U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28291
Far West Group, Inc.
(Name of small business issuer in its charter)
Arizona 86-0867960
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
1665 E. 18th Street, Tucson, AZ 85719
(Address of principal executive office) (Zip Code)
Issuer's telephone number (520) 740-1119
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Securities registered pursuant to Section 12(g) of the Act:
$.0001 par vale common stock
(Title of class)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Check if disclosure of delinquent filers in response to item
405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year None.
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the
price at which the common equity was sold, or the average bid and
ask price of such common equity, as of a specified date within
the past 60 days.
March 31, 2000 $7,138,821
State the number of shares outstanding of each issuer's classes
of common stock, as of the latest practicable date.
7,003,532 share as of March 31, 2000.
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g.,
Part I, Part II, etc.) into which the documents incorporate: (1)
any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities
Act"). The listed documents should be clearly described for
identification Transitional Small Business Disclosure Format
(Check one). Yes ; No .
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PART I
Item 1: Description of Business.
Organization
Far West Group Inc. (The Company or "FarWest") was organized
under the laws of the state of Nevada in July 1996. In July of
1996, the Company was merged with Pro Vantage Corporation, an
inactive public Company which was incorporated in the State of
Florida in 1992. FarWest was the surviving Company in that
merger. Concurrently, the FarWest Pump Company ("Pump Company"),
an Arizona corporation formed in 1986 became a wholly owned
subsidiary of the Company. From July 1996 through December 31,
1998, the Company operated FarWest Pump Company as an operating
subsidiary. The operations of Pro Vantage were discontinued in
July 1996, immediately following the merger with FarWest Group,
Inc. as of January 1, 1999, the Company had no operating
subsidiaries.
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,
Current Transactions
In late December 1999, the Company entered into a multi-step
investment contract with Asea Brown Boveri, Inc. (ABB). In the
investment agreement, ABB agreed to purchase from the Company
250,000 shares of the Company's common stock at a purchase price
of $2.00 per share on or before December 31, 1999. That purchase
was completed and provided resources for the Company's
activities.
In addition, ABB purchased an additional 250,000 shares of the
Company's common stock at a purchase price of $2.00 per share in
February 2000. ABB also received options to acquire an
additional 250,000 shares of FarWest Group common stock at a
purchase price of $2.00 per share on each of March 30, 2000 and
April 30, 2000. On April 10, 2000, the Company received
notification from ABB that it would not exercise the equity
options, which eliminated any other options which ABB would have
maintained if such equity options had been exercised. ABB
currently is the largest non-management shareholder of the
Company with 500,000 shares of common stock reflecting
approximately seven (7%) percent equity position in the Company.
Technology
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
Deionizaton Technology (CDT). (That technology is described
below.) The 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
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Livermore, in the amount of $25,000 per year. Although the
Company has in the past failed to make the minimum annually
royalty payment when due, the Company has recently brought its
obligations to Lawrence Livermore current and has made all
minimum royalty payments due. The agreement provides that
Lawrence Livermore can terminate the license agreement in the
event that the Company fails to perform its obligations under the
agreement by giving the Company sixty (60) days written notice
within which to cure its obligations under the license agreement.
The Company has never received such a notice from Lawrence
Livermore. In the future, as the Company begins active
production of products covered by license from Lawrence
Livermore, the Company will owe Lawrence Livermore royalty
payments varying from one (1%) percent of product revenue to a
maximum of five (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 technology in
products which are the source of the revenues which determine the
royalties that must be paid. Although FarWest is the only
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
existing license with the Company.
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. 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 charges ions such as
chloride or nitrate. Those ions are pulled out of suspension of
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
steam through the creation and holding of charged particles.
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
Ultra Pure Water for Manufacturing
Nuclear Waste Remediation
Medical Application
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 expensive to be commercially competitive.
Therefore, initial Company efforts were focused on cost reduction
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programs. Those programs, aimed at reducing the manufacturing
cost of carbon aerogel, included improvement 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.
FarWest has completed development of its first release CDT unit
and plans to commence in-house prototype manufacture and
construction of demonstration and pilot water treatment plants
for clients during fiscal year 2000.
Development
Since 1997, FarWest has increased the cost-effectiveness of the
original aerogel product by approximately 15 times. The Company
had research and development expense 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
multi-national 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 and industrial ultra-pure
applications.
