24, 1999 for the
acquisition of 100% of FarWest Pump Co. effective
January 1, 1999.(filed as Exhibit 2.3 and 2.1 to
Registration Statement form 10SB dated November 22, 1999
and February 14, 2000, Registrant No. CIK #0001098584
and incorporated herein by reference). (2)
(d)*Specimen Copy of Common Stock Certificate
(filed as Exhibit 2.3 Registration Statement form 10SB
dated November 22, 1999, Registrant No. CIK 0001098584
and incorporated herein by reference). (2)
(e)*Articles of Incorporation of Registration
(filed as Exhibit 3.(I) Registration Statement form
10SB dated November 22, 1999 Registrant No. CIK
#0001098584 and incorporated herein by reference). (3)(i)
(f)*By-laws of Registrant (filed as Exhibit 3.(II)
Registration Statement form 10SB dated November 22,
1999, Registrant No. CIK #0001098584 and incorporated
herein by reference). (3)(ii)
(g)*Option and Warrant Agreements and Text of Warrant
(filed as Exhibit 10.2 to Registration Statement
on Form 10SB dated November 22, 1999, Registration CIK
#0001098584 and incorporated herein by reference). (10)
(h)*Lawrence Livermore License Agreement.(filed as
Exhibit 10.1 Registration Statement form 10SB dated November
22, 999, Registrant No. CIK #0001098584 and incorporated
herein by reference).
(i)*Investment Agreement between FarWest Group, Inc. and
Asea Brown Boveri, Inc. dated December 29, 1999. (filed as
Exhibit 10.3 to Registration Statement form 10SB dated
February 14,2000, Registrant No. CIK #0001098584 and
incorporated herein by reference). (10)
27
<PAGE>
(j) Article of Merger of T.A. Corp into Far West Pump
Company. (10.4)
(k) Letter from "The Royal Hasemite Court, The Ecomonic
Department" dated November 21, 1999. (10.5)
(l) Letter from "The Hashemite Kingdom of Jordan, Ministry
of Water & Irrigation" dated March 3, 2000. (10.6)
*Previously filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
By: [s] Dallas Talley
Dallas Talley, President
and Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of Registrant and in the capacity and on the date
set forth following their name.
Signature Capacity Date
[s] Clark Vaught Chairman and CEO May 11, 2000
Clark Vaught
[s] Dallas Talley President and Financial
Dallas Talley Officer May 11, 2000
[s] Chris Sheppard Vice President May 11, 2000
Chris Sheppard
[s] Tom Friezen Director May 11, 2000
Tom Friezen
[s] Nicholas Yensen Director May 11, 2000
Nicholas Yensen
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
FarWest Group, Inc.
We have audited the accompanying consolidated balance sheets of
FarWest Group, Inc. and subsidiary as of December 31, 1998 and
1997, and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for the years then
ended. These consolidated financial statements are the
responsibility of the Company s management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of FarWest Group, Inc. as of December 31, 1998
and 1997, and the results of their operations and their cash
flows for the years 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 1 to the financial statements, the Company's significant
operating losses and its working capital deficit and stockholders
deficit raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
As explained in Note 10, subsequent to September 30, 1999, the
Company discovered certain errors in the 1998 financial
statements. The 1998 financial statements have been restated to
reflect this restatement.
Jackson & Rhodes P.C.
Dallas, Texas
April 12, 2000
29
<PAGE>
FARWEST GROUP, INC.
BALANCE SHEETS
Assets
(Unaudited)
September 30, December 31,
1999 1998 1997
Current assets: (Restated) (Restated)
Cash $ 30,199 $ - $ 3,211
Accounts receivable - 28,704 3,143
Total current assets 30,199 28,704 6,354
Furniture and equipment 5,435 2,952 2,952
Less accumulated depreciation (3,218) (1,968) (984)
2,217 984 1,968
Total Assets $ 32,416 $ 29,688 $ 8,322
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued
liabilities $ 406,917 $691,484 $ 137,000
Accounts payable to shareholder
(Note 3) 207,059 127,809 32,448
Net liabilities of discontinued
operations (Note 2 658,401 1,439,368 581,928
Total current liabilities 1,272,377 1,345,843 751,376
Convertible debt (Note 5) 100,000 200,000 100,000
Commitments and contingencies
(Note 6) - - -
Stockholders' equity:
Preferred stock, $.0001 par value,
20,000,000 shares authorized;
60,000 issued and outstanding
at September 30, 1999 and
December 31, 1998 6 6 -
Common stock, $.0001 par value,
80,000,000 shares authorized;
6,114,912, 3,591,480 and
3,191,480 shares issued and
outstanding 611 359 319
Additional paid-in capital 2,350,690 699,525 527,289
Accumulated deficit (3,691,268)(2,309,570)(1,370,662)
Total stockholders' equity(deficit) (1,339,961)(1,609,680) (843,054)
Total Liabilities and Stockholders' Equity $ 32,416 $ 29,688 $ 8,322
See accompanying notes to financial statements.
30
<PAGE>
FARWEST GROUP, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended Years
September 30, Ended December 31,
1999 1998 1998 1997
(Restated) (Restated) (Restated)
Revenues $ - $ - $ - $ -
Operatng expenses:
Common stock and options
issued for services 929,750 163,669 218,225 227,500
General and administrative 432,520 447,645 353,483 245,114
1,362,270 611,314 571,708 472,614
Loss from operations (1,362,270) (611,314) (571,708) (472,614)
Other income (expense):
Interest expense (3,500) (51,512) (56,539) (7,000)
Total other expense (3,500) (51,512) (56,539) (7,000)
Loss from continuing
operations (1,365,770) (662,826) (628,247) (479,614)
Discontinued operations (Note 2):
Loss from discontinued
operations (15,928) (240,051) (310,661) (347,491)
Net loss $(1,381,698) $(902,877) $(938,908) $(827,105)
Loss per common share:
From continuing
operations $(0.25) $(0.20) $(0.18) $(0.33)
Net loss $(0.25) $(0.27) $(0.28) $(0.58)
Weighted average common
shares outstanding 5,502,316 3,347,036 3,408,147 1,433,147
See accompanying notes to financial statements.
31
<PAGE>
FARWEST GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997 and the Nine Months
Ended September 30, 1999 (Unaudited
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Additional
Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
Balance, December 31, 1996 - $ - 1,081,480 $108 $ - $ (543,557) $ (543,449)
Common shares issued for services - - 910,000 91 227,409 - 227,500
Common shares issued for accounts
payable to shareholder - - 1,200,000 120 299,880 - 300,000
Net loss - - - - - (827,105) (827,105)
Balance, December 31, 1997 - - 3,191,480 319 527,289 (1,370,662) (843,054)
Shares issued for cash 60,000 6 400,000 40 172,236 - 172,282
Net loss - - - - - (938,908) (938,908)
Balance, December 31, 1998 60,000 6 3,591,480 359 699,525 (2,309,570) (1,609,680)
Shares issued for cash - - 626,500 63 283,188 - 283,251
Shares issued to convert debt - - 253,332 25 126,641 - 126,666
Shares issued for services
rendered
1998 - - 1,247,000 125 311,625 - 311,750
1999 - - 396,600 40 99,110 - 99,150
Stock options issued as
compensation - - - - 830,600 - 830,600
Net loss - - - - - (1,326,953) (1,326,953)
Balance, September 30, 1999
(unaudited) 60,000 $ 6 6,114,912 $611 $2,350,690 $(3,691,268) $(1,339,961)
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
FARWEST GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C> <C>
(Unaudited)
Nine Months Ended
September 30, Years Ended December 31,
1999 1998 1998 1997
(Restated) (Restated) (Restated)
Cash flows from operating activities:
Net loss $(1,381,698) $(902,877) $(938,908) $(827,105)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 1,250 494 984 984
Shares issued for services 99,150 - - 227,500
Stock options issued as compensation 830,600 - - -
Changes in operating assets and liabilities:
Accounts receivable 3,704 (1,857) (25,561) (2,574)
Accounts payable and accrued liabilities 53,849 489,979 460,959 62,000
Net assets of discontinued operations 38,326 (67,026) 38,147 430,079
Net cash used in operating activities (329,819) (411,143) (370,854) (109,116)
Cash flows from investing activities:
Purchase of furniture and equipment (2,483) - - (2,952)
Cash flows from financing activities:
Net advances from shareholder (Note 3) 79,250 135,650 95,361 15,279
Sale of common and preferred shares 283,251 172,282 172,282 -
Proceeds from convertible debt - 100,000 100,000 100,000
Net cash provided by financing activities 362,501 407,932 367,643 115,279
Net increase (decrease) in cash and cash
equivalents 30,199 (3,211) (3,211) 3,211
Cash at beginning of year - 3,211 3,211 -
Cash at end of year $30,199 $ - $ - $ 3,211
Supplemental disclosure:
Total interest paid $ - $ - $ - $ -
</TABLE>
Non-cash transactions:
During 1997, the Company issued 1,200,000 common shares for
$300,000 in accounts payable to a shareholder.
During 1999, the Company issued 1,643,600 common shares for
services rendered in 1999 and 1998, of which $311,750 had been accrued
in 1998.
During 1999, the Company issued 253,332 common shares to convert
$100,000 in convertible debt and $26,666 in accrued interest.
See accompanying notes to financial statements.
33
<PAGE>
1. Summary of Significant Accounting Policies
Description of Business
FarWest Group, Inc. (the "Company" or "FarWest") was organized under
the laws of the state of Nevada in July 1996 to serve as a water
technology company dedicated to advanced water filtration and
purification. In July 1996 the Company transacted a triangular
merger with Pro Vantage Corporation ("Pro Vantage"), an inactive
public company which had been incorporated in the state of Florida
in 1992. Pro Vantage's name was changed to FarWest Group, Inc.
Concurrently, the FarWest Pump Company ("Pump Company"), an Arizona
Corporation, became a wholly owned subsidiary of the Company.
The transaction with Pro Vantage was accounted for as a "reverse
acquisition" whereby FarWest acquired Pro Vantage in a
transaction accounted for as a purchase. The purchase price has
been determined based on the fair value of the Pro Vantage's net
assets at the date of acquisition. Because Pro Vantage was
inactive and had no assets or liabilities, the purchase price was
determined essentially to be zero and no goodwill was recognized in
the transaction.
In January 1997 the Company entered into a manufacturing and marketing
license agreement with Lawrence Livermore National Laboratories
(Lawrence Livermore) whereby the Company obtained the rights to
Lawrence Livermore's patented Capacitive Deionization Technology
(CDT). The company has the rights to develop and manufacture a carbon
aerogel CDT product for commercial use in the desalination,
filtration and purification of water. The manufacturing and
marketing license is effective for the life of the patents (up to
17 years). To maintain the license the Company must make contracted
annual royalty payments to Lawrence Livermore beginning with $30,000
per year, then becoming a percentage of revenue. The Company was in
arrears on its royalty payments to Lawrence Livermore as of September
30, 1999, but has become current on its payments subsequently. The
Company has completed development of its first release CDT unit
and expects to commence in-house prototype manufacture and
construction of demonstration and pilot water treatment plants for
clients in the first quarter of 2000.
See Note 2 regarding the Company's sale of Pump Company to Pump
Company management.
Going Concern
The Company's financial statements have been presented on
34
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
Going Concern (Continued)
the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
The Company is reporting cumulative net losses from continuing
operations since January 1, 1997 of $2,473,631 as of September 30,
1999 and has utilized $809,789 in cash from operations during the
same period. The following is a summary of management's plan to raise
capital and generate additional operating funds.
The Company was funded initially through investment by the principal
shareholder. Since 1998 funding has been principally through private
placements. Private placement opportunities combined with management
funding are expected to continue through the fourth quarter of 1999.
Business opportunities for the next twelve months include international
CDT systems sales to governments and major multi-national industrial
corporations and U.S. pilot sales. Several opportunities are now
being discussed including: governments, humanitarian trust funds,
industrial joint ventures, market sectors and geographic distribution
agreements.
The Company recognizes the financial investment required to support
the potential business opportunities which are being discussed.
There is no guarantee that the Company can complete the funding
necessary to develop the manufacturing and engineering structure to
manufacture and install the potential CDT orders. The company is
currently discussing financing options which include: a Corporate
Partnership for Manufacturing which could be expanded to include
marketing services; joint ventures with an international investment
group; and a European government-sponsored program. In addition,
a religious humanitarian fund is evaluating equity investment and
CDT installation opportunities in the Mid-East. Management believes
that there is a probability of obtaining the required financing
for the next twelve months through one of the above.
34
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
The Company is dependent upon the proceeds of proposed offerings of
the Company's securities to implement its business plan and to
finance its working capital requirements. Should the Company's
plans or its assumptions change or prove to be inaccurate or offering
proceeds are insufficient to fund the Company's operations, the
Company would be required to seek additional financing sooner than
anticipated. Management is confident it will be able to continue
raising funds, principally through private placements. With the
filing of a Form 10-SB in the fourth quarter of 1999 and becoming
a Securities and Exchange Commission fully reporting Company,
management anticipates that additional funding will be likely in 2000.
There can be no assurances given that the Company will be successful
in generating sufficient revenues from its planned activities or
in raising sufficient capital to allow it to continue as a going
concern which contemplates increased operating expenses, acquisition
of assets and the disposition of liabilities in the normal course
of business. These factors can affect the ability of the Company
to implement its general business plan including the completion
of the required manufacturing facilities and continued proprietary
CDT product improvements.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances
and transactions are eliminated in consolidation.
Use of Estimates and Assumptions
Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts
and disclosures. Accordingly, actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all liquid investments, with an
36
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
original maturity of three months or less when purchased, to be cash
equivalents.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is computed
principally by the straight-line method based on the estimated
useful lives of five to seven years.
Net Loss Per Common Share
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per
Share ("SFAS 128"). SFAS 128 provides a different method of
calculating earnings per share than was formerly used in APB Opinion
15. SFAS 128 provides for the calculation of basic and diluted
earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding fo the
period. Dilutive earnings per share reflects the potential dilution
of securities that could share in the earnings of the Company. The
Company was required to adopt this standard in the fourth quarter of
calendar 1997. Because the Company's potential dilutive securities
are antidilutive, the accompanying presentation is only of basic loss
per share. The numerator in the basic per share calculation is the
loss from continuing operations and net loss, respectively. The
denominator in the calculation is weighted average shares for each
period.
Stock-Based Compensation
The Company has issued stock options. Compensation costs arising
from such options will be recorded as an expense. The measurement
date for determining compensation costs is the date of the grant.
Compensation cost is the excess, if any, of the market value of the
stock at date of grant over the amount the employeemust pay to
acquire the stock. The Company measures
37
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
Stock-Based Compensation (Continued)
compensation costs using the intrinsic value based method of
accounting for stock issued to employees.
Income taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for
Income Taxes"("SFAS 109"). The objective of the asset and liability
method is to establish deferred tax assets and liabilities for the
temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when such amounts are realized
or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
Research and Development
Research and development expenditures are expensed when incurred.
Research and development expenses amounted to $420,000, $170,000,
$234,000 and $287,000 for the nine months ended September 30,
1999 and 1998 and the years ended December 31, 1998 and 1997,
respectively.
Accounts Receivable
Accounts receivable at December 31, 1997 represented non-revenue
type items.
2. Discontinued Operations
Pump Company was formed to provide drilling and pump services in
Arizona and Western New Mexico. It includes an operating division,
Arizona Well Services, which provided wholesale parts services to
Pump and other companies.