While the basic carbon aerogel patent is owned 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 several of these
proprietary improvements will be patented by FarWest and certain
others may be maintained as "trade secrets". 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
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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 the United States and other
global markets that require water purification and filtration.
The technology also should have market applications in industries
such as electronic manufacturing, medical manufacturing and
multiple waste water treatment applications. FarWest will
concentrate on water industry seminar presentations, technology
papers and technology demonstrations to reach its target market.
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 appears
imminent.
The Company shifted its emphasis in mid-1999 to bring its
prototype manufacturing capability on-line to satisfy at least
the first group of pilot plants for which it had already
committed (Arizona Public Service for industrial water and solar
power use; Carlsbad, California for municipal water; and the
Kingdom of Jordan for municipal water. The Company has been
informed by the Minister of Water and Irrigation of the Kingdom
of Jordan that formal approval has been received to immediately
proceed with final contractual negotiations of the project).
Under the Jordan agreement, the Company and the Kingdom of Jordan
will establish a pilot plant which will have the capacity to
produce 100,000 gallons of drinking water per day and with and
estimated value of approximately $1,000,000. The drinking water
will be processed from a brackish water input with installation
of the pilot plant scheduled to be completed in late 2000. If
the pilot plant is successfully operated for 6 to 12 months, the
Kingdom of Jordan and the Company will expand the relationship to
create a production plant producing over 20 million gallons of
drinking water per day.
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 plans 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 plan to develop its own capability to act as
prime contractor for engineering, constructing, operating, and
owning treatment plants. It will engineer and construct pilot
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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. In addition to the financing from equity investments
made by strategic partners, the contract with the Kingdom of
Jordan includes an initial payment of approximately $300,000 with
additional progress payments during the construction of the CDT
system.
Discontinued Operations - Well Drilling Pump and Services
FarWest Pump Company was formed in 1986 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
1999, the Company's Board of Directors agreed to sell FarWest
Pump to their 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) dollars as consideration for
the assumptions of all net liabilities (over $650,000) of the
Pump Company.
Item 2: Description of Properties.
The Company maintains administrative offices at 1665 East 18th
Street, Suite 113, Tucson, AZ 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 capabilities.
The Company is in discussions with an investment group in
Livermore, California to build a Research and Development Center
adjacent to Lawrence Livermore which would 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 3: Legal Proceedings.
Three former employees of the Company or its former subsidiary
FarWest Pump Co. have filed a lawsuit in Maricopa County Superior
Court alleging the Company failed to pay them certain wages and
provided them with certain stock options. The former subsidiary
of the Company, FarWest Pump, Inc., has also entered the lawsuit
and asserted various claims against the three former employees
and their current employer, Duncan Pump, Inc., including
conversion, civil conspiracy, wrongful interference with
contractual relationships, and violation of trade secrets. The
employees seek to recover approximately $250,000.00 in future
wages and, in the aggregate, have asked to be awarded stock
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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, beyond stock considerations, the payments of such
damage awards may have an adverse effect upon its financial
condition.
Item 4: Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fiscal year covered by
this report to a vote of security holders, through solicitation
of proxies or otherwise prior to the filing of the Form 10SB in
November 1999. The Company has not previously been obligated to
file quarterly or annual reports timely. The Company will now
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.
PART II
Item 5: Market for Common Equity and Related Stockholder
Matters.
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". The following NASDAQ supplied table
sets forth for the period indicated the high and low bid prices
during the period through to December 31, 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.
1999HighLow
First Quarter 1 1/8 1/4
Second Quarter 5 1/4 2 1/32
Third Quarter 3 1/8 1 1/2
Fourth Quarter 2 5/8 1 1/8
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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 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.
Recent Financing
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 March of 1999, the Company issued 1,643,000 shares to a group
including directors, officers, employees, consultants, and
service providers as compensation for the 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 closing
quarter's prices. The shares were issued in reliance upon
Section 4(2) of the Securities Act of 1933.
In July 1999, the Company issued 253,333 shares of its common
stock upon the partial conversion of a convertible promissory
note issued by the Company in January 1998. The issuance of such
stock was completed in reliance upon Section 4(2) of the
Securities Act of 1933.
In September 1999, the Company issued warrants for the purchase
of 410,000 shares of its Common Stock, with exercise prices of
$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 and for legal services for the Company. The
warrant was issued in reliance upon the exemption found in
Section 4(2) of the Securities Act of 1933.
In December 1999, the Company entered into an Investment
Agreement with ABB Inc. (Item 1) whereby ABB would acquire
500,000 shares of unregistered Rule 144 stock at a price of
$2.00. ABB also had two equity options to acquire an additional
250,000 shares (at $2.00) on March 30 and April 30, 2000. The
initial 500,000 share purchase was completed in February 2000.
In April, the Company received notification from ABB that it
would not exercise its equity options.
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The only investments within the past two years (1998 and 1999)
involving management were the payment of accrued salaries 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 (Item 10 Executive
Compensation). No other director, officer, or beneficial owner
of over five (5%) percent of a class stock had involvement in any
transaction exceeding $60,000.
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.
Item 6: 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 production began in the first 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.
The Company did not recognize any revenue through 1999 although
pilot contracts were received during the period. The Company
currently is negotiating additional pilot contracts and alliances
both domestically and in the international market.
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
$800,000. Private placement opportunities have continued in
early 2000. In addition, the equity financing received from ABB
provided the operating capital required by the Company until the
Company receives funding from the Kingdom of Jordan pursuant to
the pilot contract in negotiations.
Operations for the Next Twelve Months
Business opportunities for the next twelve months include
international CDT systems sales to governments and major
multinational 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. As
indicated above, the Company is engaged in a variety of pilot
plant activities. Those activities can be categorized into two
sectors: the first; the pilot plant is operated 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/or gain contracts for larger production CDT
systems, to be built in the future. Pilot contracts usually last
from 3 to 12 months. Although 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 potential private placements, the equity investment
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which was provided by ABB plus the payments to be made by the
Kingdom of Jordan.
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 infrastructure to complete the potential CDT orders.
The Company is currently discussing financing options which
include:
- International Investment Agreement with application
marketing rights;
- Corporate Partnership for Manufacturing which could be
expanded to include marketing services;
- Joint ventures with international investment groups; and
- Government-sponsored programs.
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 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
establishment 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 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 including Joint Venture Development
Contracts 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 seek to increase
the efficiency of power utilization and power recapture, as well
as seeking 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 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 be insufficient to fund the Company's
operations, the Company would be required to seek additional
financing sooner than anticipated. Management is confident it
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will be able to continue obtaining equity investment principally
through private placements.
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.
The Company recently expanded its facility and is engaged in
preliminary discussions for the development of a new facility
adjacent to 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 involve significant
capital investment by the Company, but instead involves 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 capactive deionization technology.
The Company believes that the 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 facility is being discussed with both
organizations skilled in the establishment of manufacturing
facilities and financial parties considering additional
investments.
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
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 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 understands that governmental approvals, particular
those from the Environmental Protection Agency with respect to
emission controls at any aerogel manufacturing facility
established by the Company, will be necessary for the
establishment of the Company's operations. In addition, the
Company believes that compliance with federal, state, and local
laws or regulations which have been enacted or adopted to
regulate the environment have not to date, nor are they expected
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to have a material effect in the future, upon the Company's
operations, product development, capital expenditures, earnings,
competition, or financial position. The expenditures required to
allow the Company to comply with Environmental Protection Agency
statutes and regulations must be included in any financial
package obtained to establish the manufacturing facilities which
will become subject to the environmental regulations.
Information Regarding and Factors Affecting Forward-Looking
Statements
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 7: Financial Statements.
Information required by this item appears in the Financial
Statements and Auditor's Report of FarWest Group, Inc. for
December 31, 1999 and 1998 as listed under Item 13.
Item 8: 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, 1999, the Company's directors 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, 1998, and 1999 are part of
this Statement.
PART III
Item 9: Directors, Executive Officers, Promoters and Control
Persons, Compliance with Section 16(a) of the Exchange Act.
See Item 11.