In the fourth quarter of 1998 discussions were initiated with Pump
Company management for the purchase of the Pump Company. In March
1999 the Company's Board of Directors agreed to sell Pump Company
to its management, effective January 1, 1999. In order to induce
Pump Company management to assume the net liabilities of Pump Company,
FarWest agreed to pay Pump Company $70,000. These funds will be
satisfied upon the successful completion
38
<PAGE>
2. Discontinued Operations (Continued)
of additional significant private equity placements. In addition,
on January 31, 2000, FarWest paid $200,000 to Pump Company to satisfy
a FarWest payable to a stockholder who has assigned the receivable to
Pump Company. The Company also assumed a note payable in the amount
of approximately $63,000 in connection with the sale of Pump Company.
The Company has accounted for the Pump Company in the accompanying
financial statements as a discontinued operation. Because the Pump
Company has net liabilities, the Company will record a gain on the
transaction when the sale closes. The sale was closed in November
1999.
Pump Company had revenues of approximately $3,000,000, $1,665,000,
$2,250,000 and $3,180,000 for the periods ended September 30, 1999
and 1998 and December 31, 1998 and 1997, respectively.
Following is a description of the remaining assets and liabilities
of the Pump Company at each balance sheet date:
September December 31,
30, 1999 1998 1997
Current assets $ 319,723 $ 210,586 $ 228,541
Net property, plant and equipment 677,166 630,393 1,255,900
Notes payable (402,772) (454,361) (923,627)
Accounts payable and accrued
liabilities (945,873) (588,465) (709,809)
Accounts payable-shareholder (306,645) (418,228) (432,933)
Net liabilities of discontinued
operations $(658,401) $(620,075) $(581,928)
3. Related Party Transactions
A principal shareholder, Clark Vaught, Chairman, has loaned the
Company funds at various times. The payable is included in accounts
payable to shareholder in the accompanying balance sheet. While the
funds were not loaned under a note agreement, the Company has accrued
interest at 8% on the balances payable. The accrued interest
has been added to the amounts payable.
39
<PAGE>
4. Income Taxes
There were no significant temporary differences between the Company's
tax and financial bases, except for the Company's net operating loss
carryforwards amounting to approximately $2,700,000, $1,350,000 and
$830,000 at September 30, 1999 and December 31, 1998 and 1997,
respectively. These carryforwards will expire, if not utilized, in
2012-2014.
The Company has deferred tax assets amounting to approximately
$900,000, $450,000 and 280,000 at September 30, 1999, and December
31, 1998 and 1997, respectively, related to the net operating loss
carryovers. The realization of the benefits from these deferred
tax assets appears uncertain due to recurring net losses.
Accordingly, a valuation allowance has been recorded which offsets
the deferred tax assets at the end of each period.
5. Convertible Debt
During December 1997 and January 1998, the Company issued $200,000
in 7% convertible debt. The debt is convertible into shares of
the Company s common stock at $.50 per share until maturity of the
principal on January 15, 2001. During 1999, the holder of the debt
converted $100,000 of principal and $26,666 of accrued interest
into 253,332 shares of common stock. The note is collateralized
by 750,000 shares of Company common stock. The debt was paid in
February 2000.
6. Capital Stock
During 1997, the Company issued 1,200,000 common shares for $300,000
accounts payable to Clark Vaught, Chairman of the Board of Directors.
The stock was valued by a consultant to the Company at $.25 per
share based on the thin trading in the Company's shares and a two-
year restriction on trading of the shares.
During 1998 and the nine months ended September 30, 1999, the
Company issued common shares for cash as follows:
No. of Price
Date Shares Per Share Amount
Private placement May-98 400,000 $ 0.36 $172,282
Private placement March-99 160,000 $ 0.31 $ 50,000
Private placement April-99 466,500 $ 0.50 233,251
Total 1999 626,500 $283,251
40
<PAGE>
6. Capital Stock(Continued)
During 1998, the Company issued 60,000 shares of preferred stock for
cash of $30,000. The shares pay no dividends and each share is
convertible into one share of common stock. The preferred stock
was converted to 60,095 shares of common stock after September 30,
1999.
The Company has issued stock options to non-employees. A summary
of the status of stock options is set forth below:
Period Ended
September 30, 1999
Weighted Average
Stock Options Shares Exercise Price
Outstanding, beginning or period - $ -
Granted 410,000 $0.82
Exercised - $ -
Forfeited/expired - $ -
Outstanding, end of period 410,000 $0.82
Options exercisable, end of period 410,000 $0.82
The weighted average grant date fair value of options issued during
the period ended September 30, 1999 was $2.02.
Compensation costs for employee options are recognized as an expense
in an amount equal to the excess of the fair market value of the stock
at the date of measurement over the amount the employee must pay.
The measurement date is generally the grant date. There were no
options issued to employees as of September 30, 1999. The Company
recorded $830,600 in compensation expense during the nine months
ended September 30, 1999 under FASB Statement 123 for options issued
to non-employees. There is no future compensation expense to be
recorded in subsequent periods as of September 30, 1999. Using the
fair value method, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants
in 1999: dividend yield of 0.0 percent; expected volatility of 783
percent; risk free interest rates of 4.5 percent; expected lives
of two years.
41
<PAGE>
6. Capital Stock(Continued)
Compensation expense for non-employees is recognized in accordance
with Statement of Financial Accounting Standards No. 123 based on
the fair value of the consideration received or the fair equity
instruments issued, whichever is more reliably measurable. During
the periods ended December 31, 1997 and September 30, 1999, the
Company utilized the fair value of the equity instruments issued
to recognize expense for shares issued to non-employees. Following
is a summary of the common shares issued for services rendered
during the year ended December 31, 1997 and the nine months ended
September 30, 1999:
Number
Date of Shares Expense
Employees compensation Nov-97 250,000 $ 62,500
Legal services Nov-97 10,000 2,500
Directors compensation Nov-97 600,000 150,000
Marketing Nov-97 50,000 12,500
Total issued in 1997 910,000 $227,500
Employees compensation Mar-99 1,415,000 $353,750
Professional services Mar-99 202,600 50,650
Marketing Mar-99 8,500 2,125
Research and Development Mar-99 7,500 1,875
Legal services Mar-99 10,000 2,500
Total issued in 1999 1,643,600 $410,900
The expense for the above services was recognized based upon the
market value of the common stock at the time it was committed to
be issued. Because the Company did not keep complete time records
of its employees with which to determine a fair value of services
rendered each period, the Company has utilized the fair value of
the shares at the date of issue and allocated the value to expense
on a pro rata basis during the periods of service of 1998 and 1999.
The shares were not issued under a stock compensation plan. The
Company accrued $311,750 as of December 31, 1998, included in accounts
payable and accrued liabilities in the balance sheet at that date
and included in common stock and options issued for services in 1998
statement of operations.
7. Commitments and Contingencies
Lease Commitments
The Company leases officespace under an operating lease which expires
42
<PAGE>
7. Commitments and Contingencies (Continues)
in May 2001. Future minimum rental commitments amount to $12,650.
Rent expense for the nine months ended September 30, 1999 and
1998 and the years ended December 31, 1998 and 1997 amounted to
$8,409, $34,501, $38,056 and $11,020, respectively.
Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of
SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
The estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. The fair value of financial instruments classified
as current assets of liabilities including cash and cash equivalents
and notes and accounts payable approximate carrying value due to the
short-term maturity of the instruments. The fair value of the
convertible debt is estimated to be $405,000, $120,000 and $61,000
as of September 30, 1999, December 31, 1998 and 1997, respectively,
based on the underlying value of the common stock into which the
debt is convertible, discounted for its initial two-year holding
restrictions.
The fair value of financial instruments classified as current assets
or liabilities including cash and cash equivalents and notes and
accounts payable approximate carrying value due to the short-term
maturity of the instruments.