12
<PAGE>
Item 10: Executive Compensation
Executive Name and Principal Position
Clark Vaught Chairman, Chief Executive Officer
Dallas Talley President, Financial Officer, Director
Chris Sheppard Vice President Development, Director
Cash Non-Cash Total
Name Year Compensation Compensation(2) Compensation
Clark Vaught 1999 $37,500 $105,000 $142,500
Dallas Talley 1999 $37,500 $105,000 $142,500
Chris Sheppard 1999 $37,500 $ 37,625 $ 75,125
Clark Vaught 1998 $96,000 $ 0 $ 96,000
Dallas Talley 1998 $72,000 $ 0 $ 72,000
Chris Sheppard 1998 $72,000 $ 0 $ 72,000
Clark Vaught 1997 $72,000 $ 0 $ 72,000
Dallas Talley (1) 1997 $ 0 $ 0 $ 0
Chris Sheppard 1997 $60,000 $ 0 $ 60,000
(1) Mr. Talley joined the Company in March 1998.
(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.
Item 11: Security Ownership of Certain Beneficial Owners and
Management
Item 11 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
December 31, 1999.
13
<PAGE>
Directors and Officers of Registrant
The following persons served as directors of the Company for the
Fiscal Year ending December 31, 1999.
Shares
Beneficially
Owned
Director Of Outstanding %
Name and Age Position Since Stock Stock
Clark Vaught(49) Chairman of 1996 2,675,000 32.77
The Board
CEO and Director
Dallas Talley (66) President 1998 600,000 7.35
Financial Officer
and Director
Chris Sheppard (42) Vice President 1997 425,000 5.21
and Director
Thomas Friezen (41) Director 1996 252,000 3.09
Dr. Nicholas Yensen (53) Director 1997 130,000 1.59
All Officers and Directors as a Group 4,082,000 50.00
(as of December 31, 1999)
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.
Executive Officers/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 major 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 international
technology marketing and licensing partnership and served as a
director of the American Electronics Association and as Chairman
14
<PAGE>
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.
At December 31, 1999, the Company had five full-time employees
and six consultants on a part-time basis.
Board of Directors
The Company's Board of Directors at the end of Fiscal Year 1999
consisted 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 is CFO of a $150 million Food Processing Cooperative.
He manages the financial operations and oversees the legal
activities of the Cooperative.
Dr. Nick Yensen 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. Dr. Yensen is
not standing for re-election to the Company's Board of Directors.
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.
Item 12: Certain Relationships and Related Transactions
Pump Company Management 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
15
<PAGE>
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 over $650,000, FarWest agreed to pay Pump Company
$70,000 upon financing. In addition, the Company had an account
payable of approximately $200,000 to Mr. Clark Vaught, the
Company's chairman which Mr. Vaught agreed to assign to the pump
Company. As of March 20, 2000 the Company has paid to the Pump
Company $200,000 according to the agreement. In addition,
$70,000 will be paid to the Pump Company upon additional
significant equity investment.
Item 13: Exhibits and Reports on Form 8-K.
(a) Documents filed as part of this report
1.Financial Statements
Consolidated Financial Statements of FarWest Group, Inc. Page
(i)Independent Auditor's Report 18
(ii)Consolidated Balance Sheets as of December
31, 1999 and 1998 19
(iii)Consolidated Statements of Operations for the
years ended December 31, 1999 and 1998 20
(iv)Consolidated Statements of Changes in Stockholders'
Equity (Deficit) for the years ended December 31,
1999 and 1998 21
(v)Consolidated Statements of Cash Flows for the
years ended December 31, 1999 and 1998 22
(vi)Note to Consolidated Financial Statements 23-32
2.Exhibits
(2) 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(a) to Registration
Statement on Form 10SB dated February 14, 2000
Registrant No. CIK #0001098584 and incorporated herein
by reference).
(2) The Articles of Merger of Pro Vantage, Inc. into
FarWest Group, Inc. dated July 2, 1996 (Filed as
Exhibit 2.6 to Registration Statement on Form 10SB
dated November 22, 1999 Registrant No. CIK#0001098584
and incorporated herein by reference).
16
<PAGE>
3(i) Articles of Incorporation of Registrant (Filed as to
Exhibit 2.1 Registration Statement on Form 10SB dated
November 22, 1999 Registrant No. CIK#0001098584 and
incorporated herein by reference).
3(ii) By-laws of Registrant (Filed as Exhibit 2.2 to
Registration Statement on Form 10SB dated November 22,
1999 Registrant No. CIK#0001098584 and incorporated
herein by reference).
(4) Specimen Copy of Common Stock Certificate (Filed as
Exhibit 2.3 to Registration Statement on Form 10SB
dated November 22, 1999 Registrant No. CIK#0001098584
and incorporated herein by reference).
(10) Lawrence Livermore License Agreement (Filed as Exhibit
10 to Registration Statement on Form 10SB dated
November 22, 1999 Registrant No. CIK 0001098584 and
incorporated herein by reference).
(10) Option and Warrant Agreements and Text of Warrant
(Filed as Exhibit 2.4 and 2.5 to Registration Statement
on Form 10SB dated November 22, 1999 Registrant No.
CIK#0001098584 of Registrant and incorporated herein by
reference).
(10) Investment Agreement between FarWest Group, Inc. and
Asea Brown Boveri, Inc. dated December 29, 1999 (Filed
as Exhibit (g) to Registration Statement on Form 10SB
dated February 14,2000 Registrant No. CIK#0001098584
and incorporated herein by reference).
(b) Reports on form 8-K
None
17
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FARWEST GROUP, INC.
By:/s/ Dallas Talley
Dallas Talley
President and Principal Financial
Officer
April 14, 2000
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 April 14, 2000
Clark Vaught
/s/ Dallas Talley President, Financial
Dallas Talley Officer and
Director April 14, 2000
/s/ Chris Sheppard Vice President and
Chris Sheppard Director April 14, 2000
/s/ Thomas Friezen Director April 14, 2000
Thomas Friezen
/s/ Dr. Nicholas Yensen Director April 14, 2000
Dr. Nicholas Yensen
18
<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, 1999 and
1998, 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, during the year ended December 31, 1999,
the Company discovered an error in the measurement of fair value
of common shares issued in 1999 for services rendered in 1998 and
1999. The 1998 financial statements have been restated to
reflect this restatement.
Jackson & Rhodes P.C.
Dallas, Texas
April 12, 2000
19
<PAGE>
FARWEST GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
Assets
1999 1998
Current assets:(Restated)
Cash $ 389,401 $ -
Accounts receivable - 28,704
Total current assets 389,401 28,704
Furniture and equipment 11,125 2,952
Less accumulated depreciation (3,728) (1,968)
7,397 984
$ 396,798 $ 29,688
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 348,929 $ 691,484
Accounts payable to shareholder (Note 2) 152,388 127,809
Current portion of long-term debt 109,891 -
Payable to former subsidiary (Note 2) 270,000 -
Net liabilities of discontinued operations
(Note 2) - 620,075
Total current liabilities 881,208 1,439,368
Long-term and convertible debt (Note 5) 53,174 200,000
Commitments and contingencies (Note 6) - -
Stockholders' equity:
Preferred stock, $.0001 par value, 20,000,000
shares authorized; 60,000 issued and
outstanding at December 31, 1998 - 6
Common stock, $.0001 par value, 80,000,000
shares authorized; 6,684,057 and 3,591,480
shares issued and outstanding 668 359
Additional paid-in capital 2,985,725 699,525
Accumulated deficit (3,523,977)(2,309,570)
Total stockholders' equity (537,584)(1,609,680)
$ 396,798 $ 29,688
See accompanying notes to consolidated financial statements.
20
<PAGE>
FARWEST GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
1999 1998
(Restated)
Revenues $ - $ -
Operating expenses:
Common stock and options issued for services 963,500 311,750
General and administrative (excluding amounts
applicable to stock and options issued for
for services each period) 700,780 259,958
1,664,280 571,708
Loss from operations (1,664,280) (571,708)
Other expenses
Interest expense (37,136) (56,539)
Loss from continuing operations (1,701,416) (628,247)
Discontinued operations (Note 2):
Income (loss) from discontinued operations 8,227 (310,661)
Gain on sale of discontinued operations 478,782 -
487,009 (310,661)
Net loss $(1,214,407) $(938,908)
Loss per common share:
From continuing operations $(.30) $(.18)
Net loss $(.21) $(.28)
Weighted average common shares outstanding 5,702,931 3,408,147
See accompanying notes to consolidated financial statements.