Concentration of Credit Risk
The Company invests its cash and certificates of deposit primarily
in deposits with major banks. Certain deposits, at times, are in
excess of federally insured limits. The Company has not incurred
losses related to its cash.
Uncertainty Due to the Year 2000 Issue
The Company did not and does not expect to encounter any significant
matter which will affect its operations arising from the so called
Y2K or Year 2000 issue problem.
43
7. Commitments and Contingencies (Continues)
Litigation
Three former employees of the Company or its former subsidiary, Pump
Company, have filed a lawsuit alleging that the Company failed to pay
them certain wages and provide them with certain options. Pump
Company has also entered the lawsuit and asserted various claims
against the three former employees and their current employer,
including conversion, civil conspiracy, wrongful interference with
contractual relationships, and violation of trade secrets. The former
employees seekto recover approximately $250,000 in future wages and,
in the aggregate, have asked to be awarded stock options permitting
the purchase of up to 630,000 shares of stock of the Company at $.25
per share. The employees have also requested that any damages awarded
be trebled under Arizona law applicable to the failure of an employer
to pay wages. The Company is contesting this matter vigorously. The
Company does not believe that there is validity to the claims; however,
should the Company be required to pay damages as a result of the
litigation, the payments of such damage awards may have an adverse
effect upon its financial condition.
8. New Accounting Pronouncements
SFAS 129
Statement of Financial Accounting Standards No. 129, Disclosure of
Information about Capital Structure ("SFAS 129"), effective for
periods ending after December 15, 1997, establishes standards
for disclosing information about an entity's capital structure.
SFAS 129 requires disclosure of the pertinent rights and privileges
of various securities outstanding (stock, options, warrants,
preferred stock, debt and participating rights) including dividend
and liquidation preferences, participant rights, call prices and
dates, conversion or exercise prices and redemption requirements.
Adoption of SFAS 129 has had no effect on the Company as it currently
discloses the information specified.
SFAS 130
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and
display of comprehensive income, its components and
44
<PAGE>
8. New Accounting Pronouncements (Continued)
accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. This pronouncement
had no effect on the Company's financial statements.
SFAS 131
SFAS 131, "Disclosure about Segments of a Business Enterprise",
establishes standards for the way that public enterprises report
information about operating segments in annual financial statements
and requires reporting of selected information about operating
segments in interim financial statements issued to the public.
It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate
resources and in assessing performance. This accounting pronouncement
has had no effect on the Company's financial statements.
SFAS 132
Statement of Financial Accounting Standards (SFAS) 132, "Employers'
Disclosure about Pensions and Other Post-retirement Benefits,"
revises standards for disclosures regarding pensions and other
post-retirement benefits. It also requires additional information
on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis. This statement does not
change the measurement or recognition of the pension and other post-
retirement plans. The financial statements are unaffected by
implementation of this new standard.
SFAS 133
Statement of Financial Accounting Standards (SFAS) 133,
45
8. New Accounting Pronouncements (Continued)
"Accounting for Derivative Instruments and Hedging Activities,"
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives) and
for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at
fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes
in the fair value of a recognized asset or liability or an unrecogn
-ized firm commitment, (b) a hedge of the exposure to variable cash
flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for sale security, or
a foreign-currency-denominated forecasted transaction. Because
the Company has no derivatives, this accounting pronouncement has no
effect on the Company's financial statements.
9. Subsequent Events
On January 6, 2000, the Company entered into an agreement with ABB,
Inc., an international conglomerate specializing in technology.
The terms of the agreement are summarized as follows: ABB contracted
to purchase 500,000 shares of FarWest common stock at $2.00 per
share in two payments. The payments of $500,000 each were received
on December 31, 1999 and January 31, 2000. ABB declined to exercise
its remaining options.
10. Restatement
Subsequent to September 30, 1999, the Company discovered certain
errors in the financial statements previously issued for the periods
ended September 30, 1999 and December 31, 1998. The measurement
of the fair value of common share issued in 1999 for services rendered
in 1998 and 1999 (see Note 6) was misstated and the Company also
recognized that it should write off an account receivable of $25,000
which was deemed to be uncollectible. The Company had previously
discounted the market value of the shares by 30% to account for
restrictions on the shares and their thin market. The accompanying
financial statements for 1998 have been restated to correctly reflect
the shares valued at market value without discount. The effect of
the restatements was to increase net loss for 1998 and stockholders'
deficit as of December 31, 1998 by $93,525 (an increase of $.03 in
net loss per share), increase net loss for the nine months ended
September 30, 1999 and 1998 by $54,745 and $70,144 ($.01 and $.02
per share), respectively and increase stockholders' deficit at
September 30, 1999 and December 31, 1998 by $25,000 and $93,525,
respectively.
46
<PAGE>
EXHIBIT 10.4
ARTICLE OF MERGER OF T.A. CORP.
INTO
FAR WEST PUMP COMPANY
Pursuant to the provisions of Section 10-1105 of the Arizona
General Corporate Law, T. A. CORP., an Arizona corporation
("Merging Corporation") and FAR WEST PUMP COMPANY, an Arizona
corporation ("Surviving Corporation") entered into the following
Articles of Merger.
1. Merging Corporation shall be merged into Surviving
Corporation.
2. The shares of common stock of Merging Corporation shall
become shares of common stock of Surviving Corporation. Each
share of common stock of Surviving Corporation, which is
outstanding immediately prior to the consummation of the merger,
shall be converted into 650 shares of $.0001 par value per share
common stock of Provantage, Inc. Surviving Corporation shall, as
a result thereof, become a wholly-owned subsidiary of Provantage,
Inc.
3. The holders of all of the outstanding shares of capital
stock of Merging Corporation approved these Articles of Merger.
4. The holders of all of the outstanding shares of capital
stock of Surviving Corporation approved these Articles of Merger.
5. Merging Corporation shall from time to time, as and
when requested by Surviving Corporation, execute and deliver all
such documents and instruments and take all such action necessary
or desirable to evidence or carry out this merger.
6. The effect of the merger and the effective date of the
merger are as prescribed by law.
EXHIBIT 10.5
The Royal Hashemite Court
The Economic Department
Amman, November 21st., 1999
Mr. Clark Vaught
Chairman & CEO
Farwest Group, Inc.
1665 East 18 Street, Suite 113
Tucson, Arizona 85719
Dear Mr. Vaught,
Further to our meeting earlier today at the Royal Hashemite
Court, I would like to convey to you the intent of His
Majesty King Abdullah II to introduce Capacitive
Deionization Technology into Jordan. His Majesty is aware
of the proposal that Farwest Group submitted to the Ministry
of Water & Irrigation in that regard. Accordingly, he has
instructed me to closely follow up on this matter in order
to expedite the conclusion of all relevant agreements to
this project including the agreement for the installation of
a Capacitive Deionization Technology (CDT) Pilot Plant in
Jordan for the purposes of desalinating brackish water.
We understand that Farwest's proposal includes provisions to
the effect that following successful completion and
operation of the CDT Pilot Project in Jordan, which is
expected to last for 2 years, it will commence work on the
construction of a major desalination plant on a commercial
scale.
Furthermore, we understand that the Hashemite Kingdom of
Jordan will acquire the rights to both the manufacturing and
assembly of the CDT technology systems planned for Jordan as
well as to the Middle East and North Africa regions,
including the arabian Gulf States. It is also intended that
the Kingdom will participate in the future advancements in
the development with regards to the desalination technology
as well as spin-offs of CDT/Aerogel technology of the
Farwest Group and related parties.
We also understand that initially, the Farwest Group, Inc.
will be involved in designing, fabricating, installing,
operating and training Jordian personnel for the purposes of
plant operations, as well as the joint development and
research of this technology as related to the region. We
also understand that agreements on future joint venture
developments are subject to the approval of the governments
of the Hashemite Kingdom of Jordan and the United States of
America.