21
<PAGE>
<TABLE>
FARWEST GROUP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1999 and 1998
<S> <C> <C> <C> <C> <C> <C> <C>
Additional
Preferred Stock Common Stock Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
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 - - 1,059,000 106 884,480 - 884,586
Shares issued to
convert preferred (60,000) (6) 60,095 6 - - -
Shares issued to
convert debt - - 253,332 25 126,642 - 126,667
Shares issued for
services rendered in
1998 - - 1,247,000 125 311,625 - 311,750
1999 - - 531,600 53 132,847 - 132,900
Cancel shares issued in
1997 - - (58,000) (6) 6 - -
Stock options issued as
compensation - - - - 830,600 - 830,600
Net loss - - - - - (1,214,407) (1,214,407)
Balance, December 31, 1999 - $ - 6,684,507 $668 $2,985,725 $(3,523,977) $ (537,584)
See accompanying notes to consolidated financial statements.
</TABLE>
22
<PAGE>
FARWEST GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999 and 1998
1999 1998
Cash flows from operating activities: (Restated)
Net loss $(1,214,407) $(938,908)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 1,760 984
Shares issued for services 132,900 -
Stock options issued as compensation 830,600 -
Gain on sale of discontinued operations,
less note assigned to former subsidiary (278,782) -
Changes in operating assets and liabilities:
Accounts receivable 28,704 (25,561)
Accounts payable and accrued liabilities (4,139) 554,484
Net liabilities of discontinued operations - 38,147
Net cash used in operating activities (503,364) (370,854)
Cash flows from investing activities:
Purchase of furniture and equipment (8,173) _
Cash flows from financing activities:
Net advances from shareholder (Note 3) 16,352 95,361
Sale of common and preferred shares 884,586 172,282
Proceeds from convertible debt - 100,000
Net cash provided by financing activities 900,938 367,643
Net increase(decrease)in cash and cash
equivalents 389,401 (3,211)
Cash at beginning of year - 3,211
Cash at end of year $389,401 $ -
Supplemental disclosure:
Interest paid $ - $ -
Non-cash transactions:
During 1999, the Company issued 1,778,600 common shares for
services rendered in 1999 and 1998, of which $211,750 had been
accrued in 1998.
During 1999, the Company issued 253,332 common shares to convert
$100,000 in convertible debt and $26,667 in accrued interest.
During 1999, the Company sold its subsidiary, Pump Company, by
assuming certain debt amounting to $63,066 and assigning to Pump
Company $200,000 of debt payable to a shareholder ( See Note 2).
See accompanying notes to consolidated financial statements.
23
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
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 was acquired in a
reverse acquisition by Pro Vantage Corporation ("Pro Vantage"),
an inactive public company which had been incorporated in the
state of Florida in 1992. FarWest was the surviving
corporation. 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 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 of beginning with $30,000 per year, then
becoming a percentage of revenue. The Company was in arrears on
its annual royalty payments to Lawrence Livermore as of December
31, 1999, but has become current on its payments subsequently.
The Company has completed development of its first release CDT
unit and has commenced 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 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 $2,809,277 as
of December 31, 1999 and has utilized $983,334 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.
24
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
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 seed additional
financing sooner than anticipated. Management is confident it
will be able to continue raising funds in the balance of 2000 as
it has in the early part of 1999, 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 more likely in 2000.
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.
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.
25
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
1.Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
The Company considers all liquid investments, with an 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 for the period. Dilutive earnings per share reflects
the potential dilution of securities that could share in the
earnings of the Company. Because the Company's potential
dilutive securities are antidilutive, the accompanying
presentation is only of basic loss per share. The numerator in
the basic loss 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 employee must pay
to acquire the stock. The Company measures 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.
26
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
1.Summary of Significant Accounting Policies (Continued)
Research and Development
Research and development expenditures are expensed when incurred.
Research and development expenses amounted to $517,000 and
$234,000 for the years ended December 31, 1999 and 1998,
respectively.
Accounts Receivable
Receivables at December 31, 1998 represented cash advanced to a
professional services organization to support an international
business opportunity. This receivable was collected in 1999.
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 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.
The sale was closed in November 1999.
Pump Company had revenues of approximately $1,868,000 and
$2,250,000 for the eleven months ended November 30, 1999 and the
year ended 1998, respectively.
Following is a description of the remaining assets and
liabilities of the Pump Company at December 31, 1998:
Current assets $ 210,586
Net property, plant and equipment 630,393
Notes payable (454,361)
Accounts payable and accrued liabilities (588,465)
Accounts payable - shareholder (418,228)
Net liabilities of discontinued operations $(620,075)
27
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
3.Related Party Transactions
A principal shareholder 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, under an informal agreement, at 8% on the balances
payable. The accrued interest has been added to the amounts
payable.
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
$2,500,000 and $1,350,000 December 31, 1999 and 1998,
respectively. These carryforwards will expire, if not utilized,
in 2012-2014.
The Company has deferred tax assets amounting to approximately
$850,000 and $450,000 at December 31, 1999 and 1998,
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.Long-term Debt and 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.
As explained in Note 2, the Company has assumed a note in
connection with the sale of the Pump Company. The 8% note is
payable $1,200 per month, including interest, through February
2005 and is collateralized by real property owned by Pump
Company. Following are the scheduled maturities of the debt
principal:
2000 $ 9,891
2001 10,711
2002 11,600
2003 12,564
2004 13,606
2005 4,693
Total $63,065
28
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
6.Capital Stock
During 1999 and 1998, the Company issued common shares for cash
as follows:
No. of Price
Date Shares Per Share Amount
Private placement March-99 160,000 $.31 $ 50,000
Private placement April-99 466,500 $.50 233,251
Private placement December-99 262,500 $2.00 500,000
Private placement December-99 170,000 $.78 101,335
1,059,000 $884,586
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
shares were converted to 60,095 shares of common stock in 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 of period - $ -
Granted 410,000 $.82
Exercised - -
Forfeited/expired - -
Outstanding, end of period 410,000 $.82
Options exercisable, end of period410,000$.82
The weighted average grant date fair value of options issued
during the period ended December 31, 1999 was $.82.
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 December
31, 1999. The Company recorded $830,600 in compensation expense
during the year ended December 31, 1999 under FASB
29
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
6.Capital Stock (Continued)
Statement 123 for options issued to non-employees. The options
were issued for legal services and settlement of a legal action.
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.
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 value of the equity instruments issued, whichever is more
reliably measurable. During the years ended December 31, 1999
and December 31, 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 years ended December 31,
1999 and, 1999:
Number
Date of Shares Expense
Employee compensation Jan-99 1,550,000 $387,500
Professional services Jan-99 202,600 50,650
Marketing Jan-99 8,500 2,125
Research and Development Jan-99 7,500 1,875
Legal services Jan-99 10,000 2,500
1,778,600 $444,650
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 the 1998 statement of operations.
7.Commitments and Contingencies
Lease Commitments
The Company leases office space under an operating lease which
expires in May 2001. Future minimum rental commitments amount
to $19,000 for 2000 and $8,000 for 2001. Rent expense for the
years ended December 31, 1999 and 1998 amounted to $22,183 and
$34,501, respectively.
30
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
7.Commitments and Contingencies (Continued)
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 or 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 and $120,000 at
December 31, 1999 and 1998, respectively, based on the underlying
value of the conversion rights of the debt, discounted for its
two-year holding restrictions.
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 problem.
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 provide 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
damage awards may have an adverse effect upon its financial
condition.
31
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated Financial Statements
8.New Accounting Pronouncements
SFAS 130
Statement of Financial Accounting Standards (SFAS) 130,
"Reporting Comprehensive Income", 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. 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 for the periods presented.
SFAS 132
Statement of Financial Accounting Standards (SFAS) 132,
"Employers' Disclosure about Pensions and Other Postretirement
Benefits," revises standards for disclosures regarding pensions
and other postretirement 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 postretirement plans. The financial statements
are unaffected by implementation of this new standard.
SFAS 133
Statement of Financial Accounting Standards (SFAS) 133,
"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 unrecognized 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.
32
<PAGE>
FARWEST GROUP, INC.
Notes to Consolidated 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 per share in two payments. The payments of $500,000 each
were received on December 31, 1999 and February 15, 2000,
respectively. ABB declined to exercise its remaining options.
10.Restatement
During the year ended December 31, 1999, the Company discovered
an error in the measurement of fair value of common shares issued
in 1999 for services rendered in 1998 and 1999 (see Note 6). 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 restatement 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).
33
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
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