Please accept my sincere regards and highest consideration
and we look forward to a close and successful working
relationship between Jordan and Farwest Group.
Sincerely,
/s/ Bassein I Awadallah
Bassein I Awadallah
Director
EXHIBIT 10.6
The Hashemite Kingdom of Jordan
Ministry of Water & Irrigation
Ref. No. WZ/16/116
Date March 3rd, 2000
Mr. Clark Vaught
Chairman & CEO
The Farwest Group, Inc.
1665 East 18 Street
Suite 113
Tucson, AZ 85719
USA
Dear Mr. Vaught,
It gives me great pleasure to inform you that His
Excellency, the Prime Minster has given me the approval to
proceed with implementing the proposal submitted by you to
set up a brackish water desalination pilot plant using the
Capacitive Deionization Technology (CDT) of the Farwest
Group, Inc.
As such, I would like to invite you to come to Amman at the
earliest opportunity to finalize the details that would
allow this project to become operational, as well as explore
other avenues of mutual cooperation related to the water
sector of the Hashemite Kingdom of Jordan.
At your earliest convenience kindly confirm to us the
specific dates of the visit.'
Please accept my sincere regards and highest consideration
and again, we look forward a long and successful
collaboration between out two institutions.
Respectively,
/s/ Dr. Karnel Mahadin
Dr. Karnel Mahadin, ASLA
Minister of Water and Irrigation
_________________________________________________________________
Tel. 603100 - 683115 - 680100 Ex 680871 Tix. 22439 WAJ Jo. Cable
: Water JO. P.O. Box 2412 - 5012 Amman - Jordan
LINDQUIST & VENNUM P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Telephone: 612-371-3211
Fax: 612-371-3207
Ronald D. McFall
612-371-3551
May 11, 2000
Mr. John D. Clopper
Mail Stop 0308
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Re: Farwest Group, Inc.
Second Amendment to Form 10-SB Filed November 29, 1999 and
Amended February 14, 2000
File Number 0-28291
Ladies and Gentlemen:
With this filing, you will find a blacklined copy of Amendment
Number 2 to Form 10-SB filed by FarWest Group, Inc. through Edgar
on May 11, 2000. The amendment to Form 10-SB reflects revisions
responding to comments regarding the Form 10-SB received in a
letter from the staff dated March 30, 2000. Listed below you
will find the text of the comments as well as the company's
response. Please contact me at your convenience with any
additional comments on questions.
SEC Comments:
Item 1. Business
General
COMMENT 1:Please clarify the relationship between Lawrence
Livermore Laboratory, the University of California, and the U.S.
Government with respect to ownership of the patents. It is our
understanding that the U.S. Government is rarely, if ever, the
holder of a patent. The Patent and trademark Office's website
lists two patents relating to capacitive deionization technology,
but the assignee" of the patents is the Regents of the
University of California. The U.S. Department of Energy appears
to e a licensee. Finally, we note your statement on page 6 that
the basic carbon aerogel patent is owned by the U.S.
Government[.]" Please clearly and succinctly identify the rights
of the company and the above-mentioned parties.
1
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RESPONSE:Complied. The Regents ("The Regents") of the University
of California, under its U.S. Department of Energy Contract ("No.
W-7405-ENG-48") manages and operates the Lawrence Livermore
National Laboratory. The Regents is a corporation organized and
existing under the laws of the State of California, with its
principal office at 300 Lakeside Drive, Oakland, CA. Certain
copyrightable works and inventions, characterized as capacitive
deionization process using carbon aerogel electrodes and software
to automate the deionization and regeneration process were made
at Lawrence Livermore National Laboratory ("LLNL"). The U.S.
Department of Energy ("DOE") entirely or in part sponsored
development of the copyrightable works and inventions.
Consequently, the license agreement and resulting license between
The Regents and FarWest is subject to overriding obligations to
the U.S. Government. The U.S. Government retains a paid-up,
royalty free, nontransferable, worldwide, irrevocable license.
As indicated in the license agreement filed as an Exhibit to the
Form 10, FarWest Group is a non-exclusive license for the
identified markets. Part I, Item 1, of the Form 10SB has been
modified to include the information described above.
COMMENT 2:Clarify whether the sale to ABB of 250,000 shares of
stock that was expected to be completed on January 31, 2000 was
accomplished.
RESPONSE:Complied. The second purchase by ABB , 250,000 shares
at $2.00 for $500,000, was completed in February, 2000. Part I,
Item 1, has been revised to reflect the completion of that
transaction.
COMMENT 3:You state that if ABB exercises its option to purchase
a number shares giving ABB control of the company, the
"expectation" is that the purchase price will be the current
market price. Clarify the basis for this expectation. Have
there been any negotiations over purchase price? Do you have an
agreement in principle or a memorandum of understanding? Could
the company refuse to issue the stock at less that its current
market price?
RESPONSE:ABB gave the company notice in April, 2000 that it would
not exercise the March 30 and April 30, 2000 equity options;
therefore, all future rights and options in the ABB Agreement
were forfeited. Part I, Item 1, has been revised to reflect
ABB's decision.
COMMENT 4:State whether, as part of the shareholder agreement,
the shareholders have agreed to vote their shares in favor of
selling a license to the technology to ABB.
RESPONSE:See Response to Comment No. 3. Given the change of
circumstances with ABB, the information requested seems
inapplicable to the Company's current situation.
COMMENT 5:State whether the shareholder agreement controls, in
any way, the voting of shareholder-directors in their capacity as
directors.
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RESPONSE:See Response to Comment No. 3. Given the change of
circumstances with ABB, the information requested seems
inapplicable to the Company's current situation.
COMMENT 6:We note the ABB has an option to acquire FarWest's
rights to the CDT technology through a purchase, exclusive
license, or other arrangement. Please disclose any consideration
that ABB would be obligated to pay FarWest to exercise this
option. If no additional consideration would be required,
clearly disclose that fact. Also, disclose any conditions to
ABB's right to acquire the technology.
RESPONSE:See Response to Comment No. 3. Given the change of
circumstances with ABB, the information requested seems
inapplicable to the Company's current situation.
The Business, page 6
COMMENT 7:Please give a brief description of the company's
"internet resources."
RESPONSE:Complied. As described under "The Business" FarWest
out-sources the creation, operation, maintenance and ongoing
activity of the Company's web site on the internet.
COMMENT 8:Refer to our previous comments 10 and 11. Please
disclose all material information regarding your three
demonstration facilities and pilot plant. Disclose when you
anticipate completing the projects, the intended use of the
projects, the anticipated cost of each project, the source of
financing for each project, and any other material information
regarding these projects.
RESPONSE:Complied. Page 6 has been modified to provide the
requested information. The Arizona Public Services pilot is
funded by the client. One-third will be paid on delivery in the
second quarter of 2000 and the remainder on proof of operations.
The Carlsbad contract is funded by FarWest Group, including
installation. The projected cost for the CDT system is
approximately $200,000 and is scheduled for June, 2000
installation. These projects are to be funded by ABB's equity
payments and funds obtained through the private placement of
company securities.
COMMENT 9:You state on page 7 that you will be "significantly
dependent" on your agreement with the Kingdom of Jordan.
Accordingly, you must file the agreement as an exhibit. Refer to
Part III, Item 2(6) of Form 1-A. Also, please disclose how you
will generate revenue from the project in the Kingdom of Jordan.
RESPONSE:Complied. The Jordan Letter Agreement is included as
Exhibit 10.4. Revenue will be generated from the sale of the CDT
system as well as under an operating and services agreement.
Disclosure to that effect has been added.
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Discontinued Operations Well Drilling and Pump Services, page 8
COMMENT 10:Please explain the consideration associated with this
transaction more clearly. It is not clear why FarWest agreed to
make a deferred payment of $270,000 when it was selling the stock
to Pump Company management. It appears that the deferred
guarantee payments are consideration for Pump Company
management's assumption of all liabilities of the Pump Company.
If so, it is not clear what consideration the Pump Company
management paid for these shares. Please revise.
RESPONSE:Complied. The "Discontinued Operations" section has
been revised. The consideration the Pump Company management paid
for the shares would equal $380,000 through the assumption of
debt. Pump Company management assumed over $650,000 in
liabilities, but is to receive only $270,000 in deferred
payments. The difference, or consideration, is $380,000.
COMMENT 11:Refer to our previous comment 12. You state on page 8
that you will make "deferred guaranteed payments" to the buyers
of the Pump Company. Please state when you intend to make these
payments.
RESPONSE:Complied. Item 7, page 15, has been revised to indicate
that as of January 31, 2000, the Company had paid to the Pump
Company $200,000 according to the agreement. In addition,
$70,000 has not yet been paid, but will be paid to the Pump
Company when the Company receives a significant equity investment
enabling the payment to Pump Company.
Item 2. Management's Discussion and Analysis of Plan of
Operation
Operations for the Next Twelve Months, page 9
COMMENT 12:Please discuss the extent to which your "business
opportunities" for the next months will involve revenue
generating projects. We note that some of your current projects
will not generate revenue. Also, please refer to our previous
comment 18. Please disclose any additional agreements or
understandings you have entered into with potential customers.
RESPONSE:Complied. The MD&A section has been revised. There
have been no additional agreements with potential customers since
the Form 10SB filings. All business opportunities which are
being discussed with potential completion in year 2000 will
generate revenue. The Company expects to enter into additional
agreements in the second quarter of 2000. However, given the
early stage of those negotiations, the Company believes that
additional disclosure is inappropriate.
COMMENT 13:We have reviewed the disclosure added in response to
prior comment no. 13. In this regard, please specifically
disclose how long you expect to be able to satisfy your cash
requirements and continue operations without additional funding.
Please also disclose that your auditors have noted there is
substantial doubt about your ability to continue as a going
concern. (A)
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RESPONSE:Complied. The "Financial Condition" section has been
revised. Cash requirements have been and are expected to
continue to be met through payment agreements such as the
placements to ABB, pilot contracts, and private placements. One
million dollars was received from ABB. In March, 2000, a private
placement for $160,000 was completed. Confidential discussions
are continuing with multi-national corporations for equity and
strategic investments. The Company expects to complete an equity
investment and marketing rights agreement with a leading Japanese
multi-national corporation by the end of May.
COMMENT 14:See prior comment 15. We note your added disclosures
on pages 7 and 9 of the Form 10-SB. Please revise to also
discuss the following:
a) The significant terms of your agreement with the Kingdom of
Jordan. It is not clear how or when you will earn revenues. Are
you presently incurring costs for the project: How are those
costs treated and classified? Tell us in detail why your
accounting is appropriate.
b) For the first type of pilot project, discuss how you treat
and classify costs. How do you expect to benefit from these
projects? Is this just research and development, or do you have
a contract with another party?
c) Do you have any other revenue generating pilot projects
besides the one with the Kingdom of Jordan? The disclosure on
page 9 makes it sound as if you do.
d) What is a gain contract?
e) Why do you earn revenue from a pilot project? What are the
significant terms of your agreements and how do you record these
revenues and why?
f) What happens when the pilot project ends? (A)
RESPONSE:The MD&A section has been revised. The company and its
auditors provide the following responses to the questions
presented in the staff's comment 14.
a) As stated above, the Letter of Intent with the Kingdom of
Jordan is attached as an exhibit. As indicated above, the
Company earns revenue when the project is completed. Costs are
expensed on a job cost basis as incurred.
b) In the first pilot project concept all costs, including
manufacturing, installation, and operations are classified as
development costs. The Company utilizes the results to continue
the enhancement of its technology. Information gained from this
type pilot will be incorporated in future products. All work is
conducted by the Company.
c) Arizona Public Services will generate revenue upon completion
of the pilot in the second quarter 2000.
d) The company defines a "gain contract" as a contract utilizing
the pilot as a proof of concept to obtain additional revenue
contracts.
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e) The Company earns revenue when the pilot is operational and
the client makes the final payment for the system.
f)The customer either pays for the system or the Company takes
the system back. The Company's goal is to use the pilot to
attempt to sell larger capacity systems.
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COMMENT 15:You have added disclosure to Note 1 to the financial
statements in response to prior comment no. 33 which states that
receivables at September 30, 1999 were loans to potential joint
venture partners and that at December 31, 1998 receivables
represented cash advanced to a professional services organization
to support an international business opportunity. You should
provide a discussion in MD&A and Business regarding the potential
joint venture and the potential business opportunity as well as
the loans made to these parties. Also disclose the significant
terms of the loans and tell us why you reflect the amounts as
current. (A)
RESPONSE:The December 31, 1998 receivable was collected from the
consultant in 1999. There was no activity, revenue, contracts or
investments received from the consultant.
The receivable of September 30, 1999, has since been written off.
Limited Operating History, page 10
COMMENT 16:Please provide an estimate of the amount you intend to
spend on research and development in the next twelve months. See
Item 303 of Regulation S-B.
RESPONSE:The amount to be spent on Research and Development will
be totally dependent on the availability of funds from sources
such as private placements, pilot projects and other strategic
alliances. First quarter 2000 is expected to reflect a minimum
of $400,000 of development expenditures. This is expected to be
the minimum quarterly rate for the year 2000 assuming that
resources are available for such efforts.
COMMENT 17:Refer to our previous comment 14. We note your
statement on page 10: "As disclosed above, the Company recently
expanded its facility . . ." Please tell us where you disclosed
this information, or provide the information requested by
previous comment 14.
RESPONSE:In Item 1, Business, General, at the end of page 2
states that "FarWest in July, 1999 expanded its facilities to
include general administration offices and a pilot manufacturing
facility."
COMMENT 18:Refer to our previous comment 20. Supplementally,
tell us your plans to sell stock of your company to the two
"international corporations." We may have further comment.
RESPONSE:FarWest Group, Inc. is in discussions with two
international corporations to enter into private placements of
the Company's Common Stock. The current discussions are subject
to confidentiality agreements which prevent public disclosure.
One proposed agreement is for $500,000 at $2.50 per share; the
second is for one to one and one-half million dollars at $3.00
per share.
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Other Business Matters, page 11
COMMENT 19:We do not understand the following sentence: "The
expenditures required to allow the Company to comply with
Environmental Protection Agency statutes and regulations must be
included in any financing package obtained to establish the
manufacturing facilities which will become subject to the
environmental regulations." Please clarify. The fact that you
will consider the impact of environmental laws and regulations in
the course of obtaining financing does not mean that such laws
and regulations will not have a material impact on your company.
RESPONSE:Complied. We have revised the "Other Business Matters"
section to indicate that, although environmental compliance will
be a material cost, financing to deal with those costs must be
included in any financing transactions. We have disclosed this
requirement to all potential manufacturing partners or investors.
Item 5. Directors and Officers of the Registrant, page 12
COMMENT 20:Please update the "All Officers and Directors as a
Group section in the Security Ownership table. Currently, the
line-item indicates September 30, 1999.
RESPONSE:Complied. See page 12.
COMMENT 21:You state in Item 4 that the Item 5 table includes
beneficial owners of more than five percent of your common stock.
We note that you have excluded ABB from this table, however,
disclosure on page 4 indicates that ABB acquired 250,000 shares
as of December 31, 1999 and an additional 250,000 shares as of
January 31, 2000. Please update the table to reflect holdings as
of a more recent date, and include ABB in the table.
RESPONSE:Complied. We have revised the table to include ABB.
Please note that Items 4 and 5 were correct as of December 31,
1999. At that date, no other parties, including ABB, were
beneficial owners of more than five (5%) percent of its common
stock. ABB did not become a five (5%) percent owner until
February, 2000; that ownership is included in the updated table
reflecting March 31, 2000 ownership.
COMMENT 22:We note your responses to previous comments 25 and 28.
You state on page 13 that none of the officers or directors
listed in the stock ownership table has any options to acquire
additional securities within the next sixty days. This statement
appears to be inconsistent with the disclosure on page 16, which
indicates that your outside directors have been granted options
to acquire 100,000 shares of common stock, and that one-third of
those options vested on the grant date. Please revise or advise.
RESPONSE:As stated on Page 13 of the Form 10SB, no officer or
director listed in the foregoing table has any options, warrants,
conversion rights or privileges to acquire additional shares
which are exercisable during the sixty (60) days after the date
hereof. Outside Directors receive options for 100,000 shares as
stated, with one-third vesting at the beginning of each annual
term. The two outside directors began their terms in 1996 and
1997, and their options have been exercised. New directors and
terms will be approved at the May, 2000 shareholders' meeting.
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COMMENT 23:Please disclose the age of each of the non-employee
directors you identify on page 14.
RESPONSE:The age of each non-employee director is listed in the
table in Item 5: Directors and Officers of Registrant.
Item 7. Certain Relationships and Related Transactions, page 16
COMMENT 24:Refer to our previous comment 30. Please identify the
members of "Pump Company Management" that participated in the
spin-off.
RESPONSE:Complied. This section of the Form 10SB has been
revised. Pump Company management includes Channa Crews (Mr.
Clark Vaught's wife), Chris Wortman, Joel Rodrigues, and Brian
Vaught (Mr. Clark Vaught's brother).
Part II
Item 1. Market Price for Registrant's Common Stock and Related
Stockholder Matters
COMMENT 25:Discuss the impact of "Penny Stock" rules under the
Securities Exchange Act of 1934 on the ability of broker-dealers
to sell your shares. Refer to Rules 15g-1 through 9 of the
Exchange Act.
RESPONSE:Complied. Part II, Item 1, has been revised to
reference Rules 15g-1-9.
Item 4. Recent Sales of Unregistered Securities, page 19
COMMENT 26: Refer to our previous comment 53. We restate that
comment in its entirety. It appears that you still have not
disclosed various sales of unregistered securities completed in
the last three years. We note in particular the shares you have
issued to ABB and the convertible debt you issued in December
1997 and January 1998. In addition, some of your disclosure is
incomplete. For example, disclose the aggregate consideration
for the July 1999 issuance of 253,332 shares of common stock, and
the person or class of persons to whom the securities were sold.
Disclose all other information required by Item 701 of Regulation
S-B.
RESPONSE:Item 4 has been revised.
Part III
Item 1, Index to Exhibits
COMMENT 27:Renumber your exhibits so that they conform to the
requirements of this Item.
RESPONSE:The exhibit numbering has been modified to conform to
the Form 10SB requirements.
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COMMENT 28:Please file the agreements between ABB and Mr. Vaught,
Mr. Talley and Mr. Sheppard as exhibits to the registration
statement. Also, file a copy of your license agreement with
Lawrence Livermore.
RESPONSE:Due to the termination of the relationship with ABB, the
Company does not believe these agreements to be material
contracts. Lawrence Livermore license was filed in the initial
Form 10SB filing as Exhibit 10.1.
The following responses to the staff's comments number 29 through
40, inclusive, were provided by the Company and its independent
auditors.
Financial Statements
Statements of Operations, page 25
COMMENT 29:We note your response to prior comment no. 34 which
states that you have revised the financial statements to comply
with our comment by including in parentheses after general and
administrative expense a reference to the stock-based
compensation excluded. Based on a review of the Statement of
Operations, we are unable to locate this change. Please revise
to make this change in the next amendment. (A)
RESPONSE:Complied. The revision referenced in the response to
prior comment no. 34 inadvertently did not appear in the
statement of operations. The statement of operations has been
adjusted to reflect this change.
COMMENT 30:We note your response to prior comment no. 35 which
states that you have revised the statement of stockholders'
equity for the period ended September 30, 1999 to reconcile the
amount of shares issued for services to the statement of
operations and the statement of cash flows and that the
difference related to amounts of compensation accrued in 1998.
We are still unable to determine how the $69,405 reflected as
common stock and options issued for services during the year
ended December 31, 1998 was derived. Please revise Note 6 and/or
the statement of stockholders' equity to clarify this. You
should also clarify in Note 6 that $218,225 of the $287,630
reflected as Total for 1999 was actually accrued during the year
ended December 31, 1998 and to state where the amount is
reflected in the Statement of Operations. (A)
RESPONSE:The revision referenced in the response to prior comment
no. 35 inadvertently did not appear in the statement of changes
in stockholders' equity. The statement of stockholders' equity
has been adjusted to reflect this change.
Statement of changes in Stockholders' Equity, page 26
COMMENT 31:We have reviewed your response to prior comment no.
36. We note that you have stated that you valued these shares at
$.175 per shares which was derived by discounting the low bid
price for the first quarter of $.25 per share by 30% based on the
two-year trade restrictions and the thin market in the shares.
We believe that discounting the stock starting from the low bid
price is not appropriate and not consistent with the guidance set
forth
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in paragraph 10a of the APB Opinion No. 25. It appears that you
had cash sales of your stock at prices of $.31 to $.50 per share
and conversions of debt at $.50 per share during 1999 as well as
cash sales of your stock at $.36 in 1998. In a thin trading
market we believe that you should consider various factors
including stock prices and cash sales to unrelated parties in
determining fair value. In this regard, you should revise the
financial statements to record shares issued for services at the
undiscounted fair value of the stock. You should tell us what
the actual stock prices for transactions between unrelated
parties were during these periods. If you determine fair value
to be less than $.31 per share, you should tell us supplementally
why the company's stock was worth more in March, 1999 than in
January, 1999 and provide management's view of what specific
events caused the increase in the fair value of the stock. We
may have further comment after reviewing your response. (A)
RESPONSE:The Company has considered the Staff's comments and the
guidance in APB 25 and has restated the financial statements for
1998 and 1999 to value the stock issued at $.25 per share, which
was the undiscounted value of the stock at the date of issue.
The value of the stock increased beginning in early March 1999
specifically as the result of a Business Week article on the
Company's CDT technology.
COMMENT 32:We also note in your response to prior comment no. 36,
that you stated that management of the company had agreed to
compensate certain officers, employees and consultants beginning
in 1998 by promising to issue shares of company stock in the
future, but that because the Company did not keep complete time
records of its employees with which to determine a fair value of
the services rendered each period, the Company has utilized the
fair value of the shares at the date of issue and allocated the
value to expense on a pro rata basis during the periods ended
December 31, 1998 and September 30, 1999. Since you have stated
that you do not have complete time records for your employees,
tell us how you determined the allocation of the value to expense
on a pro rata basis. Tell us how this is in compliance with
GAAP. Also, have your auditors tell us how they were able to
obtain sufficient competent evidential matter to satisfy
themselves that the expense is reflected in the proper periods.
(A)
RESPONSE:The Company has utilized the guidance in FAS No. 123,
paragraphs 8, 9 and 10 regarding valuing the subject stock issued
to employees and non-employees. The fair value of the equity
instruments issued were deemed more reliably measurable than the
fair value of the services provided for the shares. As
previously explained, management of the Company has agreed to
compensate certain officers, employees and consultants beginning
in 1998 by promising to issue shares of Company stock in the
future. Because the Company did not keep complete time records
of its employees or have salary agreements with them or
agreements with consultants with which to determine a fair value
of the services rendered each period, the Company has utilized
the fair value of the stock at the date of issue and allocated
the value to expense on a pro rate basis during the periods
benefited by the services. The pro rate basis was used based on
the period of time each employee or consultant committed to the
Company. Some were for fifteen months, others for lesser periods
of time. The Company's auditors' response to the Staff's
request is attached.
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Note 1. Summary of Significant Accounting Policies, page 28
COMMENT 33:We have reviewed your response to prior comment no. 37
in which you state that Note 1 has revised to clarify that
FarWest Pump Company was acquired through a reverse acquisition.
We have reviewed the revised disclosure and do not see this
disclosure. Please revise the filing to state how FarWest Pump
Company was acquired. (A)
RESPONSE:Note 1 has been revised to explain that the Pump Company
was part of the reverse merger by way of a triangular merger with
Pro Vantage.
COMMENT 34:We have reviewed your response to prior comment no. 38
which states that pilot plant revenue will be recognized upon
completion for Arizona Public Services and the Kingdom of Jordan.
Deposit and progress payments will be classified as pre-paid
liabilities until project acceptance, as which time they will be
recognized as revenue and non-revenue generating pilot project
items will be expenses. Based on your response it appears that
you are planning to account for the revenue side of these
contracts on the completed-contract method, however, it is
unclear how you plan to account for contract expenses. Please
tell us what accounting literature you are relying upon and why
this method is appropriate. Explain in more detail the
significant terms of your arrangements under these agreements.
(A)
RESPONSE:The Company anticipates utilizing the completed contract
method to account for its revenue-producing contracts, at least
in the early stages of its revenue life cycle. This is because
it is anticipated that the Company will not be able to dependably
estimate its costs until it has much more experience in its
production. The Company would accumulate contract costs of
contracts in process until the contract is substantially
completed. It is anticipated that general and administrative
costs would be expensed as period costs.
Arizona Public Service has paid $15,000 at the signing of the
contract, $15,000 will be collected upon delivery and $13,000
will be collected on successful operation of the project. Final
contract terms of the Jordan contract are presently being
negotiated; however, the present proposal would require a
$300,000 deposit upon signing of the contract.
Note 2. Discontinued Operations, page 32
COMMENT 35:We note that you have added disclosure to Note 2 to
state that the $200,000 was paid to Pump Company on January 31,
2000 and that the $70,000 will be paid on March 31, 2000,
however, you have not stated whether you need or used additional
financing in order to pay these amounts. Please revise the
disclosure to specifically provide this information as previously
requested. Refer to prior comment no. 42. (A)
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RESPONSE:The $70,000 has not yet been paid. The disclosure in
Note 2 has been revised to explain that additional equity funds
must be raised to satisfy the liability.
Note 5, Convertible Debt
COMMENT 36:We have reviewed your response to prior comment no.
44. You have stated that you have disclosed the maturity date of
the debt in the Note, however, we are unable to locate the
revised disclosure in Note 5. Please revise. (A)
RESPONSE:Note 5 has been revised to be more specific regarding
the maturity (and subsequent payment) of the convertible debt.
Note 6, Capital Stock, page 33
COMMENT 37:We have reviewed your response to prior comment no.
46. Tell us whether you valued the 410,000 options issued to
settle a legal claim and for legal services using the Black-
Scholes option pricing model or some other method. We note that
the amount of expense you have recorded is exactly the amount you
have stated was the fair value (stock price) of the underlying
stock on the date of the option grant. We note that you have
stated that you used the Black-Scholes option pricing model, is
it a coincidence that the fair value of the options is the same
as total number of options times the stock price on the date of
the grant before consideration of the exercise price of the
options. In addition, as previously requested, disclose the
reason these options were granted to non-employees. (A)
RESPONSE:The 410,000 options were valued using the Black-Scholes
option pricing model. The disclosure in the paragraph
immediately following the options table regarding value of shares
was misleading and has been removed. It is a coincidence that
the Black-Scholes model calculates the value of the options as
equal to the stock price at the date of the grant. This anomaly
is apparently a result of the high volatility of the stock price.
Disclosure has been made of the reasons the options were granted
to non-employees (for legal services and to settle a legal
action.)
COMMENT 38:We have reviewed your response to prior comment no.
47. As previously requested provide support for the values you
used in determining expense for these services. Your response
should provide the actual stock prices during these periods (for
transactions between unrelated parties), volume of trading, cash
sales and how you derived fair value. As we have indicated
above, it does not appear appropriate to discount the stock 30%
for the restrictions. We would expect only a minimal discount to
be reflected. Please provide support as to why a 30% discount is
appropriate. Refer to paragraphs 8 through 10 of FAS 123. (A)
RESPONSE:As explained in the response to Comment 31, the
financial statements have been restated to reflect the value of
the shares issued at $.25 per
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share, which was the undiscounted value of the stock at the date
of issue.
COMMENT 39:We note the disclosure added in response to prior
comment no. 48. Tell us supplementally and disclose whether you
discounted the stock from its trading price to arrive at the $.25
per share value. Why did you choose a value of $.25 and not
$.50? (A)
RESPONSE:The 1,200,000 shares issued to a shareholder in 1997
were valued at $300,000 based on the stock price at the time of
$.25 (undiscounted) during July 1997 when the negotiations were
completed between the Company and the shareholder. The
shareholder agreed to take the shares as a reduction of $300,000
in the Company's payable to him. A consultant to the Company
also agreed that $300,000 was a fair value.
Note 7. Commitments and contingencies, page 36
COMMENT 40:See prior comment 50. We note your revised disclosure
in response to our prior comment. It is not clear to us how you
determined the fair value of your convertible debt. Please show
us your calculation. (A)
RESPONSE:The calculation of the convertible debt is attached.
The disclosure in Note 7 has been revised.
Please contact me at (612) 371-3551 or if you have any questions
or need additional information. Thank you in advance for your
assistance.
Very truly yours,
LINDQUIST & VENNUM p.l.l.p.
_____________________________
Ronald D. McFall
RDM:jep
Enclosures
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May 8, 2000
Securities and Exchange Commission
Washington, D. C.
Re: FarWest Group, Inc., Second Amendment to Form 10-SB
File Number 0-28291
Gentlemen:
In response to the Staff s comment number 32, regarding have
the auditors tell us how they were able to obtain sufficient
competent evidential matter to satisfy themselves that the
expense is reflected in the proper periods, following is our
response:
In reviewing the Company s utilization of the guidance in SFAS
No. 123, paragraphs 8, 9, and 10 regarding valuing the subject
stock issued to employees and nonemployees, we concurred that the
fair value of the equity instruments issued were deemed more
reliably measurable than the fair value of the services provided
for the shares. As explained in their letter to the Staff,
management of the Company had agreed to compensate certain
officers, employees and consultants beginning in 1998 by
promising to issue shares of Company stock in the future.
Because the Company did not keep complete time records of its
employees or have salary agreements with them or agreements with
consultants with which to determine a fair value of the services
rendered each period, the Company has utilized the fair value of
the stock at the date of issue and allocated the value to expense
on a pro rata basis during the periods benefited by the services.
The pro rata basis was used based on the period of time each
employee or consultant committed to the Company. Some were for
fifteen months, others for lesser periods of time. Our audit
work was based first on determining the appropriate use of the
accounting principle by reviewing the literature. Determining
the proper periods to which to allocate the costs was audited by
discussions with certain employees, on a test basis, to determine
their understanding of the agreement and to confirm their
employment for the period of time to which the expense was
allocated. As explained by the Company, the allocations were for
periods ranging from nine to 21 months. We also confirmed that
neither the employees nor the Company kept accurate records of
time worked and, due to lack of adequate cash flow, the employees
were only receiving sporadic paychecks. We believe we obtained
sufficient competent evidential matter to support the allocation
of the expense.
Very truly yours,
/s/ Jackson & Rhodes P.C.
Jackson & Rhodes P.C.
14
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